The probabilistic problem solved by cFiresim/FIRECalc has the following form: You start with $1m at a random year, you spend $40k yearly from then on, what's the probability of success over 50 years?
The actual plan people follow is more like: You start at 0, you save $50k yearly, when you reach $1m you stop working, then you start spending $40k yearly, what's your probability of success over 50 years?
The 2 formulations look very similar, but the probabilities are very different. Can you see why?
I calculated that Plan A has 98% success rate while Plan B only has 40%!! (Python yahoo-finance package)
The reason is that under Plan B, the year you stop working is not actually uniformly distributed -- you're much more likely to retire on a peak year, and unlikely to retire just after a crash. This makes a big difference, because cFiresim assumes you could have retired on $1m in 2009, but that wouldn't happen on Plan B because you'd have had $2m in 2007 and would have retired then. On Plan B, you're more likely to have only $500k in 2009.
A better approach to increase your probability of success is Plan C: same as Plan B, but you're only allow to retire when your target has been reached for 5 years in a row. Success rate is back at 90% but you just lost 5 years... So, please be careful.
The probabilistic problem solved by cFiresim/FIRECalc has the following form: You start with $1m at a random year, you spend $40k yearly from then on, what's the probability of success over 50 years?
The actual plan people follow is more like: You start at 0, you save $50k yearly, when you reach $1m you stop working, then you start spending $40k yearly, what's your probability of success over 50 years?
The 2 formulations look very similar, but the probabilities are very different. Can you see why?
I calculated that Plan A has 98% success rate while Plan B only has 40%!! (Python yahoo-finance package)
The reason is that under Plan B, the year you stop working is not actually uniformly distributed -- you're much more likely to retire on a peak year, and unlikely to retire just after a crash. This makes a big difference, because cFiresim assumes you could have retired on $1m in 2009, but that wouldn't happen on Plan B because you'd have had $2m in 2007 and would have retired then. On Plan B, you're more likely to have only $500k in 2009.
A better approach to increase your probability of success is Plan C: same as Plan B, but you're only allow to retire when your target has been reached for 5 years in a row. Success rate is back at 90% but you just lost 5 years... So, please be careful.
I calculated that Plan A has 98% success rate while Plan B only has 40%!! (Python yahoo-finance package)
The reason is that under Plan B, the year you stop working is not actually uniformly distributed -- you're much more likely to retire on a peak year, and unlikely to retire just after a crash.
I calculated that Plan A has 98% success rate while Plan B only has 40%!! (Python yahoo-finance package)
The reason is that under Plan B, the year you stop working is not actually uniformly distributed -- you're much more likely to retire on a peak year, and unlikely to retire just after a crash.
This is a great post, but the difference between 98% and 40% seems a bit too high. Can you share the distribution that you came up with? 98% suggests that only 2 years (3?) failed, and thus the 40% success rate suggests that 60% of all retirements occurred in those 2-3 years, which is obviously impossible.
The other aspect that worries me about achieving "FIRE" is that the guidance here seems to be to just shoot for 25x of your expenses. What's more accurate is that you need 25x of your predicted expenses in retirement. Rosily subtracting out taxes and other job-related expenses really seems to ignore the fact that future health care costs (as one example) will substantially increase as you age. Maybe some people are okay with taking that chance and relying on the government to bail them out, but I really don't see how these people retiring with a 500K net worth will have what's considered successful retirements if we could look back in 50 years.
The other aspect that worries me about achieving "FIRE" is that the guidance here seems to be to just shoot for 25x of your expenses. What's more accurate is that you need 25x of your predicted expenses in retirement. Rosily subtracting out taxes and other job-related expenses really seems to ignore the fact that future health care costs (as one example) will substantially increase as you age. Maybe some people are okay with taking that chance and relying on the government to bail them out, but I really don't see how these people retiring with a 500K net worth will have what's considered successful retirements if we could look back in 50 years.
The 2 formulations look very similar, but the probabilities are very different. Can you see why?
There has been much discussion in the forum about this issue, most prominently in this thread: "Firecalc and cFIREsim both lie" (http://forum.mrmoneymustache.com/ask-a-mustachian/firecalc-and-cfiresim-both-lie/)
The reason is that under Plan B, the year you stop working is not actually uniformly distributed -- you're much more likely to retire on a peak year, and unlikely to retire just after a crash. This makes a big difference, because cFiresim assumes you could have retired on $1m in 2009, but that wouldn't happen on Plan B because you'd have had $2m in 2007 and would have retired then. On Plan B, you're more likely to have only $500k in 2009.
4% is just based on history. And remember it only applies for 30 years and includes inflation adjustments. So, if we believe history, we can still retire on the highest of the high market peaks and still make it 30 years (not 50!). In fact, we can even restart/reset our starting year each time our portfolio hits a new high and it will still last 30 forward years, according to the historic behavior. If the market crashes the year AFTER we retire we can still continue our 4%+inflation withdrawals and we'll still make it 30 years, according to historic behavior.
IF we want additional insurance, we have many levers we can pull including those mentioned - trying to time the market for retirement year (easier to see market peaks than future stagflation), variable withdrawal rates according to market/economic behavior, variable withdrawal rates with more up front and less after age 75, a SWR less than 4%, a shorter retirement plan (less than 30 years), options to return to work, social security additions, deferred pension additions, property sales, reverse mortgages, and more.
What this group needs is some case studies from people who actually calculated all this, retired and ran out of money!
4% is just based on history. And remember it only applies for 30 years and includes inflation adjustments. So, if we believe history, we can still retire on the highest of the high market peaks and still make it 30 years (not 50!). In fact, we can even restart/reset our starting year each time our portfolio hits a new high and it will still last 30 forward years, according to the historic behavior. If the market crashes the year AFTER we retire we can still continue our 4%+inflation withdrawals and we'll still make it 30 years, according to historic behavior.
IF we want additional insurance, we have many levers we can pull including those mentioned - trying to time the market for retirement year (easier to see market peaks than future stagflation), variable withdrawal rates according to market/economic behavior, variable withdrawal rates with more up front and less after age 75, a SWR less than 4%, a shorter retirement plan (less than 30 years), options to return to work, social security additions, deferred pension additions, property sales, reverse mortgages, and more.
What this group needs is some case studies from people who actually calculated all this, retired and ran out of money!
thats gonna be hard to come by
4% is just based on history. And remember it only applies for 30 years and includes inflation adjustments. So, if we believe history, we can still retire on the highest of the high market peaks and still make it 30 years (not 50!). In fact, we can even restart/reset our starting year each time our portfolio hits a new high and it will still last 30 forward years, according to the historic behavior. If the market crashes the year AFTER we retire we can still continue our 4%+inflation withdrawals and we'll still make it 30 years, according to historic behavior.
IF we want additional insurance, we have many levers we can pull including those mentioned - trying to time the market for retirement year (easier to see market peaks than future stagflation), variable withdrawal rates according to market/economic behavior, variable withdrawal rates with more up front and less after age 75, a SWR less than 4%, a shorter retirement plan (less than 30 years), options to return to work, social security additions, deferred pension additions, property sales, reverse mortgages, and more.
What this group needs is some case studies from people who actually calculated all this, retired and ran out of money!
thats gonna be hard to come by
Absolutely! Anyone who has taken the time to consider the things being discussed on the threads in this forum is not going to allow themselves to run out of money.
Or just keep enough cash on hand to get you through the first year or 2 after a crash.
4% is just based on history. And remember it only applies for 30 years and includes inflation adjustments. So, if we believe history, we can still retire on the highest of the high market peaks and still make it 30 years (not 50!). In fact, we can even restart/reset our starting year each time our portfolio hits a new high and it will still last 30 forward years, according to the historic behavior. If the market crashes the year AFTER we retire we can still continue our 4%+inflation withdrawals and we'll still make it 30 years, according to historic behavior.
IF we want additional insurance, we have many levers we can pull including those mentioned - trying to time the market for retirement year (easier to see market peaks than future stagflation), variable withdrawal rates according to market/economic behavior, variable withdrawal rates with more up front and less after age 75, a SWR less than 4%, a shorter retirement plan (less than 30 years), options to return to work, social security additions, deferred pension additions, property sales, reverse mortgages, and more.
What this group needs is some case studies from people who actually calculated all this, retired and ran out of money!
thats gonna be hard to come by
Absolutely! Anyone who has taken the time to consider the things being discussed on the threads in this forum is not going to allow themselves to run out of money.
and there isnt a large enough sample ... i mean this question could be revisited in say 30-40 years to see how it effected people and 2 generations can benefit from our success and blunders.
Or just keep enough cash on hand to get you through the first year or 2 after a crash.
This assumes you worked longer-than-needed to get this cash.
Or just keep enough cash on hand to get you through the first year or 2 after a crash.
Or just keep enough cash on hand to get you through the first year or 2 after a crash.
This is why, at retirement, I put 8 years of base living expenses in treasures and short term bonds. Eight years was the longest bear market I could find. I still have 50% in stocks and 8 years in bonds. I plan to live off my bonds which will slowly tilt my portfolio to 60% or 65% stocks.
The idea of trying to plan for 30 or 40 years of retirement is, at best, a crap shoot. Life has a way of giving you a punch to the face every once in a while that you never see coming.
CFiresim assumes you never work again.
There has been much discussion in the forum about this issue, most prominently in this thread: "Firecalc and cFIREsim both lie" (http://forum.mrmoneymustache.com/ask-a-mustachian/firecalc-and-cfiresim-both-lie/)
Or just keep enough cash on hand to get you through the first year or 2 after a crash.
This assumes you worked longer-than-needed to get this cash.
The idea of trying to plan for 30 or 40 years of retirement is, at best, a crap shoot. Life has a way of giving you a punch to the face every once in a while that you never see coming.
I mean, I don't think anyone here will lay down and die on the street if the market crashes, so their "success" will always be 100%. Doesn't mean that their plan has worked though.
you're much more likely to retire on a peak year, and unlikely to retire just after a crash.
There has been much discussion in the forum about this issue, most prominently in this thread: "Firecalc and cFIREsim both lie" (http://forum.mrmoneymustache.com/ask-a-mustachian/firecalc-and-cfiresim-both-lie/)
Exactly what I thought of when I saw the thread title, and confirmed reading the OP.
OP, read that thread, you'll probably find it quite interesting. :)
There has been much discussion in the forum about this issue, most prominently in this thread: "Firecalc and cFIREsim both lie" (http://forum.mrmoneymustache.com/ask-a-mustachian/firecalc-and-cfiresim-both-lie/)
Exactly what I thought of when I saw the thread title, and confirmed reading the OP.
OP, read that thread, you'll probably find it quite interesting. :)
Everything old is new again.
Wait around long enough, bell bottoms will be back in style and someone will re-ask every question this forum has already beaten to death.
Soon enough we should see new threads promoting dual momentum investment schemes, whether or not to invest a windfall immediately or to DCA into the market, whether or not a Mustachian can honestly invest in an exploitive capitalist system, and how to allocate your future charitable contributions.
Networth dropped then came back and today is higher than when I first FIREd.
In my opinion, cFIREsim underestimates actual success in FIRE.^This. I retired shortly before 2007 and easily cut expenses for a few years without any problems. Networth dropped then came back and today is higher than when I first FIREd. Having wiggle room in your budget (something most ERees have) or being flexible in your lifestyle for a few years to ride out a market downturn, even a big one, shouldn't be a problem.
cFIREsim assumes that you start withdrawing a certain percentage of your stash, and then every year, no matter what happens, you continue to increase the amount you withdraw based on inflation.
In reality, most people don't just robotically keep withdrawing the same amount and continuing to increase it for inflation no matter what happens in the markets. If a market crash happens, most rational people will adjust their spending accordingly. Some will get a job, others will earn money from a side business, rent out a room in their house or maybe just cut expenses.
This is the greatest existential risk I think this community faces. It's not like the 95% success rate of the 4% rule means that 95 out of 100 of us who retire in any given year are going to make it on 4%. We're either ALL going to make it, in that year, or we're ALL not going to make it. Totally depends on what the future economy looks like. If things go south on us bad enough, every singe retiree here is going to fail the 4% rule all at once, and then threads like this one (http://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/) are going to seem pretty silly. All those early retirement rules and forecasts, though mathematically unchanged, will suddenly seem like a farce.
