The Money Mustache Community
General Discussion => Welcome and General Discussion => Topic started by: NaturallyHappier on May 02, 2015, 12:25:58 PM
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What success rate do you consider safe when running CFireSim and using historical data -all years and constant withdrawal rate adjusted for inflation?
I know that Vanguard uses a Montecarlo simulator and considers anything above 80% safe.
I'm sure this a "based on personal opinion" type of thing, but I am wondering what other MMM folks use and how they rationalize it.
I am thinking that I should target between 90 and 100% because it is running numbers against historical returns and I can afford to lower my withdraw by as much as $10K if I had too for several years. Of course, that assumes that the future will be no worst than the past.
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I am comfortable with anything better than 80%
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Of course, that assumes that the future will be no worst than the past.
If you assumed that the future would be no worse than the past, then you would target a 50% success rate. Targeting 80% success means that you are expecting the future to be as bad as the worst 20% of historical periods. Targeting 100% success, like many here do, means you expect the future to be worse than anything that has ever happened, including world wars, oil embargoes, presidential assassinations, and global catastrophic economic collapse. All of that has happened.
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Of course, that assumes that the future will be no worst than the past.
If you assumed that the future would be no worse than the past, then you would target a 50% success rate. Targeting 80% success means that you are expecting the future to be as bad as the worst 20% of historical periods. Targeting 100% success, like many here do, means you expect the future to be worse than anything that has ever happened, including world wars, oil embargoes, presidential assassinations, and global catastrophic economic collapse. All of that has happened.
I'm not sure I understand. Wouldn't 50% mean that in 50% of the cases in the past I would have run out of money? If I want to make sure that I don't run out of money when my current situation is projected over all past time periods, wouldn't that require a 100% success rate using CFireSim? Maybe I am not understanding what the program is doing.
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Of course, that assumes that the future will be no worst than the past.
If you assumed that the future would be no worse than the past, then you would target a 50% success rate. Targeting 80% success means that you are expecting the future to be as bad as the worst 20% of historical periods. Targeting 100% success, like many here do, means you expect the future to be worse than anything that has ever happened, including world wars, oil embargoes, presidential assassinations, and global catastrophic economic collapse. All of that has happened.
I'm not sure I understand. Wouldn't 50% mean that in 50% of the cases in the past I would have run out of money? If I want to make sure that I don't run out of money when my current situation is projected over all past time periods, wouldn't that require a 100% success rate using CFireSim? Maybe I am not understanding what the program is doing.
You understand correctly. Sol has suggested in the past that a 50% success rate is sufficient for him because he is willing to cut back the fat from his budget (and/or get a job) if it looks like his retirement timing would put him in that 50% of scenarios that would be likely to fail. The idea is that you can generally tell within the first 5 years whether your portfolio is likely to succeed or fail based on what the market does during that time. If you have less flexibility to make those adjustments or are not as interested in taking that risk, then you can choose to work longer to save up enough extra money to make it much more likely that you will die rich and without many money worries.
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I'm not sure I understand. Wouldn't 50% mean that in 50% of the cases in the past I would have run out of money?
Yes, 50% of the time you would have run out of money with a 50% success rate. In a large population of retirees, half of them would have saved too much and half would have not saved enough. On average, they have saved the right amount.
When you reach the 50% success rate, that means that you have on average already saved enough. Unless you expect the market future to be below the historical average, this might be sufficient for you.
You can never "make sure" you never run out of money. You could get cancer or get sued or the world could get nuked. Most people target an 80% success rate not because they're willing to risk not being in the 20%, but because they recognize that there are extrinsic risks not accounted for in their analysis that historical market analyses cannot represent. By moving from an 80% success rate to a 90% success rate, you're just buying false security because your chances of some extrinsic risk probably exceeds the market performance risk you're analyzing.
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Sol. This is a very good point. We can always count on you for a deeper perspective. Thanks.
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I'm a coward, so I'm shooting for over 90%. Over 95% would be even better. I've found that cFiresim is less conservative than the Monte Carlo simulator that I also use (Schwab). When cFiresim is over 90%, the Monte Carlo is usually around 80%. FireCalc, on the other hand, seems to be more liberal. It gives a 100% success rate. I'm sure the variability has to do with the fact that you can't set all the parameters exactly the same on all three.
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I'm a coward, so I'm shooting for over 90%. Over 95% would be even better. I've found that cFiresim is less conservative than the Monte Carlo simulator that I also use (Schwab). When cFiresim is over 90%, the Monte Carlo is usually around 80%. FireCalc, on the other hand, seems to be more liberal. It gives a 100% success rate. I'm sure the variability has to do with the fact that you can't set all the parameters exactly the same on all three.
This is because the Monte Carlo simulators end up with some retirement cycles having multiple catastrophically bad years of stock returns one-after-the-other. Which is something that has never happened in modern developed financial markets. Monte Carlo simulators provide unrealistic sequence of returns risks. They also have the same problem with putting too many crazy boom years in a row as well. Both the highest and lowest returns on those simulators are incredibly unlikely.
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Sol's insight that a 50% success rate is optimal if your goal is minimization of total lifetime working hours (and assuming the future is no worse than the past) is in my view one of his more important contributions to the interdisciplinary field of FIREology (which is saying a lot).
I would just note, however, that in addition to assuming the future is no worse than the past, this idea also assumes that every retirement has an equal chance of success regardless of what market conditions exist when the retirement commences (which is also an implicit assumption inherent in the notion of using historical success rates as a proxy for chances of future retirement success in the first place). When we use SWR-related concepts like "success rate," we all pretend this assumption is true, but in reality we all know it is false, and that is at least part of the reason most of us shoot for a WR that has historically succeeded in history's worst case (or near-worst case) scenarios.
Also, the idea that "any success rate over 80% constitutes false precision" (which is quickly becoming a cliche around here) is itself an example of false precision--it's not as if "80%" (or, in weaker versions of the expression, "around 80%") represents a bright line (or even a fuzzy bright line) under which every percentage point increase in historical success rate translates into a meaningful (and precise) corresponding increase in actual chances of your own retirement's success.
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Sol's insight that a 50% success rate is optimal if your goal is minimization of total lifetime working hours
Every once on a while I have a moment of clarity, though most of the time I fail to communicate it very well and it is lost to the ages. I'm glad you found something of value in what I've shared.
I would just note, however, that in addition to assuming the future is no worse than the past, this idea also assumes that every retirement has an equal chance of success regardless of what market conditions exist when the retirement commences
I agree that this is a very real problem, and one that we have discussed here before. An 80% success rate never means that 20% of this year's retirees will fail, it generally means either 100% or 0% of this year's retirees will fail and you have an 80% chance of this being one of the good 100% years. At least it's usually been pretty obvious when you're headed towards one of the 20% failure scenarios, so that's something to be glad about.
I do wonder about the cohort effect, though. If the class of 2015 retirees who use a 4% SWR all end up getting hosed, they are no less hosed even if the odds were in their favor. Sometimes you just lose.
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Yeah. It makes me wonder what I would do if there truly were a way of knowing the precise odds of my own retirement plan's success, like if the government offered every worker the chance to win a guaranteed inflation-indexed pension in an amount equal to your projected spending under a "Wheel of Fortune" like scheme, where every year of additional work increases the share of winning slices put on the wheel when you decide to take your spin. Of course, in the real world, we do almost have the equivalent of this option, given the availability for purchase of inflation-indexed single premium fixed annuities (except, unlike a government-backed annuity, the retiree bears some counterparty credit risk, and unlike the Wheel of Fortune gimmick, you know exactly what you're getting when and if you decide to purchase one), but the prohibitive expensiveness of this option for extremely early retirees effectively means (generally speaking, or maybe even in all cases?) that you would have to work many, many years beyond the otherwise doable early retirement age in order to obtain a significantly high confidence level.
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I don't trust any calculator 100%. However I'd never consider retirement at anything less than 100% based on past data.
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I don't trust any calculator 100%. However I'd never consider retirement at anything less than 100% based on past data.
So you're willing to work longer than required, that's fine. If you like your work, and would prefer to leave a large legacy when you die, or you plan on increasing your spending in retirment.
It's that last one that I think causes most people to work longer than necessary. Just because you can mathematically retire today with your current expenses doesn't mean there is no incentive to work longer so that you can spend more in the future than you do today. Several of the regulars here have talked openly about our desire to spend significantly more in retirement than we do now, while working.
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Further to Sol's point, at some point you have to acknowledge two big risks that will tend to confound historical simulators and with which Monte Carlo struggles as well: exogenous risks and mortality/morbidity risks. The exogenous risks could range from the mundane (US gets invaded and we all end up bowing to the head Imam or whatever) to the exotic (space aliens kill us all, environmental catastrophe, etc.). No success rate in any calculator will account for any of these. Exogenous risks as I describe them are low probability, high severity. Mortality/morbidity risks OTOH are 100% certain at some point. Look at a mortality table for your gender and age and you will realize that a big percentage of would-be retirees your age do not have to worry about outliving their savings. As for morbidity, my otherwise very healthy FIL is in advanced Parkinson's at age 70. I'd blow my brains out in his shoes rather than live his life.
Get busy living, because before you know it you will get busy dying.
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Yeah. It makes me wonder what I would do if there truly were a way of knowing the precise odds of my own retirement plan's success, like if the government offered every worker the chance to win a guaranteed inflation-indexed pension in an amount equal to your projected spending under a "Wheel of Fortune" like scheme, where every year of additional work increases the share of winning slices put on the wheel when you decide to take your spin. Of course, in the real world, we do almost have the equivalent of this option, given the availability for purchase of inflation-indexed single premium fixed annuities (except, unlike a government-backed annuity, the retiree bears some counterparty credit risk, and unlike the Wheel of Fortune gimmick, you know exactly what you're getting when and if you decide to purchase one), but the prohibitive expensiveness of this option for extremely early retirees effectively means (generally speaking, or maybe even in all cases?) that you would have to work many, many years beyond the otherwise doable early retirement age in order to obtain a significantly high confidence level.
Social Security is pretty close to this. You have to assume it will still exist in its current form. And it's not exactly scaleable to your desired level of spending (unless you desire to spend within whatever level of benefit you have).
I think our current public policy on retirement is pretty dumb. By having pensions (other than SS) going by the wayside, we're forcing people to take on a lot of personal risk for the solvency of their retirement. They may be unsophisticated and trust financial advisors who put them into active management funds with lots of big load fees and ongoing fees. Or they may panic when the market crashes and sell. It would be much better to have a supplemental pension system to SS that you can take with you from job to job. Maybe the government sets some actuarial rate for your age and that's the amount of your salary you have to pay in to get a certain percent of your salary as a pension when you hit a certain age. Like SS does now, but as an additional benefit. That way the nation can target the 50% rate for everyone (or 55% if you want to make sure the government doesn't have to kick in public funds). And no one has to work until they get to 80% or 100% success rate just in case they retire just before a bad market period.
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Social Security is pretty close to this.
Except that annuity doesn't start until close to traditional retirement age (at the earliest), so it doesn't help the extremely early retiree in the decades before that point (other than to potentially reduce the amount needed to bridge the gap until then, but the gap is usually large enough that the amount needed to bridge it is equal or nearly equal to what would be needed indefinitely).
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I think our current public policy on retirement is pretty dumb. By having pensions (other than SS) going by the wayside, we're forcing people to take on a lot of personal risk for the solvency of their retirement.
