Author Topic: I can last 45years on the 4% rule?  (Read 8585 times)

Boofinator

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Re: I can last 45years on the 4% rule?
« Reply #50 on: February 21, 2019, 03:33:25 PM »


I was curious myself, so I did the math using cFIREsim (see the second link in my earlier post). Hopefully the data is clear, but if not: the positive values correlate to hypothetical Portfolio A being able to retire sooner, whereas the negative values correlate to Portfolio B being able to retire sooner. Again, this was all done using cFIREsim, which I think is probably the most popular tool used around here to predict financial independence in the U.S.

Trying to run a comparison myself, first time using this tool.  However, after running the simulation, I'm not sure how to easily convert the data to a 'success rate'.  Whats the quickest way to do this?   Also not seeing an area for mortgage info.

It will take a little bit of playing around with before you can get comfortable. For my analysis, I compared max initial spending (in the dropdown), selected 100% equities, and put any mortgage spending under "Extra Spending" along with selecting "false" for inflation adjusted (mortgage only). You will have to determine the amortization schedule for the mortgage (there are a few calculators online).

Those plots took a good while to make, so I don't recommend recreating them. But you should be able to pick a few points to confirm whether or not they are accurate.
« Last Edit: February 22, 2019, 07:11:41 AM by Boofinator »

FIREin2018

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Re: I can last 45years on the 4% rule?
« Reply #51 on: February 21, 2019, 08:34:38 PM »
One thing that concerns me about your plan is that a $20k annual budget is very lean and will not have much wiggle room or safety margin if something goes south in a big way.  Doe you have something like home equity that you are not counting in your in your target assets? I am also looking at a 40+ year retirement, but my budget is $60k per year and I could easily trim 30% by eliminating golf, travel, and charitable contributions if things got tight. If things go horribly wrong, I have $700k in home equity I could tap.
While a $20k budget is lean, with a budget that low the impact of Social Security is huge. Assuming FIREin2018? is in the US and has worked for ten years, about half of their annual budget at age 62 will be provided for by Social Security (barring any drastic changes).
yes, have worked from 1996 - 2018.
my house is paid off. market value is $400k. property taxes is $300/month, utils (electric/gas/water) = $200/month

catch 22: im not working so cant get a HELOC. :(
if i need $, i have to sell my house and move :(

BicycleB

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Re: I can last 45years on the 4% rule?
« Reply #52 on: February 21, 2019, 08:54:41 PM »
@FIREin2018?, do you have a 400k house and 100k in financial investments? Or 400k house and 500k in financial investments?

Sorry if I missed this upthread. I thought the original numbers were hypothetical and didn't mention a house; maybe I missed something. Important differences though.

EnjoyIt

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Re: I can last 45years on the 4% rule?
« Reply #53 on: February 21, 2019, 09:17:28 PM »
For us, having a mortgage in retirement is a bad decision as it hinders our ability to tax gain harvest and do Roth conversions at 0% taxed.  This current mortgage was a 15 year at 2.75% with <9 more years to go.  While I continue to work part time I will hold off on paying it down.  But when I finally decide to stop all income producing activity, I will try and divert the previous year's extra assets towards the mortgage instead of taxable investing or reinvesting dividends in my taxable account in the hopes of eliminating it quickly.  When we move, it will be unlikely for us to take on another mortgage.  We will reevaluate again once SS kicks in.

YttriumNitrate

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Re: I can last 45years on the 4% rule?
« Reply #54 on: February 21, 2019, 10:30:41 PM »
yes, have worked from 1996 - 2018.
my house is paid off. market value is $400k. property taxes is $300/month, utils (electric/gas/water) = $200/month

catch 22: im not working so cant get a HELOC. :(
if i need $, i have to sell my house and move :([/quote]
Rummaging through your old posts, it looks like you are in your late 40s (planning to live to 95!) and were making ~$100k when working. Making some estimates as to how your salary changed over the years, I would guess social security will be sending you around $18,000 a year...or 90% of your expenses at age 60.

Manatee

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Re: I can last 45years on the 4% rule?
« Reply #55 on: February 22, 2019, 07:57:26 AM »
For us, having a mortgage in retirement is a bad decision as it hinders our ability to tax gain harvest and do Roth conversions at 0% taxed. 