... Assuming ss survived the hypothetical doomsday market condition. But yes, the principle of constant optimization appliesThis is the greatest existential risk I think this community faces. It's not like the 95% success rate of the 4% rule means that 95 out of 100 of us who retire in any given year are going to make it on 4%. We're either ALL going to make it, in that year, or we're ALL not going to make it. Totally depends on what the future economy looks like. If things go south on us bad enough, every singe retiree here is going to fail the 4% rule all at once, and then threads like this one (http://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/) are going to seem pretty silly. All those early retirement rules and forecasts, though mathematically unchanged, will suddenly seem like a farce.
Only if we ALL rigidly adhere to a rule without changing our behavior at all in spite of poor market returns. The ones who adjust and earn a little money in ER, or who cut their spending, likely will be just fine (and this is ignoring those who planned for a lower WR to begin with).
I'd bet that if a 4% WR "failed" over a 30 year period, much less than half of us would actually run out of money and end up with only social security income.
... Assuming ss survived the hypothetical doomsday market condition. But yes, the principle of constant optimization appliesThis is the greatest existential risk I think this community faces. It's not like the 95% success rate of the 4% rule means that 95 out of 100 of us who retire in any given year are going to make it on 4%. We're either ALL going to make it, in that year, or we're ALL not going to make it. Totally depends on what the future economy looks like. If things go south on us bad enough, every singe retiree here is going to fail the 4% rule all at once, and then threads like this one (http://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/) are going to seem pretty silly. All those early retirement rules and forecasts, though mathematically unchanged, will suddenly seem like a farce.
Only if we ALL rigidly adhere to a rule without changing our behavior at all in spite of poor market returns. The ones who adjust and earn a little money in ER, or who cut their spending, likely will be just fine (and this is ignoring those who planned for a lower WR to begin with).
I'd bet that if a 4% WR "failed" over a 30 year period, much less than half of us would actually run out of money and end up with only social security income.
This is the greatest existential risk I think this community faces.
Ok, but do we really need soap?
It's not obvious to me that this is true.
Why would you be more likely to retire on a peak year than a positive year in the middle of a bull (or flatish) market? I don't think you'd be any more likely to retire in 2007 than 1995 or 2013.
Predictions are hard to makes, especially about the future.
When the 4% rule fails (and it probably will) it will likely be for reasons no one saw coming and no one prepared for. Doesn't mean it's not a great starting point though and it should hold up in most scenarios.
The biggest threat I see to MMM style early retirement is there is so much inflexibility to cutting further spending. If you are retiring on 25k/yr it is much harder/impossible to cut spending by 10k than if you are spending 70k. All the fat has already been cut out of the budget. There is more danger of sequence of return risk. Also everyone is healthy in their 30's (more or less). As I see insurance become thinner and more restrictive over time I worry about a medical event causing failure. It is hard to be frugal or go back to work when someone in the family is going through multiple rounds of chemotherapy. In this case even though the 4% rule may work, it may fail if you are unable to keep spending at 4%. We all talk about being flexible and spending less in times of market stress, but few talk about the potential need to spend MORE during these times.
At the end of the day it's about being comfortable with risk. The more redundant systems in place the better.
Everything old is new again.
Wait around long enough, bell bottoms will be back in style
Interesting take. I don't think DH and I are more likely to declare FIRE in an up market for psychology reasons, but it makes sense that an up market might be enough to push people's stache up to the FIRE target, thus increasing the likelihood of FIRE during an up year.That is happening to me, we had a pretty good stache 6 years ago, but our average
Interesting take. I don't think DH and I are more likely to declare FIRE in an up market for psychology reasons, but it makes sense that an up market might be enough to push people's stache up to the FIRE target, thus increasing the likelihood of FIRE during an up year.That is happening to me, we had a pretty good stache 6 years ago, but our average
yearly stock market gain over the last 6 years is $110k, plus another $40k of savings each year. These gains plus the stache we had is giving me the NW to retire at the end of this year, at a market peak.
I have three advantages, I can get full SS in 5 years, I have excess stache, and my wife wants to work 5 more years.
One large disadvantage, my daughter starts dental school soon, at $40k+ per year,
that's why my wife wants to continue working. We should be able to live on her income plus, pay the tuition.
I calculated that Plan A has 98% success rate while Plan B only has 40%!! (Python yahoo-finance package)
There's nothing wrong with retiring at a new high of it's only halfway up to the peak. For example, retiring in 2005 or 2013, I think you'd be fine(although I know we don't have the full 30 years yet). 2008, on the other hand, only time will tell.Some data (https://investedlife.wordpress.com/2016/04/25/understanding-sequence-of-returns-risk/) to put this in perspective. The average return for the first 10 years of someone retiring in 2005 was 5.41%, adjusted for inflation. At no time in history has a portfolio with that return during the first 10 years gone on to fail over 30 years. At worst, the portfolio ended up being less than the initial value after 30 years (the orange cells in the link). If you live in the US, the importance of anything longer than 30 years is greatly reduced because SS kicks in and buffers the portfolio, unless you were on the ball from day one and retired in your 20's. So, unless we have some unprecedented bad returns over the next 20 years, a 2005 retiree has already won the game (being their portfolio doing the distance over 30 years). The jury is still out on 2013 because the first 10 years are still happening.
Something to keep in mind is that the market is within a small percentage of it's peak for the majority of the time period cFiresim reflects.
The "what if you retire near a market peak?" is already more or less built into the numbers it runs.
What cFIREsim doesn't take into effect is our ability to use our brains. On threads like these I see so many people who make comments that allude to the idea that they want some type of method for their spending in retirement that will automatically account for that risk of a downturn after retiring. I know there are a lot of engineers here so I understand (I am one). But no method is required, just thinking. Since we know there is a very strong correlation between poor initial returns and portfolio failure, it's as simple as being proactive if you find yourself in this position.
For example, I FIRE'd in June. Many people would say they're expecting a market downturn soon. Let's say 5 years from now the average return for those 5 years was 0%. Based on sequence of returns risk, I already know that my portfolio now has a substantially higher risk of failure over 30 years, assuming I spent all the money I had planned to during those 5 years. If I didn't curtail my spending at all, I would consider picking up a part-time job to give my portfolio an assist. I'm only spending $40,000 a year from my initial $1 million stash, so a few years of 10-20k income will give me a boost. The next few years' returns would likely dictate how long I kept the part-time job. I could also lower my spending a bit if I didn't want to go back to work. Our bare bones expenses are $25,000 so if I'm really conscious of the sequence of returns risk maybe I just cut my spending hard in the year where the returns are particularly bad. No set method required, just a little brain power and flexibility.
| WR (%) | cFIREsim SR (%) | typical SR (%) | worst-case SR (%) |
| 3 | 100.0 | 100.0 | 100.0 |
| 4 | 94.7 | 93.0 | 81.9 |
| 5 | 69.1 | 62.8 | 47.2 |
| 6 | 42.6 | 37.2 | 25.0 |
| 8 | 20.2 | 14.0 | 1.4 |
I can post the code if someone is interested.
- Life Insurance. My wife and I each have a 500,000 universal life policy on each other.
Alright, there were errors in my previous numbers. The effect is smaller than I initially thought.
What I proposed in the OP is to improve cFIREsim-like simulations, which only consider drawdown periods starting at uniformly distributed years, to more realistic simulations that also consider accumulation periods where investment contributions are made until a FIRE target is reached, at which point the drawdown period starts. This more realistic scenario (plan B) leads to different FIRE starting year distributions, with higher probabilities in peak market years, which in turn lower success rates.
Below are success rates (SR) for 50-year drawdown periods (90% stocks / 10% bonds) for different withdrawal rates (WR), calculated either as by cFIREsim, or by considering MMM-typical (10 years) or worst-case accumulation phases:
WR (%) cFIREsim SR (%) typical SR (%) worst-case SR (%) 3 100.0 100.0 100.0 4 94.7 93.0 81.9 5 69.1 62.8 47.2 6 42.6 37.2 25.0 8 20.2 14.0 1.4
The figure below gives a more complete picture. The main thing to undertand is that very fast accumulation phases reduce down to uniformly distributed FIRE starting years as in cFIREsim (far right of the x axis). As such, the effect of this correction is more pronounced for long, slow accumulation phases and higher WRs, but usually small in typical FIRE scenarios.
I can post the code if someone is interested.
My hunch is this: the shorter your investing timeline, the more likely you are to be prone to sequence of returns risk, and vice-versa. But even then, you aren't necessarily more likely to be at the top of the market, as there's no way to predict that. I agree that you're less likely to retire in a bear market, but that doesn't mean the opposite is true.
Thanks, I'd be fascinated to take a look at it.
import json
import matplotlib.pyplot as plt
import numpy as np
START_YEAR = 1871
END_YEAR = 2015
PERIOD = 50
STOCK_FRACTION = 0.9
BONDS_FRACTION = 0.1
# From https://github.com/boknows/cFIREsim-open/blob/master/js/marketData.js
market_data = json.load(file('market.json'))
market_data = {int(year): properties for year, properties in market_data.iteritems()}
def Simulate(start_value, start_year, end_year, accumulation, target):
value = start_value
die = None
reached = None
for year in xrange(start_year, end_year):
properties = market_data[year]
next_properties = market_data[year + 1]
value += accumulation
if value > 0:
stock_gains = (1. + properties['dividends']) * (1. + properties['growth'])
bonds_gains = 1. + properties['fixed_income']
value *= STOCK_FRACTION * stock_gains + BONDS_FRACTION * bonds_gains
value *= float(properties['cpi']) / next_properties['cpi']
if value <= 0 and die is None:
die = year
if target is not None and value >= target and reached is None:
reached = year + 1
#print year, value
return {'end_value': value, 'die': die, 'reached': reached}
def SuccessRate(period, accumulation, withdrawal):
successes = []
durations = []
fire_years = []
for start_year in xrange(START_YEAR, END_YEAR - period):
accumulation_results = Simulate(0.0, start_year, END_YEAR, accumulation, 1.0)
if accumulation_results['reached'] is None:
continue
reached_year = accumulation_results['reached']
fire_years.append(reached_year)
if reached_year + period > END_YEAR:
continue
drawdown_results = Simulate(1.0, reached_year, reached_year + period, -withdrawal, target=None)
die_year = drawdown_results['die']
success = die_year is None
duration = period if die_year is None else die_year - reached_year
successes.append(success)
durations.append(duration)
return {'success_rate': np.mean(successes), 'mean_duration': np.mean(durations), 'fire_years': fire_years}
def Accumulation(savings_rate, withdrawal):
# Assuming expenses (as fraction of target) = withdrawal rate
# savings_rate = accumulation / (accumulation + withdrawal)
return withdrawal / (1. / savings_rate - 1.)
def PlotSuccessRate():
savings_rates = np.arange(0.1, 1., .05)
withdrawals = [0.03, 0.04, 0.05, 0.06, 0.07]
legend = []
for withdrawal in withdrawals:
success_rates = [100. * SuccessRate(PERIOD,
Accumulation(savings_rate, withdrawal),
withdrawal)['success_rate']
for savings_rate in savings_rates]
plt.plot(100. * savings_rates, success_rates)
legend.append('%i%% WR' % (100. * withdrawal))
print '%i%% WR:' % (100. * withdrawal),
print ' '.join('(%i,%.1f)' % t for t in zip(100. * savings_rates, success_rates))
plt.xlabel('accumulation phase savings rate (%)')
plt.ylabel('success rate (%)')
plt.legend(legend)
plt.title('Historical success rates over %i years after accumulation phase\n(%i%% stock / %i%% bonds portfolio)' %
(PERIOD, STOCK_FRACTION * 100, BONDS_FRACTION * 100))
plt.grid(True)
plt.show()
def PlotFireYearDensity():
savings_rates = [0.1, 0.5, 0.9]
withdrawal = 0.04
years = np.arange(START_YEAR, END_YEAR, 0.1)
smoothing_years = 2.
def kernel(fire_year):
return np.exp(-0.5 * ((years - fire_year) / smoothing_years) ** 2)
legend = []
for savings_rate in savings_rates:
fire_years = SuccessRate(0, Accumulation(savings_rate, withdrawal), withdrawal)['fire_years']
distribution = np.sum([kernel(fire_year) for fire_year in fire_years], axis=0)
plt.plot(years, distribution, linewidth=1.0)
legend.append('%i%% SR' % (100. * savings_rate))
plt.xlabel('year')
plt.ylabel('FIRE density')
plt.legend(legend)
plt.title('FIRE year distribution under targeted accumulation phase\n(%i%% stock / %i%% bonds portfolio)' %
(STOCK_FRACTION * 100, BONDS_FRACTION * 100))
plt.grid(True)
plt.show()
The peaks seem to be smooth slopes on the climb with cliffs on the backside as the markets panic. Based on that, I would expect a stronger aversion to RE in a year like 2008 than a bias towards 2007.
