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General Discussion => Welcome and General Discussion => Topic started by: FIREin2018 on February 20, 2019, 11:11:58 AM

Title: I can last 45years on the 4% rule?
Post by: FIREin2018 on February 20, 2019, 11:11:58 AM
lets say my expenses are $20k/yr.
with the 4% rule, i only need $500k to FIRE.

but by simple math (500k/20k), that $ will be gone in 25 years.
but my $ will be in a conservative asset allocation mix of 15% total market, 15% Intl, 70% total bonds.

Let say the mix returns 5.5% on avg, and inflation = 2.5% thus 3% profit.

from my Excel spreadsheet, ($500k  - $20k) * 1.03 = $494k.
if i keep subtracting $20k from that amount every year and multiplying by 1.03, i can last 45 years?

yes, i know inflation will increase my expenses but my gains in the stock market will offset that.
i offset inflation by subtracting 2.5% from my gains before i do my calcs. This makes doing the math easier for me.

So is my calculation right?
if not, what am i missing?
Title: Re: I can last 45years on the 4% rule?
Post by: bacchi on February 20, 2019, 11:36:45 AM
For your scenario, canr you 30/70 asset allocation really return 5.5%? With bond rates as they are right now, I'm skeptical.

You should use one of the tools out there like cfiresim or portfolio charts.
Title: Re: I can last 45years on the 4% rule?
Post by: YttriumNitrate on February 20, 2019, 11:46:13 AM
Probably ... if you change your asset allocation. With a 75-25 or 50-50 stock-bond split you've got about a 9 out of 10 chance of making it 45 years at 4%. If you use the approximately 25-75 split you are considering, you have less than a 50% chance of being successful.
https://20somethingfinance.com/safe-withdrawal-rate/ (https://20somethingfinance.com/safe-withdrawal-rate/)
Title: Re: I can last 45years on the 4% rule?
Post by: wglennreid on February 20, 2019, 11:51:31 AM
As you said inflation will increase expenses.  Inflation from some of your categories, like health care, will be much higher than the general inflation.  Also any emergency costs, such as new car, major medical expense, or major housing expenses (even if you rent, you may have to move), needs to be considered.  You are averaging the increase in a investment portfolio, but since the portfolio returns will be volatile, you may end up dipping more than 4% if there is a big decline in your portfolio early in your FIRE period.
Title: Re: I can last 45years on the 4% rule?
Post by: FIREin2018 on February 20, 2019, 12:03:41 PM
For your scenario, canr you 30/70 asset allocation really return 5.5%? With bond rates as they are right now, I'm skeptical.

You should use one of the tools out there like cfiresim or portfolio charts.
thx for telling me about portfolio charts.

from that site,  a 25% US/25% Intl/50% bond mix gets me 5.2% on avg.
so my 15/15/70 mix was too conservative
Title: Re: I can last 45years on the 4% rule?
Post by: FIREin2018 on February 20, 2019, 12:07:06 PM
Probably ... if you change your asset allocation.
With a 75-25 or 50-50 stock-bond split you've got about a 9 out of 10 chance of making it 45 years at 4%.
If you use the approximately 25-75 split you are considering, you have less than a 50% chance of being successful.
https://20somethingfinance.com/safe-withdrawal-rate/
um.. 75% stock/25% bond mix while im in retirement??
that goes against everything i've read, which is more bonds the closer you are to retirement/in retirement.

or is allocation theory different if you're in early retirement? ie: Age 48

edit:
saw you edited you post with a safe-withdrawal-rate link.
" SAFEMAX (maximum SWR without failure) concept for a conservative 50% stock/50% bond portfolio for a retirement starting in each year going all the way back to 1926 (through 2010).
 You can see that the maximum SWR to avoid failure did not go below 4% over any 30-year time period."

50 (US,intl)/50 bond mix it will be.
thanks!
Title: Re: I can last 45years on the 4% rule?
Post by: TomTX on February 20, 2019, 12:13:13 PM
Probably ... if you change your asset allocation.
With a 75-25 or 50-50 stock-bond split you've got about a 9 out of 10 chance of making it 45 years at 4%.
If you use the approximately 25-75 split you are considering, you have less than a 50% chance of being successful.
(https://20somethingfinance.com/wp-content/uploads/2017/02/trinity-study-table-e1488146988257.jpeg)
um.. 75% stock/25% bond mix while im in retirement??
that goes against everything i've read, which is more bonds the closer you are to retirement/in retirement.

or is allocation theory different if you're in early retirement? ie: Age 48

Yeah, that old "conventional wisdom" on bonds was OK when you were planning on dying within a decade of retiring. And back when bonds had more yield above inflation.

Run some of the simulators/calculators. The "ideal" stock percentage (lowest chance of failure) is always pretty high if it's an honest calculator and based on the US stock market. "pretty high" being in the 80-100% stock range.

Here's one I like, though the default investment fee is pretty high for a Mustachian at 0.3% - my investment expenses are 0.04%:

https://engaging-data.com/will-money-last-retire-early/
Title: Re: I can last 45years on the 4% rule?
Post by: MDM on February 20, 2019, 12:39:50 PM
So is my calculation right?
if not, what am i missing?
The calculation, as a math exercise, is correct.

You may be missing that real life doesn't proceed in an average fashion every year.  E.g., see Understanding Sequence Of Return Risk & Safe Withdrawal Rates (https://www.kitces.com/blog/understanding-sequence-of-return-risk-safe-withdrawal-rates-bear-market-crashes-and-bad-decades/).
Title: Re: I can last 45years on the 4% rule?
Post by: BicycleB on February 20, 2019, 02:26:41 PM
@FIREin2018?, there is a big difference between retiring at 48 vs a more typical 65 years of age.

