The Money Mustache Community
General Discussion => Welcome and General Discussion => Topic started by: NCTarheel on March 23, 2017, 02:21:02 PM
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Any thoughts or concerns on the following article?
You have to remember the source... USA today.. and the Motley Fool.. but
- Lower interest rates
- Certain asset allocations in the Trinity Study
- People living longer
Will be interested in your thoughts..
Any reason to be worried?
http://http://www.usatoday.com/story/money/personalfinance/retirement/2017/03/04/3-serious-problems-with-the-4-retirement-rule/98376312/
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The article you want to read is here:
http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/
It addresses a lot of these concerns, most notably the long retirement fallacy since RE is what MMM did and he's going to have a 50-60 year retirement and is not concerned.
I would not get worked up. These articles are meant to generate revenue for places like The Motley Fool because they get people worried and then the subscribe to the newsletter thinking they know something no one else does, and then you find out pretty quickly, that it really is simple and does not require you buying advice.
The Trinity study has no intelligence in it i.e. no decisions are made. As MMM says, if you do not stick you head in the sand when things shift and adjust as a Mustachian would, you'll be fine.
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In all honesty, I think that the 4% guideline (it was never a "rule") deserves some scrutiny. If your bare bones core expenses add up to 4% of all your investments, I think you are skating too close to the edge. In order to comfortably retire, having your core expenses between 2 and 3 % is more realistic. You can be at 4% with all your expenses, assuming you have the ability to cut if needed. The longevity factor should not come into play, unless you are planning on spending your money down to zero. In my projections, the value of my investments goes up over time, so more time actually means more money, not less. Therefore, I see longevity as a solution, not a problem.
The low real interest rates are a challenge if you want fixed interest rate investments. But if you live on dividends from stocks, I don't think that is a huge problem. Interest rates are rising, but so is inflation. What matters is real interest rates, not the nominal rates.
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I actually thought it was a decent article. In my opinion they were just calling out a couple things you need to consider. You do need to consider those things. Then down at the bottom they explain how you might need to be flexible. Which is exactly what MMM describes in the link from caracarn. For the everyday non mustachian they should know that you have to understand the pros and cons of the 4% and be willing to learn and adapt. It didn't seem like a doom and gloom try to scare you article to me.
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I thought the article was constructed pretty well for a USA Today treatment. The value of the 4% rule, IMHO, is that it provides a starting point for understanding and conversation. Simply put, every $100,000 you can accumulate likely can successfully spin off $4,000 for most 25 year periods. The bigger issues for debate are "How many of these do you need to eat well during the day while sleeping well at night?".
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In all honesty, I think that the 4% guideline (it was never a "rule") deserves some scrutiny. If your bare bones core expenses add up to 4% of all your investments, I think you are skating too close to the edge. In order to comfortably retire, having your core expenses between 2 and 3 % is more realistic. You can be at 4% with all your expenses, assuming you have the ability to cut if needed. The longevity factor should not come into play, unless you are planning on spending your money down to zero. In my projections, the value of my investments goes up over time, so more time actually means more money, not less. Therefore, I see longevity as a solution, not a problem.
The low real interest rates are a challenge if you want fixed interest rate investments. But if you live on dividends from stocks, I don't think that is a huge problem. Interest rates are rising, but so is inflation. What matters is real interest rates, not the nominal rates.
I get that you are just stressing the "remain flexible" point, which is extremely important, but the 4% rule is for the WORST OF TIMES
Taking out 4 starting years out of the last 100+ ups the 4% rule to right around 6.5% which is insanely high.
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Very good critical look at various safe withdrawal strategies at this blog:https://earlyretirementnow.com/2016/03/24/the-4-is-not-as-good-as-i-hoped/ (https://earlyretirementnow.com/2016/03/24/the-4-is-not-as-good-as-i-hoped/)
ERN is on part 11 of a series and shows no sign of letting up.
Best wishes. -ap
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My biggest concern about retirement is that 4% will cover most of my expenses just fine, but now that the USA's private near-universal healthcare program is being outlawed, I have no idea how to be able to afford health insurance. While working, I have employer-provided insurance, but I went without health insurance for years when I was younger and it was a living nightmare.
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The 4% rule is just a rough guideline.
Only you know the intricacies of your unique situation and the equally unique opportunities you have to adjust your life.
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From what I've seen, the biggest risks to ER (and the 4% rule) are:
1. You retire and the market tanks, especially during the first 10 years.
2. Large, unexpected expense
I plan hedge against that by doing 2 things.
First, have an extra 2 years living expenses in cash (or bonds) above and beyond the 4% nest egg. That way if the market crashes during those first few years, I can switch to my cash and not draw down the nest egg during a down turn.
Second, save enough to live a $50k per year lifestyle, but be able to dial my expenses back to around $30k on a moment's notice. I know this is possible because I live on $30k per year right now (outside of my mortgage). Oh, and I'll have my mortgage paid off before I retire.
That's some pretty serious buffers against the areas that the 4% rule is vulnerable. Will I have to work a little longer to get there? Sure, but for me the peace of mind is totally worth it.