Same here, plus the higher spending required to pay the mortgage affects ACA eligibility. We paid off our mortgage once we reached FI for those reasons and because (as others here pointed out) holding a mortgage in retirement increases sequence of returns risk. A mortgage itself isn't an inflation hedge, it's the real estate purchase that is. If the dollars you're using for your mortgage payments don't keep up with inflation there's no benefit.

https://www.kitces.com/blog/why-a-mortgage-is-not-actually-an-inflation-hedge-itself-but-can-provide-access-to-investments-that-are/

Boofinator

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Re: I can last 45years on the 4% rule?
« Reply #56 on: February 22, 2019, 08:40:18 AM »
For us, having a mortgage in retirement is a bad decision as it hinders our ability to tax gain harvest and do Roth conversions at 0% taxed. 

Same here, plus the higher spending required to pay the mortgage affects ACA eligibility. We paid off our mortgage once we reached FI for those reasons and because (as others here pointed out) holding a mortgage in retirement increases sequence of returns risk. A mortgage itself isn't an inflation hedge, it's the real estate purchase that is. If the dollars you're using for your mortgage payments don't keep up with inflation there's no benefit.

https://www.kitces.com/blog/why-a-mortgage-is-not-actually-an-inflation-hedge-itself-but-can-provide-access-to-investments-that-are/

Interesting analysis from Kitces. I mostly agree with the conclusions, with the exception that equities act as an inflation hedge. From what I've read on the topic, historical equity returns have a roughly rainbow-shaped relationship with inflation rate: increasing with inflation up to a point, but then decreasing with higher levels of inflation (to the point where some of the worst nominal equity returns have coincided with high periods of inflation). Overall, the correlation between inflation and equity returns is negligible if not non-existent.

dude

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Re: I can last 45years on the 4% rule?
« Reply #57 on: February 22, 2019, 08:55:41 AM »
For us, having a mortgage in retirement is a bad decision as it hinders our ability to tax gain harvest and do Roth conversions at 0% taxed.  This current mortgage was a 15 year at 2.75% with <9 more years to go.  While I continue to work part time I will hold off on paying it down.  But when I finally decide to stop all income producing activity, I will try and divert the previous year's extra assets towards the mortgage instead of taxable investing or reinvesting dividends in my taxable account in the hopes of eliminating it quickly.  When we move, it will be unlikely for us to take on another mortgage.  We will reevaluate again once SS kicks in.

I'm more than happy to carry a mortgage into retirement since I'll have a COLA-adjusted pension that will cover all essential expenses. And at a fixed 3.25%, it will constitute a smaller and smaller percentage of annual spending as the years go by. Plus we've already got some $400k equity in it already, so worse case scenario we sell and move to LCOL, but I don't foresee that ever becoming a necessity. My retirement investment accounts will cover discretionary spending only, and plenty of it.

bacchi

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Re: I can last 45years on the 4% rule?
« Reply #58 on: February 22, 2019, 09:04:11 AM »
For us, having a mortgage in retirement is a bad decision as it hinders our ability to tax gain harvest and do Roth conversions at 0% taxed. 

Same here, plus the higher spending required to pay the mortgage affects ACA eligibility.

This is indeed a problem.

Quote
We paid off our mortgage once we reached FI for those reasons and because (as others here pointed out) holding a mortgage in retirement increases sequence of returns risk.

How so? According to ERN's charts, the safety of holding a mortgage does not increase for an 80/20 w/o mortgage except for the failsafe and SWR. In fact, with a more historically accurate 3% inflation rate, an 80/20+mortgage is almost certainly safer than an 80/20 w/o mortgage.

Quote
A mortgage itself isn't an inflation hedge, it's the real estate purchase that is. If the dollars you're using for your mortgage payments don't keep up with inflation there's no benefit.

https://www.kitces.com/blog/why-a-mortgage-is-not-actually-an-inflation-hedge-itself-but-can-provide-access-to-investments-that-are/

Well, yeah. On the MMM board, we don't blow the money that could be spent on a mortgage on ski doos and upgrading a phone each year. It's invested.

« Last Edit: February 22, 2019, 09:06:34 AM by bacchi »

Boofinator

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Re: I can last 45years on the 4% rule?
« Reply #59 on: February 22, 2019, 09:11:06 AM »
Quote
A mortgage itself isn't an inflation hedge, it's the real estate purchase that is. If the dollars you're using for your mortgage payments don't keep up with inflation there's no benefit.

https://www.kitces.com/blog/why-a-mortgage-is-not-actually-an-inflation-hedge-itself-but-can-provide-access-to-investments-that-are/

Well, yeah. On the MMM board, we don't blow the money that could be spent on a mortgage on ski doos and upgrading a phone each year. It's invested.