CFiresim assumes you never work again.
Below is a clearer graph of success rate in function of savings rate instead of contribution rate. At typical 4% SWR and 50% savings rate, cFIREsim predicts 94.6% success, which goes down to 91.6% when considering the effect of market fluctuations on FIRE start year.
Below is a clearer graph of success rate in function of savings rate instead of contribution rate. At typical 4% SWR and 50% savings rate, cFIREsim predicts 94.6% success, which goes down to 91.6% when considering the effect of market fluctuations on FIRE start year.
Excellent analysis, thanks a lot for posting this!
I have a question about using PE10 to determine SWR: according to Mad Fientist who I believe used Kitces' analysis, the following formula can be used for SWR:
Safe Withdrawal Rate ~ 1/Shiller PE Ratio
The current PE10 is about 30, so the SWR is 3.333%.
Question: has this relationship been backtested? If so, how extensively? Would you rely on this formula to calculate your safe withdrawal rate?
Below is a clearer graph of success rate in function of savings rate instead of contribution rate. At typical 4% SWR and 50% savings rate, cFIREsim predicts 94.6% success, which goes down to 91.6% when considering the effect of market fluctuations on FIRE start year.
Excellent analysis, thanks a lot for posting this!
I have a question about using PE10 to determine SWR: according to Mad Fientist who I believe used Kitces' analysis, the following formula can be used for SWR:
Safe Withdrawal Rate ~ 1/Shiller PE Ratio
The current PE10 is about 30, so the SWR is 3.333%.
Question: has this relationship been backtested? If so, how extensively? Would you rely on this formula to calculate your safe withdrawal rate?
It was derived from historical data therefore back tested. It needs more analysis than just looking at it as it sits now the shiller is very inflated due to 09 earnings plummet in a couple years that will move off and it will normalize some. We're really not as high as shiller makes it look right now.
I as I said above rely on this formula from a simple data point that I'll use when I fire to help determine if I personally think my plan will work.
For example I'd feel very comfortable retiring today with 25x my expenses even with the shiller that high due to the reasons I think it's inflated above.
The individual has to take all data they have and apply it to their situation and determine if they are personally comfortable with the safety of their own fire plan.
The probabilistic problem solved by cFiresim/FIRECalc has the following form: You start with $1m at a random year, you spend $40k yearly from then on, what's the probability of success over 50 years?Wow, so, this is absolutely correct. The dependence of the early retirement variable with recent financial performance is super important. Now, assuming you can adjust your spending, you're still probably in OK shape, but this makes engineering tolerances that much more important. I think this adds considerably to the early retirement discussion, and I thank you for posting it.
The actual plan people follow is more like: You start at 0, you save $50k yearly, when you reach $1m you stop working, then you start spending $40k yearly, what's your probability of success over 50 years?
The 2 formulations look very similar, but the probabilities are very different. Can you see why?
I calculated that Plan A has 98% success rate while Plan B only has 40%!! (Python yahoo-finance package)
The reason is that under Plan B, the year you stop working is not actually uniformly distributed -- you're much more likely to retire on a peak year, and unlikely to retire just after a crash. This makes a big difference, because cFiresim assumes you could have retired on $1m in 2009, but that wouldn't happen on Plan B because you'd have had $2m in 2007 and would have retired then. On Plan B, you're more likely to have only $500k in 2009.
A better approach to increase your probability of success is Plan C: same as Plan B, but you're only allow to retire when your target has been reached for 5 years in a row. Success rate is back at 90% but you just lost 5 years... So, please be careful.
Update with analysis and figure (https://forum.mrmoneymustache.com/welcome-to-the-forum/cfiresim-severely-overestimates-success-rates-for-mustachians/msg1625045/#msg1625045)
But isn't the whole point of using PE10 to include recession years in profit calculations, not only good years? Given that normally, every 10 years or so there is a recession.
Do your simulations account for the fact that the market has been on a bit of a tear and the long-term upside is expected to be lower?
High CAPE ratios are a good predictor of low returns going forwards.
Do your simulations account for the fact that the market has been on a bit of a tear and the long-term upside is expected to be lower?
High CAPE ratios are a good predictor of low returns going forwards.
This is a Trinity study-like simulation that only compiles historical success rates of the aforementioned accumulation/withdrawal strategies; it is not Monte Carlo and does not attempt (at least not explicitly) to predict the success rate as of 2017.
Historical modeling doesn't assume it'll be like average, it assumes it won't be worst than the worst ever.Do your simulations account for the fact that the market has been on a bit of a tear and the long-term upside is expected to be lower?
High CAPE ratios are a good predictor of low returns going forwards.
This is a Trinity study-like simulation that only compiles historical success rates of the aforementioned accumulation/withdrawal strategies; it is not Monte Carlo and does not attempt (at least not explicitly) to predict the success rate as of 2017.
Hmm that's not good. People are blindly assuming that returns will follow the historical distribution when research shows that below-average returns should be expected.
Oh really? didn’t know that. How does 6% do historically ? 5%?
Oh really? didn’t know that. How does 6% do historically ? 5%?
Years of low or negative returns have happened in the past. That's taken into account.
Oh really? didn’t know that. How does 6% do historically ? 5%?
See the graph above in the limit of 100% savings rate (far right). Historically, 5% WR has ~70% success rate, 6% WR has 45%.
However at high WRs, it becomes more interesting to include flexible withdrawal strategies in the picture. I'm working on extending these simulations to quantify how high of a WR we can go with some amount of flexibility.
Also, the study is also nearly 20 years old.
If you read the newer study, I just think we should be skeptical of the 4% rule given that we are in an expensive market and proceed cautiously.
A CAPE ratio of <10 should has an expected return of 11.7% while a CAPE ratio of 30+ has an expected return of 0.5%..5% real gains? At 50 and an expected FIRE at 52 to 54, I would have to delay my retirement an additional 4 years to have the same "extra" amount of cash to spend each month as I would using a SWR of 4%, and that's even factoring the boost I would get in SS at age 62 from working those extra years. However, either way, I have a decent enough cushion that I wouldn't extend my working career, even if I could be certain of .5% real gains. I suspect most here expect their retirement to be longer than the 10 to 15 year time period referred to in the document.
And you think no one has updated it since?
I also worry that the very name of that thread "Stop Worrying about the 4% Rule" encourages people to accept it blindly.
For example my wife works as a physical therapist just a few days of the week, but i'm guessing even post FIRE she would work occasionally (maybe 1 day a week idk) so even just that hundred bucks of income/week would likely change things quite a bit. Especially since either of us could always pick up some work during severe dips quite easily.
I also worry that the very name of that thread "Stop Worrying about the 4% Rule" encourages people to accept it blindly.
I don't even accept gravity blindly, but I do accept it and encourage others to do the same.
It astounds me that anyone could read through the hundreds of pages of careful mathematical analysis this forum has done about safe withdrawal rates, and then accuse us of blind faith because of a thread title summarizing our findings.
And you think no one has updated it since?I don't know for sure. But, I don't trust MMM or the general public to either (1) read the actual study or (2) sufficiently critically consider its merits and drawbacks.
I think there is a lot of good information in the study, such as the benefit from maintaining a reasonably high allocation of equities.
As investment returns benefit from diversification, I also think it's safer to find wisdom in a lot of different viewpoints rather than to cling to a single piece of research.
I also worry that the very name of that thread "Stop Worrying about the 4% Rule" encourages people to accept it blindly.
It astounds me that anyone could read through the hundreds of pages of careful mathematical analysis this forum has done about safe withdrawal rates, and then accuse us of blind faith because of a thread title summarizing our findings.
It astounds me that anyone could read through the hundreds of pages of careful mathematical analysis this forum has done about safe withdrawal rates, and then accuse us of blind faith because of a thread title summarizing our findings.
If the there is no reason to worry about the 4% withdrawal rule (as per the thread title), why is hundreds of pages of careful mathematical analysis going on then?
Ahh, that got a chuckle. First the forum is wrong because they didn't think about it, them they're wrong because they thought about it too much. Well, which is it?
My concern was that a title like "Stop worrying about the 4% rule" could encourage the masses to blindly accept something without giving it careful consideration. Perhaps a title like that will instead lure people into a discussion in which case they educate themselves. I just think it's ironic that the title says stop worrying but the amount of research in the thread says the exact opposite. It's false advertising.
I think there's a lot of value warning people that if the market crashes or languishes in the 5 years after retirement, that you need to start implenting your backup plan(s).
That said, I think the far larger threat to a portfolio is unexpected expenses. This could be medical, taxes, lawsuits, or anything that cant be completely predicted or insured against. If anyone knows of a FIRE blogger that's had their 4% SWR portfolio survive a large disruption like that, I'd be very interested in seeing how they managed.
Your expenses could include a cushion of $10,000 year of unexpected things.Sure, but then it becomes the 3% (or 3.5% or 3.9% or whatever) rule.
Your expenses could include a cushion of $10,000 year of unexpected things.
I also worry that the very name of that thread "Stop Worrying about the 4% Rule" encourages people to accept it blindly.
I don't even accept gravity blindly, but I do accept it and encourage others to do the same.
It astounds me that anyone could read through the hundreds of pages of careful mathematical analysis this forum has done about safe withdrawal rates, and then accuse us of blind faith because of a thread title summarizing our findings.
- Life Insurance. My wife and I each have a 500,000 universal life policy on each other.
Not to completely take over this thread, but why in the world do you have these policies, and what are they costing you?
With so many backup plans, and the fact that since you are on this site you are likely to FIRE at an early age, you are probably one with the least need for a whole life plan(with my overall opinion being that NOBODY needs whole life).
A FIRE couple needs NO life insurance because you are a liability in FIRE, not an asset. Your remaining stashe need only fund one person instead of the planned 2 people.
I would cash out a whole life plan and buy a term life plan until FIRE to get the surviving spouse to FIRE upon the others death.
Stop worrying about the gravitational constant. Even if your assumptions turn out to be wrong, at least everyone else will fly off into space with you!
Why continually worry about outlying statistical situations that can neither be accurately predicted or mitigated against with a passive investment allocation? It's better to invest in adaptability skills in those potential situations. For the 4% rule to fail there has to be both a precipitous drop in asset value soon after draw-down begins AND long-term very low real returns. Even if this happens, someone with only half of FI assets remaining is better suited to take advantage of a universally bad situation, if they adapt to it.
- Life Insurance. My wife and I each have a 500,000 universal life policy on each other.
Not to completely take over this thread, but why in the world do you have these policies, and what are they costing you?
With so many backup plans, and the fact that since you are on this site you are likely to FIRE at an early age, you are probably one with the least need for a whole life plan(with my overall opinion being that NOBODY needs whole life).
A FIRE couple needs NO life insurance because you are a liability in FIRE, not an asset. Your remaining stashe need only fund one person instead of the planned 2 people.
I would cash out a whole life plan and buy a term life plan until FIRE to get the surviving spouse to FIRE upon the others death.
I agreed with radram, who so far is the only one to comment on this point. I agree that term life insurance, as opposed to universal life insurance, is a good idea during the accumulation phase, but not thereafter.
I think there's a lot of value warning people that if the market crashes or languishes in the 5 years after retirement, that you need to start implenting your backup plan(s).
That said, I think the far larger threat to a portfolio is unexpected expenses. This could be medical, taxes, lawsuits, or anything that cant be completely predicted or insured against. If anyone knows of a FIRE blogger that's had their 4% SWR portfolio survive a large disruption like that, I'd be very interested in seeing how they managed.
Why continually worry about outlying statistical situations that can neither be accurately predicted or mitigated against with a passive investment allocation? It's better to invest in adaptability skills in those potential situations. For the 4% rule to fail there has to be both a precipitous drop in asset value soon after draw-down begins AND long-term very low real returns. Even if this happens, someone with only half of FI assets remaining is better suited to take advantage of a universally bad situation, if they adapt to it.
I generally agree with this sentiment...("OMG!!! What if ____????!!! AHHHHH!!!!").
But you CAN address these fears...so if you have concerns, do some research and plug in numbers that would address them into cfiresim. You can do that...add to your projected annual budget, and/or periodic additional expenses. If that means working longer, well that is the price of being so conservative in your financial planning.
And then, if things are actually worse in a way that is unforeseen...well...life happens. I actually think the prospects of getting some crazy disease that could eat up a bunch of money is a good reason to retire earlier and enjoy life while you can (same goes for some kind of financial apocalypse). If these things come about, flexibility and badassity are two of your greatest assets in coping.
