A Financial Thought from an Early ER

[Gone4Good]

Re: A Financial Thought from an Early ER

The SWR that is put out with FieCalc has inflation factored into it already, so your standard of living would not be reduced! If you just continued at 4% without a COLA, you would be cutting back! - Quite dramatically!

For someone retiring in 1966 a 4% WR adjusted annually for inflation fails by 1990.

I ran my own simulation to see what life would be like for that 1966 retiree using Guyton's Capital Preservation Rules. And according to my #'s (maybe ESRBob or someone else could verify), the CPR results in a 47% standard of living decrease by 1979 with the first 10% spending reduction happening in 1970.

The "upside" of the CPR is that you never run out of money - but it is also worth knowing what those rules could potentially mean in reduced standard of living.

 

[Cut-Throat]

Re: A Financial Thought from an Early ER

For someone retiring in 1966 a 4% WR adjusted annually for inflation fails by 1990.

Yes it does and 3.7% survives with Cola. My point was that your standard of living does not have to decrease by 47% to survive.

Also the guy that diversified into a Cola immediate Annuity in 1966, was probably just fine.

 

[Gone4Good]

Re: A Financial Thought from an Early ER

My point was that your standard of living does not have to decrease by 47% to survive.

No, it didn't. But we don't get to make choices knowing the outcome in advance. Even your initial 3.7% initial withdrawal rate explodes to 10% by the early 1980's. I'm not sure I'd be willing to bet in 1980 that my portfolio would last another another 15 or 20 years. As it turned out, it barely did notwithstanding a fantastic equity run.

Although everyone's situation is different most of us here aren't talking about 30 year retirement horizons. So in 1980, if I'm still looking at maybe another 30 years to go, I'd probably want to cut that 10% withdrawal rate in half (which is pretty much what the CPR says to do).

COLA'd annuities are nice, but I don't think anyone is going to offer me one when I retire at 38 or so.

 

[Cut-Throat]

Re: A Financial Thought from an Early ER

No, it didn't.
COLA'd annuities are nice, but I don't think anyone is going to offer me one when I retire at 38 or so.

retiring at 38 is a big risk. Not trying to talk you out of it at all. - In fact congratulations. But that is probably your greatest risk factor. I am talking from the point of view of a 55 year old, which makes things a little simpler. And I would not purchase an annuity until age 70.

 

[ESRBob]

Re: A Financial Thought from an Early ER

I ran my own simulation to see what life would be like for that 1966 retiree using Guyton's Capital Preservation Rules. And according to my #'s (maybe ESRBob or someone else could verify), the CPR results in a 47% standard of living decrease by 1979 with the first 10% spending reduction happening in 1970.

I'd have to dig up the numbers that I ran for the simulation on page 191 of Work Less Live More, but the graph shows that in constant dollars, retiring in 1965, you are down nearly 40% by 1974, using a 4% of portfolio value withdrawal each year and the 95% Rule (spend 95% of what you spent last year if it is more than 4% of your Jan 1 portfolio balance to smooth out the bumps). The whole portfolio does recover in real terms but it still took 20 years to climb back up to your starting point, and by the 30 year mark you are about 45% ahead of starting point in real terms.

The drop in real portfolio value is a steep one in times like that, and having some sort of way to bail out your sanity and your spending levels with some additional PT income pretty much needs to be part of the plan if you run into another 1965-1982 kind of period, no matter what your withdrawal method. (either that or cut expenses dramatically by moving to a developing country or somesuch).

 

[Gone4Good]

Re: A Financial Thought from an Early ER

retiring at 38 is a big risk. Not trying to talk you out of it at all. - In fact congratulations. But that is probably your greatest risk factor.

That's why I'm walking through the downside scenarios and re-defining what "success" means for me. In my situation it can't be having $1 left in the portfolio after 40 years and its not sitting with a 10% withdrawal rate hoping that somehow the market bails me out. But there are other folks here talking about similarly long retirement periods. For them (and anyone planning to rely almost entirely on their portfolio for income) I'd suggest going beyond FIRECalc's definition of "success" and try to imagine how your life would unfold year-by-year through the 1970's bear market and inflation. I don't think tweaking the WR rate to a level of portfolio survivability captures the reality of what actually happens. Gauzy ideas of returning to work or cutting spending don't really constitute plans unless you actually have figured out how you're going to re-enter the workforce or how much real spending you're actually able to cut. All I'm saying is that if people are thinking that 20% fat in the budget is enough, they may be mistaken.