Someone recently suggested that this switch to defined contribution plans like 401ks instead of defined benefit plans like pensions was basically a reaction to the red scare. The concern was that labor unions would end up owning all of the US stock market through their pension and retirement plans, making us a defacto socialist state where only union members are citizens.
In a time when average Joes couldn't easily invest and unions were ubiquitous and strong, that logic made more sense. Today the markets are saturated by corporate players, hedge funds, day traders, and foreign investors so I think the fear is unfounded. In that light, maybe it's time to revisit the idea of defined benefit plans.
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You understand correctly. Sol has suggested in the past that a 50% success rate is sufficient for him because he is willing to cut back the fat from his budget (and/or get a job) if it looks like his retirement timing would put him in that 50% of scenarios that would be likely to fail. The idea is that you can generally tell within the first 5 years whether your portfolio is likely to succeed or fail based on what the market does during that time. If you have less flexibility to make those adjustments or are not as interested in taking that risk, then you can choose to work longer to save up enough extra money to make it much more likely that you will die rich and without many money worries.
I am not sure if that is really true you can tell after 5 years if your retirement is in failure. As a 99/2000 retiree arguable one of the worst years to retire (although I guess we won't know until 2030). my portfolio had recovered modestly by Dec 2005 from the dotcom bubble and bear markets. Raddr's study http://www.raddr-pages.com/forums/viewtopic.php?f=2&t=1208&start=390 (http://www.raddr-pages.com/forums/viewtopic.php?f=2&t=1208&start=390)puts it at $754,000 at the start of 2006. Would you really start to looking for work at the point? I suspect most all actual retirees did what I did during those years and gave up the annual inflation adjustment. (I switched in 2003/4 to focusing on dividends and only spending my dividends and interest.) Now by the end of 2008 when your portfolio was cut in half, then you'd probably consider either looking or making significant cut backs. I know March of 2009 was when I seriously thought about going back to work. Needless to say a 50 year old trying to look for a job in 2009, with almost 10 year gap in my resume in the midst of the great recession wasn't in fact a viable back up plan.
I am not really sure if there is huge difference on the employablilty of somebody with a 5 years off the job versus 10. However I do think there is a big difference between 45, 50, 55, or 65 going back to work I think mothers who have returned to the work would be an interesting perspective to get. I would have had to take a massive (50-75%+) pay cut from my previous job was undeniable, while my pay cut would have been larger than most people I suspect it will be substantial for most everyone. I think if you are truly trying to minimize the amount of your life spent working for the man, you also need to factor in the likelyhood that a market crash will correspond with a general economic downturn, and the lower wages of going back to work after quitting.
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I am not sure if that is really true you can tell after 5 years if your retirement is in failure.
I agree with this. I think the general "outrageous optimism" ethos of mustachianism and the ingrained reliance on various levels of safety margin sometimes colors our perception a bit too rosy.
It's a common refrain around here (and elsewhere in the FIRE community) that the early years of retirement are the most critical, with the implicit (or explicit) implication that it's easy to recognize if your retirement is headed for failure in order to take appropriate corrective action. Lest we get too cavalier about the potential difficulty of mitigating sequence of return risk, though, let's keep in mind that, although most of us tend to focus on the nightmare scenario of a sharp and sudden market drop shortly after commencing retirement, the more significant risk has historically been an extended period of low (but still positive, even in real terms) market returns during the first decade or so of retirement. So it's not as if there will always be a 2008-like market crash to serve as a wake-up call that things aren't going according to plan; it's just as likely (or, based on history, more likely) that an extended period of subpar (but not drastically bad) real market returns will slowly doom a withdrawal plan to failure like a frog trapped inside a boiling pot. Moreover, consistent with recent musings around the forum by skyrefuge and others, we shouldn't fall into the trap of believing that the market's next retirement-killer will necessarily resemble any of those of the past.
I think if you are truly trying to minimize the amount of your life spent working for the man, you also need to factor in the likelyhood that a market crash will correspond with a general economic downturn, and the lower wages of going back to work after quitting.
On the other hand, we shouldn't veer too far down the path of pessimism and ignore the various levels of safety margin that we rightly take comfort in (the ability to return to work being, in most cases, only one of many).
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I am not sure if that is really true you can tell after 5 years if your retirement is in failure.
While I still think that a sudden steep crash immediately after retirement should be a clear warning sign, I also think it's easier to recognize when you're comfortably into the "guaranteed success" side of the equation. If you retired in 2009 and then saw your investments more than double over the next five years, chances are good that your retirement is not in jeopardy.
And as long as both the really great outcomes and the really horrible outcomes are both recognizable, I don't worry as much about the great unknown middle ground. I recognize that it exists, but it's not like no retiree can ever know how well his plan is unfolding. In some cases, you know a lot.
just as likely (or, based on history, more likely) that an extended period of subpar (but not drastically bad) real market returns will slowly doom a withdrawal plan to failure like a frog trapped inside a boiling pot.
I think you're not adequately describing the early 1970s retiree, who clearly saw his low returns being coupled to crazy high inflation, making the relevant effective return pretty obviously terrible. It's not like those folks were watching the stock market hold steady and celebrating because they didn't recognize the danger.
What other historical period of failure had a long period of moderate returns and still saw a 4% SWR portfolio failure? cFIREsim suggests that 1906 is the only other year that 4% fails a 30 year retirement.
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I think our current public policy on retirement is pretty dumb. By having pensions (other than SS) going by the wayside, we're forcing people to take on a lot of personal risk for the solvency of their retirement.
Someone recently suggested that this switch to defined contribution plans like 401ks instead of defined benefit plans like pensions was basically a reaction to the red scare.
Doubtful.
If that were the case the movement away from defined benefit pensions would have started in the 50's, rather than the early 80's. Also it bears mentioning that no more than ~35% of Americans ever had access to a defined benefit pension. The myth that they were a widespread benefit is just that (http://www.theatlantic.com/magazine/archive/2010/09/the-great-stock-myth/308178/).
Start with private pension plans, which underpin nostalgic yarns about the golden age of the 1960s, when every man could raise a family on assembly-line wages and then retire in comfort. These pensions never were as widespread in fact as they are in popular legend—when the number of such plans peaked in the 1980s, they covered only about one-third of the workforce. And as it turned out, a lot of those plans failed catastrophically. Defined-benefit plans have a huge downside: they drastically discourage labor mobility. Not only do they make an economy less dynamic by tying workers to a given company, but they also leave the workers vulnerable if the company goes under, taking their retirement with it.
The reason pensions were dropped is because they are astoundingly expensive, and commit the company's future earnings in a very restrictive way. It is much better business to have the worker assume the risk and expense of their own retirement.
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I think you're not adequately describing the early 1970s retiree, who clearly saw his low returns being coupled to crazy high inflation, making the relevant effective return pretty obviously terrible. It's not like those folks were watching the stock market hold steady and celebrating because they didn't recognize the danger.
What other historical period of failure had a long period of moderate returns and still saw a 4% SWR portfolio failure? cFIREsim suggests that 1906 is the only other year that 4% fails a 30 year retirement.
Well, not all the retiree cohorts undone by the period of stagflation in the 1970s had equally terrible returns in the early years of their retirements. Take the 1962 starting year cohort, for example, which registers as a "success" in cFIREsim (using its default settings for all the variables) using a 4% SWR retirement plan, but these retirees only avoided failure by the skin of their teeth -- their remaining portfolio in year 30 was so drastically low that one or two more years of retirement would clearly deplete their portfolio to zero. Yet the first decade of retirement for that cohort witnessed pretty decent real total annualized returns of 6.65% in the S&P 500 (according to IndexView).
But still, your point is well taken that an early retiree would have had to be pretty clueless to be living through that period without recognizing the writing on the wall. My point was intended mostly to expand the anti-recency-bias campaign that's been undertaken in various threads around the forum, because my sense is that many people may be mentally steeling themselves against the types of risks history has presented in the last few years but not the more prevalent risks of the last few decades or the potential risks that history has yet to throw at us at all.
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or the potential risks that history has yet to throw at us at all.
I'm fundamentally optimistic about the future.
I think the odds of another major terror attack (and subsequent revenge invasion) are significantly greater than zero, and I have a short list of personal favorites that I can't believe no one has tried yet. Flying airplanes into buildings was a good one, but there are a bunch more ways that bad people could do major harm with limited resources. I think most people don't realize how fragile civilization really is.
I wouldn't be surprised by a devastating outbreak of some antibiotic-resistant pathogen taking 10% of the world population in my lifetime. Such diseases already exist, and new ones are evolving faster than our drugs are. I don't think anyone believes our ability to scale up the production of new antibiotics can possible compete with exponentially growing infection numbers, so this is one of those deals where we rapidly lose control of if we don't stop it up front. The planet has never had this many people living in such close quarters before, we're ripe for infection.
Natural disasters happen with some regularity. What would the US economy do if Mt. Rainier wiped out half of Seattle? If the Hayward fault took down half of Northern California? Katrina was a speedbump in a second-tier city.
War. Always war. It's what humans do. There are lots of ways for this to unfold next time, but my money is on some combination of the Middle East and China.
Climate Change. In most places, changes will be slow and gradual and we'd have no problems adapting. In some places, those slow changes will lead to very rapid shifts. Plate tectonics was slow, too, until South America suddenly disconnected from Antarctica and connected the Pacific and Atlantic oceans for the first time in a billion years and dramatically changed the planet's ocean circulation pattern. That's the sort of problem with climate change I'm worried about.
Generic population growth. There are currently more people living in southeast Asia than in the rest of the world combined. I don't claim to understand what impact that will have on the future of the planet, but I don't believe it will be irrelevant to the next century.
And despite all of that, I still think the future of the world economy looks better than the past. Standards of living are rising. The rule of law is expanding. Life expectancy and literacy rates are climbing. We've already survived a bunch of that bad stuff listed above, and we'll get through some more of it, but I still think the general trend for humanity (and the stock market) is up up and away for the remainder of my own short life.
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I love the irony of preceding and concluding a laundry-list of possible global calamities with serious potential for actual occurrence in the near-term with an expression of your optimism about the future :)
And I have to say, I agree 100%. As a NYC resident (with no plans on ever moving) who lost a loved one on 9/11, catastrophic terrorist attack is at the forefront of my own personal list of exogenous risk factors. But I remain optimistic about the future for the same reasons you described, plus the recognition that if the shit hits the fan in one of these ways then the triviality of the success of my own retirement will be thrown into razor-sharp relief.
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I'm not sure I understand. Wouldn't 50% mean that in 50% of the cases in the past I would have run out of money?
Yes, 50% of the time you would have run out of money with a 50% success rate. In a large population of retirees, half of them would have saved too much and half would have not saved enough. On average, they have saved the right amount.
When you reach the 50% success rate, that means that you have on average already saved enough. Unless you expect the market future to be below the historical average, this might be sufficient for you.
You can never "make sure" you never run out of money. You could get cancer or get sued or the world could get nuked. Most people target an 80% success rate not because they're willing to risk not being in the 20%, but because they recognize that there are extrinsic risks not accounted for in their analysis that historical market analyses cannot represent. By moving from an 80% success rate to a 90% success rate, you're just buying false security because your chances of some extrinsic risk probably exceeds the market performance risk you're analyzing.