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To be honest I'm probably taking a different approach than many here, but I'm not going by the 4 percent rule. I'm more based on using high yield dividend streams that are consistent, tax-efficient, and diverse, as well as hedging for risk with dollar cost averaging. I'm also using margin and leverage which allows me a much larger yield and hopefully long term allows me a greater withdrawal rate than 4 percent without ever touching the principal. Of course anything can happen in the course of things but maybe this will work for me. Realistically the 4 percent wd is a good and safe guideline to follow long term and will work for most people attempting to FIRE. I'm just wondering if anyone out there has a different idea how to reach their goal other than the 4% guideline or 25x desired income saved please feel free to share.
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In my mind 3% is the new 4%.
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I never "bought" the 4% rule, to me, the study was just a "hey look, this guy had money after 30 years" thing
Like walking outside and saying, "hey look, the sun is yellow", we know stars burn at different temperatures and and not all of them are yellow in color
saying that, I do plan my retirement around 4%, if anyone had to ask, my reasoning would be, do I feel like I can at least net 4%/year (accounting for down years), then my answer would be yes. Because I feel like I can net at least 4%/year, then I don't mind spending 4%/year
and this is only because I live in the US, will have a US pension, and US social security... go to any other country, and the 4% rule quickly falls apart
even holding a total world stock portfolio does not achieve 4% swr...
https://www.mcleanam.com/4-rule-work-around-world/
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I think I'd be a bit nervous on a 4% plan if I was planning for a fairly barebones retirement. We plan to be pretty spendypants, which means there is a lot of fat to trim in bad years. Market is down? This year we do a 1 week national parks vacation instead of two weeks in Spain and Portugal. We cut a few more coupons, and eat meatless an extra night each week. Maybe we even cancel Netflix for a year, and I only read library books, rather than picking up things for my Kindle as well.
If our plan already included doing those things, the steps we'd need to take to come up with $5000 per year would feel much more extreme and painful.
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Any thoughts or concerns on the following article?
You have to remember the source... USA today.. and the Motley Fool.. but
- Lower interest rates
- Certain asset allocations in the Trinity Study
- People living longer
Will be interested in your thoughts..
Any reason to be worried?
http://http://www.usatoday.com/story/money/personalfinance/retirement/2017/03/04/3-serious-problems-with-the-4-retirement-rule/98376312/
short: no
explanation:
1) lower interest rates should mean better stock performance (except banks lol) so even better then worse
2) certain allocations are always crushing. Point is that 99% work and that you are not chained to decisions from 20 years ago.
3) simply does not play a role if you have higher earnings then you need
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Wait I'm having deja vu all over again.
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In my mind 3% is the new 4%.
I think it is a very relevant article. Therefore I would personally prefer to go into FIRE with a good buffer.
In my country we need to pay 28% taxes on profit from stock sales. That is 1% disappearing. Therefore a 3% withdrawal rate is more realistic for me than 4%. I made my own spreadsheet including Norwegian taxes and can adjust the withdrawal rate to what I think will be realistic.
The other option, selling less stock when the market has fallen, means we should try to generate some other income in that period. I think this sounds sensible.
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I never "bought" the 4% rule, to me, the study was just a "hey look, this guy had money after 30 years" thing
Like walking outside and saying, "hey look, the sun is yellow", we know stars burn at different temperatures and and not all of them are yellow in color
saying that, I do plan my retirement around 4%, if anyone had to ask, my reasoning would be, do I feel like I can at least net 4%/year (accounting for down years), then my answer would be yes. Because I feel like I can net at least 4%/year, then I don't mind spending 4%/year
and this is only because I live in the US, will have a US pension, and US social security... go to any other country, and the 4% rule quickly falls apart
even holding a total world stock portfolio does not achieve 4% swr...
https://www.mcleanam.com/4-rule-work-around-world/
Look at the countries at the bottom of that list: Austria, Japan, Italy, France, Germany, Finland, Belgium. What do they all have in common? They each had the second world war fought directly on their soil, killing people,* overturning governments,** and destroying infrastructure and housing.***
There is essentially no sum of money that will allow you to go on living your lifestyle without any adjustment while people are fighting and dying outside your front door and bombs are falling from the sky.
*Generally a bad thing.
**Bad for return on government bonds
***Bad for return on stocks
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I didn't read the article, but my understanding is that the biggest concern is sequence of returns risk (i.e. poor market performance early in your retirement that rapidly erode your principle).
Basically, if you're down to 50% in 10 years you might be in the bin of portfolios that fail the 4% rule. I don't know what the "early warning" equivalent is if you retire very early. Would it scale by % of retirement time? In other words, if you planned to retire for 60 years instead of 30 should you worry if you're down 50% after 20 years? My guess is that it would scale more by projected time remaining. In other words, if you're down 50% before you're 40 years into a 60 year retirement (same as 10 years into a 30 year retirement) then I'd be worried.
I agree that being flexible and prepared to earn even a portion of your spending is important if you retire early. I think you need to take steps when you're younger to make sure that you're not getting anywhere close to that 50% threshold.
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It addresses a lot of these concerns, most notably the long retirement fallacy since RE is what MMM did and he's going to have a 50-60 year retirement and is not concerned.
MMM is raking in a ton of money. If the 4% rule fails on his initial stash, he has no reason to be concerned. Maybe he can do it on the original amount; but if he can't- he's not going to be living in poverty, because he has continued to earn a ton of money in retirement through other business interests.