I think there's a lot of value warning people that if the market crashes or languishes in the 5 years after retirement, that you need to start implenting your backup plan(s).
That said, I think the far larger threat to a portfolio is unexpected expenses. This could be medical, taxes, lawsuits, or anything that cant be completely predicted or insured against. If anyone knows of a FIRE blogger that's had their 4% SWR portfolio survive a large disruption like that, I'd be very interested in seeing how they managed.
The general point being, there are significantly diminishing returns (by returns I mean anti-fragility or safety in FIRE) with dollars being saved after about 20-25X expenses. After that point, each year of expenses saved increases success rates (via historical back-testing) by very little in true S-curve fashion. If 3.5%WR rates fails, its likely a 2.5% WR will fail too, because some horrible economic calamady has taken place which was outside the scope of backtesting. That's a lot of extra years working for virtually no increase in FIRE safety margin.
Title should be cfiresim severely overestimates for non-Mustachians. For Mustachians, it barely overestimates, due to our high savings rates.
3) Once FIRED allocate enough to bonds/CDs, etc that a 5-10 year shit in the market won't be the end of the world since you're drawing down mostly from bonds/CDs (i have 25% in BND and will go to 5% after 10 years, so most of the first 10 years of FIRE will come from bond liquidation and interest/dividends, unless the stock market goes on a big run, in which case it won't matter anyway)
Title should be cfiresim severely overestimates for non-Mustachians. For Mustachians, it barely overestimates, due to our high savings rates.
I mean, I don't think anyone here will lay down and die on the street if the market crashes, so their "success" will always be 100%. Doesn't mean that their plan has worked though.
3) Once FIRED allocate enough to bonds/CDs, etc that a 5-10 year shit in the market won't be the end of the world since you're drawing down mostly from bonds/CDs (i have 25% in BND and will go to 5% after 10 years, so most of the first 10 years of FIRE will come from bond liquidation and interest/dividends, unless the stock market goes on a big run, in which case it won't matter anyway)
That sounds good in theory but a 50%/50% bond/stock allocation has lower success rate than 20/80 I think? Small difference either way.
3) Once FIRED allocate enough to bonds/CDs, etc that a 5-10 year shit in the market won't be the end of the world since you're drawing down mostly from bonds/CDs (i have 25% in BND and will go to 5% after 10 years, so most of the first 10 years of FIRE will come from bond liquidation and interest/dividends, unless the stock market goes on a big run, in which case it won't matter anyway)
That sounds good in theory but a 50%/50% bond/stock allocation has lower success rate than 20/80 I think? Small difference either way.
It makes complete sense because sequence of return risk is isolated to the first decade of draw-down (maybe a little more depending on specifics). This writer is sacrificing a few scenarios of dying very wealthy to limit the sequence risk. It's called a reverse glide path strategy and is a very sound theory.
- In terms of a shorter glidepath, we haven't yet tested extensively for varying the speed of the glidepath. I wouldn't be surprised at all if the optimal rising equity glidepath is at least SOMETHING faster than gliding for all 30 years (as realistically, the glidepath changes in the last 5-10 years have negligible effect anyway, because there just aren't many years remaining to compound). I doubt the optimal would be as fast as 3 years, though, as that's TOO fast and don't solve the REAL problem, which is not just bear markets but a mediocre DECADE (see http://www.kitces.com/blog/... ). A 3-year glidepath doesn't address the fact that the Dow hit 1,000 in 1966, hit 1,000 again in 1973, and hit 1,000 again in 1982. If you have a 3-year glidepath in 1966 or 1973, you averaged in "too fast" and still bore most of the volatility with little benefit. If I had to guess, we'll find that the optimal glidepath speed is probably more along the lines of gliding over the first 10-15 years and then leveling out. But again, that's still just a hypothesis we hope to test at this point. :)
Title should be cfiresim severely overestimates for non-Mustachians. For Mustachians, it barely overestimates, due to our high savings rates.
Disagree with this characterization. Check out the graph showing FIRE density again. Both 10% and 50% were highly nonuniform. It was at 90% where the effect on FIRE density was minor. I believe that a 50% SR is much more typical of Mustachians than 90%. 90 is deep in ERE-land.
It would be interesting to have more data points, but I think it's suggestive that 50% looks so much more like 10% than it does 90%.
I also worry that the very name of that thread "Stop Worrying about the 4% Rule" encourages people to accept it blindly.
I don't even accept gravity blindly, but I do accept it and encourage others to do the same.
It astounds me that anyone could read through the hundreds of pages of careful mathematical analysis this forum has done about safe withdrawal rates, and then accuse us of blind faith because of a thread title summarizing our findings.
I just computed it.Those are very interesting numbers. Even though I have been reading MMM for about 2 years and have seen the simulations that a higher percentage of stock results in a longer success rate, I have 30 years behind me of "when you get close to retirement shift your assets over to 50/50 or 60/40."
For reference, here are the success rates for 50 year periods at 4% WR as a function of (constant) stock allocation:
50%: 79.8%
60%: 86.2%
70%: 90.4%
80%: 92.6%
90%: 95.7%
100%: 94.7%
Now, starting at 50% allocation and increasing to 100% at a given pace, I get:
over 5 years: 95.7%
over 10 years: 96.8%
over 20 years: 94.7%
so 50% -> 100% over 10 years seems to be the sweet spot. I doubt the difference is statistically significant given the small data set though, because stopping at 90% allocation instead of 100% goes back to 95.7%.
I also worry that the very name of that thread "Stop Worrying about the 4% Rule" encourages people to accept it blindly.
I don't even accept gravity blindly, but I do accept it and encourage others to do the same.
It astounds me that anyone could read through the hundreds of pages of careful mathematical analysis this forum has done about safe withdrawal rates, and then accuse us of blind faith because of a thread title summarizing our findings.
Don't bother being astounded. It's been established he doesn't even bother to read the whole 4% thread, much less the many analysis threads that preceded and coincided with it.
The whole concept seems to be threatening his belief system. I suggest a mosey over to the Oatmeal for some background thoughts:
http://theoatmeal.com/comics/believe
I just computed it.
For reference, here are the success rates for 50 year periods at 4% WR as a function of (constant) stock allocation:
50%: 79.8%
60%: 86.2%
70%: 90.4%
80%: 92.6%
90%: 95.7%
100%: 94.7%
Now, starting at 50% allocation and increasing to 100% at a given pace, I get:
over 5 years: 95.7%
over 10 years: 96.8%
over 20 years: 94.7%
so 50% -> 100% over 10 years seems to be the sweet spot. I doubt the difference is statistically significant given the small dataset though, because stopping at 90% allocation instead of 100% goes back to 95.7%.
A natural follow-up to these simulations is coming up with the "ultimate withdrawal strategy", which I guess would be along the lines of start aggressively at a high WR%, be flexible, and ramp up stock allocation in the first decade. Unfortunately, historical data to backtest this is pretty sparse, so we'd probably be overfitting quickly, and finding it wouldn't improve things all that much, especially considering other risks that are not part of the model.
http://theoatmeal.com/comics/believe
http://theoatmeal.com/comics/believe
Delightful.
Thanks for the runs!
I wonder if the impact becomes more pronounced at higher WR's... like 4.5 or 5? (im too lazy at the moment, lol)
Also an important subject for some, how much left at the end for legacy? IOW how much legacy potential is sacrificed for slightly higher success rates?
I didn't give a shit about any of the "facts" presented. Maybe I have no beliefs.
Thanks for the runs!
I wonder if the impact becomes more pronounced at higher WR's... like 4.5 or 5? (im too lazy at the moment, lol)
Also an important subject for some, how much left at the end for legacy? IOW how much legacy potential is sacrificed for slightly higher success rates?
Success rates for 50 year periods at 5% WR as a function of (constant) stock allocation:
50%: 39.4%
60%: 47.9%
70%: 58.5%
80%: 66.0%
90%: 72.3%
100%: 72.3%
50% -> 100% allocation ramp up
over 5 years: 73.4%
over 10 years: 69.1%
over 20 years: 63.8%
Conclusion: for 5% WR a high stock allocation is even more crucial (constant 80/20 is much worse), so makes sense that optimal ramp up period of 5 years is shorter. Then again, very noisy numbers, we're talking a handful of failed years difference between the strategies.
Your data runs are very helpful. Would you mind re-running the glide path with different initial allocations? ie - initial 40, 50, 60, 70, 80, 90% stocks. The withdrawal rates at 4, 4.5 and 5% are probably most interesting.
| ramp up over (years) \ initial stock allocation (%) | 40 | 50 | 60 | 70 | 80 | 90 | 100 |
| 3 | 95.7 | 96.8 | 97.9 | 97.9 | 96.8 | 95.7 | 94.7 |
| 5 | 93.6 | 95.7 | 97.9 | 97.9 | 96.8 | 95.7 | 94.7 |
| 7 | 94.7 | 96.8 | 96.8 | 97.9 | 96.8 | 95.7 | 94.7 |
| 10 | 93.6 | 96.8 | 96.8 | 97.9 | 96.8 | 95.7 | 94.7 |
| 15 | 94.7 | 94.7 | 97.9 | 97.9 | 96.8 | 95.7 | 94.7 |
| inf | 62.8 | 79.8 | 86.2 | 90.4 | 92.6 | 95.7 | 94.7 |
| ramp up over (years) \ initial stock allocation (%) | 40 | 50 | 60 | 70 | 80 | 90 | 100 |
| 3 | 81.9 | 81.9 | 83.0 | 83.0 | 83.0 | 80.9 | 83.0 |
| 5 | 78.7 | 81.9 | 81.9 | 81.9 | 83.0 | 79.8 | 83.0 |
| 7 | 77.7 | 80.9 | 81.9 | 80.9 | 83.0 | 79.8 | 83.0 |
| 10 | 77.7 | 80.9 | 80.9 | 80.9 | 81.9 | 79.8 | 83.0 |
| 15 | 72.3 | 78.7 | 79.8 | 79.8 | 80.9 | 79.8 | 83.0 |
| inf | 41.5 | 54.3 | 67.0 | 74.5 | 79.8 | 79.8 | 83.0 |
| ramp up over (years) \ initial stock allocation (%) | 40 | 50 | 60 | 70 | 80 | 90 | 100 |
| 3 | 71.3 | 71.3 | 71.3 | 72.3 | 72.3 | 73.4 | 72.3 |
| 5 | 70.2 | 73.4 | 72.3 | 72.3 | 73.4 | 74.5 | 72.3 |
| 7 | 69.1 | 71.3 | 72.3 | 71.3 | 74.5 | 74.5 | 72.3 |
| 10 | 67.0 | 69.1 | 69.1 | 69.1 | 73.4 | 74.5 | 72.3 |
| 15 | 61.7 | 63.8 | 66.0 | 67.0 | 73.4 | 74.5 | 72.3 |
| inf | 31.9 | 39.4 | 47.9 | 58.5 | 66.0 | 72.3 | 72.3 |
| ramp up over (years) \ initial stock allocation (%) | 40 | 50 | 60 | 70 | 80 | 90 | 100 |
| 3 | 58.5 | 58.5 | 57.4 | 59.6 | 59.6 | 58.5 | 57.4 |
| 5 | 58.5 | 59.6 | 59.6 | 59.6 | 59.6 | 57.4 | 57.4 |
| 7 | 59.6 | 58.5 | 57.4 | 58.5 | 59.6 | 57.4 | 57.4 |
| 10 | 56.4 | 56.4 | 57.4 | 56.4 | 58.5 | 57.4 | 57.4 |
| 15 | 51.1 | 52.1 | 53.2 | 56.4 | 56.4 | 57.4 | 57.4 |
| inf | 17.0 | 30.9 | 39.4 | 41.5 | 47.9 | 55.3 | 57.4 |
| ramp up over (years) \ initial stock allocation (%) | 40 | 50 | 60 | 70 | 80 | 90 | 100 |
| 3 | 45.7 | 47.9 | 47.9 | 48.9 | 46.8 | 50.0 | 52.1 |
| 5 | 45.7 | 47.9 | 48.9 | 46.8 | 48.9 | 51.1 | 52.1 |
| 7 | 45.7 | 46.8 | 46.8 | 46.8 | 47.9 | 48.9 | 52.1 |
| 10 | 43.6 | 44.7 | 44.7 | 44.7 | 45.7 | 47.9 | 52.1 |
| 15 | 39.4 | 42.6 | 42.6 | 43.6 | 44.7 | 47.9 | 52.1 |
| inf | 12.8 | 18.1 | 30.9 | 36.2 | 40.4 | 45.7 | 52.1 |
Why continually worry about outlying statistical situations that can neither be accurately predicted or mitigated against with a passive investment allocation? It's better to invest in adaptability skills in those potential situations. For the 4% rule to fail there has to be both a precipitous drop in asset value soon after draw-down begins AND long-term very low real returns. Even if this happens, someone with only half of FI assets remaining is better suited to take advantage of a universally bad situation, if they adapt to it.