I still don't understand this. With a 100% success rate you would have survived every possible outcome that has occurred. I.e you expect the future to be exactly as bad as the past. If you expect the future to be twice as bad as the past you'd target a 200% success rate. With a 50% success rate you would have been ok in the 50% least-bad cycles (and failed in the other half), so you implicitly expect the future to be half as bad as the past. That is how I interpret it.
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I still don't understand this.
The idea is that if (i) you expect the future to be exactly as bad as the past and (ii) the chances that your own retirement start year will follow the path of any of history's previous retirement start years are exactly equal, then once you attain more than a 50% success rate your retirement is more likely than not to succeed, which means if you continue working you are more likely than not working longer than necessary.
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With a 100% success rate you would have survived every possible outcome that has occurred. I.e you expect the future to be exactly as bad as the past.
No, with a 100% success rate you expect the future to exactly as bad as the absolute worst times of the past, not as bad as the past on average.
See the difference? I'm proposing that your expectations of the future should be based on the historical record, including lots of bad stuff but also lots of good stuff. You seem to be suggesting that your expectations of the future should be based on the worst times in history you can find, and I don't think that's a reasonable expectation.
Unless you think the 2020s will be worse than the decades that included world wars and global depressions and presidential assassinations. Not impossible, I just find it unlikely.
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I still don't understand this.
The idea is that if (i) you expect the future to be exactly as bad as the past and (ii) the chances that your own retirement start year will follow the path of any of history's previous retirement start years are exactly equal, then once you attain more than a 50% success rate your retirement is more likely than not to succeed, which means if you continue working you are more likely than not working longer than necessary.
OK, I see. But I think that agrees with what I wrote above too. Then if you happen to be in 49% of periods you are likely to fail too. "You're chance of not ending up in poverty is slightly better than a coin flip" is not really the level of assurance I'll aim for personally, but whatever floats your boat.
It's not like more money is a waste either. Sure, maybe I worked X years longer than I had to, but now I can buy myself a boat when I'm 65. I'd be ok with that outcome too.
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With a 100% success rate you would have survived every possible outcome that has occurred. I.e you expect the future to be exactly as bad as the past.
No, with a 100% success rate you expect the future to exactly as bad as the absolute worst times of the past, not as bad as the past on average.
See the difference? I'm proposing that your expectations of the future should be based on the historical record, including lots of bad stuff but also lots of good stuff. You seem to be suggesting that your expectations of the future should be based on the worst times in history you can find, and I don't think that's a reasonable expectation.
Unless you think the 2020s will be worse than the decades that included world wars and global depressions and presidential assassinations. Not impossible, I just find it unlikely.
aah ok. I understand what you mean now. I'm certainly not advocating for 100% success. But not sure I'm convinced I should aim for the average either. Which I think is generally the feeling on this board; most people aim for 80-95% numbers. This means you'd survive most of the bad events, but not the truly terrible ones (AKA: "The 60s"). Whichever approach is reasonable is obviously a personal decision. As an engineer most calculations end with x1.5 safety factor, but I'm trying to not go that crazy:)
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Katrina was a speedbump in a second-tier city.
I agree with literally everything you've said except for classifying New Orleans as a second-tier city. The acquisition of New Orleans and the corresponding ability to ship our goods cheaply to the world via the Mississippi is one of the essential reasons that the United States is a superpower. Stratfor's George Freidman had a great article about this a few years back. The port of New Orleans is absolutely critical to America.
End of tangent!
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@sol: If you go for 50% success rate, then that translates to roughly a 6% withdrawal rate, right?
Is that what you use(d) for your retirement decision?
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@sol: If you go for 50% success rate, then that translates to roughly a 6% withdrawal rate, right?
Is that what you use(d) for your retirement decision?
The short answer is that we're shooting for something above 5%, but there are many caveats to that number.
The longer answer is that percent SWR recommendations are just rules of thumb anyway, and I wouldn't advocate for anyone to make a retirement decision based solely on one number.
My personal situation, like everyone else's, is complicated by details. My wife and I both have pensions and social security to collect one day. We have real estate we intend to sell, providing cashflow for now and large lump sum influxes of cash in the future. We have investments tied up in a variety of tax sheltered accounts that constrain how those funds can be accessed or spent. We will have the option to annuitize a portion of our investments upon retirement. We have some investments, like solar panels, that produce real income each year but are not counted as part of our net worth. We may or may not receive an inheritance one day, and we don't know how much money our children might need for college. We also don't need our investments to support a traditional 30 year retirement, and SWRs rise for shorter time periods.
My retirement is planned out using a spreadsheet that lists all these numbers by month, along with our projected expenses, and then tries to figure out which sources can be accessed at what times to meet our anticipated living expenses. It's a bit more complicated than "4% SWR means save 25x your expenses."
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But I remain optimistic about the future for the same reasons you described, plus the recognition that if the shit hits the fan in one of these ways then the triviality of the success of my own retirement will be thrown into razor-sharp relief.
Also, it occurs to me that we may be improperly ignoring the other side of the coin when we focus on the downside exogenous risk factors (like sol's parade of horribles above) to the exclusion of the possibility that upside transformative dislocations will come to pass (which the recent discussions in the forum related to artificial intelligence have opened my eyes to). Very smart and knowledgable people seriously believe that, due to the exponential nature of the rate of technological progress, we could be on the cusp of achieving previously unimaginable breakthroughs, like conquering our own mortality and manipulating the physical world on an atom-by-atom level. If we're going to wade into the waters of "false precision," shouldn't we also consider the possibility that utopia will be realized? Or am I now stretching the wild optimism of this thread beyond its breaking point?
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Or am I now stretching the wild optimism of this thread beyond its breaking point?
Your optimism gun is now an optimism raygun! Pew pew!
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Very smart and knowledgable people seriously believe that, due to the exponential nature of the rate of technological progress, we could be on the cusp of achieving previously unimaginable breakthroughs, like conquering our own mortality and manipulating the physical world on an atom-by-atom level. If we're going to wade into the waters of "false precision," shouldn't we also consider the possibility that utopia will be realized? Or am I now stretching the wild optimism of this thread beyond its breaking point?
Is it a best-case scenario or a worst-case scenario if I turn into a lich who feeds its immortality by sucking away the lifeforces of lesser humans?
I'm leaning toward best-case... but I wonder if 4% is appropriate?
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I agree some pretty bad stuff has happened that gives a lot of leeway with the 4% number. But we also haven't lost a significant war and haven't fought much on actual US soil.
Germany's worst year is 1914 which I assume is a consequence of reparations after WWI. 1.14% withdrawal rate
Japan's worst is 1940. 0.47%.
Considering UK was shelled pretty heavily, their SWR (3.77) is not actually that bad. So that would suggest being at war is fine for retirees as long as your country doesn't lose (badly).
Is our investment in the military a form of retirement planning?
I think the weird part about the idea of SWR is if you were to extend market data out 1000 years, eventually there would be some period where a generation of people could not "retire" on any amount of money. But in any such scenarios, there are no winners and everyone else is in the same situation. But I personally feel like that is also motivation to pull the trigger. If I retired at 40 with the assumption I could retire under most conditions, and the world went to hell when I was 60, at least I got twenty years of quality retirement.
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But in any such scenarios, there are no winners and everyone else is in the same situation. But I personally feel like that is also motivation to pull the trigger. If I retired at 40 with the assumption I could retire under most conditions, and the world went to hell when I was 60, at least I got twenty years of quality retirement.
Bingo! And after those 20 glorious years you'd go back to living with family and help raise whatever kids were around. You'd tell them about the glorious days of your retirement and teach them about how to FIRE in the new environment.
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I agree some pretty bad stuff has happened that gives a lot of leeway with the 4% number. But we also haven't lost a significant war and haven't fought much on actual US soil.
Germany's worst year is 1914 which I assume is a consequence of reparations after WWI. 1.14% withdrawal rate
Japan's worst is 1940. 0.47%.
Considering UK was shelled pretty heavily, their SWR (3.77) is not actually that bad. So that would suggest being at war is fine for retirees as long as your country doesn't lose (badly).
Is our investment in the military a form of retirement planning?
I think the weird part about the idea of SWR is if you were to extend market data out 1000 years, eventually there would be some period where a generation of people could not "retire" on any amount of money. But in any such scenarios, there are no winners and everyone else is in the same situation. But I personally feel like that is also motivation to pull the trigger. If I retired at 40 with the assumption I could retire under most conditions, and the world went to hell when I was 60, at least I got twenty years of quality retirement.
tl;dr
You have to diversify internationally.
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You have to diversify internationally.
I'd definitely agree with the first four words.
I'm not sure international exposure is the only viable option to get that diversification, though. If you live in the US there are tons of other options for diversifying your investments. Annuities and real estate, for example, can both provide a more protected steady cashflow that can offset most of the downside risk at the expense of the upside growth.
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You have to diversify internationally.
I'd definitely agree with the first four words.
I'm not sure international exposure is the only viable option to get that diversification, though. If you live in the US there are tons of other options for diversifying your investments. Annuities and real estate, for example, can both provide a more protected steady cashflow that can offset most of the downside risk at the expense of the upside growth.
People like to invoke Japan, so I'll be trendy and do that here. In the 80's Japan looked like it was ruling the business world and going to take over everything, had a rip-roaring economy, international business, the Nikkei was 40% of global market cap, yadda yadda. Well, the US has a lot of similarities there, and we're something like 55% of global market cap. Why can't it happen here? In 10 years or 20? For whatever reason. Some international diversification has historically improved returns and decreased volatility.
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You have to diversify internationally.
I'd definitely agree with the first four words.
I'm not sure international exposure is the only viable option to get that diversification, though. If you live in the US there are tons of other options for diversifying your investments. Annuities and real estate, for example, can both provide a more protected steady cashflow that can offset most of the downside risk at the expense of the upside growth.
People like to invoke Japan, so I'll be trendy and do that here. In the 80's Japan looked like it was ruling the business world and going to take over everything, had a rip-roaring economy, international business, the Nikkei was 40% of global market cap, yadda yadda. Well, the US has a lot of similarities there, and we're something like 55% of global market cap. Why can't it happen here? In 10 years or 20? For whatever reason. Some international diversification has historically improved returns and decreased volatility.
It could. But it would also probably happen after an unbelievable stock run-up. For context, for the S&P 500 to reach the same p/e valuation as the Nikkei in 1989, it would have to go up more than fivefold from current levels.
It doesn't take much thought to realize that a 4% withdrawal rate after a fivefold increase in the stock market is nowhere near as safe as a 4% withdrawal rate calculated before that runup.
http://www.economist.com/node/9370662
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Who was it who said, 'life is what happens while you're busy making plans'? I have to chuckle at people who think they can predict their future whether just financially or in any other way.
I also like the saying, 'man plans and the Gods laugh.'
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Who was it who said, 'life is what happens while you're busy making plans'? I have to chuckle at people who think they can predict their future whether just financially or in any other way.
I also like the saying, 'man plans and the Gods laugh.'
And who was it that told a story about an ant and a grasshopper? To paraphrase one of sol's refrains on these boards, imperfect planning is still better than no planning.