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I never "bought" the 4% rule, to me, the study was just a "hey look, this guy had money after 30 years" thing
Like walking outside and saying, "hey look, the sun is yellow", we know stars burn at different temperatures and and not all of them are yellow in color
saying that, I do plan my retirement around 4%, if anyone had to ask, my reasoning would be, do I feel like I can at least net 4%/year (accounting for down years), then my answer would be yes. Because I feel like I can net at least 4%/year, then I don't mind spending 4%/year
and this is only because I live in the US, will have a US pension, and US social security... go to any other country, and the 4% rule quickly falls apart
even holding a total world stock portfolio does not achieve 4% swr...
https://www.mcleanam.com/4-rule-work-around-world/
Look at the countries at the bottom of that list: Austria, Japan, Italy, France, Germany, Finland, Belgium. What do they all have in common? They each had the second world war fought directly on their soil, killing people,* overturning governments,** and destroying infrastructure and housing.***
There is essentially no sum of money that will allow you to go on living your lifestyle without any adjustment while people are fighting and dying outside your front door and bombs are falling from the sky.
*Generally a bad thing.
**Bad for return on government bonds
***Bad for return on stocks
that's why I don't mind the 4% rule, I am so heavily tilted towards the US through being a US citizen/SS/pension, that even when I tilt away from it via stocks... no matter what happens, if the US collapses, my "retirement" will be gone anyways
at least I have skills/family to live overseas, everyone needs healthcare providers right?
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From what I've seen, the biggest risks to ER (and the 4% rule) are:
1. You retire and the market tanks, especially during the first 10 years.
2. Large, unexpected expense
I plan hedge against that by doing 2 things.
First, have an extra 2 years living expenses in cash (or bonds) above and beyond the 4% nest egg. That way if the market crashes during those first few years, I can switch to my cash and not draw down the nest egg during a down turn.
So you are targeting a 3.7% WR......$50k / (($50k x 25 yrs) + ($50k x 2 yrs))
Second, save enough to live a $50k per year lifestyle, but be able to dial my expenses back to around $30k on a moment's notice. I know this is possible because I live on $30k per year right now (outside of my mortgage). Oh, and I'll have my mortgage paid off before I retire.
Oh wait, you are targeting a 2.2% WR $30k / (($50k x 25 yrs) + ($50k x 2 yrs)), but maybe still 3.7% because you are suddenly going to spend $20k more per year, every year, than you currently and historically have on top of whatever the mortgage payments are....YOLO!
That's some pretty serious buffers against the areas that the 4% rule is vulnerable. Will I have to work a little longer to get there? Sure, but for me the peace of mind is totally worth it.
Yes it is and yes you will, but as long as it works for you its ok.
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In my mind 3% is the new 4%.
Yeah, it feels better to me too....not sure I will wait to get there though.
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I didn't read the article, but my understanding is that the biggest concern is sequence of returns risk (i.e. poor market performance early in your retirement that rapidly erode your principle).
Basically, if you're down to 50% in 10 years you might be in the bin of portfolios that fail the 4% rule. I don't know what the "early warning" equivalent is if you retire very early. Would it scale by % of retirement time? In other words, if you planned to retire for 60 years instead of 30 should you worry if you're down 50% after 20 years? My guess is that it would scale more by projected time remaining. In other words, if you're down 50% before you're 40 years into a 60 year retirement (same as 10 years into a 30 year retirement) then I'd be worried.
I agree that being flexible and prepared to earn even a portion of your spending is important if you retire early. I think you need to take steps when you're younger to make sure that you're not getting anywhere close to that 50% threshold.
There are variations of the 4% rule where you cut a portion of your non-essential spending (or if you feel like it, replace some of your portfolio income with side job income) once your portfolio drops below a certain threshold of its inflation adjusted starting value. If you cut your spending to 3.3% of the starting value of the portfolio (17.5% spending cut) whenever your portfolio drops below it's starting value, you never run out of money with a 100% stock portfolio for retirement lengths between 20 and 100 years, using all possible starting months between 1871 and today where there is enough history to simulate the full length of the retirement.
You can get the same result by waiting until your portfolio is 80% or 50% of its starting value after adjusting for inflation, but you have to make a bigger percent cut in spending at that point.
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I think the main thing is to accept the fact that there is no "guarantee" in any SWR. When someone shoots for 100% on Firecalc or some graph they are of course shooting to have all past periods covered, but the current one could be worse and so could fail. Thats why I dont really see any difference between 99% & 100, or 95 or 90 for that matter. So someone drawing 2% or 6% needs to have the "be flexible" idea in the back of their head. And frankly, a 40 year old is in a great place to be flexible. If the major concern is the sequencing risk, then that means if there is to be a sustainability issue it should present itself early on...when you;re still young and healthy enough to go earn more income.
If your only concern is ever running out of money, then you just cant ever retire with ease. If your major goal is to have the longest comfortable retirement, then don't put it off too long, because at some point your risk of failure of that goal is increased by putting off your retirement (an extreme example...a person with a 4% SWR and retires at 40 will likely have a long comfortable retirement....if he works until he is 90 and gets to a 1% SWR, he is probably not gonna have a long comfortable retirement).
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My biggest concern about retirement is that 4% will cover most of my expenses just fine, but now that the USA's private near-universal healthcare program is being outlawed, I have no idea how to be able to afford health insurance. While working, I have employer-provided insurance, but I went without health insurance for years when I was younger and it was a living nightmare.
This is my worry too and may delay my FIRE.