In a short period like 15 years, the high variability of stock can be seen as risky, so bonds are seen as "safer." Retirement articles in the general press often take this perspective.

In a long period such as 30 years or more, stocks almost always outperform bonds by a wide margin. Bonds' return over such a long time are usually lower than the needed return rate. As you extend past 30 years, such a 48 year old living to be 93, stock percentages of 50% to 80% start being safer than portfolios with majority bonds.

There is also the fact that, when you're not having a worst case scenario investment wise, the high stock portfolio often produces huge amounts of excess funds. Other things being equal, this is an advantage. It can help you compensate for spending risks not anticipated in the original plan.

I retired a few years ago in my late 40s on what was then about 450k, now about 480k. My financial assets are roughly 70% stock, 27% bonds, 3% cash.

PS. One way of checking your safety baseline is to look for the "perpetual withdrawal rate" in portfoliocharts.com as well your safe withdrawal rate.

For what it's worth, here's another analysis tool. This one lets you input expenses, portfolio allocation, and future income (such as Social Security) and then calculates a graph showing whether you'll ever run out. As a bonus, it calculates the extra money you'll likely have at any point, displaying the result by shading the graph in different colors. You can save a URL for your personalized result.

https://engaging-data.com/will-money-last-retire-early/

ETA: Oops, just realized @TomTX already posted this link. Well, great minds think alike!  :)
Title: Re: I can last 45years on the 4% rule?
Post by: AlexMar on February 20, 2019, 02:52:49 PM
MMM suggests 100% stocks.  FYI.  That when you FIRE, you don't really care about volatility.  You aren't retiring for 10 years.  You are retiring for 45.  So you'll have ups, you'll have downs, but the market should continue trending up as usual.  No big deal.  "We don't worry about things like that."

His recent post covers a lot of this:

https://www.mrmoneymustache.com/2018/11/29/how-to-retire-forever-on-a-fixed-chunk-of-money/

Title: Re: I can last 45years on the 4% rule?
Post by: EnjoyIt on February 20, 2019, 03:05:15 PM
lets say my expenses are $20k/yr.
with the 4% rule, i only need $500k to FIRE.

but by simple math (500k/20k), that $ will be gone in 25 years.
but my $ will be in a conservative asset allocation mix of 15% total market, 15% Intl, 70% total bonds.

Let say the mix returns 5.5% on avg, and inflation = 2.5% thus 3% profit.

from my Excel spreadsheet, ($500k  - $20k) * 1.03 = $494k.
if i keep subtracting $20k from that amount every year and multiplying by 1.03, i can last 45 years?

yes, i know inflation will increase my expenses but my gains in the stock market will offset that.
i offset inflation by subtracting 2.5% from my gains before i do my calcs. This makes doing the math easier for me.

So is my calculation right?
if not, what am i missing?

Your math seems correct. The reality of life being so accurately consistent year after years is 100% impossible. As stated, use cfirsim or one of the other historical tools to help you out.

I can tell you that 30/70 does not have good success at. 4% withdrawal retr historically.
50/50 or 60/40 will do much better.

If you want to stick to 30/70 then you may need to increase your wealth to a 3.7% withdrawal rate or look for some ways to make a little extra cash every year.
Title: Re: I can last 45years on the 4% rule?
Post by: sol on February 20, 2019, 03:15:32 PM
You're looking at this problem wrong, OP.  MDM's link above should explain it better.

You can't just subtract your expenses each year and then multiply by 1.03, because of sequence of return risk.  Sometimes the market gives you negative years for several years in a row, and if that happens early in your retirement period then your portfolio will not support your expenses anymore.  The "risk" in a Safe Withdrawal Rate calculation is all about the likelihood of hitting that bad sequence of negative return years in a row early on. 

The 4% recommendation is based on 95% of all historical retirement starting dates avoiding asset depletion within a 30 year window by avoiding those clusters of bad years.  It doesn't presuppose you will earn something close to 4% per year on your investments, it presupposes the market will have some great years and some terrible years and the timing of both kinds will average out the same way it has in the past.  This is what tools like firecalc and cfiresim do, they tabulate the various combinations of historical returns for you to see what percentage of the time your plan would have worked out in the past.
Title: Re: I can last 45years on the 4% rule?
Post by: terran on February 20, 2019, 03:18:27 PM
Here's the start of a good series of articles on this topic: https://earlyretirementnow.com/2016/12/07/the-ultimate-guide-to-safe-withdrawal-rates-part-1-intro/
Title: Re: I can last 45years on the 4% rule?
Post by: FIREin2018 on February 20, 2019, 03:25:53 PM
@FIREin2018?, there is a big difference between retiring at 48 vs a more typical 65 years of age.

In a short period like 15 years, the high variability of stock can be seen as risky, so bonds are seen as "safer." Retirement articles in the general press often take this perspective.

In a long period such as 30 years or more, stocks almost always outperform bonds by a wide margin. Bonds' return over such a long time are usually lower than the needed return rate. As you extend past 30 years, such a 48 year old living to be 93, stock percentages of 50% to 80% start being safer than portfolios with majority bonds.

There is also the fact that, when you're not having a worst case scenario investment wise, the high stock portfolio often produces huge amounts of excess funds. Other things being equal, this is an advantage. It can help you compensate for spending risks not anticipated in the original plan.

I retired a few years ago in my late 40s on what was then about 450k, now about 480k. My financial assets are roughly 70% stock, 27% bonds, 3% cash.

PS. One way of checking your safety baseline is to look for the "perpetual withdrawal rate" in portfoliocharts.com as well your safe withdrawal rate.