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I have a question about this 80% success rate idea. I've been working towards a 100% success rate, simply because there are so many unknowns in the numbers I'm entering into cfiresim. For example, my income varies greatly, so I enter a conservative number for that (pretty much my lowest year's income as a freelancer.) We will be getting a significant inheritance at some point, but of course I have to guess when, so I'm conservative with that, as well as the amount. We will eventually sell our house and downsize, but with the canadian real estate market right now, that is a guess too, as we could be in a huge RE bubble. My DH is looking to retire soon, so I'd rather shoot for a higher success rate than a lower one. Am I being too conservative overall? It just doesn't seem like we have enough saved yet. With the 4% withdrawal rate, the actual money we have in investments gives us only about 1/3 what we would need to spend, not counting all these other variables.
When I enter all my "safe" guesses we get a success rate of about 95% with DH retiring next year, but there are still so many unknowns, and the actual money-in-the-bank figure seems low to me. It's scary to be thinking of withdrawing from this already.
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When I enter all my "safe" guesses we get a success rate of about 95% with DH retiring next year, but there are still so many unknowns, and the actual money-in-the-bank figure seems low to me. It's scary to be thinking of withdrawing from this already.
I think you need to figure out why you feel scared. Do you have no confidence in the other "safety margins" that MMM and other forum members have discussed, such as additional work, Social Security (or its equivalent elsewhere), downsizing, cutbacks, etc? Shouldn't that be more than enough, coupled with the 95% success rate based upon conservative inputs?
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When I enter all my "safe" guesses we get a success rate of about 95% with DH retiring next year, but there are still so many unknowns, and the actual money-in-the-bank figure seems low to me. It's scary to be thinking of withdrawing from this already.
I think you need to figure out why you feel scared. Do you have no confidence in the other "safety margins" that MMM and other forum members have discussed, such as additional work, Social Security (or its equivalent elsewhere), downsizing, cutbacks, etc? Shouldn't that be more than enough, coupled with the 95% success rate based upon conservative inputs?
I'd say I'm uneasy because I live in a very HCOL area where for a normal retirement people think they need upwards of 2 million. By next year we'll be at roughly MMM-approved retirement savings amounts but we spend way more than MMM (about 3x). I don't see people mentioning inheritances too much on this site - it seems taboo to be using that as part of a retirement plan. And from what I inderstand canadian old age security is much less than US social security and should not be relied upon in retirement, either. (Though I used a conservative estimate for both in my cfiresim inputs.)
The good news is that I plan to work another 15-20 years because I enjoy what I do. So I'm hoping I can increase my income if I need to, or DH can potentially work part time or something as well. I am probably being over cautious. We would be pretty resourceful people if the shit ever hit the fan.
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You have to diversify internationally.
I'd definitely agree with the first four words.
I'm not sure international exposure is the only viable option to get that diversification, though. If you live in the US there are tons of other options for diversifying your investments. Annuities and real estate, for example, can both provide a more protected steady cashflow that can offset most of the downside risk at the expense of the upside growth.
People like to invoke Japan, so I'll be trendy and do that here. In the 80's Japan looked like it was ruling the business world and going to take over everything, had a rip-roaring economy, international business, the Nikkei was 40% of global market cap, yadda yadda. Well, the US has a lot of similarities there, and we're something like 55% of global market cap. Why can't it happen here? In 10 years or 20? For whatever reason. Some international diversification has historically improved returns and decreased volatility.
It could. But it would also probably happen after an unbelievable stock run-up. For context, for the S&P 500 to reach the same p/e valuation as the Nikkei in 1989, it would have to go up more than fivefold from current levels.
It doesn't take much thought to realize that a 4% withdrawal rate after a fivefold increase in the stock market is nowhere near as safe as a 4% withdrawal rate calculated before that runup.
http://www.economist.com/node/9370662
The market is at a CAPE of 27--right where it was a few months before Black Tuesday and the following Great Depression. And quite a few people on this forum are getting ready to retire now. Who knows what will happen. Maybe CAPE doesn't mean now what it used to. If people are willing to sacrifice returns to buy some portfolio stability by owning bonds they should be willing to maintain or increase returns and increase portfolio stability by owning cheap international funds too.
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You have to diversify internationally.
I'd definitely agree with the first four words.
I'm not sure international exposure is the only viable option to get that diversification, though. If you live in the US there are tons of other options for diversifying your investments. Annuities and real estate, for example, can both provide a more protected steady cashflow that can offset most of the downside risk at the expense of the upside growth.
People like to invoke Japan, so I'll be trendy and do that here. In the 80's Japan looked like it was ruling the business world and going to take over everything, had a rip-roaring economy, international business, the Nikkei was 40% of global market cap, yadda yadda. Well, the US has a lot of similarities there, and we're something like 55% of global market cap. Why can't it happen here? In 10 years or 20? For whatever reason. Some international diversification has historically improved returns and decreased volatility.
It could. But it would also probably happen after an unbelievable stock run-up. For context, for the S&P 500 to reach the same p/e valuation as the Nikkei in 1989, it would have to go up more than fivefold from current levels.
It doesn't take much thought to realize that a 4% withdrawal rate after a fivefold increase in the stock market is nowhere near as safe as a 4% withdrawal rate calculated before that runup.
http://www.economist.com/node/9370662
The market is at a CAPE of 27--right where it was a few months before Black Tuesday and the following Great Depression. And quite a few people on this forum are getting ready to retire now. Who knows what will happen. Maybe CAPE doesn't mean now what it used to. If people are willing to sacrifice returns to buy some portfolio stability by owning bonds they should be willing to maintain or increase returns and increase portfolio stability by owning cheap international funds too.
Oh I don't disagree with that. I'm just saying the example of the Nikkei is an extreme one - more like Nasdaq at the dot com bubble peak, rather than the S&P ever. Although international equities are a strange beast - they have had lower returns than US markets, with higher risk. They can increase portfolio stability, sure, but I wouldn't count on them to increase returns long term.
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It doesn't take much thought to realize that a 4% withdrawal rate after a fivefold increase in the stock market is nowhere near as safe as a 4% withdrawal rate calculated before that runup.
As recently as two months ago I would've agreed with this statement as being tautologically true, but, as you (beltim) recently pointed out here (http://forum.mrmoneymustache.com/post-fire/if-(swrinflation-lt-4-of-stash-reset-to-4-spend-swrinflation)/msg604359/#msg604359), as counterintuitive as it seems, retiring in the wake of a large market run-up has historically had zero impact on portfolio success rate.
Now, as we recognized in the linked thread, there are flaws in the statistical analysis you conducted that prevent us from drawing statistically significant conclusions (most prominently, the lack of sufficient data in the historical record), and perhaps if we run the same analysis again a few years from now (when the more recent market crashes are included in the data set) that answer will change. But it just isn't true that retiring on a stash equal to a given withdrawal-multiple after a big market run-up is necessarily less safe than retiring on a stash equal to the same withdrawal-multiple before a big market run-up, because both options may turn out to be 100% safe -- the problem is that it's impossible to ever know whether that's the case in advance, before we have benefit of hindsight to confirm it for us.
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It doesn't take much thought to realize that a 4% withdrawal rate after a fivefold increase in the stock market is nowhere near as safe as a 4% withdrawal rate calculated before that runup.
As recently as two months ago I would've agreed with this statement as being tautologically true, but, as you (beltim) recently pointed out here (http://forum.mrmoneymustache.com/post-fire/if-(swrinflation-lt-4-of-stash-reset-to-4-spend-swrinflation)/msg604359/#msg604359), as counterintuitive as it seems, retiring in the wake of a large market run-up has historically had zero impact on portfolio success rate.
Now, as we recognized in the linked thread, there are flaws in the statistical analysis you conducted that prevent us from drawing statistically significant conclusions (most prominently, the lack of sufficient data in the historical record), and perhaps if we run the same analysis again a few years from now (when the more recent market crashes are included in the data set) that answer will change. But it just isn't true that retiring on a stash equal to a given withdrawal-multiple after a big market run-up is necessarily less safe than retiring on a stash equal to the same withdrawal-multiple before a big market run-up, because both options may turn out to be 100% safe -- the problem is that it's impossible to ever know whether that's the case in advance, before we have benefit of hindsight to confirm it for us.
Ah, but we did that analysis on US markets, and we know the safe withdrawal rate varies depending on what country you're in. The Nikkei was at significantly higher levels (valuation-wise) than the broad US markets have ever been, to my knowledge. The closest comparable bubble was the Nasdaq at the dot-com peak - and if we were to do an analysis of the safe withdrawal rate of a portfolio consisting of the Nasdaq 100, I am sure that the max safe withdrawal rate would be much lower.
I still think it's reasonable to think that valuation plays an important role in SWR. Perhaps broad US markets have never reached the valuation levels needed to see that effect. We know, however, that international markets have seen such an effect, at least at very high valuation levels.
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You have to diversify internationally.
I'd definitely agree with the first four words.
I'm not sure international exposure is the only viable option to get that diversification, though. If you live in the US there are tons of other options for diversifying your investments. Annuities and real estate, for example, can both provide a more protected steady cashflow that can offset most of the downside risk at the expense of the upside growth.
People like to invoke Japan, so I'll be trendy and do that here. In the 80's Japan looked like it was ruling the business world and going to take over everything, had a rip-roaring economy, international business, the Nikkei was 40% of global market cap, yadda yadda. Well, the US has a lot of similarities there, and we're something like 55% of global market cap. Why can't it happen here? In 10 years or 20? For whatever reason. Some international diversification has historically improved returns and decreased volatility.
It could. But it would also probably happen after an unbelievable stock run-up. For context, for the S&P 500 to reach the same p/e valuation as the Nikkei in 1989, it would have to go up more than fivefold from current levels.
It doesn't take much thought to realize that a 4% withdrawal rate after a fivefold increase in the stock market is nowhere near as safe as a 4% withdrawal rate calculated before that runup.
http://www.economist.com/node/9370662
The market is at a CAPE of 27--right where it was a few months before Black Tuesday and the following Great Depression. And quite a few people on this forum are getting ready to retire now. Who knows what will happen. Maybe CAPE doesn't mean now what it used to. If people are willing to sacrifice returns to buy some portfolio stability by owning bonds they should be willing to maintain or increase returns and increase portfolio stability by owning cheap international funds too.
Oh I don't disagree with that. I'm just saying the example of the Nikkei is an extreme one - more like Nasdaq at the dot com bubble peak, rather than the S&P ever. Although international equities are a strange beast - they have had lower returns than US markets, with higher risk. They can increase portfolio stability, sure, but I wouldn't count on them to increase returns long term.
That's definitely been the case for the TSP's international (I) fund (which tracks the EAFE index):
http://www.tspfolio.com/tspfunds
The risk-adjusted return simply hasn't been worth owning it, when compared to the Small Cap (S) and S&P 500 (C) funds. That being said, I've still got 5% in it.
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Ah, but we did that analysis on US markets, and we know the safe withdrawal rate varies depending on what country you're in. The Nikkei was at significantly higher levels (valuation-wise) than the broad US markets have ever been, to my knowledge. The closest comparable bubble was the Nasdaq at the dot-com peak - and if we were to do an analysis of the safe withdrawal rate of a portfolio consisting of the Nasdaq 100, I am sure that the max safe withdrawal rate would be much lower.
I still think it's reasonable to think that valuation plays an important role in SWR. Perhaps broad US markets have never reached the valuation levels needed to see that effect. We know, however, that international markets have seen such an effect, at least at very high valuation levels.
Yes, I agree with all that. My point is just that, while it's tempting to conclude that lower market valuations necessarily (as a logical truth) increase the safety of your portfolio, as your analysis demonstrated, that simply isn't true (in the same way that wrapping an egg to be thrown off a roof in additional bubble wrap does not "increase the safety" if it has already been wrapped in more than enough to keep it from breaking).