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I think I'd be a bit nervous on a 4% plan if I was planning for a fairly barebones retirement. We plan to be pretty spendypants, which means there is a lot of fat to trim in bad years. Market is down? This year we do a 1 week national parks vacation instead of two weeks in Spain and Portugal. We cut a few more coupons, and eat meatless an extra night each week. Maybe we even cancel Netflix for a year, and I only read library books, rather than picking up things for my Kindle as well.
If our plan already included doing those things, the steps we'd need to take to come up with $5000 per year would feel much more extreme and painful.
This. Our retirement plan -- at least for the first decade or so -- is to do a lot of slow travel, renting apartments in different countries. Our current plan is to mix more expensive countries with cheaper ones, nicer apartments in city centers with cheaper ones farther out, etc. So if we run into several years of down markets, we just shift the mix toward the cheaper end of the spectrum. There's a whole big world out there, and a lot of places you can live very comfortably on comparatively smaller amounts of money; even if I don't want to permanently move to, say, Thailand or Equador, it's not exactly a hardship live there for a few months (instead of, say, London or Paris) to help weather the storm.
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It addresses a lot of these concerns, most notably the long retirement fallacy since RE is what MMM did and he's going to have a 50-60 year retirement and is not concerned.
MMM is raking in a ton of money. If the 4% rule fails on his initial stash, he has no reason to be concerned. Maybe he can do it on the original amount; but if he can't- he's not going to be living in poverty, because he has continued to earn a ton of money in retirement through other business interests.
Yes, but when he wrote that original article that ton of money was not coming in yet, so his lack of concern was on his original stache. A good portion of his confidence is on the fact that if things get bad you adjust and make a few thousand dollars doing odd jobs here and there. As long as you are willing you can almost always find someone to pay for a few bucks to do something, and getting to $3,000 a year which nearly guaranteed success amounts to about $250 a month or $75 a week. I'm pretty sure anyone could find something to do that would raise that.
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Right, but if your retirement is 35 years long and you had to work to create some income during 1 of those 35 years, isn't that an ER failure?!!
Haha, sorry I can't help but be snarky sometimes.
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Right, but if your retirement is 35 years long and you had to work to create some income during 1 of those 35 years, isn't that an ER failure?!!
Haha, sorry I can't help but be snarky sometimes.
No it means you are being a Trinity study robot. I do not think anyone would say that if they had to work for 10 hours a week as a Wal-Mart greeter (one way to make $75 a week) for a couple years to shore up their savings would be a problem. Again, the OP wanted to know if the 4% rule was something to be worried about, and the majority of responses are some form of "not if you pay attention and adjust something as needed".
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I didn't read the article, but my understanding is that the biggest concern is sequence of returns risk (i.e. poor market performance early in your retirement that rapidly erode your principle).
Basically, if you're down to 50% in 10 years you might be in the bin of portfolios that fail the 4% rule. I don't know what the "early warning" equivalent is if you retire very early. Would it scale by % of retirement time? In other words, if you planned to retire for 60 years instead of 30 should you worry if you're down 50% after 20 years? My guess is that it would scale more by projected time remaining. In other words, if you're down 50% before you're 40 years into a 60 year retirement (same as 10 years into a 30 year retirement) then I'd be worried.
I agree that being flexible and prepared to earn even a portion of your spending is important if you retire early. I think you need to take steps when you're younger to make sure that you're not getting anywhere close to that 50% threshold.
There are variations of the 4% rule where you cut a portion of your non-essential spending (or if you feel like it, replace some of your portfolio income with side job income) once your portfolio drops below a certain threshold of its inflation adjusted starting value. If you cut your spending to 3.3% of the starting value of the portfolio (17.5% spending cut) whenever your portfolio drops below it's starting value, you never run out of money with a 100% stock portfolio for retirement lengths between 20 and 100 years, using all possible starting months between 1871 and today where there is enough history to simulate the full length of the retirement.
You can get the same result by waiting until your portfolio is 80% or 50% of its starting value after adjusting for inflation, but you have to make a bigger percent cut in spending at that point.
Is there more info on this somewhere? Like a thread or blog post or study? I'd love to look at this a little more in depth. (without having to re-create every scenario myself)
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There was another study, I forgot where, that they analyzed people who retired in 2008 with 4% WR like the Trinity Study, today, their money would be lasting at most 20-25 years only from 2008. As long as you're flexible in working again, any WR would work. 4% is just a guideline to get you started, the original study was for 4% WR to last 30 years when you retired at 65.
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Is there more info on this somewhere? Like a thread or blog post or study? I'd love to look at this a little more in depth. (without having to re-create every scenario myself)
Came up a bit in this post (https://forum.mrmoneymustache.com/investor-alley/the-4-rule-for-those-in-their-mid-20's-completely-unrealistic/msg1368531/#msg1368531) using the same code as this earlier post (https://forum.mrmoneymustache.com/ask-a-mustachian/'length-of-retirement-'-or-when-will-you-shuffle-off-this-mortal-mustache/msg1364887/#msg1364887) about how just blindly using longer retirement lengths actually produces misleading results because really long retirement windows make years like 1965 drop out of the dataset. The data is just downloaded from shiller (http://www.econ.yale.edu/~shiller/data.htm), I think the only "weird" thing I do is calculate success rates based on starting a portfolio each month instead of once per year. But I realize neither of those posts go into a great deal of methodological detail.