For what it's worth, here's another analysis tool. This one lets you input expenses, portfolio allocation, and future income (such as Social Security) and then calculates a graph showing whether you'll ever run out. As a bonus, it calculates the extra money you'll likely have at any point, displaying the result by shading the graph in different colors. You can save a URL for your personalized result.

https://engaging-data.com/will-money-last-retire-early/

wow.. so i should go more aggressive with a 50% US/25% intl/25% bond mix?

perpetual withdrawal rate- the maximum withdrawal rate that would have sustained the original inflation-adjusted principal even for the unlucky retiree starting at the worst possible time.

with a 50/25/25 mix, my safemax withdraw rate is 4.3% meaning if i never withdraw more than 4.3% of my portfolio in any year then i have a 95% chance of it lasting 40years but it might be $1 left.

My perpetual withdrawal rate is 3.8% meaning if i never withdraw more than 3.8% of my portfolio in any year, i have a 95% chance of still having my initial principal after 40years???
Holy WOW... 0.5% makes that huge of a difference?
Title: Re: I can last 45years on the 4% rule?
Post by: HBFIRE on February 20, 2019, 03:53:45 PM
also keep in mind that if you plan to have a mortgage in your WR rate calc, you're even safer.  A mortgage provides your total expenses with more inflation protection.  A significant portion of my planned long term expenses will be a mortgage, which makes me very happy.
Title: Re: I can last 45years on the 4% rule?
Post by: BicycleB on February 20, 2019, 04:31:54 PM

wow.. so i should go more aggressive with a 50% US/25% intl/25% bond mix?

You have to decide for yourself, but that's pretty close to what I do with my financial assets. (I also own a home and rent out rooms; a big portion of my income is rent, a big portion of assets is real estate. Not saying you should duplicate me, just that I don't want to pretend to be more similar than I am. Part of my calculation re international is that my rent is not international, so I lean international in stock a little more than I would if all my assets were financial. My international target is over 25%, but the effect is close to your 50/25/25, I think).

Bear in mind that these investment return numbers are averages or minimums or represent % of past performance, depending on the measurement. We are guessing the future will be similar to the past, but we don't know.

Bear in mind also that these return numbers assume you maintain the same allocation percentage very consistently. They assume you don't change your plan in the middle. Investors often change their plan in the middle. Usually, they do so in a way that reduces their returns. For example, when the stock market drops, people sell stock. That's the time to buy stock. These return projections won't be valid unless you have the guts to sell a few bonds and buy a little stock when everyone is selling their stock. This will be at a time when it looks like the world (or at least the financial world) is falling apart. If you can stick with your 50/25/25 (or whatever you choose now) under that circumstance, then the numbers you're finding are believed to be a good estimate.



Title: Re: I can last 45years on the 4% rule?
Post by: Blindsquirrel on February 20, 2019, 05:05:16 PM
   I think you may wish to visit an astute fellow, you have over protected yourself from sequence risk at that asset allocation. Please check out a sharp dude and read the whole series.
https://earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/
Title: Re: I can last 45years on the 4% rule?
Post by: AlexMar on February 20, 2019, 05:19:40 PM
Big US companies have a ton of international exposure.  Apple, Amazon, Microsoft, GE, auto companies, etc.  TONS of international business.  I've never understood the desire to invest in international funds at all.  You already get a substantial amount of international with an S&P 500 index fund.  So by doing 25% international only plus big cap US, you may actually have a LOT more international exposure than you realize.  Plus, when the American market crashes, pretty much the entire world goes with it anyways.  There is a reason Buffett recommends just putting 90% in VOO and 10% in bonds. As Buffett said "Never bet against America."  MMM recommends just doing VTI (entire market) and that's basically it.
Title: Re: I can last 45years on the 4% rule?
Post by: Bloop Bloop on February 20, 2019, 06:26:22 PM
I don't believe in the 4% rule. I think it requires one to live too conservatively, especially since passive income is still taxed. I use a 3% rule myself.
Title: Re: I can last 45years on the 4% rule?
Post by: HBFIRE on February 20, 2019, 06:33:28 PM
Big US companies have a ton of international exposure.  Apple, Amazon, Microsoft, GE, auto companies, etc.  TONS of international business.  I've never understood the desire to invest in international funds at all. 

Obligatory Dodge post:

https://forum.mrmoneymustache.com/investor-alley/statistics-personal-experience-and-risk-management/msg629210/#msg629210
Title: Re: I can last 45years on the 4% rule?
Post by: FIREin2018 on February 20, 2019, 06:58:35 PM
   I think you may wish to visit an astute fellow, you have over protected yourself from sequence risk at that asset allocation. Please check out a sharp dude and read the whole series.
https://earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/
i dont understand this part:
"Moreover, an equity glidepath is like an insurance policy. A hedge against a tail event! On average it will cost you money, but if and when you need it the most it will likely pay off. Exactly when the static stock/bond allocation paths had their worst sustainable safe withdrawal rates you get slightly better results but you also give up some of the upside if the equity market “decides” to rally some more right after your retirement."

how does an equity glidepath cost $ to people who FIRE if the market rallies shortly after they retire?

if i understood the article correctly, i follow the normal consensus allocation mix (ie: 60% stocks/40% bonds) leading up to retirement.
then when i retire, i decrease bonds instead of the general consensus to increase it.
you decrease the bonds by just cashing them out for living expenses.
reason: If the equity market were to go down during this time, we’d avoid selling our equities at rock bottom prices. That should help with Sequence of Return Risk.

so how does the author's equity glidepath plan cost us $ if the market rallies shortly after retirement since we now have MORE stocks and less bonds?
Title: Re: I can last 45years on the 4% rule?
Post by: TomTX on February 20, 2019, 07:01:55 PM
also keep in mind that if you plan to have a mortgage in your WR rate calc, you're even safer.  A mortgage provides your total expenses with more inflation protection.  A significant portion of my planned long term expenses will be a mortgage, which makes me very happy.