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Ah, but we did that analysis on US markets, and we know the safe withdrawal rate varies depending on what country you're in. The Nikkei was at significantly higher levels (valuation-wise) than the broad US markets have ever been, to my knowledge. The closest comparable bubble was the Nasdaq at the dot-com peak - and if we were to do an analysis of the safe withdrawal rate of a portfolio consisting of the Nasdaq 100, I am sure that the max safe withdrawal rate would be much lower.
I still think it's reasonable to think that valuation plays an important role in SWR. Perhaps broad US markets have never reached the valuation levels needed to see that effect. We know, however, that international markets have seen such an effect, at least at very high valuation levels.
Yes, I agree with all that. My point is just that, while it's tempting to conclude that lower market valuations necessarily (as a logical truth) increase the safety of your portfolio, as your analysis demonstrated, that simply isn't true (in the same way that wrapping an egg to be thrown off a roof in additional bubble wrap does not "increase the safety" if it has already been wrapped in more than enough to keep it from breaking).
Sure. I'll amend my initial statement to:
"It doesn't take much thought to realize that a huge asset bubble can reduce your safe withdrawal rate"
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Sure. I'll amend my initial statement to:
"It doesn't take much thought to realize that a huge asset bubble can reduce your safe withdrawal rate"
Thanks - just in case my posts came across the wrong way, note that I wasn't being hypertechnical for the sake of being a prick. It's just that I was (and continue to be) astounded by the results of the analysis you did in that thread, which struck me as incredibly counterintuitive, and your initial statement presented a good opportunity to use this thread as a platform for sharing those results with others who may not have seen that thread.
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Sure. I'll amend my initial statement to:
"It doesn't take much thought to realize that a huge asset bubble can reduce your safe withdrawal rate"
Thanks - just in case my posts came across the wrong way, note that I wasn't being hypertechnical for the sake of being a prick. It's just that I was (and continue to be) astounded by the results of the analysis you did in that thread, which struck me as incredibly counterintuitive, and your initial statement presented a good opportunity to use this thread as a platform for sharing those results with others who may not have seen that thread.
Don't worry - I didn't think you were being hypertechnical nor did I think you were being a prick. I very much enjoy these conversations, and this one is no exception.
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It is worth noting that the Nikkei increased in value ~6.5-fold over a 6 year period. The biggest jump in the S&P over a 6 year period was ~3.5-fold (perhaps unsurprisingly, the 6-year period that ended in 2000).
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The market is at a CAPE of 27--right where it was a few months before Black Tuesday and the following Great Depression. And quite a few people on this forum are getting ready to retire now. Who knows what will happen. Maybe CAPE doesn't mean now what it used to. If people are willing to sacrifice returns to buy some portfolio stability by owning bonds they should be willing to maintain or increase returns and increase portfolio stability by owning cheap international funds too.
Also, the CAPE for Japan in 1990 was about 96. There is simply a huge difference between Japan's peak valuation and anything the US has ever experienced.
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Oh I don't disagree with that. I'm just saying the example of the Nikkei is an extreme one - more like Nasdaq at the dot com bubble peak, rather than the S&P ever. Although international equities are a strange beast - they have had lower returns than US markets, with higher risk. They can increase portfolio stability, sure, but I wouldn't count on them to increase returns long term.
I think it's likely that long term returns will be similar for US/Intl. A Random Walk shows a long period where adding Intl at ~20% increased returns and lowered volatility. The future may be different. The last 7 years have been. Emerging markets could explode or implode. Who knows!
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Sol's perspective on success rates is something I've been digesting over the past few days. I collect a (small) pension that is independent of market returns, and I've thought that would give me some leeway within the 4% rule.
Now I'm starting to think that 5% might be acceptable to me. That's pretty incredible, as it cuts a significant amount of time before I could FIRE. I need to discuss it with my wife.
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It doesn't take much thought to realize that a 4% withdrawal rate after a fivefold increase in the stock market is nowhere near as safe as a 4% withdrawal rate calculated before that runup.
As recently as two months ago I would've agreed with this statement as being tautologically true, but, as you (beltim) recently pointed out here (http://forum.mrmoneymustache.com/post-fire/if-(swrinflation-lt-4-of-stash-reset-to-4-spend-swrinflation)/msg604359/#msg604359), as counterintuitive as it seems, retiring in the wake of a large market run-up has historically had zero impact on portfolio success rate.
Now, as we recognized in the linked thread, there are flaws in the statistical analysis you conducted that prevent us from drawing statistically significant conclusions (most prominently, the lack of sufficient data in the historical record), and perhaps if we run the same analysis again a few years from now (when the more recent market crashes are included in the data set) that answer will change. But it just isn't true that retiring on a stash equal to a given withdrawal-multiple after a big market run-up is necessarily less safe than retiring on a stash equal to the same withdrawal-multiple before a big market run-up, because both options may turn out to be 100% safe -- the problem is that it's impossible to ever know whether that's the case in advance, before we have benefit of hindsight to confirm it for us.
Ben Graham would say that higher prices are more risky, de facto.
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Oh I don't disagree with that. I'm just saying the example of the Nikkei is an extreme one - more like Nasdaq at the dot com bubble peak, rather than the S&P ever. Although international equities are a strange beast - they have had lower returns than US markets, with higher risk. They can increase portfolio stability, sure, but I wouldn't count on them to increase returns long term.
That's definitely been the case for the TSP's international (I) fund (which tracks the EAFE index):
http://www.tspfolio.com/tspfunds
The risk-adjusted return simply hasn't been worth owning it, when compared to the Small Cap (S) and S&P 500 (C) funds. That being said, I've still got 5% in it.
Don't fall prey to recency bias. Sometimes US > Intl, sometimes the other way around. There's no reason to believe that large developed economies will lag over the long run just because they are outside the US borders. They are lagging due in large part to austerity policies pursued after the 2008 crash. In the US we had much better economic policy and recovered more quickly. The next time around, we could be the policy dolts.
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Ah, but we did that analysis on US markets, and we know the safe withdrawal rate varies depending on what country you're in. The Nikkei was at significantly higher levels (valuation-wise) than the broad US markets have ever been, to my knowledge. The closest comparable bubble was the Nasdaq at the dot-com peak - and if we were to do an analysis of the safe withdrawal rate of a portfolio consisting of the Nasdaq 100, I am sure that the max safe withdrawal rate would be much lower.
I still think it's reasonable to think that valuation plays an important role in SWR. Perhaps broad US markets have never reached the valuation levels needed to see that effect. We know, however, that international markets have seen such an effect, at least at very high valuation levels.
Yes, I agree with all that. My point is just that, while it's tempting to conclude that lower market valuations necessarily (as a logical truth) increase the safety of your portfolio, as your analysis demonstrated, that simply isn't true (in the same way that wrapping an egg to be thrown off a roof in additional bubble wrap does not "increase the safety" if it has already been wrapped in more than enough to keep it from breaking).
The SWR was calculated with historical data to see what % withdrawal would allow for 95% portfolio success. Now you are using the same historical data and picking specific years when equities were overpriced and seeing that portfolios mostly succeeded. Yes, because the SWR was calculated using that same data. Of course. In the future, we're not sure what's going to happen. Given a set portfolio withdrawal rate, it is definitely more risky to start retirement when assets are overpriced than when they are underpriced. If you look historically, the SWR for different retirement years (in retrospect) is higher for years when assets were underpriced and lower for years when assets were overpriced. That's where a high CAPE comes into play.
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Ben Graham would say that higher prices are more risky, de facto.
Yes, I think any investor following any investment philosophy would say so, but that's only because it's impossible to know what amount constitutes "enough" until the future has become the past. If you retire on a given WR-based stash after prices have shot up instead of the same WR-based stash before prices have shot up, that is by definition "riskier" because it's impossible for the latter portfolio to outperform the former. But, if the future ends up telling us that both stashes turned out to be "safe", then was one of them really safer than the other? Is a $100M stash any "safer" than a $50M stash if your projected spending is only $25k? Or see the bubble-wrapped egg analogy above.
This is all philosophical hairsplitting, but (originally) in service of highlighting the fact that, per beltim's analysis in the linked thread, in the U.S., the safety of a 4% WR was completely unaffected by retiring after a run-up in the S&P 500 in the five years prior to commencing retirement, which is completely at odds with the assumptions most of us (I think) have about historical portfolio performance.
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Oh I don't disagree with that. I'm just saying the example of the Nikkei is an extreme one - more like Nasdaq at the dot com bubble peak, rather than the S&P ever. Although international equities are a strange beast - they have had lower returns than US markets, with higher risk. They can increase portfolio stability, sure, but I wouldn't count on them to increase returns long term.
That's definitely been the case for the TSP's international (I) fund (which tracks the EAFE index):
http://www.tspfolio.com/tspfunds
The risk-adjusted return simply hasn't been worth owning it, when compared to the Small Cap (S) and S&P 500 (C) funds. That being said, I've still got 5% in it.
Don't fall prey to recency bias. Sometimes US > Intl, sometimes the other way around. There's no reason to believe that large developed economies will lag over the long run just because they are outside the US borders. They are lagging due in large part to austerity policies pursued after the 2008 crash. In the US we had much better economic policy and recovered more quickly. The next time around, we could be the policy dolts.
Definitely! The fact that International has trailed US lately is the exact reason to invest internationally. These trends do not continue long term. This was my one main take away from Four Pillars of Investing.
Similar chart as in the book:
(http://stanfordwealth.com/uploads/3/0/7/4/3074079/1422063791.jpg)
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The SWR was calculated with historical data to see what % withdrawal would allow for 95% portfolio success. Now you are using the same historical data and picking specific years when equities were overpriced and seeing that portfolios mostly succeeded. Yes, because the SWR was calculated using that same data.
No, this isn't what's going on; beltim's analysis shows that the subset of historical retirements that commenced after a five-year market run-up were not only still mostly successful, but that they were just as likely to be successful as any retirement commencement year in the full data set. I would have expected to see the opposite result (which is what your quoted statement above implicitly assumes as well) -- that the 5% failure cases would be clustered around the start years that witnessed a previous market run-up, leading to a lower success rate than the overall success rate. But that wasn't the case.
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the subset of historical retirements that commenced after a five-year market run-up were not only still mostly successful, but that they were just as likely to be successful as any retirement commencement year in the full data set.
This observation aligns neatly with our previous discussion about how the best time to invest in the stock market has always been right after it achieves an all-time high.
And, in another way, with the dual momentum investing thread that argued that you can use these kinds of run-ups as momentum signals to buy, though in that case they were suggesting shorter lookback periods.
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Good discussions, subscribing.
My WR is nonsensical, as rents will be my income, and I'm not "withdrawing" anything.. but if I were to liquidate my real estate at conservative numbers and input my plan into cFIREsim using inflation adjusted spending (but adding extra income/spending offsets in the first few years, since it will vary the first few years of FIRE) into a success rate, it tells me around 71%, which equates to about a 5% WR (though again, it will be lower than that to start with, then rise, but it'll average to around a 5% WR).
I probably worked too long. But I enjoyed it, so I'm okay with it.
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This observation aligns neatly with our previous discussion about how the best time to invest in the stock market has always been right after it achieves an all-time high.