If 3.5%WR rates fails, its likely a 2.5% WR will fail too, because some horrible economic calamady has taken place which was outside the scope of backtesting. That's a lot of extra years working for virtually no increase in FIRE safety margin.
The 4% rule et al is pretty dynamic but relies on static expenses in real terms.
The 4% rule et al is pretty dynamic but relies on static expenses in real terms.
What do you mean by "dynamic" here?
If 3.5%WR rates fails, its likely a 2.5% WR will fail too, because some horrible economic calamady has taken place which was outside the scope of backtesting. That's a lot of extra years working for virtually no increase in FIRE safety margin.
The 3% withdrawal rate was pretty rock-solid in the study. 2% must be super-mega-rock-solid. It seems fairly unlikely for either to fail, in which case nobody really knows what a scenario looks like where 3% fails and 2% doesn't. The above statement thought is complete and utter speculation and I wouldn't trust it.
If 3.5%WR rates fails, its likely a 2.5% WR will fail too, because some horrible economic calamady has taken place which was outside the scope of backtesting. That's a lot of extra years working for virtually no increase in FIRE safety margin.
The 3% withdrawal rate was pretty rock-solid in the study. 2% must be super-mega-rock-solid. It seems fairly unlikely for either to fail, in which case nobody really knows what a scenario looks like where 3% fails and 2% doesn't. The above statement thought is complete and utter speculation and I wouldn't trust it.
You've made it quite clear you don't trust anything around here. I will rephrase the statement.
If historical back-testing shows a 100% success rate for a 3.5% WR, then some sequence of economic events occurs which causes a failure of 3.5%WR. It becomes clear the new sequence of events is outside the scope of historical back-testing, hence this data is irrelevant. No WR (2.5 or less) is technically "safe" based on back-testing because we are in virgin territory.
In historical back-testing there is a VERY clear S-curve in portfolio success rates, the 4% rule is clearly on the far right of that curve. Each year of additional savings has significantly diminishing returns to success rates. One is better off mitigating risk in others ways vs saving piles of extra money that remains at risk.
If you are interested in risk mitigation for unpredictable events I suggest you read Taleb. Then come back and comment.
What was the SWR for Jews in nazi Germany? East Berliners when the wall went up? Chinese nationalists during the communist revolution? 2 vs 3% didn't make a difference and is part of the reason the permanent portfolio technically holds physical gold.Best strategy in those situations is to already be wealthy and MOVE.
What was the SWR for Jews in nazi Germany? East Berliners when the wall went up? Chinese nationalists during the communist revolution? 2 vs 3% didn't make a difference and is part of the reason the permanent portfolio technically holds physical gold.Best strategy in those situations is to already be wealthy and MOVE.
What was the SWR for Jews in nazi Germany? East Berliners when the wall went up? Chinese nationalists during the communist revolution? 2 vs 3% didn't make a difference and is part of the reason the permanent portfolio technically holds physical gold.Best strategy in those situations is to already be wealthy and MOVE.
Sure, but you are likely leaving the majority of your wealth behind, be it 25 or 50x expenses.
What was the SWR for Jews in nazi Germany? East Berliners when the wall went up? Chinese nationalists during the communist revolution? 2 vs 3% didn't make a difference and is part of the reason the permanent portfolio technically holds physical gold.Best strategy in those situations is to already be wealthy and MOVE.
Sure, but you are likely leaving the majority of your wealth behind, be it 25 or 50x expenses.
What was the SWR for Jews in nazi Germany? East Berliners when the wall went up? Chinese nationalists during the communist revolution? 2 vs 3% didn't make a difference and is part of the reason the permanent portfolio technically holds physical gold.Best strategy in those situations is to already be wealthy and MOVE.
Sure, but you are likely leaving the majority of your wealth behind, be it 25 or 50x expenses.
Assuming you wait to leave until after capital controls are put into place. Otherwise just transfer your money out.
If you cannot do that, how likely are you to be able to get your physical gold out of the country without having it seized? An average sized stash (say $600k) would be about 35 lbs of gold at current prices, which would be hard to hide in your carry on luggage and in a situation with capital controls I imagine you wouldn't just be able to declare it and take it with you no questions asked.
What was the SWR for Jews in nazi Germany? East Berliners when the wall went up? Chinese nationalists during the communist revolution? 2 vs 3% didn't make a difference and is part of the reason the permanent portfolio technically holds physical gold.Best strategy in those situations is to already be wealthy and MOVE.
Sure, but you are likely leaving the majority of your wealth behind, be it 25 or 50x expenses.
Assuming you wait to leave until after capital controls are put into place. Otherwise just transfer your money out.
If you cannot do that, how likely are you to be able to get your physical gold out of the country without having it seized? An average sized stash (say $600k) would be about 35 lbs of gold at current prices, which would be hard to hide in your carry on luggage and in a situation with capital controls I imagine you wouldn't just be able to declare it and take it with you no questions asked.
I don't personally keep gold around for SHTF scenarios, but in theory it's great for bribes, chartering travel, whatever is necessary.
I like yous guys attitude. Just leave before SHTF or capital controls are in place. Likewise, invest in 100% stocks and just sell before the crash. Buy in at the bottom. Simple, right?
These days, it's easy to move money around, as long as the electronic systems are working. I'm not a conspiracy theorist, but I wouldn't be surprised if the government had the ability to shut down or reverse electronic money transfer at will. You do keep your money as 1's and 0's in the bank, right?
Fortunately there is no equivalent of the efficient market hypothesis for the emergence of totalitarian regimes.
Or just keep your money in a bank in Switzerland.
Or just keep your money in a bank in Switzerland.
Yeah, sure. Do you?
Not that the US couldn't touch it. If Trump, in a fever dream, told Switzerland "wire the money or bombs" I think they would comply. If they didn't your money would still be gone.
Fortunately there is no equivalent of the efficient market hypothesis for the emergence of totalitarian regimes.
Since the market is efficient, it will tank long before you are personally aware of SHTF. This will leave you with approximately bupkis to flee. If index funds existed in 1933, you would have had a decent 10 years of negative returns to fund your escape.
Fortunately there is no equivalent of the efficient market hypothesis for the emergence of totalitarian regimes.
Since the market is efficient, it will tank long before you are personally aware of SHTF. This will leave you with approximately bupkis to flee. If index funds existed in 1933, you would have had a decent 10 years of negative returns to fund your escape.
Kristallnacht happened in 1938. The german stock market didn't start to decline until 1944.
So here's my tip - when you see massive numbers of wealthy people fleeing your country - join them ASAP.
If something forces me to flee the country and I have enough assets to buy or bribe my way out with my family and shirt on my back, I call that a win. Similarly, if I or a family member catches an awful expensive disease that isn't covered by insurance or state health care and that wipes out all my money, I call that a win.
There are some things that money can't buy, for everything else, there'sMastercardmoney.
The purpose of the SWR isn't to protect me from aliens and Daleks, it is to make my no worse financially off than if I'd stayed at work.
Why continually worry about outlying statistical situations that can neither be accurately predicted or mitigated against with a passive investment allocation? It's better to invest in adaptability skills in those potential situations. For the 4% rule to fail there has to be both a precipitous drop in asset value soon after draw-down begins AND long-term very low real returns. Even if this happens, someone with only half of FI assets remaining is better suited to take advantage of a universally bad situation, if they adapt to it.
Vanguard says that P/E is a reliable indicator of future returns. No formula is going to give you the day or week when the market corrects or tumbles, but it appears there are warning signs and strategies that can help.
The 4% rule failed after the great depression, and when enough history plays out, it might also fail during some of the severe downturns of the 2000's. Guess what? CAPE market valuations are back up in lime with the great depression started (although I would argue it's not quite as bad now as it was then). Don't give yourself a false sense of security that the idea from a single research paper puts the question of the safety of a 4% withdrawal rate to rest, at least with these high market valuations.
The 4% rule failed after the great depression, and when enough history plays out, it might also fail during some of the severe downturns of the 2000's.
The bolded statement is not true, and Sol and others have already debunked similar statements that you made in the 4% rule thread. Go run cFiresim at either a 60/40 or 75/25 stock/bond allocation, and you will see that the only failures occurred for start years in the mid and late 1960's, due to the 1970s stagflation era. The Great Depression did NOT cause a failure of the 4% rule. And if you run a 17-year sim that captures the Y2k retiree, he/she is doing demonstrably better than any of the 1960s/70s failure trajectories were doing 17 years in. I'm pretty sure this has been pointed out to you before also.
Please stop spreading misinformation.
If we assume that market returns will not be as good for the next 30 years (CAPE research shows this to be very likely) then you would probably get a significantly higher success rate.Market returns being not as good due to a current high CAPE would result in a "lower" success rate, higher "failure" rate.
Please stop spreading misinformation.
If we assume that market returns will not be as good for the next 30 years (CAPE research shows this to be very likely) then you would probably get a significantly higher success rate.Market returns being not as good due to a current high CAPE would result in a "lower" success rate, higher "failure" rate.
Please stop spreading misinformation.
I hope you all have financially secure early retirements. I'm hoping to quit around age 60 with almost $2M.
All you have to do is look at Table 3 in the original Trinity Study and you'll see that for a 30-yr time frame with an adjustment for inflation between 1926-1995 the success rate was only 95%-98% for a portfolio that had at least 1/2 stocks, 71% success for 25% stocks, and only 20% success for 100% bonds. Not sure why my statement is true! Let's see what we think about you not worrying about the year-2000 retiree...
cFiresim is only one simulation tool, and it doesn't even agree with the results of the Trinity study. As long as people are going to quote the 4% rule I'm going to stick with one of the sources of that very rule.
But let's use it to simulate a 30-yr outcome starting at 2000. We don't need to stop at 17 years of simulation, we can do it in two stages to try and add on the other 13 years to get a proper 30-yr time frame, shall we?
I used the cFiresim default calculations with a 2017 retirement date and a 2034 retirement end year. Someone starting with $1M in 2000 would only have about $629K of their portfolio left in a US market - with a lofty CAPE ratio of 30 - we can't even factor in how expensive the market is, but that doesn't sound very safe at all.
Put that $629K back in the simulator and run it for another 13 years. Adjusting expenses for inflation, $40,000 in 2000 is now $57,545 in 2017, so that's our starting expense number, and the simulations years are 2017-2030. Now let's count how many times the portfolio fails over the 134 historical simulations. The answer is 48! That's the best way I can think to simulate a 30-yr horizon starting with 2000, and I get a 36% failure rate with this method.
If we assume that market returns will not be as good for the next 30 years (CAPE research shows this to be very likely) then you would probably get a significantly higher success rate.
Please stop spreading misinformation.
Fortunately there is no equivalent of the efficient market hypothesis for the emergence of totalitarian regimes.
Since the market is efficient, it will tank long before you are personally aware of SHTF. This will leave you with approximately bupkis to flee. If index funds existed in 1933, you would have had a decent 10 years of negative returns to fund your escape.
Kristallnacht happened in 1938. The german stock market didn't start to decline until 1944.
I was hardly there, but according to Wikipedia, we are talking hyperinflation, then 30% unemployment rate, followed by closure of exchanges in 1935. If that happened in the US, you would not have much left.
Why continually worry about outlying statistical situations that can neither be accurately predicted or mitigated against with a passive investment allocation? It's better to invest in adaptability skills in those potential situations. For the 4% rule to fail there has to be both a precipitous drop in asset value soon after draw-down begins AND long-term very low real returns. Even if this happens, someone with only half of FI assets remaining is better suited to take advantage of a universally bad situation, if they adapt to it.
Vanguard says that P/E is a reliable indicator of future returns. No formula is going to give you the day or week when the market corrects or tumbles, but it appears there are warning signs and strategies that can help.
The 4% rule failed after the great depression, and when enough history plays out, it might also fail during some of the severe downturns of the 2000's. Guess what? CAPE market valuations are back up in lime with the great depression started (although I would argue it's not quite as bad now as it was then). Don't give yourself a false sense of security that the idea from a single research paper puts the question of the safety of a 4% withdrawal rate to rest, at least with these high market valuations.