Not just a mortgage. A fixed rate, long-term mortgage. Ideally a fresh 30 year mortgage.
Title: Re: I can last 45years on the 4% rule?
Post by: TomTX on February 20, 2019, 07:03:00 PM
I don't believe in the 4% rule. I think it requires one to live too conservatively, especially since passive income is still taxed. I use a 3% rule myself.

I find your comment puzzling.

You intend to spend less, and that is somehow living less conservatively?
Title: Re: I can last 45years on the 4% rule?
Post by: Bloop Bloop on February 20, 2019, 07:08:02 PM
No, it means that I won't retire till I have about 35x my annual living expenses saved away.
Title: Re: I can last 45years on the 4% rule?
Post by: HBFIRE on February 20, 2019, 07:22:44 PM

Not just a mortgage. A fixed rate, long-term mortgage. Ideally a fresh 30 year mortgage.

Yes, of course.  Ideally a low % long term fixed rate.
Title: Re: I can last 45years on the 4% rule?
Post by: MrThatsDifferent on February 20, 2019, 07:46:17 PM
No, it means that I won't retire till I have about 35x my annual living expenses saved away.

You’re also living in Australia and I think there’s a variation of 4% in Australia.
Title: Re: I can last 45years on the 4% rule?
Post by: Bloop Bloop on February 20, 2019, 07:58:52 PM
No, it means that I won't retire till I have about 35x my annual living expenses saved away.

You’re also living in Australia and I think there’s a variation of 4% in Australia.

Possibly, especially given our taxes are much more punitive and our cost of living is far higher. I should have stipulated that, sorry. Maybe 4% works perfectly well in America with its much lower COL and better higher living standards (for the top quintile).
Title: Re: I can last 45years on the 4% rule?
Post by: bacchi on February 20, 2019, 08:05:24 PM
   I think you may wish to visit an astute fellow, you have over protected yourself from sequence risk at that asset allocation. Please check out a sharp dude and read the whole series.
https://earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/
i dont understand this part:
"Moreover, an equity glidepath is like an insurance policy. A hedge against a tail event! On average it will cost you money, but if and when you need it the most it will likely pay off. Exactly when the static stock/bond allocation paths had their worst sustainable safe withdrawal rates you get slightly better results but you also give up some of the upside if the equity market “decides” to rally some more right after your retirement."

how does an equity glidepath cost $ to people who FIRE if the market rallies shortly after they retire?

if i understood the article correctly, i follow the normal consensus allocation mix (ie: 60% stocks/40% bonds) leading up to retirement.
then when i retire, i decrease bonds instead of the general consensus to increase it.
you decrease the bonds by just cashing them out for living expenses.
reason: If the equity market were to go down during this time, we’d avoid selling our equities at rock bottom prices. That should help with Sequence of Return Risk.

so how does the author's equity glidepath plan cost us $ if the market rallies shortly after retirement since we now have MORE stocks and less bonds?

Per the first graph, the equity glidepath starts out at 60/40 (stock/bond %) and increases to a desired allocation of 100/0 over, say, 10 years.

Look at graph 3. As the individual gets closer to retirement, the stock % decreases, especially during the 10 years prior (to ~30%). It then increases to the desired allocation of 60/40. This is also called a "bond tent" because bonds % increase during the years leading to retirement and decrease after. /\

If the market was on a tear during those 10 years prior or the first few years of retirement, it would be better to be all in at 100% stocks. Instead, some is in bonds to avoid a sequence of returns attack on your portfolio.

If you're comfortable with 60/40, you might decrease stocks to 30% at retirement and increase it to 60% over 10 years.
Title: Re: I can last 45years on the 4% rule?
Post by: FIREin2018 on February 20, 2019, 08:40:10 PM
Per the first graph, the equity glidepath starts out at 60/40 (stock/bond %) and increases to a desired allocation of 100/0 over, say, 10 years.

Look at graph 3. As the individual gets closer to retirement, the stock % decreases, especially during the 10 years prior (to ~30%). It then increases to the desired allocation of 60/40. This is also called a "bond tent" because bonds % increase during the years leading to retirement and decrease after. /\

If the market was on a tear during those 10 years prior or the first few years of retirement, it would be better to be all in at 100% stocks. Instead, some is in bonds to avoid a sequence of returns attack on your portfolio.

If you're comfortable with 60/40, you might decrease stocks to 30% at retirement and increase it to 60% over 10 years.
well, i thought graph one (60% stock/40% bonds) was his to deal with Sequence of Return Risk for those who FIRE.
and Graph 3 was by someone named Michael Kitces for those who retire at the traditional age of about 65. (30% equity just as you hit retirement wont cut it for those who FIRE since we spend alot more years in retirement and thus need more $.)

ahh.. re-reading the author's statement about giving up some $ if the market rallies when you hit retirement, he's comparing his 60/40 glidepath to a static 80/20 allocation.

now that brings up another question:
Why is he comparing his glidepath to a static 80/20?
the current belief is more bonds the closer you are to retirement. ie: 60/40

it was a good article till he started confusing things by comparing his glidepath to the static allocation.

my takeaway of his article:
1) follow normal AA where you increase bonds the closer you are to retirement.
2) after retirement, increase equity by selling bonds to pay for expenses to mitigate Sequence of Return Risk
Title: Re: I can last 45years on the 4% rule?
Post by: TomTX on February 21, 2019, 05:13:53 AM
No, it means that I won't retire till I have about 35x my annual living expenses saved away.