Can you show that equities act as an inflation hedge? As I mentioned just a couple posts ago, all of the evidence that I have seen does not support this conclusion.

bacchi

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Re: I can last 45years on the 4% rule?
« Reply #60 on: February 22, 2019, 09:20:27 AM »
For us, having a mortgage in retirement is a bad decision as it hinders our ability to tax gain harvest and do Roth conversions at 0% taxed. 

Same here, plus the higher spending required to pay the mortgage affects ACA eligibility. We paid off our mortgage once we reached FI for those reasons and because (as others here pointed out) holding a mortgage in retirement increases sequence of returns risk. A mortgage itself isn't an inflation hedge, it's the real estate purchase that is. If the dollars you're using for your mortgage payments don't keep up with inflation there's no benefit.

https://www.kitces.com/blog/why-a-mortgage-is-not-actually-an-inflation-hedge-itself-but-can-provide-access-to-investments-that-are/

Interesting analysis from Kitces. I mostly agree with the conclusions, with the exception that equities act as an inflation hedge. From what I've read on the topic, historical equity returns have a roughly rainbow-shaped relationship with inflation rate: increasing with inflation up to a point, but then decreasing with higher levels of inflation (to the point where some of the worst nominal equity returns have coincided with high periods of inflation). Overall, the correlation between inflation and equity returns is negligible if not non-existent.

Yeah, there doesn't appear to be a lot of correlation. Looking at decades only, the 80s had great returns and high inflation but the 40s had average returns and similar inflation. The 70s had mediocre returns with high inflation (inflation beat equity returns, unlike the 40s; hence the famous article, "The Death of Equities").

It's probably better analyzed on a year-by-year basis.

bacchi

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Re: I can last 45years on the 4% rule?
« Reply #61 on: February 22, 2019, 09:30:54 AM »
Quote
A mortgage itself isn't an inflation hedge, it's the real estate purchase that is. If the dollars you're using for your mortgage payments don't keep up with inflation there's no benefit.

https://www.kitces.com/blog/why-a-mortgage-is-not-actually-an-inflation-hedge-itself-but-can-provide-access-to-investments-that-are/

Well, yeah. On the MMM board, we don't blow the money that could be spent on a mortgage on ski doos and upgrading a phone each year. It's invested.

Can you show that equities act as an inflation hedge? As I mentioned just a couple posts ago, all of the evidence that I have seen does not support this conclusion.

http://jamesrlothian.com/media/Equities&Inflation.PDF

There's a lag?

Quote
The  puzzle  therefore  is  not  that  equities fail the test as inflation hedges, but that they take so long to pass

This passes the smell test.

10s --> great returns in the 20s
40s --> 50s
70s --> 80s
80s --> 90s
« Last Edit: February 22, 2019, 09:33:44 AM by bacchi »

Boofinator

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Re: I can last 45years on the 4% rule?
« Reply #62 on: February 22, 2019, 09:33:54 AM »
For us, having a mortgage in retirement is a bad decision as it hinders our ability to tax gain harvest and do Roth conversions at 0% taxed. 

Same here, plus the higher spending required to pay the mortgage affects ACA eligibility. We paid off our mortgage once we reached FI for those reasons and because (as others here pointed out) holding a mortgage in retirement increases sequence of returns risk. A mortgage itself isn't an inflation hedge, it's the real estate purchase that is. If the dollars you're using for your mortgage payments don't keep up with inflation there's no benefit.

https://www.kitces.com/blog/why-a-mortgage-is-not-actually-an-inflation-hedge-itself-but-can-provide-access-to-investments-that-are/

Interesting analysis from Kitces. I mostly agree with the conclusions, with the exception that equities act as an inflation hedge. From what I've read on the topic, historical equity returns have a roughly rainbow-shaped relationship with inflation rate: increasing with inflation up to a point, but then decreasing with higher levels of inflation (to the point where some of the worst nominal equity returns have coincided with high periods of inflation). Overall, the correlation between inflation and equity returns is negligible if not non-existent.

Yeah, there doesn't appear to be a lot of correlation. Looking at decades only, the 80s had great returns and high inflation but the 40s had average returns and similar inflation. The 70s had mediocre returns with high inflation (inflation beat equity returns, unlike the 40s; hence the famous article, "The Death of Equities").

It's probably better analyzed on a year-by-year basis.

And then there was this decade, with relatively low inflation but exceptional returns. There are lots of good reasons to keep a mortgage versus paying it off, but the inflation hedge argument just doesn't hold water.