I'm happy to share some code (just messy python scripts) or more detailed numerical results about the outcomes, just let me know what you'd like. It'd be great to have a second set of eyes go over it!
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Just don't forget that most of the Trinity "fails" are time-based, right before a big crash.
If you invested a lump sum at the end of 2007 it probably failed the 4%. If you invested in late 2008 you are probably in the 6% area.
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Right, but if your retirement is 35 years long and you had to work to create some income during 1 of those 35 years, isn't that an ER failure?!!
Haha, sorry I can't help but be snarky sometimes.
No it means you are being a Trinity study robot. I do not think anyone would say that if they had to work for 10 hours a week as a Wal-Mart greeter (one way to make $75 a week) for a couple years to shore up their savings would be a problem. Again, the OP wanted to know if the 4% rule was something to be worried about, and the majority of responses are some form of "not if you pay attention and adjust something as needed".
Dude, I totally agree with you - I was making a snarky joke against the Internet Retirement Police :-D
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I do not think anyone would say that if they had to work for 10 hours a week as a Wal-Mart greeter (one way to make $75 a week) for a couple years to shore up their savings would be a problem.
*Waves* Hey there! I've worked various low wage customer service jobs and I would be absolutely miserable if I had to go back to that by being a walmart greeter or the like after FIRE (I was also miserable the first time through those jobs, but didn't have any more employable skills yet). So yes, I would find the scenario you describe a problem.
Feel free to include a little casual low wage customer service work as part of your contingency plans if it's not an unpleasant experience for you (and I recognize there is a substantial fraction of the MMM community which wouldn't mind doing so), but please understand that your own preferences are not universal, as your statement above makes them sound.
I'm still planning to be flexible after I hit my magic number, but my fallback plans come from various options to cut spending as needed (which I acknowledge a different fraction of the MMM community would also find to be a big problem).
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Any thoughts or concerns on the following article?
You have to remember the source... USA today.. and the Motley Fool.. but
- Lower interest rates
- Certain asset allocations in the Trinity Study
- People living longer
Will be interested in your thoughts..
Any reason to be worried?
http://http://www.usatoday.com/story/money/personalfinance/retirement/2017/03/04/3-serious-problems-with-the-4-retirement-rule/98376312/
If it's related to The Motley Fool and has been published in the last 10 years, it's very likely garbage. They used to be good (decades ago) with the books. Now they just push clickbait articles and try to get you to pay them money for their stock picking service.
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My biggest concern about retirement is that 4% will cover most of my expenses just fine, but now that the USA's private near-universal healthcare program is being outlawed, I have no idea how to be able to afford health insurance. While working, I have employer-provided insurance, but I went without health insurance for years when I was younger and it was a living nightmare.
If you are going to retire very soon, this seems like a legitimate concern. But if you have a little while, I wouldn't worry about it too much. The odds are that the U.S. will eventually have a single-payer, universal healthcare system, or something close to it. The ACA was merely a Trojan horse for single-payer. If you look at the history of the U.S., betting on government expansion is almost always a winning bet. Progressives bellyache about minor reversions rightward, i.e., losing a few battles here and there, but they won the war. The New Deal, and Roosevelt's lawless court packing threat, eviscerated the limited government the U.S. used to enjoy. Moreover, the populace has become soft and dependent, and would rather have government take care of them than have more freedom.
The current Congress/President will make lots of noises about how Obamacare sucks to appease their base, but it is unlikely that they'll just flat out repeal the ACA with no replacement. And even if they did, once the Dems retake power, they'll just reenact the ACA or single-payer.
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My biggest concern about retirement is that 4% will cover most of my expenses just fine, but now that the USA's private near-universal healthcare program is being outlawed, I have no idea how to be able to afford health insurance. While working, I have employer-provided insurance, but I went without health insurance for years when I was younger and it was a living nightmare.
If you are going to retire very soon, this seems like a legitimate concern. But if you have a little while, I wouldn't worry about it too much. The odds are that the U.S. will eventually have a single-payer, universal healthcare system, or something close to it. The ACA was merely a Trojan horse for single-payer. If you look at the history of the U.S., betting on government expansion is almost always a winning bet. Progressives bellyache about minor reversions rightward, i.e., losing a few battles here and there, but they won the war. The New Deal, and Roosevelt's lawless court packing threat, eviscerated the limited government the U.S. used to enjoy. Moreover, the populace has become soft and dependent, and would rather have government take care of them than have more freedom.
The current Congress/President will make lots of noises about how Obamacare sucks to appease their base, but it is unlikely that they'll just flat out repeal the ACA with no replacement. And even if they did, once the Dems retake power, they'll just reenact the ACA or single-payer.
Ain't that the truth. We continue to sacrifice freedom for security. Best post I've seen all day.
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Jesus christ, can you keep your political screeds limited to the Off Topic forum?
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My biggest concern about retirement is that 4% will cover most of my expenses just fine, but now that the USA's private near-universal healthcare program is being outlawed, I have no idea how to be able to afford health insurance. While working, I have employer-provided insurance, but I went without health insurance for years when I was younger and it was a living nightmare.