How many additional years of work are you guaranteeing to avoid a 5-10% risk of needing some additional income using the 4% rule?
Title: Re: I can last 45years on the 4% rule?
Post by: Malcat on February 21, 2019, 05:26:34 AM

wow.. so i should go more aggressive with a 50% US/25% intl/25% bond mix?

perpetual withdrawal rate- the maximum withdrawal rate that would have sustained the original inflation-adjusted principal even for the unlucky retiree starting at the worst possible time.

with a 50/25/25 mix, my safemax withdraw rate is 4.3% meaning if i never withdraw more than 4.3% of my portfolio in any year then i have a 95% chance of it lasting 40years but it might be $1 left.

My perpetual withdrawal rate is 3.8% meaning if i never withdraw more than 3.8% of my portfolio in any year, i have a 95% chance of still having my initial principal after 40years???
Holy WOW... 0.5% makes that huge of a difference?

In a word, yes.

In other words, it's more complicated than that and highly depends on exactly your circumstances, risk strategies, spending flexibility, capacity to generate income if needed, and desire to stay in your job.

A lower withdrawal rate just means saving significantly more than the 4% rule calls for. This may be a totally reasonable option for you if you enjoy your full time job and don't mind sticking around to save more than 25X your projected retirement spend. 

Hell, if you love your job, why not save 50-75X???

Also, how are you defining your retirement spend? That number is entirely made up. You imagined it and loosely based it on figures that you expect to be true, but it isn't a real number.

Is that number bare bones projected expenses? Or does that number also have some padding on it to account for travel, incidentals, etc?

If that number is heavily padded, then your 4% is already very conservative, because any given year, you could drop your spending down to 2-3% if needed.

What should your AA be now, nearing retirement, during early retirement, during later retirement???
Who knows!
Again, that depends on your circumstances. That depends on how much buffer you built into your annual spend budget, how flexible your lifestyle is, if part of your savings is a pension, real estate, a side hustle, etc

You will read endlessly here about sequence of returns risk (SORR), and you could definitely time it to up your bonds in a "bond tent" during your most vulnerable years to avoid SORR, or you could stategize to spend your most vulnerable years spending much less through geo-arbitrage, or by pulling in some part time income to minimize early withdrawals.
Or you could do both...depends on what you enjoy doing and what your actual goals are.

I mentioned loving your job earlier and having padding on your annual spend, but what if you hate your job and have saved enough for a very bare bones 25X, or what we call a Lean-FIRE?
Should you stick it out at your hated job to pad that 'stache to get a 3.8% withdrawal rate? Cuz then you have 100% success rate, right???

Not exactly.
You still made up your retirement numbers. You still have no idea what you may end up needing to spend, and your annual spend budget is still super lean and doesn't account for unexpected expenses.

So, how long should you stay in this job that you hate???
How much is actually safe???

WHO KNOWS! IT'S ALL IMAGINARY NUMBERS ANYWAY.

Okay, so you hate your job, you have 25X lean spend saved and you really want to quit, but can't because you haven't saved enough for FIRE success, and don't forget the dreaded SORR.

Not so fast...

You hate your job.
Staying in it means trading the guaranteed risk of having to work a job you hate vs the risk of running out of money.
Hmm...

Personally, I think that if you hate your job you should quit and do something else. You could easily quit at 25X/lean FIRE, and do some part time work, consulting, whatever, and let your stache grow on its own to mammoth fat-FIRE proportions.

OR

You could quit as soon as you reach FU-money stage, which is also a self-defined and made up number, meaning, you could quit once you've saved enough money to feel comfortable to quit, let that sum grow over time, and pursue work you enjoy.
Hell, you could quit at 15X, go full on nomad for 10 years doing house/pet sitting around the world while picking up off jobs or writing and making enough to live on, and then end up with more than enough to retire on AND have developed the skill of living on extremely little as a nomad.

OR
You could quit your job with FU money (whatever that amount is) and start a business that you've always wanted to do, or become a doctor, or whatever big goal you always had that you never pursued for whatever reason. Then save your 50-75X because you are now doing what you love, if that's your thing.

What's the point of this long-ass diatribe?
Well, it's that it's incredibly important to remember that the 4% rule, SORR, cFIREsim, Big ERN, and all of the endless threads here about the various mathematical models and what they mean:

they are all REAL MATH DONE WITH MADE UP NUMBERS.

So, what should you, personally do?

You should read A LOT.
You should reflect deeply and personally on what happiness means to you, what role work plays in that happiness, what role money plays, analyze what risk actually means to you personally, and learn to utilize the brilliant math tools available to coordinate the numbers with your deeply personal values.

At the end of the day, money isn't anything in and of itself. Unless it is used, it is utterly meaningless to your life. It is simply a placeholder for time and energy.

Time and energy do not have static values either. 8 hours of time and back breaking energy at 19 is very different from its value at 75.

This means, your relationship with money will always be changing depending on the circumstances of your life. The value of time changes if you get diagnosed with terminal cancer. The value of energy changes if you have an illness that causes fatigue and weakness, or if you have triplets.

You cannot predict the money/time/energy exchange of the future, only for today.

In the end, make your plans, do your math, but don't get too distracted by virtually undefinable numbers because what this is all about is maximizing happiness.

Yep...it looks like math on paper, but really, all of these calculations are actually just about the nebulous concept of happiness.
If you never forget that, you will manage to figure out what plan is best for you, and how to pivot along the way as things change.

Enjoy your reading.

Title: Re: I can last 45years on the 4% rule?
Post by: Bloop Bloop on February 21, 2019, 05:50:25 AM
No, it means that I won't retire till I have about 35x my annual living expenses saved away.

How many additional years of work are you guaranteeing to avoid a 5-10% risk of needing some additional income using the 4% rule?

Probably 4 more years. For me, it's worth it for the peace of mind. But I guess I can make the final decision when I get up to T minus 4 years.
Title: Re: I can last 45years on the 4% rule?
Post by: AlexMar on February 21, 2019, 05:55:53 AM
Big US companies have a ton of international exposure.  Apple, Amazon, Microsoft, GE, auto companies, etc.  TONS of international business.  I've never understood the desire to invest in international funds at all. 