The bolded statement is not true, and Sol and others have already debunked similar statements that you made in the 4% rule thread. Go run cFiresim at either a 60/40 or 75/25 stock/bond allocation, and you will see that the only failures occurred for start years in the mid and late 1960's, due to the 1970s stagflation era. The Great Depression did NOT cause a failure of the 4% rule. And if you run a 17-year sim that captures the Y2k retiree, he/she is doing demonstrably better than any of the 1960s/70s failure trajectories were doing 17 years in. I'm pretty sure this has been pointed out to you before also.
Please stop spreading misinformation.
Runewell, you do realize you're not being very consistent here, right? You've been dismissing the trinity study on these threads for the last few days as a twenty year old out of date study, people have pointed out the wide range of updated research and simulation tools, and now you've turned around and are holding up the original 1995 paper as the gold standard.
Again, we've already discussed how the CAPE ratio is misleading, in fact you're the one who linked to the study (https://forum.mrmoneymustache.com/welcome-to-the-forum/what-is-your-expected-long-term-rate-of-return-for-the-sp-500/msg1635569/#msg1635569) showing that it is currently overestimating how overpriced the market is, perhaps by as much as 50%.
I'm assuming you clicked the "adjust for inflation" box in cFireSim, so that $629K is in 2000 dollars. So you'll want to either keep spending constant at $40k/year which is probably the simplest approach, or also adjust $629k in remaining net worth up to the $912k it is in 2017 dollars.
Since the market is efficient
I sincerely don't want to spread false information.
please please stop talking about the CAPE being at 30 and how that predicts terrible stock market returns, which you and I and basically everyone else agrees that comparing CAPE values today to those from before the 1990s is actively misleading. (Note: If you want to point out that the markets are overvalued, go for it! Just don't claim the CAPE value is an accurate representation of how overvalued they are.)
Anyway, it's a free country, but that's my advice.
I hope you all have financially secure early retirements. I'm hoping to quit around age 60 with almost $2M. I would retire earlier than that but I am reluctant to take any chances with health insurance and costs which is the biggest unknown apart from stock returns.That's true about the health insurance - I've got a couple years, maybe longer, to see how things play out. Based on some increases over my current expenses that I expect at FIRE, I should be able to get by with a 2% WR over 35 years to cover increased expenses and still have a monthly cushion, and that's even without factoring in SS 10 years into retirement. cFiresim gives me 100% with 5% WR equivalent when I factor in SS @62. 4% would be fine with me, but at least I know I have room to be flexible without necessarily having to return to work or cut to bare bones, although some part time or side gigs are not out of the question if I feel like doing that.
Fortunately there is no equivalent of the efficient market hypothesis for the emergence of totalitarian regimes.
Since the market is efficient, it will tank long before you are personally aware of SHTF. This will leave you with approximately bupkis to flee. If index funds existed in 1933, you would have had a decent 10 years of negative returns to fund your escape.
Kristallnacht happened in 1938. The german stock market didn't start to decline until 1944.
I was hardly there, but according to Wikipedia, we are talking hyperinflation, then 30% unemployment rate, followed by closure of exchanges in 1935. If that happened in the US, you would not have much left.
I'll just leave this chart here.
(https://i.imgpile.com/n5C8tM.png) (https://imgpile.com/i/n5C8tM)
Don't get me wrong, I don't hide my money in a mattress, think collapse of the US is likely, etc. But I also don't kid myself that the number cFiresim spits out is the end-all and be-all of success rate, for broad definitions of success. Once you get to the point that non-investment risks are on par with investment risks, it doesn't make sense to increase your savings.Out of curiosity, what do you think the probability of non-investment risk over the next say 50 years is?
Noted. As they say: "Always sell right after the landwar in Asia"
but I don't know how to price in global financial collapse, aliens, or Republicans winning the next 10 elections.
I'll just leave this chart here.
(https://i.imgpile.com/n5C8tM.png) (https://imgpile.com/i/n5C8tM)
Since the market is efficient
Robert Shiller in one of his lectures called the Efficient Market Hypothesis a "half-truth".
Don't get me wrong, I don't hide my money in a mattress, think collapse of the US is likely, etc. But I also don't kid myself that the number cFiresim spits out is the end-all and be-all of success rate, for broad definitions of success. Once you get to the point that non-investment risks are on par with investment risks, it doesn't make sense to increase your savings.Out of curiosity, what do you think the probability of non-investment risk over the next say 50 years is?
Some risks are local and have standard methods of assessing, like earthquakes, floods, etc. but I don't know how to price in global financial collapse, aliens, or Republicans winning the next 10 elections.
I'm fine using this as a rule of thumb, however, since it jives nicely with the 80/20 rule, and the idea of diminishing benefits after you reach an 80% cFireSim success rate.
Sweet, great post, thanks. My intuition tells my that starting at 40% bonds, following a 2% glide path per year to 20%, and then a 1% per year to 10% is about right. I don't think it is smart to get below 10% bonds because the market can always crash 90%,, which could put you in a tight spot even after 20 years. Plus it matches my narrative the optimal range is 10%-40% bonds, and allows me to check "all of the above"!Your data runs are very helpful. Would you mind re-running the glide path with different initial allocations? ie - initial 40, 50, 60, 70, 80, 90% stocks. The withdrawal rates at 4, 4.5 and 5% are probably most interesting.
Here you go.
4.0% WR
ramp up over (years) \ initial stock allocation (%) 40 50 60 70 80 90 100 3 95.7 96.8 97.9 97.9 96.8 95.7 94.7 5 93.6 95.7 97.9 97.9 96.8 95.7 94.7 7 94.7 96.8 96.8 97.9 96.8 95.7 94.7 10 93.6 96.8 96.8 97.9 96.8 95.7 94.7 15 94.7 94.7 97.9 97.9 96.8 95.7 94.7 inf 62.8 79.8 86.2 90.4 92.6 95.7 94.7
Besides, if a country does nationalize (like Germany or China), gold won't help - it'll be taken from you like everything else. Whether you stay or go, physical assets can be seized just as easily as any other asset.
Assuming you wait to leave until after capital controls are put into place. Otherwise just transfer your money out.Technically, the PP calls for most of your gold to be stored out of the country and far overseas, with just enough in a safe deposit box to make bribes.
If you cannot do that, how likely are you to be able to get your physical gold out of the country without having it seized? An average sized stash (say $600k) would be about 35 lbs of gold at current prices, which would be hard to hide in your carry on luggage and in a situation with capital controls I imagine you wouldn't just be able to declare it and take it with you no questions asked.
Since it hasn't been linked in this thread yet, William Bernstein's short treatment of how investment risk differs from other risks: http://www.efficientfrontier.com/ef/901/hell3.htmYou should read more Bernstein. In "Deep Risk" he analyzes stocks during the German hyper inflation and finds that after a lag of a year or two they come out very well.
Don't get me wrong, I don't hide my money in a mattress, think collapse of the US is likely, etc. But I also don't kid myself that the number cFiresim spits out is the end-all and be-all of success rate, for broad definitions of success. Once you get to the point that non-investment risks are on par with investment risks, it doesn't make sense to increase your savings.Fortunately there is no equivalent of the efficient market hypothesis for the emergence of totalitarian regimes.
Since the market is efficient, it will tank long before you are personally aware of SHTF. This will leave you with approximately bupkis to flee. If index funds existed in 1933, you would have had a decent 10 years of negative returns to fund your escape.
Kristallnacht happened in 1938. The german stock market didn't start to decline until 1944.
I was hardly there, but according to Wikipedia, we are talking hyperinflation, then 30% unemployment rate, followed by closure of exchanges in 1935. If that happened in the US, you would not have much left.
I promised to stop posting, but this topic is very interesting to me (complex systems, and the impact of disruptive forces on economic valuations of equities). So perhaps a rare appearance to comment.That's stupid, why would you stop posting? Because Boarder42 had a hissy fit? You've been one of the better and more knowledgeable posters here, with a slightly different perspective. Keep posting.
Sweet, great post, thanks. My intuition tells my that starting at 40% bonds, following a 2% glide path per year to 20%, and then a 1% per year to 10% is about right. I don't think it is smart to get below 10% bonds because the market can always crash 90%,, which could put you in a tight spot even after 20 years. Plus it matches my narrative the optimal range is 10%-40% bonds, and allows me to check "all of the above"!
Hmmm so similar results to similar options but more complicated :).Sweet, great post, thanks. My intuition tells my that starting at 40% bonds, following a 2% glide path per year to 20%, and then a 1% per year to 10% is about right. I don't think it is smart to get below 10% bonds because the market can always crash 90%,, which could put you in a tight spot even after 20 years. Plus it matches my narrative the optimal range is 10%-40% bonds, and allows me to check "all of the above"!
You're right, I just backtested your strategy and I get 97.9% success (only 2 failed starting years), which is on par with the best strategy. Pretty much anything that starts with 60-70% stock and ramps up to 90-100% in 3-10 years gets around this success rate. Looking at higher WRs, similar strategies work well too, but it becomes more important to ramp up to high stock quickly (3-5 years) and/or start at higher stock (80%) and not linger too long in bonds.
All you have to do is look at Table 3 in the original Trinity Study and you'll see that for a 30-yr time frame with an adjustment for inflation between 1926-1995 the success rate was only 95%-98% for a portfolio that had at least 1/2 stocks, 71% success for 25% stocks, and only 20% success for 100% bonds. Not sure why my statement is true! Let's see what we think about you not worrying about the year-2000 retiree...
cFiresim is only one simulation tool, and it doesn't even agree with the results of the Trinity study. As long as people are going to quote the 4% rule I'm going to stick with one of the sources of that very rule.
Runewell, you do realize you're not being very consistent here, right? You've been dismissing the trinity study on these threads for the last few days as a twenty year old out of date study, people have pointed out the wide range of updated research and simulation tools, and now you've turned around and are holding up the original 1995 paper as the gold standard.
One example (https://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/msg1629500/#msg1629500)QuoteBut let's use it to simulate a 30-yr outcome starting at 2000. We don't need to stop at 17 years of simulation, we can do it in two stages to try and add on the other 13 years to get a proper 30-yr time frame, shall we?
I used the cFiresim default calculations with a 2017 retirement date and a 2034 retirement end year. Someone starting with $1M in 2000 would only have about $629K of their portfolio left in a US market - with a lofty CAPE ratio of 30 - we can't even factor in how expensive the market is, but that doesn't sound very safe at all.
Again, we've already discussed how the CAPE ratio is misleading, in fact you're the one who linked to the study (https://forum.mrmoneymustache.com/welcome-to-the-forum/what-is-your-expected-long-term-rate-of-return-for-the-sp-500/msg1635569/#msg1635569) showing that it is currently overestimating how overpriced the market is, perhaps by as much as 50%.QuotePut that $629K back in the simulator and run it for another 13 years. Adjusting expenses for inflation, $40,000 in 2000 is now $57,545 in 2017, so that's our starting expense number, and the simulations years are 2017-2030. Now let's count how many times the portfolio fails over the 134 historical simulations. The answer is 48! That's the best way I can think to simulate a 30-yr horizon starting with 2000, and I get a 36% failure rate with this method.
I'm assuming you clicked the "adjust for inflation" box in cFireSim, so that $629K is in 2000 dollars. So you'll want to either keep spending constant at $40k/year which is probably the simplest approach, or also adjust $629k in remaining net worth up to the $912k it is in 2017 dollars.QuoteIf we assume that market returns will not be as good for the next 30 years (CAPE research shows this to be very likely) then you would probably get a significantly higher success rate.
Please stop spreading misinformation.
Again, you yourself pointed out that the CAPE is drastically overestimating how overvalued the market is right now.
Runewell, you do realize you're not being very consistent here, right? You've been dismissing the trinity study on these threads for the last few days as a twenty year old out of date study, people have pointed out the wide range of updated research and simulation tools, and now you've turned around and are holding up the original 1995 paper as the gold standard.
I noted that the Trinity study was 20 years old, and that it should be supplemented with newer ideas, but I don't believe i dismissed it. My point was that with markets at high valuations, using any method with a historical lookback of investment returns would be too optimistic since research shows that higher valuations lead to lower than average returns going forward.