 

[Gone4Good]

Re: A Financial Thought from an Early ER

I'd have to dig up the numbers that I ran for the simulation on page 191 of Work Less Live More, but the graph shows that in constant dollars, retiring in 1965, you are down nearly 40% by 1974, using a 4% of portfolio value withdrawal each year and the 95% Rule.

Seems consistent with what I came up with.

The other idea I was playing with is capping the WR to some level of portfolio yield. That requires less severe reductions in the late 70's because interest rates were so high. It might not be necessary to limit your withdrawals to ~5% in 1980 when the portfolio is yielding ~8%. The problem is, we'll never know what would have worked in a world where the 70's stagflation didn't give way to a 20 year equity boom so maybe greater caution is in order.

The whole portfolio does recover in real terms but it still took 20 years to climb back up to your starting point, and by the 30 year mark you are about 45% ahead of starting point in real terms.

It may go without saying, but its worth pointing out anyway, that when I cap WRs at the portfolio yield (allowing them to go higher than what is allowed under CPR or probably even under the 95% rule) the reductions to your standard of living are smaller, but the subsequent recovery takes a lot longer too.

 

[firewhen]

Re: A Financial Thought from an Early ER

I still think that depending on your situation, a SWR of less than 4% might be preferable to avoid living on the edge or worrying about depleting one's portfolio, etc. While it will delay ER, it could be warranted in these situations, especially if many of them apply:

especially early ER, with upwards of 50+ nonworking years
no pension or retiree health care benefits
family issues (young children, older parents who need help)
unwillingness to relocate to less expensive areas

We have all of the above, which is why I am aiming for 2% SWR. I do not want to cut to the bone or look for work again once I stop.

 

[youbet]

Re: A Financial Thought from an Early ER

Gauzy ideas of returning to work or cutting spending don't really constitute plans unless you actually have figured out how you're going to re-enter the workforce or how much real spending you're actually able to cut.

Yep. That's exactly how I thought about it.

Variables we can't possibly predict turn the planning process into a bit of a crapshoot. How long will I live? Will unanticipated extraordinary expenditures become a factor? Will I live through market conditions that are unusually good or unusually bad? Will I become so miserable working that beginning ER with risk is worth it? Will my tastes in activities and lifestyle change? Will that nice inheritance from mom and dad come through or will they spend it on nursing home care? And so on and so forth.

Everyone needs to understand and prioritize their own risk adversions. We came to understand that depleting our portfolio or reducing spending to the point of significantly changing our lifestyle was something we dreaded. Maintaining our lifestyle but with a 10% withdrawal rate would keep me awake at night. And our fear of dieing with a large residual portfolio is small because we have family (including a grandson with special needs) who we'd love to benefit from anything we leave behind.

We defined FIRE quite conservatively......assumed a less than 4% WR, padded the budget, didn't count the house in total net worth, figured our days of earned income were positively over and that sort of thing. That's what was right for us.

Everyone else has to do it their own way. Do what's right for YOU.

3 Yrs to Go....... we happen to 100% agree that living through a long period of reduced spending, so reduced that you're cutting deeply into things you like to do, would be the pits. Since our jobs weren't too awful, we stayed hitched to the plow to reduce the no-money or low-money risk at the cost of acquiring the shorter/later retirement risk.

You pays your money and you takes your chances. One size does not fit all. We just happen to share your outlook.

 

[Gone4Good]

Re: A Financial Thought from an Early ER

We have all of the above, which is why I am aiming for 2% SWR. I do not want to cut to the bone or look for work again once I stop.

IMO, the ability to cut your spending to 2%, or lower, is the critical factor. But a 2% initial WR may not be the optimal solution.

Consider two 1966 retirees, both starting with $2MM. Retiree A opts for a 4% initial withdrawal rate ($80K) while retiree B opts for a 2% withdrawal rate ($40k). Both decide they will cut spending by 10% in any year where their WR would exceed 4.8%. Because of the low initial WR, retiree B never has to cut his spending. Although retiree A has to make several reductions, his worst year leaves him with $42,500 in real spending . . . $2,500 more than Retiree B.

Over a 30 year period, Retiree A has total real spending of $1.7MM whereas Retiree B has total real spending of $1.25MM, 25% less.