Obligatory Dodge post:

https://forum.mrmoneymustache.com/investor-alley/statistics-personal-experience-and-risk-management/msg629210/#msg629210

I prefer Warren Buffetts advice over "Dodge".  I would point out that Bogle and Buffett both advocate for holding only (or mostly) US stocks.  MMM seems to suggest about the same as well.
Title: Re: I can last 45years on the 4% rule?
Post by: EscapeVelocity2020 on February 21, 2019, 07:06:46 AM
lets say my expenses are $20k/yr.
with the 4% rule, i only need $500k to FIRE.

(SNIP simple math example)

This thread is basically summing up everything we have learned about ER, good stuff but maybe too advanced.  One philosophical question that may help you decide where you are financially is that ER at 35 with $500k would at least be equivalent to ER at 45 with $1M, conservatively assuming no additional savings and also no spending of principal (using the rule of 72, your investments double given a 7% rate of return over 10 years).  For some folks, the idea of any years of extra work is crazy and the trade-off for potentially lower spending is perfectly fine or they are fully convinced they have 'enough'.  Other folks are OK working more years until they hit 'the number'.  Most likely you will split the difference, for example work some amount extra until you hit 3% SWR (to $600k, in your example).

There are a million variations on this FIRE theme (ER earlier at 4 or 5% SWR with a willingness to go back to work, temporarily reduce spending, side hustle income, rental properties... or increase SW spending / FI amount to achieve 3% SWR to account for adverse effects of inflation, allow more discretionary spending flexibility, or cover some estimated expense like a health event).  But this initial philosophical question helps you cut to the chase on where you stand if you are relatively new to the idea of FIRE.

I would also add, 45 years is a long time.  It would be like someone in 1975 guessing what to do with their life path all the way to 2020.
Quote
Bogle started the First Index Investment Trust on December 31, 1975. At the time, it was heavily derided by competitors as being "un-American" and the fund itself was seen as "Bogle's folly".[8] In the first five year of Bogle's company, it made 17 million dollars.[9] Fidelity Investments Chairman Edward Johnson was quoted as saying that he "[couldn't] believe that the great mass of investors are going to be satisfied with receiving just average returns".[10]
Title: Re: I can last 45years on the 4% rule?
Post by: Greystache on February 21, 2019, 07:20:19 AM
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.
Title: Re: I can last 45years on the 4% rule?
Post by: YttriumNitrate on February 21, 2019, 10:01:05 AM
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).
Title: Re: I can last 45years on the 4% rule?
Post by: HBFIRE on February 21, 2019, 11:01:23 AM


I prefer Warren Buffetts advice over "Dodge".  I would point out that Bogle and Buffett both advocate for holding only (or mostly) US stocks.  MMM seems to suggest about the same as well.

Rather than appealing to authority which is a logical fallacy, you should argue the points made.

If you must appeal to authority, read Vanguard's own excellent research and recommendations on the matter:

https://personal.vanguard.com/pdf/icriecr.pdf
Title: Re: I can last 45years on the 4% rule?
Post by: MrThatsDifferent on February 21, 2019, 11:07:43 AM
No, it means that I won't retire till I have about 35x my annual living expenses saved away.

You’re also living in Australia and I think there’s a variation of 4% in Australia.

Possibly, especially given our taxes are much more punitive and our cost of living is far higher. I should have stipulated that, sorry. Maybe 4% works perfectly well in America with its much lower COL and better higher living standards (for the top quintile).

Although, 4% is what you’re forced to withdraw from your Super at a certain point I believe. You should talk to @deborah , she’s a genius with this stuff.
Title: Re: I can last 45years on the 4% rule?
Post by: Boofinator on February 21, 2019, 11:46:45 AM
also keep in mind that if you plan to have a mortgage in your WR rate calc, you're even safer.  A mortgage provides your total expenses with more inflation protection.  A significant portion of my planned long term expenses will be a mortgage, which makes me very happy.

I have to disagree and say it's actually quite nuanced as to when is a good time to have a mortgage in retirement (I see you and TomTX went into a few more details below, but I hope to address the sentiment I often see on this site expressed so clearly above). First, someone much smarter than me has concluded mortgages in retirement are generally not a good idea in early retirement: https://earlyretirementnow.com/2017/10/11/the-ultimate-guide-to-safe-withdrawal-rates-part-21-mortgage-in-retirement/ (https://earlyretirementnow.com/2017/10/11/the-ultimate-guide-to-safe-withdrawal-rates-part-21-mortgage-in-retirement/). I also ran some numbers a while back that calculated several more specifics as to when it would probably be a good idea to keep the mortgage and when it wouldn't be: https://forum.mrmoneymustache.com/investor-alley/stop-saying-it-is-not-mathematically-correct-to-pay-off-your-mortgage-early!/msg2181733/#msg2181733 (https://forum.mrmoneymustache.com/investor-alley/stop-saying-it-is-not-mathematically-correct-to-pay-off-your-mortgage-early!/msg2181733/#msg2181733). And of course, if you keep your mortgage you should in no way be invested in bonds (unless the yield is higher than the mortgage), meaning you're going full bore 100% stocks with the associated sequence of returns risk.
Title: Re: I can last 45years on the 4% rule?
Post by: bacchi on February 21, 2019, 01:09:32 PM
also keep in mind that if you plan to have a mortgage in your WR rate calc, you're even safer.  A mortgage provides your total expenses with more inflation protection.  A significant portion of my planned long term expenses will be a mortgage, which makes me very happy.