If you are going to retire very soon, this seems like a legitimate concern. But if you have a little while, I wouldn't worry about it too much. The odds are that the U.S. will eventually have a single-payer, universal healthcare system, or something close to it. The ACA was merely a Trojan horse for single-payer. If you look at the history of the U.S., betting on government expansion is almost always a winning bet. Progressives bellyache about minor reversions rightward, i.e., losing a few battles here and there, but they won the war. The New Deal, and Roosevelt's lawless court packing threat, eviscerated the limited government the U.S. used to enjoy. Moreover, the populace has become soft and dependent, and would rather have government take care of them than have more freedom.
The current Congress/President will make lots of noises about how Obamacare sucks to appease their base, but it is unlikely that they'll just flat out repeal the ACA with no replacement. And even if they did, once the Dems retake power, they'll just reenact the ACA or single-payer.
Ain't that the truth. We continue to sacrifice freedom for security. Best post I've seen all day.
Care to explain how we are sacrificing freedom for security when it comes to healthcare? Especially for early retirees looking to live off of investment returns? Because that certainly reads like some meaningless platitude to me.
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Is there more info on this somewhere? Like a thread or blog post or study? I'd love to look at this a little more in depth. (without having to re-create every scenario myself)
Came up a bit in this post (https://forum.mrmoneymustache.com/investor-alley/the-4-rule-for-those-in-their-mid-20's-completely-unrealistic/msg1368531/#msg1368531) using the same code as this earlier post (https://forum.mrmoneymustache.com/ask-a-mustachian/'length-of-retirement-'-or-when-will-you-shuffle-off-this-mortal-mustache/msg1364887/#msg1364887) about how just blindly using longer retirement lengths actually produces misleading results because really long retirement windows make years like 1965 drop out of the dataset. The data is just downloaded from shiller (http://www.econ.yale.edu/~shiller/data.htm), I think the only "weird" thing I do is calculate success rates based on starting a portfolio each month instead of once per year. But I realize neither of those posts go into a great deal of methodological detail.
I'm happy to share some code (just messy python scripts) or more detailed numerical results about the outcomes, just let me know what you'd like. It'd be great to have a second set of eyes go over it!
I don't think seeing the code is going to help me much. I'm a bit illiterate in that area. I do good work with spreadsheets, but that's about it.
I am curious to figure out how flexible spending correlates to success rates. And I like that you're attempting to put a number on it. I've recently started to dig into the variable spending granular output data on cFIREsim, but I haven't gotten very far yet.
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Is there more info on this somewhere? Like a thread or blog post or study? I'd love to look at this a little more in depth. (without having to re-create every scenario myself)
Came up a bit in this post (https://forum.mrmoneymustache.com/investor-alley/the-4-rule-for-those-in-their-mid-20's-completely-unrealistic/msg1368531/#msg1368531) using the same code as this earlier post (https://forum.mrmoneymustache.com/ask-a-mustachian/'length-of-retirement-'-or-when-will-you-shuffle-off-this-mortal-mustache/msg1364887/#msg1364887) about how just blindly using longer retirement lengths actually produces misleading results because really long retirement windows make years like 1965 drop out of the dataset. The data is just downloaded from shiller (http://www.econ.yale.edu/~shiller/data.htm), I think the only "weird" thing I do is calculate success rates based on starting a portfolio each month instead of once per year. But I realize neither of those posts go into a great deal of methodological detail.
I'm happy to share some code (just messy python scripts) or more detailed numerical results about the outcomes, just let me know what you'd like. It'd be great to have a second set of eyes go over it!
I don't think seeing the code is going to help me much. I'm a bit illiterate in that area. I do good work with spreadsheets, but that's about it.
I am curious to figure out how flexible spending correlates to success rates. And I like that you're attempting to put a number on it. I've recently started to dig into the variable spending granular output data on cFIREsim, but I haven't gotten very far yet.
Well this is getting a bit far off topic, but if you've got specific scenarios you'd like run that are beyond the flexibility of cFIREsim drop me a line and I'd be happy to see what I can put together. Flexible spending is tricky to code into a webtool because everyone has different rules and conditionals depending on different variables for when to change spending and by how much.
And I'm careful not to knock excel coding too much, I've dug into a few complex spreadsheets that have a frightening amount of logic buried under the hood.
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My savings goal matches the 4% rule, but if I get my full pension, I should only need to take out 2%/year. I think that's a decent balance. If I don't get my full pension, then I'm going to have to hope 4% works!
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My absolute biggest hurdle to retirement is health care. I've been in a deep funk since the election in November. Yesterday's failed to vote on repeal of the ACA gave me hope again. Not only did the Republican failure close the door on repeal, I think it reopened the door to single payer. Now it's a race to the midterms. Did the disgusting bill supported by the GOP and all the media coverage of the damage it would bring open the eyes of voters? It was the libertarians that really killed the vote, they want repeal without replacement. They have an R by their name but it's really an L. If the D's can retake the House and Senate I think Trump would sign single payer. He's just wants to make the deal and look like a winner. He has no pact with the Republicans, he'll deal with whoever makes him look good.
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you know, they can always put it up for another vote next week without the fanfare and no one will be wiser... nothing prevents multiple votes until it works, they did it for 7 years to repeal aca, they wont stop now
could get a fed job at 52, work five years then retire with fehb, take a gs2 job that is easy since money wont be a problem
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Anyone who aims to retire early will need to be flexible, whether that's spending less or making a little income on the side. The 4% guideline covers even historical worst-case scenarios, though.
you know, they can always put it up for another vote next week without the fanfare and no one will be wiser... nothing prevents multiple votes until it works, they did it for 7 years to repeal aca, they wont stop now
There will be tremendous blowback if they try to sneak-pass this bill, even if they could get the ideologically opposed tea partiers to vote for it. Moderate Republicans know they will get slammed by voters. You think they could pass this and nobody would know?