One example (https://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/msg1629500/#msg1629500)Again, we've already discussed how the CAPE ratio is misleading, in fact you're the one who linked to the study (https://forum.mrmoneymustache.com/welcome-to-the-forum/what-is-your-expected-long-term-rate-of-return-for-the-sp-500/msg1635569/#msg1635569) showing that it is currently overestimating how overpriced the market is, perhaps by as much as 50%.
Yes I did, but the conclusion still shows that markets are quite expensive. And Vanguard agrees that high P/Es lead to lower returns going forward.QuoteI'm assuming you clicked the "adjust for inflation" box in cFireSim, so that $629K is in 2000 dollars. So you'll want to either keep spending constant at $40k/year which is probably the simplest approach, or also adjust $629k in remaining net worth up to the $912k it is in 2017 dollars.
OK I made a mistake there. I looked at the column (new at this) and want this to be right and not exaggerate it.
882,830 is the portfolio value and i'll apply 1.5% inflation to the last spending number to get 56,983.
The failure rate is 5.2% that's much better. I still claim that the true failure rate is higher than that with an expensive market, but as others have said predictions are tricky. Thanks for noting my mistake, I sincerely don't want to spread false information.
"All models are wrong. But some are useful."
Runewell, you do realize you're not being very consistent here, right? You've been dismissing the trinity study on these threads for the last few days as a twenty year old out of date study, people have pointed out the wide range of updated research and simulation tools, and now you've turned around and are holding up the original 1995 paper as the gold standard.
I noted that the Trinity study was 20 years old, and that it should be supplemented with newer ideas, but I don't believe i dismissed it. My point was that with markets at high valuations, using any method with a historical lookback of investment returns would be too optimistic since research shows that higher valuations lead to lower than average returns going forward.
One example (https://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/msg1629500/#msg1629500)Again, we've already discussed how the CAPE ratio is misleading, in fact you're the one who linked to the study (https://forum.mrmoneymustache.com/welcome-to-the-forum/what-is-your-expected-long-term-rate-of-return-for-the-sp-500/msg1635569/#msg1635569) showing that it is currently overestimating how overpriced the market is, perhaps by as much as 50%.
Yes I did, but the conclusion still shows that markets are quite expensive. And Vanguard agrees that high P/Es lead to lower returns going forward.QuoteI'm assuming you clicked the "adjust for inflation" box in cFireSim, so that $629K is in 2000 dollars. So you'll want to either keep spending constant at $40k/year which is probably the simplest approach, or also adjust $629k in remaining net worth up to the $912k it is in 2017 dollars.
OK I made a mistake there. I looked at the column (new at this) and want this to be right and not exaggerate it.
882,830 is the portfolio value and i'll apply 1.5% inflation to the last spending number to get 56,983.
The failure rate is 5.2% that's much better. I still claim that the true failure rate is higher than that with an expensive market, but as others have said predictions are tricky. Thanks for noting my mistake, I sincerely don't want to spread false information.
"All models are wrong. But some are useful."
Not quite sure what you're doing with the inflation adjustment there. It would be simpler to do as maizeman said and just plug in the ending value from the 17 year run (629k) for the stash and keep the spending at 40k. cFiresim handles the inflation adjustment for you. When I do that with either a 60/40 or 75/25 asset breakdown, I get a failure rate of less than 4%. All the failure runs in the modern era occurred during the stagflation period, which followed a period of garden-variety high CAPE (low 20s) in the late 60s. I say "modern era" because under the 60/40 scenario, start year 1912 also failed. Notably, the 13 year period beginning in 2000 did not fail (although it came close with the 75/25 breakdown). So the 4% rule survived a 30 year period that experienced the highest CAPE in recorded history twice.
Darnit, now that you've shown that people shouldn't worry about CAPE
Darnit, now that you've shown that people shouldn't worry about CAPE
When did this happen? I think CAPE is still a worry.
I don't worry about it, but I'm just prepared for the next 10 to 15 years to provide much lower "real" gains than what we've been getting since 2009, and less than the historical average.
I think this depend on your details. If you've been preparing that long, you shouldn't be worried now, just prepared. Speaking of 2013, that's when I reached the magic 25x. I'm well above that now and will FIRE in 22 months as long as the market doesn't tank too badly. I'm just not going to worry about it.I don't worry about it, but I'm just prepared for the next 10 to 15 years to provide much lower "real" gains than what we've been getting since 2009, and less than the historical average.
I was "preparing" myself for this since 2013's gangbuster. I've had double digit returns (counting 2017 YTD) three of the last four years since then. Should I be more or less worried now?
Congratulations, this wins dumbest post on MMM forums 2017! Your prize? You get to continue regurgitating the same tired arguments ad nauseam.It astounds me that anyone could read through the hundreds of pages of careful mathematical analysis this forum has done about safe withdrawal rates, and then accuse us of blind faith because of a thread title summarizing our findings.
If the there is no reason to worry about the 4% withdrawal rule (as per the thread title), why is hundreds of pages of careful mathematical analysis going on then?
If I have 1 million in the stock market and I plan to spend "on average" $40,000/year, I'm not going to spend $45,000 if the stock market has a good year. I'm still going to spend $40,000.
If the stock market has a bad year, I'm ok spending $35,000-$38,000.
I don't see myself blindly spending 4% and paying zero attention to the market.
Congratulations, this wins dumbest post on MMM forums 2017! Your prize? You get to continue regurgitating the same tired arguments ad nauseam.It astounds me that anyone could read through the hundreds of pages of careful mathematical analysis this forum has done about safe withdrawal rates, and then accuse us of blind faith because of a thread title summarizing our findings.
If the there is no reason to worry about the 4% withdrawal rule (as per the thread title), why is hundreds of pages of careful mathematical analysis going on then?
That's been beat to death in these other threads:....hence my post
http://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/
https://forum.mrmoneymustache.com/investor-alley/start-worrying-about-the-4-rule/
Congratulations, this wins dumbest post on MMM forums 2017! Your prize? You get to continue regurgitating the same tired arguments ad nauseam.It astounds me that anyone could read through the hundreds of pages of careful mathematical analysis this forum has done about safe withdrawal rates, and then accuse us of blind faith because of a thread title summarizing our findings.
If the there is no reason to worry about the 4% withdrawal rule (as per the thread title), why is hundreds of pages of careful mathematical analysis going on then?
There might be another source of bias. The two formulations considered so far:
- Plan A: You start with $1m at a random year, you spend $40k yearly from then on, what's the probability of success over 50 years?
- Plan B: You start at 0, you save $50k yearly, when you reach $1m you stop working, then you start spending $40k yearly, what's your probability of success over 50 years?
Here's another one, possibly more accurate:
- Plan C: You start at 0 spending most of your paycheck, when you stumble into the MMM forums*, you start saving 50% of your income, and when you reach your target you stop working, and start spending 4% yearly, what's your probability of success?
*We can assume that every year, you have a probability of stumbling into MMM that is proportional to the number of recent FIREes (who will spread the word) and a coefficient representing your openness to external information / time spent browsing the internet. Recent FIREes can be estimated from FIRE density (https://forum.mrmoneymustache.com/welcome-to-the-forum/cfiresim-severely-overestimates-success-rates-for-mustachians/msg1625362/#msg1625362).
In Plan A, FIRE years were uniformly distributed. In Plan B, accumulation starting years were uniformly distributed, but not FIRE years. In Plan C, even accumulation starting years will be centered around market growth.
The bias I'm trying to get at is that during an economic boom, optimism is contagious, and this may increase the number of people who will buy into FIRE and start getting serious about saving. Since we're currently in a market boom, I'm wondering how much of an effect this may have on the 4% rule. Think about it. Would we have a glowing MMM forum in 2008?
I posted the code in the post above. Anyone want to take a stab at implementing it?
If you read the threads on FIRE 2017, or 2018, most people are not blithely optimistic, and have established padding into their investments, such that if the market falls by 40% they still can meet expenses with the 4% rule, or they have ways of cutting expenses, or they have an ongoing sidegig of income production that isn't time consuming.
About "contagious optimism", I assume that sites like these flourish more in good market conditions. Optimism or not, this will have the effect of attracting newcomers to FIRE. In addition to forums and word of mouth, it seems higher salaries would have a similar effect of making people aware of the possibility of FIREing, hence correlating accumulation phase starting years with good market conditions by a different but similar mechanism.
Look at all these fancypants people spending $40,000/year. I bet you have a solid gold bidet in your bathroom.
Look at all these fancypants people spending $40,000/year. I bet you have a solid gold bidet in your bathroom.
My off-the-cuff intuition is that any bias added by the “Plan C” you described isn’t especially meaningful—the clustering of accumulation start dates around market boom years should have less impact on portfolio success rates than the clustering of retirement start dates around market boom years, which you’ve already examined, and, if anything, I would guess that the effects of the former would tend to cancel out the occurrence of the latter for reasonably high (but not extraordinarily high) savings rate levels (as savers who start accumulating during boom years would tend to be more likely to reach their savings targets during the next phase of the market cycle).
That's my plan D, the early retirement from early retirement...Look at all these fancypants people spending $40,000/year. I bet you have a solid gold bidet in your bathroom.
Yeah, if you're spending 40k a year, unless you have a very large family then you've got a lot of luxuries you could cut back on if you found the 4% rule wasn't working for you...
If you're 4% FIREd and only spending <10k a year, you might have more difficulty finding places to cut back, but also some sort of part time job or self-employment would cover a much larger portion of your income, and I assume most people aren't planning on spending their entire retirement sitting on the sofa doing nothing.
Look at all these fancypants people spending $40,000/year. I bet you have a solid gold bidet in your bathroom.
Look at all these fancypants people spending $40,000/year. I bet you have a solid gold bidet in your bathroom.
Yikes, if $40k/year is fancypants, I must have an extra pair in the closet and a gold bidet in both bathrooms. Maybe even add cable TV!
Look at all these fancypants people spending $40,000/year. I bet you have a solid gold bidet in your bathroom.
Yikes, if $40k/year is fancypants, I must have an extra pair in the closet and a gold bidet in both bathrooms. Maybe even add cable TV!
This greatly depends on mortgage or no mortgage if you're at 40k with a mortgage i dont know if thats extremely fancy pants based on what MMM would be spending with a mortgage has been calculated to be around 40k. we're over that though with just raw spending. i'm a cafeteria mustachian mostly here for the optimization of my soldiers i do save and how to withdraw them efficiently.
Look at all these fancypants people spending $40,000/year. I bet you have a solid gold bidet in your bathroom.
Yikes, if $40k/year is fancypants, I must have an extra pair in the closet and a gold bidet in both bathrooms. Maybe even add cable TV!
This greatly depends on mortgage or no mortgage if you're at 40k with a mortgage i dont know if thats extremely fancy pants based on what MMM would be spending with a mortgage has been calculated to be around 40k. we're over that though with just raw spending. i'm a cafeteria mustachian mostly here for the optimization of my soldiers i do save and how to withdraw them efficiently.
For a couple of two who spent 39k last year..... (No mortgage included)
Travel....
Vegas X2
LA
Tokyo Japan!
FL
7 night cruise
(+ a good number of weekend road-trips on the bike)
Got a used Chevy Volt(Sold two older cars for it but still costs us taxes ect ect)
Ate out to the tune of a whopping $6,196 (A lot of this is me buying friends meals for CC points and them returning cash to me, so realistically we are probably closer to 3k but all 6k is in my spend)
I'd say 40k is pretty luxurious.
Look at all these fancypants people spending $40,000/year. I bet you have a solid gold bidet in your bathroom.
Yeah, if you're spending 40k a year, unless you have a very large family then you've got a lot of luxuries you could cut back on if you found the 4% rule wasn't working for you...
That can be solved (under current law) after retirement pretty easily, if your spending is low. And if your income is not low, particularly in retirement, you can afford to pay the actual cost of health insurance.Look at all these fancypants people spending $40,000/year. I bet you have a solid gold bidet in your bathroom.
Yeah, if you're spending 40k a year, unless you have a very large family then you've got a lot of luxuries you could cut back on if you found the 4% rule wasn't working for you...
In the USA, one of those luxuries is "health care" - which could eat a very significant fraction of $40k. With a family of 3, I'm paying $7k just in premiums - with an employer paying more half.
That can be solved (under current law) after retirement pretty easily, if your spending is low. And if your income is not low, particularly in retirement, you can afford to pay the actual cost of health insurance.Look at all these fancypants people spending $40,000/year. I bet you have a solid gold bidet in your bathroom.
Yeah, if you're spending 40k a year, unless you have a very large family then you've got a lot of luxuries you could cut back on if you found the 4% rule wasn't working for you...