I have to disagree and say it's actually quite nuanced as to when is a good time to have a mortgage in retirement (I see you and TomTX went into a few more details below, but I hope to address the sentiment I often see on this site expressed so clearly above). First, someone much smarter than me has concluded mortgages in retirement are generally not a good idea in early retirement: https://earlyretirementnow.com/2017/10/11/the-ultimate-guide-to-safe-withdrawal-rates-part-21-mortgage-in-retirement/ (https://earlyretirementnow.com/2017/10/11/the-ultimate-guide-to-safe-withdrawal-rates-part-21-mortgage-in-retirement/).

While a valuable analysis, it's odd that ERN used the historical stock record but not the historical inflation rate. The long term average annual inflation rate is 3.13%; it's only been less than 2% in 2 decades, and has never been less than 2% in any 30 year period.

This would almost certainly change the numbers in the "summary table of the safe withdrawal rates in the 8 different models." I suspect that Model 5 (80/20 with a 30 yr fixed mortgage) would do better than Model 1 (80/20 with no mortgage).
Title: Re: I can last 45years on the 4% rule?
Post by: Boofinator on February 21, 2019, 01:28:05 PM
also keep in mind that if you plan to have a mortgage in your WR rate calc, you're even safer.  A mortgage provides your total expenses with more inflation protection.  A significant portion of my planned long term expenses will be a mortgage, which makes me very happy.

I have to disagree and say it's actually quite nuanced as to when is a good time to have a mortgage in retirement (I see you and TomTX went into a few more details below, but I hope to address the sentiment I often see on this site expressed so clearly above). First, someone much smarter than me has concluded mortgages in retirement are generally not a good idea in early retirement: https://earlyretirementnow.com/2017/10/11/the-ultimate-guide-to-safe-withdrawal-rates-part-21-mortgage-in-retirement/ (https://earlyretirementnow.com/2017/10/11/the-ultimate-guide-to-safe-withdrawal-rates-part-21-mortgage-in-retirement/).

While a valuable analysis, it's odd that ERN used the historical stock record but not the historical inflation rate. The long term average annual inflation rate is 3.13%; it's only been less than 2% in 2 decades, and has never been less than 2% in any 30 year period.

This would almost certainly change the numbers in the "summary table of the safe withdrawal rates in the 8 different models." I suspect that Model 5 (80/20 with a 30 yr fixed mortgage) would do better than Model 1 (80/20 with no mortgage).

I agree, ERN's analysis in this case was subpar (compared to his usual excellence). My analysis (in the other link provided) had a different conclusion at the interest rates he was assuming, but nonetheless the best answer to the question is far from a slam dunk (in my opinion).
Title: Re: I can last 45years on the 4% rule?
Post by: Boofinator on February 21, 2019, 01:31:00 PM
also keep in mind that if you plan to have a mortgage in your WR rate calc, you're even safer.  A mortgage provides your total expenses with more inflation protection.  A significant portion of my planned long term expenses will be a mortgage, which makes me very happy.

I have to disagree and say it's actually quite nuanced as to when is a good time to have a mortgage in retirement (I see you and TomTX went into a few more details below, but I hope to address the sentiment I often see on this site expressed so clearly above). First, someone much smarter than me has concluded mortgages in retirement are generally not a good idea in early retirement: https://earlyretirementnow.com/2017/10/11/the-ultimate-guide-to-safe-withdrawal-rates-part-21-mortgage-in-retirement/ (https://earlyretirementnow.com/2017/10/11/the-ultimate-guide-to-safe-withdrawal-rates-part-21-mortgage-in-retirement/).

While a valuable analysis, it's odd that ERN used the historical stock record but not the historical inflation rate. The long term average annual inflation rate is 3.13%; it's only been less than 2% in 2 decades, and has never been less than 2% in any 30 year period.

This would almost certainly change the numbers in the "summary table of the safe withdrawal rates in the 8 different models." I suspect that Model 5 (80/20 with a 30 yr fixed mortgage) would do better than Model 1 (80/20 with no mortgage).

I agree, ERN's analysis in this case was subpar (compared to his usual excellence). My analysis (in the other link provided) had a different conclusion at the mortgage interest rates he was assuming, but nonetheless the best answer to the question is far from a slam dunk (in my opinion).
Title: Re: I can last 45years on the 4% rule?
Post by: HBFIRE on February 21, 2019, 01:44:30 PM

The long term average annual inflation rate is 3.13%; it's only been less than 2% in 2 decades, and has never been less than 2% in any 30 year period.



Oh wow, yes this is a significant error in calculations.  Inflation protection is really one of the primary benefits of keeping a mortgage, and this is underestimating that benefit by 56%.

That said, the Federal Reserve is much better at managing inflation than it was in our country's past.  We will likely see lower inflation (and lower rates) in the future than the historical average, but this is really speculation.

I currently do not have a mortgage, but am FI @ 3% WR as a renter.  Plan to get a mortgage in the next couple yrs, which will approach 1M.  Will be very happy once I am FI with huge mortgage long term.
Title: Re: I can last 45years on the 4% rule?
Post by: Boofinator on February 21, 2019, 01:52:32 PM
Inflation protection is really one of the primary benefits of keeping a mortgage.

Another phrase I see constantly, but yet to see any good evidence for. Your interest rate on the mortgage is not tied to inflation, and historically stock returns don't have a good correlation with inflation either. Ultimately, you are looking at the guaranteed fixed-return of the mortgage versus the expected higher returns and higher volatility of stock returns.

(If you are comparing mortgage payments to rent, I would concur a mortgage is an inflation hedge, but that is a different conversation.)
Title: Re: I can last 45years on the 4% rule?
Post by: HBFIRE on February 21, 2019, 01:57:22 PM
Inflation protection is really one of the primary benefits of keeping a mortgage.

Another phrase I see constantly, but yet to see any good evidence for.