Which discussion was that? Unless I'm misunderstanding you, this doesn't sound right -- there have been plenty of times (too many to count) when it would have been better to wait for the market to fall back below its peak before investing. Or did you not mean it literally? More like the tree-planting analogy - the best time to invest was decades ago, but the next best time is today?
And, in another way, with the dual momentum investing thread that argued that you can use these kinds of run-ups as momentum signals to buy, though in that case they were suggesting shorter lookback periods.
Yeah, and it's the lookback period that determines success or failure of that strategy - I think the proponents in that thread were misconstruing our doubts about the predictive-signaling reliability of any particular lookback period for doubt that momentum exists in the marketplace (which it obviously does).
My WR is nonsensical, as rents will be my income, and I'm not "withdrawing" anything.. but if I were to liquidate my real estate at conservative numbers and input my plan into cFIREsim using inflation adjusted spending (but adding extra income/spending offsets in the first few years, since it will vary the first few years of FIRE) into a success rate, it tells me around 71%, which equates to about a 5% WR (though again, it will be lower than that to start with, then rise, but it'll average to around a 5% WR).
But I'm guessing that your total rental income more than covers your projected expenses (because I'm guessing that the income your rental property portfolio produces is worth more to you than the portfolio's liquidation value)? If so, maybe you can cash in on the higher efficiency of the stock market over regional real estate markets by securitizing your rental portfolio (i.e., stick it in a legal entity and take that entity public) :)
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My WR is nonsensical, as rents will be my income, and I'm not "withdrawing" anything.. but if I were to liquidate my real estate at conservative numbers and input my plan into cFIREsim using inflation adjusted spending (but adding extra income/spending offsets in the first few years, since it will vary the first few years of FIRE) into a success rate, it tells me around 71%, which equates to about a 5% WR (though again, it will be lower than that to start with, then rise, but it'll average to around a 5% WR).
But I'm guessing that your total rental income more than covers your projected expenses (because I'm guessing that the income your rental property portfolio produces is worth more to you than the portfolio's liquidation value)?
Correct. I should have at least a 25% savings rate in FIRE, even using conservative numbers for my real estate expenses.
If so, maybe you can cash in on the higher efficiency of the stock market over regional real estate markets by securitizing your rental portfolio (i.e., stick it in a legal entity and take that entity public) :)
That is the eventual goal/plan for many real estate investors--get big enough to become a REIT. I don't have a desire to do that, what I have is more than enough for me. :)
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My WR is nonsensical, as rents will be my income, and I'm not "withdrawing" anything.. but if I were to liquidate my real estate at conservative numbers and input my plan into cFIREsim using inflation adjusted spending (but adding extra income/spending offsets in the first few years, since it will vary the first few years of FIRE) into a success rate, it tells me around 71%, which equates to about a 5% WR (though again, it will be lower than that to start with, then rise, but it'll average to around a 5% WR).
But I'm guessing that your total rental income more than covers your projected expenses (because I'm guessing that the income your rental property portfolio produces is worth more to you than the portfolio's liquidation value)? If so, maybe you can cash in on the higher efficiency of the stock market over regional real estate markets by securitizing your rental portfolio (i.e., stick it in a legal entity and take that entity public) :)
How will I choose whether to invest my life savings in BGC (http://forum.mrmoneymustache.com/investor-alley/before-the-crash-increasing-cash-holdings/msg636266/#msg636266) or in ARSC?
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How will I choose whether to invest my life savings in BGC (http://forum.mrmoneymustache.com/investor-alley/before-the-crash-increasing-cash-holdings/msg636266/#msg636266) or in ARSC?
That's easy - you buy both. Remember the first four words of your own post upthread: you have to diversify!
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My WR is nonsensical, as rents will be my income, and I'm not "withdrawing" anything.. but if I were to liquidate my real estate at conservative numbers and input my plan into cFIREsim using inflation adjusted spending (but adding extra income/spending offsets in the first few years, since it will vary the first few years of FIRE) into a success rate, it tells me around 71%, which equates to about a 5% WR (though again, it will be lower than that to start with, then rise, but it'll average to around a 5% WR).
But I'm guessing that your total rental income more than covers your projected expenses (because I'm guessing that the income your rental property portfolio produces is worth more to you than the portfolio's liquidation value)? If so, maybe you can cash in on the higher efficiency of the stock market over regional real estate markets by securitizing your rental portfolio (i.e., stick it in a legal entity and take that entity public) :)
How will I choose whether to invest my life savings in BGC (http://forum.mrmoneymustache.com/investor-alley/before-the-crash-increasing-cash-holdings/msg636266/#msg636266) or in ARSC?
It's actually not ARSC, it's ARebelSpyEndowment.
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How will I choose whether to invest my life savings in BGC (http://forum.mrmoneymustache.com/investor-alley/before-the-crash-increasing-cash-holdings/msg636266/#msg636266) or in ARSC?
That's easy - you buy both. Remember the first four words of your own post upthread: you have to diversify!
Touche, good sir! <Tip of the top hat>
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The SWR was calculated with historical data to see what % withdrawal would allow for 95% portfolio success. Now you are using the same historical data and picking specific years when equities were overpriced and seeing that portfolios mostly succeeded. Yes, because the SWR was calculated using that same data.
No, this isn't what's going on; beltim's analysis shows that the subset of historical retirements that commenced after a five-year market run-up were not only still mostly successful, but that they were just as likely to be successful as any retirement commencement year in the full data set. I would have expected to see the opposite result (which is what your quoted statement above implicitly assumes as well) -- that the 5% failure cases would be clustered around the start years that witnessed a previous market run-up, leading to a lower success rate than the overall success rate. But that wasn't the case.
I read through that thread and I don't think the analysis says what you think it does. See my string of posts on that other thread, including an alternate analysis starting here: http://forum.mrmoneymustache.com/post-fire/if-(swrinflation-lt-4-of-stash-reset-to-4-spend-swrinflation)/msg653490/#msg653490
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My WR is nonsensical, as rents will be my income, and I'm not "withdrawing" anything.. but if I were to liquidate my real estate at conservative numbers and input my plan into cFIREsim using inflation adjusted spending (but adding extra income/spending offsets in the first few years, since it will vary the first few years of FIRE) into a success rate, it tells me around 71%, which equates to about a 5% WR (though again, it will be lower than that to start with, then rise, but it'll average to around a 5% WR).
But I'm guessing that your total rental income more than covers your projected expenses (because I'm guessing that the income your rental property portfolio produces is worth more to you than the portfolio's liquidation value)? If so, maybe you can cash in on the higher efficiency of the stock market over regional real estate markets by securitizing your rental portfolio (i.e., stick it in a legal entity and take that entity public) :)
How will I choose whether to invest my life savings in BGC (http://forum.mrmoneymustache.com/investor-alley/before-the-crash-increasing-cash-holdings/msg636266/#msg636266) or in ARSC?
It's actually not ARSC, it's ARebelSpyEndowment.
Where did you pull that name from?
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Where did you pull that name from?
(http://media.247sports.com/Uploads/Assets/122/187/1187122.gif)
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Even after reading this thread, as a fairly risk-averse person and engineer (safety factor and all), I was targeting 90+% success rate, in part because we are close to 80% now, and with another year or two of work, it's not that hard to get to 90% to 95% by our mid 40's.
Those cfiresim runs and success rates were predicated actually having healthcare that is reasonably priced. With the new President elect, it's not clear that either of those things is possible (having healthcare without being employed and having it be reasonably priced). We are currently healthy but 50-60 year retirement is a long time, especially if we don't know what's going to happen with Medicare.
Now I'm thinking we'll probably target 100% but not sure about quitting even if we hit that, if Obamacare is not going to be around. Medical expenses that hit 6 figures would turn a 100% success rate into 0%.
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with another year or two of work, it's not that hard to get to 90% to 95% by our mid 40's.
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Now I'm thinking we'll probably target 100%
It's your call, I'd just make sure to ask yourself how many years of your life you're willing to sell (literally) for a few meaningless percent on a calculator that tells you very limited numbers about a very limited past.
Medical expenses that hit 6 figures would turn a 100% success rate into 0%.
So then what are you selling the years for, instead of FIREing and focusing on fitness? ;)
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Even after reading this thread, as a fairly risk-averse person and engineer (safety factor and all), I was targeting 90+% success rate, in part because we are close to 80% now, and with another year or two of work, it's not that hard to get to 90% to 95% by our mid 40's.
Those cfiresim runs and success rates were predicated actually having healthcare that is reasonably priced. With the new President elect, it's not clear that either of those things is possible (having healthcare without being employed and having it be reasonably priced). We are currently healthy but 50-60 year retirement is a long time, especially if we don't know what's going to happen with Medicare.
Now I'm thinking we'll probably target 100% but not sure about quitting even if we hit that, if Obamacare is not going to be around. Medical expenses that hit 6 figures would turn a 100% success rate into 0%.
With a timeline of 50-60 years and all the potential political and economic uncertainties associated with that much time, compounded by the uncertainties associated with assuming that the past predicts the future, the difference between 90-95% and 100% is completely meaningless. (As an engineer, you should know that ;) ). When you're FIREing that early, you have to plan on being flexible and maintaining your ability to earn some dough should the circumstances require it, regardless of how high your success rate is.
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Those cfiresim runs and success rates were predicated actually having healthcare that is reasonably priced. With the new President elect, it's not clear that either of those things is possible (having healthcare without being employed and having it be reasonably priced). We are currently healthy but 50-60 year retirement is a long time, especially if we don't know what's going to happen with Medicare.
Now I'm thinking we'll probably target 100% but not sure about quitting even if we hit that, if Obamacare is not going to be around. Medical expenses that hit 6 figures would turn a 100% success rate into 0%.
Right? Even with the ACA, healthcare spending in the USA has gone up by the largest percent since 2007. The current system does make it hard to be positive about future expenses.
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@sol: If you go for 50% success rate, then that translates to roughly a 6% withdrawal rate, right?
Is that what you use(d) for your retirement decision?
50% is crazy. Would you get on an airplane with a 50% chance of a good landing? If the consequences of failure are catastrophic you better shoot for 95% or 98% success.
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@sol: If you go for 50% success rate, then that translates to roughly a 6% withdrawal rate, right?
Is that what you use(d) for your retirement decision?
50% is crazy. Would you get on an airplane with a 50% chance of a good landing? If the consequences of failure are catastrophic you better shoot for 95% or 98% success.
You realize you have control over the chance it succeeds, right? You can spend less in a given year, earn some side gig money, etc.
The calculations assume an idiot in a vacuum blindly withdrawing each year and increasing for inflation, regardless of what's going on with their portfolio value.
50% blind vacuum probability is probably closer to 80% reality probability, and if you're willing to go back to work for a year or two (without needing to view that as ER "failure"--especially because by going for more percent than that, you're putting in those years anyways--would you consider that failure?), probably closer to 100%.
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@sol: If you go for 50% success rate, then that translates to roughly a 6% withdrawal rate, right?
Is that what you use(d) for your retirement decision?
50% is crazy. Would you get on an airplane with a 50% chance of a good landing? If the consequences of failure are catastrophic you better shoot for 95% or 98% success.
Then I guess that it's good that early retirement failure is neither as quick nor as catastrophic as a plane crash.
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One thing to keep in mind however is to think about your ability/desire to find work later in life after years/decades of being retired.
When you retire with a FIRE success rate of 80% or lower, you're essentially guaranteeing yourself that if you ever come across an economic calamity that was similar to the ones we've seen in the past, then you're going to have to find another source of income to supplement your savings so that you don't run dry.