They could vote to repeal ACA for years because they knew it would never go through. They would never have to deal with the fallout. That was a political stunt to energize their base, not real legislation with real impacts on real voters.
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you say that like they havent tried to sneak things before in the past... both parties.
yes, i think they will wait a bit then try again, few months or a year, before the midterm elections, by that time, if they see they will lose their own races, what do they got to lose but take everyone down with them?
they wont stop at this point, its built into why many of them are in office, they ran on that single issue
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Of course both sides have snuck things through. Healthcare is impossible to do stealthily. They may try again, but it's not going to pass in the dead of night with nobody aware of it.
We're getting off topic though.
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The problem isn't the 4% rule in itself...it's putting all your eggs in one basket. If your entire retirement rests on the fact that you have 25X expenses saved up and then you can retire forever without having to work, then you need to rethink everything.
I will say this is one area where MMM is very hypocritical. He literally spouts "save up 25X and you're golden" as gospel when he himself knows that's far from the truth. It's not like that advice is not coming from a good place. It's not that he's been proven wrong. It's not like you won't "probably" be okay following the advice. It's the simple fact that he himself is diversified far beyond the 25X aka 4% rule. He went into "retirement" having learned an in-demand skill, along with his wife, and continues to build new skills. But that's what smart people do. I don't know why he tries to cover the fact that you should still be diversifying your skills and money even during retirement.
Someone with an eye for the future knows that they're going to be far happier and be far more productive (often times even doing nothing is far more productive in the long run than staying busy) when left to their own devices...hence the desire to "retire" early. Said person isn't caught up on the semantics of "retirement" nor the specifics of how it's funded. They will simply look for ways to make it happen, make it happen, plan accordingly, and then adjust as necessary. In other words, they calculate that it's far riskier to continue doing something they're unhappy with than to create the potential for themselves to find things that are worth more of their time...even if it fails. Simple as that.
Stocks are simply one avenue to make this happen. There should always be backup plans like having in-demand skills and staying current with what's going on. The assumption that one should "set it and forget it" is absurd and isn't how it works in practice. But it's also equally absurd to argue about the 4% rule over insofar as to consider it to be the be-all, end-all of "retirement" planning.
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]I will say this is one area where MMM is very hypocritical. He literally spouts "save up 25X and you're golden" as gospel when he himself knows that's far from the truth. It's not like that advice is not coming from a good place. It's not that he's been proven wrong. It's not like you won't "probably" be okay following the advice. It's the simple fact that he himself is diversified far beyond the 25X aka 4% rule. He went into "retirement" having learned an in-demand skill, along with his wife, and continues to build new skills. But that's what smart people do. I don't know why he tries to cover the fact that you should still be diversifying your skills and money even during retirement.
He has advocated for having diverse income streams and a flexible lifestyle. This piece from 2011 lays out all of his safety margins, include part-time work and cutting expenses: http://www.mrmoneymustache.com/2011/10/17/its-all-about-the-safety-margin/
This post from 2012 about the 4% SWR is very positive about its safety, precisely because anyone shooting for it will understand the need for safety margins and flexibility: http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/
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I don't take issue with the fact that he doesn't share his entire story, it's statements like these that make me cringe:
"If you can get 25 times your annual spending saved up and working for you, that is enough to live off – forever" http://www.mrmoneymustache.com/2013/02/22/getting-rich-from-zero-to-hero-in-one-blog-post/
Recent tweet: "Regardless of income, mathematically you can retire FOREVER on 25-30x your annual expenses, due to stock dividends+appreciation."
Sure he backs up and talks about, but he shouldn't be stating these broad generalizations without any upfront caveats.
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I understand your viewpoint. That first link is a way to gently introduce new people to the basic MMM ideas without getting too complicated. It's designed to be a summary and collection of links for further research. That specific line you quoted links to the 2012 4% article, which goes into the details about why he thinks 4% is safe and the need for flexibility. The next sentence links to the 2011 post about safety margins.
That tweet is responding to someone asserting it's impossible to save enough to live off for 30 years. It's trying to get attention, but it also states a more conservative view. 25-30x your expenses means 3.3-4% WR. Even many doubters of the 4% SWR would be okay with 3.3%. Also... it's a tweet? You don't have room for a ton of caveats.
His persona is aggressive and optimistic, and it worked well for him. People don't build a following like he has by caveating themselves to death. People who see that tweet might be intrigued and hop onto the site to do further research. Anybody who sees it, sets 25x their expenses as their retirement goal, and does no other research is silly.
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... but he shouldn't be stating these broad generalizations without any upfront caveats.
Why not? He's trying to reach as many people as possible. Simple, direct, and to the point wins every time over long, complicated and caveated.
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Anybody who sees it, sets 25x their expenses as their retirement goal, and does no other research is silly.