Consider 2 portfolios.  Portfolio A is FI @4% WR for all expenses and no mortgage (or rent).   Portfolio B also FI @4% WR for all expenses + mortgage.

WR has taken into account inflation.  Portfolio B will not be as hampered by inflation as a portion of total expenses are fixed (the larger % of total expenses that are mortgage, the more protection against inflation).  Hence, Portfolio B should see a better chance of survival since expenses will lower (adjusting for inflation) with each passing year -- essentially the WR will progressively decrease.

Essentially what I'm saying is that I would feel much more comfortable hitting FI with a large portion of my expenses being fixed than hitting FI with 100% of my expenses being subject to inflation.  Unfortunately inflation can be difficult to predict, and some expenses will be much more subject to it than others.  Using an historical average for consumer inflation probably is not very accurate.  There have been many articles which cite why this average greatly underestimates real inflation.
Title: Re: I can last 45years on the 4% rule?
Post by: Boofinator on February 21, 2019, 02:09:40 PM
Inflation protection is really one of the primary benefits of keeping a mortgage.

Another phrase I see constantly, but yet to see any good evidence for.

Consider 2 portfolios.  Portfolio A is FI @4% WR for all expenses and no mortgage (or rent).   Portfolio B also FI @4% WR for all expenses + mortgage.

WR has taken into account inflation.  Portfolio B will not be as hampered by inflation as a portion of total expenses are fixed (the larger % of total expenses that are mortgage, the more protection against inflation).  Hence, Portfolio B should see a better chance of survival since expenses will lower (adjusting for inflation) with each passing year -- essentially the WR will progressively decrease.

Essentially what I'm saying is that I would feel much more comfortable hitting FI with a large portion of my expenses being fixed than hitting FI with 100% of my expenses being subject to inflation.  Unfortunately inflation can be difficult to predict, and some expenses will be much more subject to it than others.

I agree with your analysis, if one can assume Portfolio A and Portfolio B are equal amounts of money. But they are not. Sometimes Portfolio A will be higher than Portfolio B, and sometimes vice versa. In other words, there is a good chance Portfolio A would have had the opportunity to retire significantly before Portfolio B.
Title: Re: I can last 45years on the 4% rule?
Post by: bacchi on February 21, 2019, 02:10:07 PM

The long term average annual inflation rate is 3.13%; it's only been less than 2% in 2 decades, and has never been less than 2% in any 30 year period.



Oh wow, yes this is a significant error in calculations.  Inflation protection is really one of the primary benefits of keeping a mortgage, and this is underestimating that benefit by 56%.

Like SORR, it depends on when the mortgage is started. If there were 30 year mortgages in the 1920s, your payment would increase in the 1930s due to deflation. Of course, inflation in the 1940s was pretty high but you're paying slightly less interest on your loan, too.

In fact, the 1930-1960 period had an average annual inflation of 1.93% (I was wrong in my statement above). There are other 30 year <2% clusters around there too (but 31-61 isn't one of them because 1930 was a killer). https://www.in2013dollars.com/1931-dollars-in-1961?amount=1

There's possibly a correlation problem here. A low mortgage usually means that inflation is also low because it's one of the tools that the fed uses.
Title: Re: I can last 45years on the 4% rule?
Post by: HBFIRE on February 21, 2019, 02:21:03 PM
In other words, there is a good chance Portfolio A would have had the opportunity to retire significantly before Portfolio B.

This is interesting.  I'd suspect the person who has portfolio b that puts extra money in stocks rather than a mortgage will retire earlier.  And this person will have more protection against inflation.
Title: Re: I can last 45years on the 4% rule?
Post by: Boofinator on February 21, 2019, 02:30:06 PM
In other words, there is a good chance Portfolio A would have had the opportunity to retire significantly before Portfolio B.

This is interesting.  I'd suspect the person who has portfolio b that puts extra money in stocks rather than a mortgage will retire earlier.  And this person will have more protection against inflation.

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.
Title: Re: I can last 45years on the 4% rule?
Post by: HBFIRE on February 21, 2019, 03:09:53 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.

Title: Re: I can last 45years on the 4% rule?
Post by: Boofinator 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.
Title: Re: I can last 45years on the 4% rule?
Post by: FIREin2018 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 :(
Title: Re: I can last 45years on the 4% rule?
Post by: BicycleB 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.
Title: Re: I can last 45years on the 4% rule?
Post by: EnjoyIt 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.
Title: Re: I can last 45years on the 4% rule?
Post by: YttriumNitrate 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.
Title: Re: I can last 45years on the 4% rule?
Post by: Manatee 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/
Title: Re: I can last 45years on the 4% rule?
Post by: Boofinator 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.
Title: Re: I can last 45years on the 4% rule?
Post by: dude 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.
Title: Re: I can last 45years on the 4% rule?
Post by: bacchi 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.

Title: Re: I can last 45years on the 4% rule?
Post by: Boofinator 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.
Title: Re: I can last 45years on the 4% rule?
Post by: bacchi 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.
Title: Re: I can last 45years on the 4% rule?
Post by: bacchi 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
Title: Re: I can last 45years on the 4% rule?
Post by: Boofinator 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.
Title: Re: I can last 45years on the 4% rule?
Post by: Boofinator 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.
Title: Re: I can last 45years on the 4% rule?
Post by: Manatee 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).
Title: Re: I can last 45years on the 4% rule?
Post by: FIRE 20/20 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. 
Title: Re: I can last 45years on the 4% rule?
Post by: bacchi 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.
Title: Re: I can last 45years on the 4% rule?
Post by: GoCubsGo 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
Title: Re: I can last 45years on the 4% rule?
Post by: FIREin2018 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.

 
Title: Re: I can last 45years on the 4% rule?
Post by: FIREin2018 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?
Title: Re: I can last 45years on the 4% rule?
Post by: ender 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.