Now, if you retired early in true "mustachian" fashion, your expenses should be very low, so ultimately you'd only really have to find cheap and abundant work for supplemental income. But, you'll need to find work none-the-less. Also, you'll certainly always be in a better position than typical Americans who are overloaded with debt and work 9-5 and are dependent upon their salary incomes to stay afloat on their debt. So that's good too.
However, this all comes down to a decision of whether you want to look for cheap work during times of economic stress during your retirement so that you can ensure your 75% "success rate" turns out to be 100% successful. Or, do you want to just work 2-3 extra years during your young career working years so that you have a 100% "success rate" so that you can ensure your savings amount will sustain you through even the harshest times that may lie ahead?
If you work a couple of extra years to pad your savings to a 100% "success rate", then you can think of it like self-insuring yourself against economic calamity. Sure, you might have worked a couple extra years for nothing (if there never ends up being an economic calamity), but that insurance will still provide some peace of mind for you during retirement.
For me, since I enjoy my current job, I'll gladly work a couple extra years to pad my savings while I can and ensure that I won't ever have to supplement my passive income during retirement. That doesn't mean I won't adjust my withdrawal rate according to how well the economy is doing, but merely ensuring that I won't ever need to go back to work again. That's why I'm willing to work a couple of extra years to achieve a "100% success rate".
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One thing to keep in mind however is to think about your ability/desire to find work later in life after years/decades of being retired.
When you retire with a FIRE success rate of 80% or lower, you're essentially guaranteeing yourself that if you ever come across an economic calamityin the first 5 years or so that was similar to the ones we've seen in the past, then you're going to have to find another source of income to supplement your savings so that you don't run dry.
Now, if you retired early in true "mustachian" fashion, your expenses should be very low, so ultimately you'd only really have to find cheap and abundant work for supplemental income. But, you'll need to find work none-the-less. Also, you'll certainly always be in a better position than typical Americans who are overloaded with debt and work 9-5 and are dependent upon their salary incomes to stay afloat on their debt. So that's good too.
However, this all comes down to a decision of whether you want to look for cheap work during times of economic stress during your retirement so that you can ensure your 75% "success rate" turns out to be 100% successful. Or, do you want to just work 2-3 extra years during your young career working years so that you have a 100% "success rate" so that you can ensure your savings amount will sustain you through even the harshest times that may lie ahead?
If you work a couple of extra years to pad your savings to a 100% "success rate", then you can think of it like self-insuring yourself against economic calamity. Sure, you might have worked a couple extra years for nothing (if there never ends up being an economic calamity), but that insurance will still provide some peace of mind for you during retirement.
For me, since I enjoy my current job, I'll gladly work a couple extra years to pad my savings while I can and ensure that I won't ever have to supplement my passive income during retirement. That doesn't mean I won't adjust my withdrawal rate according to how well the economy is doing, but merely ensuring that I won't ever need to go back to work again. That's why I'm willing to work a couple of extra years to achieve a "100% success rate".
there i fixed that for you.
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But you do realize that even a 100% 'success rate' doesn't mean nothing can possibly go wrong and you are guaranteed to succeed in an (always) uncertain future.
So the question begins to be where is the threshold?
if its 2009 and i've got enough for a 6% SWR i'm quitting ... but that likely meant in 2007 i had enough for a 4% ... either way would have been safe and had piles of money.
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Good chain. Gets into my interest in the range between 50% and 100% "success" rates people end up choosing. I've been less interested on the 80% to 100% end because 100% has so little meaning (I think so many think of it as some solid line...but thats just from from past stuff...for future possibilities it is far from such).... my interest is more why one would work even until 80% and not just 51%. There seem to be such a failure associated with having to return to work that it makes the attempt risky even if success is probable.... but if someone works from 22-32, takes the next 20 years off, raises kids, does other stuff, and then, if they see they need more money, work from 52-62, have they failed? I understand the interruption makes one not as suitable for the workforce (so will likely make less income), but not sure that's so disastrous...
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I understand the interruption makes one not as suitable for the workforce (so will likely make less income), but not sure that's so disastrous...
Even the smartest of people, when faced with the security of their families, tend to make important decisions based on emotion and instinct instead of math. We're not as evolved as we like to think we are.
The historical record of US market returns suggests that anybody using a SWR below 6% per year is likely to have too much money for a 30 year retirement, and anybody using a SWR below about 5% is more likely to watch their assets grow indefinitely than be depleted.
Details are here: http://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/msg732828/#msg732828
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Details are here: http://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/msg732828/#msg732828
That graph always makes me think that we really should all be talking about a 6-7% WR, and then discussing the little things we can do (earn some side-gig income, cut spending in bad years, etc.) to make sure we're in the half of those runs that succeeds.
The 4% rule is so ridiculously safe in the hands of anyone flexible/willing to adjust to the market, it's silly.
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Details are here: http://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/msg732828/#msg732828
That graph always makes me think that we really should all be talking about a 6-7% WR, and then discussing the little things we can do (earn some side-gig income, cut spending in bad years, etc.) to make sure we're in the half of those runs that succeeds.
The 4% rule is so ridiculously safe in the hands of anyone flexible/willing to adjust to the market, it's silly.
The years of looking at this made me realize similar things. I've personally shifted my plan to a 6%. I have many options including but not limited to contract work, hobby income, and just sheer flexibility.
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yeha but there is a huge stairstep from 5 to 4 % of over 20% chance of success and while everyone's situation may be different 1 extra year of work is all it takes for me to go from 5 to 4% SWR. and i dont even have to work the whole year ... i actually plan to take a 3-4 month sabatical that year.
at the end of the day i'm pretty sure i'll have oversaved and worked 1-3 years too long. but i'm out at 37 assuming my unborn children dont have serious medical issues and health care comes back to earth in the next 4-5 years.
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yeha but there is a huge stairstep from 5 to 4 % of over 20% chance of success and while everyone's situation may be different 1 extra year of work is all it takes for me to go from 5 to 4% SWR. and i dont even have to work the whole year ... i actually plan to take a 3-4 month sabatical that year.
good point, that's the other end of the equation, what's the cost...how long do you actually have to grit your teeth to get to that next level. An extra year doesn't seem like much...unless OMY kicks in
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yeha but there is a huge stairstep from 5 to 4 % of over 20% chance of success and while everyone's situation may be different 1 extra year of work is all it takes for me to go from 5 to 4% SWR. and i dont even have to work the whole year ... i actually plan to take a 3-4 month sabatical that year.
good point, that's the other end of the equation, what's the cost...how long do you actually have to grit your teeth to get to that next level. An extra year doesn't seem like much...unless OMY kicks in
it will for me but i'll have so much FU money i'll be working on my own terms. i'm part of an employee owned firm with privately held shares and we do out of this world well. you have to sell when you leave so every year i can hangout on my own terms working 6 months a year is a huge win in asset gains.
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yeha but there is a huge stairstep from 5 to 4 % of over 20% chance of success
You have to think of this game like the gamble that it really is. Your retirement success rate can only be 0% or 100%. There is no in between for each individual person.
You control your spending level, and thus your backtested probability of lasting a given number of years. Will you roll the dice when the odds are in your favor? When you expect a 75% chance of never having to cut expenses? A 90% chance? 99%?
At some point, additional safety margin based on historical market returns becomes meaningless relative to the other risks, like getting a terminal illness or an unexpected inheritance or an asteroid hitting the earth and ending all human life. Or being financially ruined by a lawsuit or family medical emergency. Or nuclear war or global pandemic. All together the cumulative risk from uncontrollable outcomes probably outweighs the benefit of moving from 85 to 95% success on your SWR. You're working on the wrong safety margin at that point, if you're still concerned about your investments.
Once you're past about average success on your SWR, I suggest focusing on your family's emergency planning and supplies. If you're worried about worst case scenarios in the financial markets, you might want to consider worst case scenarios in real life too.
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Not worried about worst case market scenarios. Just have golden handcuffs outfitted with large diamonds. So it will be hard to not just work half of omy for 2-3 years after hitting 4% swr
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... my interest is more why one would work even until 80% and not just 51%. There seem to be such a failure associated with having to return to work that it makes the attempt risky even if success is probable.... but if someone works from 22-32, takes the next 20 years off, raises kids, does other stuff, and then, if they see they need more money, work from 52-62, have they failed? I understand the interruption makes one not as suitable for the workforce (so will likely make less income), but not sure that's so disastrous...
Typically for professional type careers, when people retire their income is at the top of the spectrum. Historically, if you retire and then come back to work, your skill set will most likely warrant a large pay cut. In my case, if I retired and needed to get back into the work force five years later I would most likely take a 80% to 90% cut in pay. So I would rather work a year or two extra and have the margin of safety. Now if I was truly Mustachian, my expenses would be cut by 70% and I would be retired. I am enjoying what I am doing and potentially going to work a number of extra years so that I have the resources to fund charitable type pursuits.
For those in physically demanding careers, their body may not be capable of sustaining the workload in the future.
One of the biggest areas that I think people should be looking into is the ability to enter the workforce in the future, due to technology taking over or eliminating your job. I would rather have a stache that owns the companies, so that I am always on the right side of the success line. http://forum.mrmoneymustache.com/welcome-to-the-forum/robots-and-their-impact-on-the-future/
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... my interest is more why one would work even until 80% and not just 51%. There seem to be such a failure associated with having to return to work that it makes the attempt risky even if success is probable.... but if someone works from 22-32, takes the next 20 years off, raises kids, does other stuff, and then, if they see they need more money, work from 52-62, have they failed? I understand the interruption makes one not as suitable for the workforce (so will likely make less income), but not sure that's so disastrous...
Typically for professional type careers, when people retire their income is at the top of the spectrum. Historically, if you retire and then come back to work, your skill set will most likely warrant a large pay cut. In my case, if I retired and needed to get back into the work force five years later I would most likely take a 80% to 90% cut in pay. So I would rather work a year or two extra and have the margin of safety. Now if I was truly Mustachian, my expenses would be cut by 70% and I would be retired. I am enjoying what I am doing and potentially going to work a number of extra years so that I have the resources to fund charitable type pursuits.
For those in physically demanding careers, their body may not be capable of sustaining the workload in the future.
One of the biggest areas that I think people should be looking into is the ability to enter the workforce in the future, due to technology taking over or eliminating your job. I would rather have a stache that owns the companies, so that I am always on the right side of the success line. http://forum.mrmoneymustache.com/welcome-to-the-forum/robots-and-their-impact-on-the-future/
yes and in my case ... everyone here should understand how compound interest works. i have to sell off super lucrative shares of a privately held company when i leave ... you dont get to buy them back if you come back so working a couple extra years is insane amounts of return on those shares. situations are unique but golden handcuffs make OMY happen much more frequently.
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there i fixed that for you.
I beg to differ. An economic calamity doesn't just have to occur during the first 5 years for it to have disastrous impact on your retirement. You could simply have stagnant growth during your first 5-10 years that prevents your portfolio from growing much while it has its largest potential to grow. Because it failed to grow when it needed to, it could leave you less resilient to failure later down the road.
The way I see it is this. If I work a couple of extra years to build up my portfolio to the point where it would've withstood all scenarios of the past and if those couple of extra years would've been wasted years of work 20% of the time (assuming that those extra couple years boosted my success rate from 80-100%), then I can simply choose to donate the excess after I die to a charity of choice.