Boofinator

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Re: I can last 45years on the 4% rule?
« Reply #63 on: February 22, 2019, 10:12:10 AM »
Quote
A mortgage itself isn't an inflation hedge, it's the real estate purchase that is. If the dollars you're using for your mortgage payments don't keep up with inflation there's no benefit.

https://www.kitces.com/blog/why-a-mortgage-is-not-actually-an-inflation-hedge-itself-but-can-provide-access-to-investments-that-are/

Well, yeah. On the MMM board, we don't blow the money that could be spent on a mortgage on ski doos and upgrading a phone each year. It's invested.

Can you show that equities act as an inflation hedge? As I mentioned just a couple posts ago, all of the evidence that I have seen does not support this conclusion.

http://jamesrlothian.com/media/Equities&Inflation.PDF

There's a lag?

Quote
The  puzzle  therefore  is  not  that  equities fail the test as inflation hedges, but that they take so long to pass

This passes the smell test.

10s --> great returns in the 20s
40s --> 50s
70s --> 80s
80s --> 90s

Interesting article, thanks for sharing. I agree that intuitively, equities should act as an inflation hedge over long enough time periods. My major takeaways from the point of view of our discussion: "[He] concluded that equity markets did adjust to inflation, but that the adjustment period lasted more than a decade." "[E]quities are hedges against anticipated inflation if β = 1, and a complete inflation hedge if β = λ =1. A considerable number of studies have rejected one, and generally both of these hypotheses, finding low and even negative coefficients for β and λ."

So considering the early retiree, who needs to protect against sequence of returns risk, worst-case scenario would be high-inflation, because not only would expenses increase significantly, but equities would likely not keep up in nominal terms (at least during the decade-lag) so that they'd be pulling more money out to cover those expenses when equities are relatively down. When equities finally recover to catch up with inflation, their stash will have depleted to the point where it will be too little too late.

As I mentioned in a previous post on this thread, I've run the numbers for when paying off the mortgage increases or decreases the early retiree's success rate (from a U.S. historical perspective using cFIREsim). There are several factors involved, and I recommend each individual who is considering this option to look at the historical record to determine the optimal choice for them.

Manatee

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Re: I can last 45years on the 4% rule?
« Reply #64 on: February 22, 2019, 02:39:56 PM »
We paid off our mortgage once we reached FI for those reasons and because (as others here pointed out) holding a mortgage in retirement increases sequence of returns risk.

How so? According to ERN's charts, the safety of holding a mortgage does not increase for an 80/20 w/o mortgage except for the failsafe and SWR. In fact, with a more historically accurate 3% inflation rate, an 80/20+mortgage is almost certainly safer than an 80/20 w/o mortgage.

I'm not sure how you're thinking of "safety" but to me the higher failsafe withdrawal rate is safer. 80/20 without a mortgage has historically resulted in lower max withdrawal rates than holding the mortgage but we're fine with that tradeoff to protect against a poor sequence of returns.

A mortgage itself isn't an inflation hedge, it's the real estate purchase that is. If the dollars you're using for your mortgage payments don't keep up with inflation there's no benefit.

https://www.kitces.com/blog/why-a-mortgage-is-not-actually-an-inflation-hedge-itself-but-can-provide-access-to-investments-that-are/

Well, yeah. On the MMM board, we don't blow the money that could be spent on a mortgage on ski doos and upgrading a phone each year. It's invested.

Yes, I was referring to the money that could have been used to pay off the mortgage instead being invested in assets that don't keep up with inflation or lagging inflation (like stocks in the 70s).

FIRE 20/20

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Re: I can last 45years on the 4% rule?
« Reply #65 on: February 22, 2019, 02:44:49 PM »
For us, having a mortgage in retirement is a bad decision as it hinders our ability to tax gain harvest and do Roth conversions at 0% taxed. 

Same here, plus the higher spending required to pay the mortgage affects ACA eligibility.

This is indeed a problem.


Same with me.  When I ran our numbers, the increased withdrawals required to support paying the mortgage had a huge impact on ACA costs and increased our taxes.  In our state's flat income tax rates also increase the cost of having a mortgage in retirement.  Given the ACA impacts, federal tax impacts, and state income tax impacts keeping the mortgage after FIRE would cost us a huge amount unless equities have above average returns going forward. 