In the USA, one of those luxuries is "health care" - which could eat a very significant fraction of $40k. With a family of 3, I'm paying $7k just in premiums - with an employer paying more half.
I'm paying $11,252 for Health insurance , family of 4, I pay it all, plus both are in college.Look at all these fancypants people spending $40,000/year. I bet you have a solid gold bidet in your bathroom.
Yeah, if you're spending 40k a year, unless you have a very large family then you've got a lot of luxuries you could cut back on if you found the 4% rule wasn't working for you...
In the USA, one of those luxuries is "health care" - which could eat a very significant fraction of $40k. With a family of 3, I'm paying $7k just in premiums - with an employer paying more half.
I'm paying $11,252 for Health insurance , family of 4, I pay it all, plus both are in college.Look at all these fancypants people spending $40,000/year. I bet you have a solid gold bidet in your bathroom.
Yeah, if you're spending 40k a year, unless you have a very large family then you've got a lot of luxuries you could cut back on if you found the 4% rule wasn't working for you...
In the USA, one of those luxuries is "health care" - which could eat a very significant fraction of $40k. With a family of 3, I'm paying $7k just in premiums - with an employer paying more half.
I'm paying $11,252 for Health insurance , family of 4, I pay it all, plus both are in college.Look at all these fancypants people spending $40,000/year. I bet you have a solid gold bidet in your bathroom.
Yeah, if you're spending 40k a year, unless you have a very large family then you've got a lot of luxuries you could cut back on if you found the 4% rule wasn't working for you...
In the USA, one of those luxuries is "health care" - which could eat a very significant fraction of $40k. With a family of 3, I'm paying $7k just in premiums - with an employer paying more half.
You should probably get a better job. Or maybe move somewhere that has better options on the healthcare exchange if you use that. I refuse to believe that people are helpless about this kind of situation.
I'm paying $11,252 for Health insurance , family of 4, I pay it all, plus both are in college.Look at all these fancypants people spending $40,000/year. I bet you have a solid gold bidet in your bathroom.
Yeah, if you're spending 40k a year, unless you have a very large family then you've got a lot of luxuries you could cut back on if you found the 4% rule wasn't working for you...
In the USA, one of those luxuries is "health care" - which could eat a very significant fraction of $40k. With a family of 3, I'm paying $7k just in premiums - with an employer paying more half.
You should probably get a better job. Or maybe move somewhere that has better options on the healthcare exchange if you use that. I refuse to believe that people are helpless about this kind of situation.
i dont think this post was meant to complain. but until they fix the cost of heathcare problem it doesnt matter who the hell pays the bill. just read an article where the cost of a knee surgery in michigan varied from 44k to 6k depending on the hospital and a birth varied from 12k to 2k - and a C - Section was 25k to 4k ... this entire industry doesnt have any price control that a typical capitalist run society has - its a joke
i dont think this post was meant to complain. but until they fix the cost of heathcare problem it doesnt matter who the hell pays the bill. just read an article where the cost of a knee surgery in michigan varied from 44k to 6k depending on the hospital and a birth varied from 12k to 2k - and a C - Section was 25k to 4k ... this entire industry doesnt have any price control that a typical capitalist run society has - its a jokeCapitalist run societies don't typically have price controls.
i dont think this post was meant to complain. but until they fix the cost of heathcare problem it doesnt matter who the hell pays the bill. just read an article where the cost of a knee surgery in michigan varied from 44k to 6k depending on the hospital and a birth varied from 12k to 2k - and a C - Section was 25k to 4k ... this entire industry doesnt have any price control that a typical capitalist run society has - its a jokeCapitalist run societies don't typically have price controls.
If you meant that American healthcare doesn't have any meaningful competition in medical service pricing, I agree.
I'm paying $11,252 for Health insurance , family of 4, I pay it all, plus both are in college.Look at all these fancypants people spending $40,000/year. I bet you have a solid gold bidet in your bathroom.
Yeah, if you're spending 40k a year, unless you have a very large family then you've got a lot of luxuries you could cut back on if you found the 4% rule wasn't working for you...
In the USA, one of those luxuries is "health care" - which could eat a very significant fraction of $40k. With a family of 3, I'm paying $7k just in premiums - with an employer paying more half.
You should probably get a better job. Or maybe move somewhere that has better options on the healthcare exchange if you use that. I refuse to believe that people are helpless about this kind of situation.
i dont think this post was meant to complain. but until they fix the cost of heathcare problem it doesnt matter who the hell pays the bill. just read an article where the cost of a knee surgery in michigan varied from 44k to 6k depending on the hospital and a birth varied from 12k to 2k - and a C - Section was 25k to 4k ... this entire industry doesnt have any price control that a typical capitalist run society has - its a joke
Perhaps the kids can contribute to their own health insurance once they graduate college and have found their footing financially.
I do agree that healthcare sucks in the US, though - I'm glad to live in the UK, even if the NHS is very overworked right now. As far as I can tell, the US has the worst of all worlds in healthcare (within the set of options in which healthcare is actually good and not "visit the local medicine man so he can get rid of spirits" or whatever): you don't have government-subsidised healthcare, but also, the fact that everyone has health insurance enables hospitals to jack up the cost of everything so that by now, you can only afford complex treatment with insurance, despite the fact that half the things probably don't cost anywhere near what you pay for them. I hope future governments make things better for you all on that front instead of worse. If health insurance didn't cover such large payouts, hospitals would be forced to charge amounts people could actually pay if they wanted to have any customers, possibly.
Regarding mortgages, if your mortgage is a particularly high percentage of your expenditure, you should probably consider a smaller house. Or renting out some of the rooms to help recoup the cost, maybe?
I'm paying $11,252 for Health insurance , family of 4, I pay it all, plus both are in college.Look at all these fancypants people spending $40,000/year. I bet you have a solid gold bidet in your bathroom.
Yeah, if you're spending 40k a year, unless you have a very large family then you've got a lot of luxuries you could cut back on if you found the 4% rule wasn't working for you...
In the USA, one of those luxuries is "health care" - which could eat a very significant fraction of $40k. With a family of 3, I'm paying $7k just in premiums - with an employer paying more half.
You should probably get a better job. Or maybe move somewhere that has better options on the healthcare exchange if you use that. I refuse to believe that people are helpless about this kind of situation.
i dont think this post was meant to complain. but until they fix the cost of heathcare problem it doesnt matter who the hell pays the bill. just read an article where the cost of a knee surgery in michigan varied from 44k to 6k depending on the hospital and a birth varied from 12k to 2k - and a C - Section was 25k to 4k ... this entire industry doesnt have any price control that a typical capitalist run society has - its a joke
Perhaps the kids can contribute to their own health insurance once they graduate college and have found their footing financially.
I do agree that healthcare sucks in the US, though - I'm glad to live in the UK, even if the NHS is very overworked right now. As far as I can tell, the US has the worst of all worlds in healthcare (within the set of options in which healthcare is actually good and not "visit the local medicine man so he can get rid of spirits" or whatever): you don't have government-subsidised healthcare, but also, the fact that everyone has health insurance enables hospitals to jack up the cost of everything so that by now, you can only afford complex treatment with insurance, despite the fact that half the things probably don't cost anywhere near what you pay for them. I hope future governments make things better for you all on that front instead of worse. If health insurance didn't cover such large payouts, hospitals would be forced to charge amounts people could actually pay if they wanted to have any customers, possibly.
Regarding mortgages, if your mortgage is a particularly high percentage of your expenditure, you should probably consider a smaller house. Or renting out some of the rooms to help recoup the cost, maybe?
Actually not everyone has health insurance. That's part of why the costs are so high. Because people without insurance still go to ER for treatment and then aren't able to pay the bill. Then the price has to go up so that the people with insurance and those who can pay are subsidizing those who can't/don't pay.
I'm paying $11,252 for Health insurance , family of 4, I pay it all, plus both are in college.Look at all these fancypants people spending $40,000/year. I bet you have a solid gold bidet in your bathroom.
Yeah, if you're spending 40k a year, unless you have a very large family then you've got a lot of luxuries you could cut back on if you found the 4% rule wasn't working for you...
In the USA, one of those luxuries is "health care" - which could eat a very significant fraction of $40k. With a family of 3, I'm paying $7k just in premiums - with an employer paying more half.
You should probably get a better job. Or maybe move somewhere that has better options on the healthcare exchange if you use that. I refuse to believe that people are helpless about this kind of situation.
I'm paying $11,252 for Health insurance , family of 4, I pay it all, plus both are in college.Look at all these fancypants people spending $40,000/year. I bet you have a solid gold bidet in your bathroom.
Yeah, if you're spending 40k a year, unless you have a very large family then you've got a lot of luxuries you could cut back on if you found the 4% rule wasn't working for you...
In the USA, one of those luxuries is "health care" - which could eat a very significant fraction of $40k. With a family of 3, I'm paying $7k just in premiums - with an employer paying more half.
You should probably get a better job. Or maybe move somewhere that has better options on the healthcare exchange if you use that. I refuse to believe that people are helpless about this kind of situation.
i dont think this post was meant to complain. but until they fix the cost of heathcare problem it doesnt matter who the hell pays the bill. just read an article where the cost of a knee surgery in michigan varied from 44k to 6k depending on the hospital and a birth varied from 12k to 2k - and a C - Section was 25k to 4k ... this entire industry doesnt have any price control that a typical capitalist run society has - its a joke
Perhaps the kids can contribute to their own health insurance once they graduate college and have found their footing financially.
I do agree that healthcare sucks in the US, though - I'm glad to live in the UK, even if the NHS is very overworked right now. As far as I can tell, the US has the worst of all worlds in healthcare (within the set of options in which healthcare is actually good and not "visit the local medicine man so he can get rid of spirits" or whatever): you don't have government-subsidised healthcare, but also, the fact that everyone has health insurance enables hospitals to jack up the cost of everything so that by now, you can only afford complex treatment with insurance, despite the fact that half the things probably don't cost anywhere near what you pay for them. I hope future governments make things better for you all on that front instead of worse. If health insurance didn't cover such large payouts, hospitals would be forced to charge amounts people could actually pay if they wanted to have any customers, possibly.
Regarding mortgages, if your mortgage is a particularly high percentage of your expenditure, you should probably consider a smaller house. Or renting out some of the rooms to help recoup the cost, maybe?
Actually not everyone has health insurance. That's part of why the costs are so high. Because people without insurance still go to ER for treatment and then aren't able to pay the bill. Then the price has to go up so that the people with insurance and those who can pay are subsidizing those who can't/don't pay.
I admit I haven't studied the US system in great detail, but I don't mean I'm under the impression that 100% of people have insurance. In order for what I said to make sense, probably somewhere between 0% and 10% of people might have health insurance? IDK a specific figure, I'm just making up numbers here. But a low percent.
If you found a herb that worked well to replace ongoing prescription medication, that'd probably save a lot of money.
If you found a herb that worked well to replace ongoing prescription medication, that'd probably save a lot of money.
Can't comment on your math, but I find many herbals are more expensive than prescription meds. I'm on two meds, one is $10 a month the other is less than $4 a month.
My doc starts with the cheapest that may do the job and works up. OH, I forgot, I had a 50%
increase in the $10 prescription recently, it's now $15. That sucks, but it's still cheap.
My off-the-cuff intuition is that any bias added by the “Plan C” you described isn’t especially meaningful—the clustering of accumulation start dates around market boom years should have less impact on portfolio success rates than the clustering of retirement start dates around market boom years, which you’ve already examined, and, if anything, I would guess that the effects of the former would tend to cancel out the occurrence of the latter for reasonably high (but not extraordinarily high) savings rate levels (as savers who start accumulating during boom years would tend to be more likely to reach their savings targets during the next phase of the market cycle).
Good point. I bet plan C would mostly affect high savings rate folks, who weren't affected under plan B (since their accumulation phase is so short anyway) but would be affected by starting their accumulation phase around market booms (which would make their FIRE start year shortly after). So basically, people will either suffer market bias on the end of their accumulation phase (at low savings rates) or on the start of it (at high savings rates).
If a market crash happens, most rational people will adjust their spending accordingly. Some will get a job, others will earn money from a side business, rent out a room in their house or maybe just cut expenses.Assuming, of course, that adjusting is possible. Sure, a 50-year old who realizes he's in trouble has options: He can cut expenses, get a part-time job, or make any number of other choices. An 90-year old in the same situation may have fewer options; he may not be able to dismiss the lawn care guys /cut his own grass. And if his financial problems are medical in nature, cutting back on services may not be possible.