So in reality, those extra couple of years I can think of as having a 80% chance of working for charity by choice. Not many people have a choice to be able to dedicate 2 years or so of their working life toward charity and that's pretty cool in my book. At the same time, I gave myself peace of mind in retirement that in the event I needed it (~20% chance), my portfolio was large enough to make it through very difficult economic times without worry.
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So in reality, those extra couple of years I can think of as having a 80% chance of working for charity by choice.
This is exactly the logic I use to rationalize my cowardice in setting my retirement-trigger threshold so high (and the same logic nicely articulated in this inspiring post (http://forum.mrmoneymustache.com/welcome-to-the-forum/'one-more-year'-strikes-the-rich-the-hardest/msg585544/#msg585544) by sol). If I'm being honest with myself, I realize that the true motivating factor is personal risk aversion, where probable increased charitable giving is merely a happy side benefit (rather than the other way around), but the result is the same either way, I suppose.
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Even after reading this thread, as a fairly risk-averse person and engineer (safety factor and all), I was targeting 90+% success rate, in part because we are close to 80% now, and with another year or two of work, it's not that hard to get to 90% to 95% by our mid 40's.
Those cfiresim runs and success rates were predicated actually having healthcare that is reasonably priced. With the new President elect, it's not clear that either of those things is possible (having healthcare without being employed and having it be reasonably priced). We are currently healthy but 50-60 year retirement is a long time, especially if we don't know what's going to happen with Medicare.
Now I'm thinking we'll probably target 100% but not sure about quitting even if we hit that, if Obamacare is not going to be around. Medical expenses that hit 6 figures would turn a 100% success rate into 0%.
With a timeline of 50-60 years and all the potential political and economic uncertainties associated with that much time, compounded by the uncertainties associated with assuming that the past predicts the future, the difference between 90-95% and 100% is completely meaningless. (As an engineer, you should know that ;) ). When you're FIREing that early, you have to plan on being flexible and maintaining your ability to earn some dough should the circumstances require it, regardless of how high your success rate is.
Yes, I do know that a few percentage point is kinda meaningless, however, the actual difference is as much as a couple hundred thousand in the size of the stache in 1-2 years of extra work. That definitely gives a little bit extra piece of mind in weathering any additional uncertainty.
The good thing is that since we are doing so well (as evidenced by our high % success rate) it allows me more flexibility in how we look towards work. Since my company gives benefits down to 50% working, that's where I'm at. I'm trying to eke out a more sustainable balance of work and non-work. See this thread where I talk about my ADEPT status:
http://forum.mrmoneymustache.com/welcome-to-the-forum/new-acronym-and-new-stage-of-my-fi-journey-adept/
So even if I'm not quite FIRE yet, I do have a bit more flexibility in work, but still getting employer based health care and just trying to understand better what the next few years might bring (i.e. if Trump is going to burn the place down, or merely be another version of GWB or something else).
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The years of looking at this made me realize similar things. I've personally shifted my plan to a 6%. I have many options including but not limited to contract work, hobby income, and just sheer flexibility.
I'm using a flat out 6% of balance variable withdrawal. Also keeping my professional license and a PRN job which requires around 200 hrs every two years of work to keep. I'll work 100, up to maybe 500 hours a year depending on the stars, the weather, and my enjoyment level. If I get lucky with good growth, I may give it up 5-10 years in. If I get lucky with a big drawdown, I might work a few more hours to invest the dip for strippers and booze in my 80's (I'll probably give to charity instead, geez stop judging!). This will cut 2-4 years off required full time work to reach the 4% rule. Oh yeah, and then there's SS.
I'm single & no kids, it has advantages.
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That graph always makes me think that we really should all be talking about a 6-7% WR, and then discussing the little things we can do (earn some side-gig income, cut spending in bad years, etc.) to make sure we're in the half of those runs that succeeds.
The 4% rule is so ridiculously safe in the hands of anyone flexible/willing to adjust to the market, it's silly.
Not so fast.
I agree in principle, why not stop working at 50% success rate at 35 years old, take the 5 more years it would take to get to 80 or 90% success rate, and postpone them far in the future, maybe 2 years when you're 50, 2 more from 54-56 and the last year from 58-59; then "flip your coin", start your retirement, see if it works, and if it does, BONUS, you can just skip those 5 more years!
Problems:
- Cutting spending in bad years: this only works if you spend rather freely already. I'm pretty mustachian, living with $35k/year in a HCOL area, and I could retire on $20k/year elsewhere, but then how much could I cut back, really, without sitting at home all day?
- Going back to work: for career types, extended breaks are career suicide (or are they?), and you'll get a 70% pay cut, so those 5 years are more like... 15? (factoring return timing). If you work at McDonalds, sure.
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That graph always makes me think that we really should all be talking about a 6-7% WR, and then discussing the little things we can do (earn some side-gig income, cut spending in bad years, etc.) to make sure we're in the half of those runs that succeeds.
The 4% rule is so ridiculously safe in the hands of anyone flexible/willing to adjust to the market, it's silly.
Not so fast.
I agree in principle, why not stop working at 50% success rate at 35 years old, take the 5 more years it would take to get to 80 or 90% success rate, and postpone them far in the future, maybe 2 years when you're 50, 2 more from 54-56 and the last year from 58-59; then "flip your coin", start your retirement, see if it works, and if it does, BONUS, you can just skip those 5 more years!
Problems:
- Cutting spending in bad years: this only works if you spend rather freely already. I'm pretty mustachian, living with $35k/year in a HCOL area, and I could retire on $20k/year elsewhere, but then how much could I cut back, really, without sitting at home all day?
- Going back to work: for career types, extended breaks are career suicide (or are they?), and you'll get a 70% pay cut, so those 5 years are more like... 15? (factoring return timing). If you work at McDonalds, sure.
This has already been discussed a million times, but I'll give you the benefit of the doubt and give you some quick answers, in case you haven't read all the discussion.
1) Lots. One example: If you want to travel, and it's a down year, book a $500 plane ticket, rent out your home, go live somewhere overseas for 10-20k. Suddenly spending is halved, plus you have some income coming in, plus you spend a kickass year doing some travel. No big deal. If you don't like to travel, switch from paid to free stuff. That not spending money requires "sitting at home" is a giant, false myth.
2) Doesn't matter--you don't need to work the same, because you don't need to earn what you were... just need to earn the small amount to reduce your WR in those years. Say, for example, you were earning 150k, spending 30k, and you pull the plug early. Chances are, you never have to work again. If you do, you don't have to go earn that 150k. You could earn 10k as a side gig, and suddenly your 4% WR becomes a 2.6% WR that year. You're only earning 10k, instead of 150k, but it's more than enough to see you through bad years. Sure, you could do a few more years at 150k, but that's a guaranteed failure of selling more years of your life, versus the possibility of maybe getting a small side gig that's enough to see you through. No big deal.
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I agree in principle, why not stop working at 50% success rate at 35 years old
I agree as well. I don't see many good reasons not to.
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interesting discussion...actually to make the 80% success threshold rate more practical...if I'd had FIREed just before the financial crisis 2008/2009 that would count (probably) to the 20% failure segment, right ?
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I dont want to have a scenario where i have to live below my minimum to survive and enjoy my work enough to keep doing it and not consider years of my life `wasted'.
Its a bit arrogant to call year working wasted years of life sold. I am alive just as much as an early retireee.
I had a very similar response recently when it was stated that I was "trading healthiest years for money."
https://forum.mrmoneymustache.com/welcome-to-the-forum/gap-year-for-my-7-5-and-40-year-old/msg1644217/#msg1644217
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While it is true that one must make a decision, and that decision is a trade off in terms of years worked vs stash size, i often see you imply peopke are stupid for wanting to have a higher wealth target and work more years, as if `optimizing for the minimum' is a abolute goal that is de facto superior.
I'm not going to take any moral issue stance on the subject, although I think it's possible to make an argument for the superior morality of reduced consumption. Personal choices and all, I don't judge, or think people are stupid. I will point out that this particular venue is one that focuses (or at least used to focus) on those whose goal was "optimizing for minimum". That's why many of the earliest forum members speak so highly of that choice and encourage it. Most who came here were looking for that type of reinforcement and camaraderie, as its not present in most mainstream investment or retirement venues.
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While it is true that one must make a decision, and that decision is a trade off in terms of years worked vs stash size, i often see you imply peopke are stupid for wanting to have a higher wealth target and work more years, as if `optimizing for the minimum' is a abolute goal that is de facto superior.
I'm not going to take any moral issue stance on the subject, although I think it's possible to make an argument for the superior morality of reduced consumption. Personal choices and all, I don't judge, or think people are stupid. I will point out that this particular venue is one that focuses (or at least used to focus) on those whose goal was "optimizing for minimum". That's why many of the earliest forum members speak so highly of that choice and encourage it. Most who came here were looking for that type of reinforcement and camaraderie, as its not present in most mainstream investment or retirement venues.
I have no problem with your comment. But the site seems to me to be more about building an open community around ideas like asserting personal control over ones financial destiny.
The idea that our core values are a formulaic idea with fixed lifestyle choices is depressing. One can like riding a bike, save to a 4% withdraw rate, assume specific market returms, make frugal choices, and do construction side gigs. Without prejudice.
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One can like riding a bike, save to a 4% withdraw rate, assume specific market returms, make frugal choices, and do construction side gigs. Without prejudice.
LOL, very true!
When I started shifting my lifestyle towards decreased consumption and FI, I found myself trying to pick up habits others on here encouraged. Somethings they were great, but most times they stunk! I tend to have the personality of one who takes an existing model, tries it out, then modify. No need to reinvent the wheel, just readjust the spokes. Others do better developing their own independent models and tend to resist group-think. Most tend to just follow the leader.
Perhaps this shows the level of expertise in a particular subject vs personality? Anyway... I'm not judging any particular type, just recognizing the difficulties with interpersonal communication between them.
This forum has a higher than general population number of model creators and modifiers (based on your posts you seem to be a model creator?). Which is why I stick around, tons of smart people and good ideas for me to tinker with. Still, the follower-the leader types are always going to be most prevalent and can lead to frustration. Some days I deal with that frustration better than others.
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Ugh...these threads have become really depressing. I've spent a lot of time with cfiresim, adding lots of padding in terms of periodic expenses for house repairs, car replacement, and also cutting expected SS and pension payouts, adding in a generous amount to the annual budget for health insurance uncertainties, and using very long life-span predictions. Add on to that the fact that we are pretty bad-ass in terms of survival skills and flexibility, and also have a budget that has fat that can easily be trimmed in case of serious down-turns. I've even built a small business that could generate a difference making amount of income for many years if it was ever needed.
Cfiresim puts us at 100% success, with the lowest ending balances still being fairly substantial.
Despite having gone over the numbers and the assumptions many times, and understanding the basics, on some level DW doesn't really believe the math, and we are basically held hostage by that lack of confidence. Uncertainty about the future combined with family/social expectations (and being engaged by her work) keep us in the game.
Oh well...if cfiresim is on track, then there is a good chance I will get to spend and give away a crap load of money at some point. In the meantime, I tell myself I really can do whatever I want, since there is this huge safety net under me, and bide my time following a passion of mine, and try to gain satisfaction from the stealth wealth factor. But it is still work, and constrains things like substantial travel (which I have done very little of ) and other itch scratching activities...