@FIREin2018? , if looks like you're taking the advice to read a lot more about FIRE.  I think that's fantastic, because to be honest your first few posts made it sound like you hadn't done your homework.  There are a lot of things to understand and consider if you're going to do something as crazy as retiring in your 40s.  Fortunately, there are a lot of people who have come before you and figured out a number of optimizations or at least things to take into consideration before FIRE.  I feel like I've earned a graduate degree in early retirement over the last 5 years or so but I still occasionally find new things I need to pay attention to before FIREing in a few months. 

bacchi

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Re: I can last 45years on the 4% rule?
« Reply #66 on: February 22, 2019, 04:20:59 PM »
We paid off our mortgage once we reached FI for those reasons and because (as others here pointed out) holding a mortgage in retirement increases sequence of returns risk.

How so? According to ERN's charts, the safety of holding a mortgage does not increase for an 80/20 w/o mortgage except for the failsafe and SWR. In fact, with a more historically accurate 3% inflation rate, an 80/20+mortgage is almost certainly safer than an 80/20 w/o mortgage.

I'm not sure how you're thinking of "safety" but to me the higher failsafe withdrawal rate is safer. 80/20 without a mortgage has historically resulted in lower max withdrawal rates than holding the mortgage but we're fine with that tradeoff to protect against a poor sequence of returns.

https://earlyretirementnow.com/2017/10/11/the-ultimate-guide-to-safe-withdrawal-rates-part-21-mortgage-in-retirement/

I'm referring to the summary table right under "here’s a summary table of the safe withdrawal rates in the 8 different models." As can be seen, Model 1 has a failsafe of 3.14%. Model 5 has a failsafe of 2.98%. That's using an inflation rate of 2%, which is historically inconsistent given the use of historical data for market returns.

In other words, the .16% difference would disappear with a ~3% inflation rate and the higher failsafe of the two would be the 80/20 + mortgage. Now, you may disagree with a >=3% inflation rate going forward and that's fine but it is the historical average.

Really, the tables should be generated with 3% and maybe with a deflationary environment and maybe with a 1960-90 environment, etc. We already know from Trinity that a 1968? retirement is one of the 4% SWR failures.

Boofinator has linked to other charts (in another thread) that may or may not disagree with ERN's tables.

GoCubsGo

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Re: I can last 45years on the 4% rule?
« Reply #67 on: February 22, 2019, 04:34:31 PM »
The Kitces article seemed to intuitively make sense.  In order to derive a positive mortgage hedge value, you would have to correctly pick what investment vehicle to put that leveraged money into (which needs to at a minimum keep up with the mortgage payment).

I'm not sure it's worth the gamble if you already have the means to FIRE on a reasonable withdrawal rate using established historical precedents.  That said, I've owned rental homes for years.  I have about $500K in home equity, I could theoretically turn that equity into a 7% cash on cash rental yield (with lower risks than 100% equities IMO).  That might be worth the hassle.....

OP.  I guess the overriding question is how desperate are you to FIRE (how much do you hate your job)?  If a couple more years working are tenable, I would do that and give yourself a bit of breathing room should life throw a big curveball.  Example- my town made me remove 7 trees or get fined daily.  It cost me $8k!  I didn't sweat it but I definitely never saw it coming.
 
Thanks for all the links and to the OP for starting this thread.  I second reading as much of the big ERN stuff as possible.  Smart dude

FIREin2018

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Re: I can last 45years on the 4% rule?
« Reply #68 on: February 23, 2019, 07:41:31 AM »
@FIREin2018?, do you have a 400k house and 100k in financial investments? Or 400k house and 500k in financial investments?

Sorry if I missed this upthread. I thought the original numbers were hypothetical and didn't mention a house; maybe I missed something. Important differences though.
the original #s are hypothetical.
just wanted to see if my math was right when my Excel spreadsheet said the $ can last 45 years.

 

FIREin2018

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Re: I can last 45years on the 4% rule?
« Reply #69 on: February 23, 2019, 07:43:59 AM »
Same here, plus the higher spending required to pay the mortgage affects ACA eligibility.
Can you explain?

How does higher spending affect Obamacare?
thought it was based on income?

ender

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Re: I can last 45years on the 4% rule?
« Reply #70 on: February 23, 2019, 08:18:18 AM »
You will need a higher income to pay for a mortgage or rent than you would if you had a paid off home. That income source, if taxable, will increase your annual taxable income meaning you will get fewer, if any, ACA subsidies.

Yeah, the trick is optimizing all the things involved.

There are a lot of potential sources for income that is "tax free" in the sense that it won't affect ACA subsidies. But it requires some planning (or luck with how your previous financial decisions were made). It also depends on how much you actually need, what the tradeoff for paying down the mortgage early was, etc.