Some obviously do think like that, hence this post and my observation. Not everyone has 500+ posts on this forum in much the same way not everyone reads more than a few of MMM's article. This is OP's first post. People get hooked on the clickbaity type stuff like "retire on 25x expenses" and then try to argue against it or find reasons why it won't work instead of coming to the realization that it doesn't matter if it does or doesn't work since it's only one component to a long and successful "retirement"/life. OP is lowkey one of those "doubters" instead of being more enlightened to the broader picture.
Why not? He's trying to reach as many people as possible. Simple, direct, and to the point wins every time over long, complicated and caveated.
That works for clickbait I guess but the truth is that the path to anything that's actually worth it in life is long, complicated, and caveated.
All I'm saying is a lot of people gloss over the details and do hone in on the 4% rule.
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Well, you can lead people to the 4% rule but you can't make them think. :-D
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Anybody who sees it, sets 25x their expenses as their retirement goal, and does no other research is silly.
Some obviously do think like that, hence this post and my observation. Not everyone has 500+ posts on this forum in much the same way not everyone reads more than a few of MMM's article. This is OP's first post. People get hooked on the clickbaity type stuff like "retire on 25x expenses" and then try to argue against it or find reasons why it won't work instead of coming to the realization that it doesn't matter if it does or doesn't work since it's only one component to a long and successful "retirement"/life. OP is lowkey one of those "doubters" instead of being more enlightened to the broader picture.
Why not? He's trying to reach as many people as possible. Simple, direct, and to the point wins every time over long, complicated and caveated.
That works for clickbait I guess but the truth is that the path to anything that's actually worth it in life is long, complicated, and caveated.
All I'm saying is a lot of people gloss over the details and do hone in on the 4% rule.
I don't see how OP's reaction is due to MMM. OP responded to an article in USA Today about the need for flexibility when following the 4% guideline. The article says nothing about MMM. MMM did not create the 4% SWR. The article itself is clear that 4% WR is useful, but there are some caveats.
So Pete casually tweeted something that was designed to bring more people to the site, where they can be educated on the caveats and be motivated to cut their consumption. I don't have a problem with this. If you think he can more effectively reach a wider audience with a different tone, you can offer to manage his social media platform for him.
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I don't have much to say that hasn't already been said. I think the sequence of returns risk is quite high right now on a 4% withdrawal rate. Something to think about for those in their 30's & 40's FIREing. The shiller pe does correlate to future returns, so it would be foolish to ignore that. Stocks will still likely beat bonds and you are unlikely to beat stocks by market timing but nevertheless stocks are only supposed to do 1-2% over the next 10 to 15 years.
With that aside, I agree that it's just about being flexible and having a backup plan. I also personally would shoot for a bit lower withdrawal. If the market performs well you can just crank up your spending a bit in a decade.
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The problem right now with looking at the correlation between Shiller P/E and stock returns is that you cannot compare pre-1990s data to post 1990 data.
One of the key flaws in the Shiller P/E was no fault of Shiller. In 1990, Standard & Poor's, following the Financial Accounting Standards Board, changed the definition of GAAP (generally accepted accounting principles) earnings to require mark-to-market accounting.
But the change in criteria only required that companies mark down their assets when they have a loss. When an asset increased in value, it could only be marked up when it was sold.
That said, I'd agree stock market valuations are high, partially because the next best alternative (bonds) have such ridiculously low interest rates, which is driving more money into stocks, which pushes down expected returns there too. The problem is that the change in GAAP means we cannot use historical data from the shiller PE10 to estimate HOW high valuations are, or what that should mean for future returns.
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Maizeman,
This is true and there are other problems. Since early 80's companies have been paying out less of earnings as dividends and have corresponding higher earnings growth. So the early years in the PE10 tend to be much lower than previous which unfairly pushes the PE10 up. You also are including the great recession in current PE10 which is unfair since pre 08/09 we had nothing close to that.
Nevertheless, whether the PE10 is 30 or 25 or 22, it is high, higher than historic. Maybe the future return is 3% REAL instead of 2% because we are miscalcuating PE10 but it is still weak. When you use something like cfiresim and get 90% success rate most of the 90% is with much lower valuations, even with mentioned issues.
I still think stocks are the better bet than bonds, so much better than bonds, but I would just be careful about your expectations. If you have a 30 year horizon things will be great but much less than that I would be cautious.
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Hi Frugal_c,
I hadn't thought about the issues caused by decreased dividend payouts driving faster earnings growth (more profit invested in growing the company), which would naturally drive PE a bit higher, thanks!
I am in complete agreement with you that, even with all the considerations we can throw in (GAAP changes, dividend policy changes, great recession still being on the books for another couple of years), valuations are high right now, suggesting we're unlikely to end up at the rosy end of the range of scenarios that can be produced by simulations picking random start years back through US history.
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I think I'd be a bit nervous on a 4% plan if I was planning for a fairly barebones retirement. We plan to be pretty spendypants, which means there is a lot of fat to trim in bad years. Market is down? This year we do a 1 week national parks vacation instead of two weeks in Spain and Portugal. We cut a few more coupons, and eat meatless an extra night each week. Maybe we even cancel Netflix for a year, and I only read library books, rather than picking up things for my Kindle as well.
If our plan already included doing those things, the steps we'd need to take to come up with $5000 per year would feel much more extreme and painful.
This
I run "worst case scenarios" in my head - even with a market crash of 50%, I would not have to return to work. I would use my common sense, go to these boards for ideas, find ways to save on discretionary spending for a time, while still having a life.