I've come to the conclusion that a higher initial WR (for me that means about 3%), coupled with an extremely flexible spending structure yields the best trade off between maximizing my standard of living and minimizing my risk of failure. Your mileage may vary.


(for those wondering, a 3% initial WR using the same details as for Retiree's A & B results in real spending of $44K at the bottom and $1.56MM over a 30-year period . . . about 8% lower than Retiree A but still 25% higher than retiree B).

 

[youbet]

Re: A Financial Thought from an Early ER

Consider two 1966 retirees, both starting with $2MM. Retiree A opts for a 4% initial withdrawal rate ($80K) while retiree B opts for a 2% withdrawal rate ($40k). Both decide they will cut spending by 10% in any year where their WR would exceed 4.8%. Because of the low initial WR, retiree B never has to cut his spending. Although retiree A has to make several reductions, his worst year leaves him with $42,500 in real spending . . . $2,500 more than Retiree B.

3 Yr to Go...... What about the variable of working longer to increase the size of the portfolio so that spending is equal in absolute terms? That is, 4% of 2 mil = $80K and 2.67% of 3 mil = $80K.

In our planning, we didn't find it possible to half our desired budget (as in your example) and still anticipate a happy RE.

 

[firewhen]

Re: A Financial Thought from an Early ER

IMO, the ability to cut your spending to 2%, or lower, is the critical factor. But a 2% initial WR may not be the optimal solution.

3 Yrs to Go,

I understand what you are saying, but for me it is the opposite direction. I would not be cutting our spending, but having calculated what our reasonable spend rate is, continuing to work and hopefully grow our portfolio to the point where our uncut expenses equal the 2% SWR. Obviously the downside is that I am working past the point where I might otherwise have to, with an enlarged safety net.

Down the road, I could see raising the SWR as expenses drop with the kids leaving the house, the number of future years in ER presumably declining, and the portfolio hopefully growing.

In all likelihood, at 2%, or even 4%, with reasonable returns most portfolios with a strong equity component will grow dramatically over time. All of us face, and seem to fear, the relatively unlikely scenario of a prolonged bad period. It is a question of how much you plan for that.

 

[sgeeeee]

Re: A Financial Thought from an Early ER

. . . If I really have an issue with money then the only course will be consulting...which would be about as attactive to me as cleaning toillets in a public restroom.

I hear that. Friends and colleagues keep trying to convince me to consult. I tried it. It s#cks as far as I'm concerned. Yeah, you can make a lot of money, but the reason I saved and invested all these years is to be free of that need. Actually, I think I would prefer cleaning public restrooms.

 

[youbet]

Re: A Financial Thought from an Early ER

I hear that. Friends and colleagues keep trying to convince me to consult. I tried it. It s#cks as far as I'm concerned. Yeah, you can make a lot of money, but the reason I saved and invested all these years is to be free of that need. Actually, I think I would prefer cleaning public restrooms.

Gosh sgeeeee I've agreed with you on more items the past few days than in the prior year. Wonder what that means? And I certainly agree here.

Sitting here past noon, still lingering over breakfast coffee, and reading these boards is more fun than if I was sitting here putting together a PP presentation to give a client tomorrow. No interest or desire whatsoever to consult.

Don't misunderstand, I'm not afraid of work. I burned the candle at both ends for years. My family knows that, if necessary, I'd stand on my head in a bucket of sh*t and whistle "Dixie" if I had to in order to support them. Thank goodness It doesn't look like I'll need to.

 

[haha]

Re: A Financial Thought from an Early ER

That's why I'm walking through the downside scenarios and re-defining what "success" means for me. In my situation it can't be having $1 left in the portfolio after 40 years and its not sitting with a 10% withdrawal rate hoping that somehow the market bails me out.

This is also exactly how I feel. I modeled this by setting a non-zero floor in Firecalc as my definition of failure. I don't want a 50% drawdown no matter what Firecalc says about whether it will come back or not. To Hell with that!


Someone in real life asked me if I thought working another year or 2 made much difference in retirement survivability. I said no; but I now think that was wrong. It all depends on what you are getting for that initial year or 2, relative to what you already have. If an additional couple of years will get you a good pension, or health care, or let some options vest, or add 20% to your liquid savings, then clearly it will be very helpful.

IMO this likely will be trumped by valuations in the investments that you own, but adding those extra $$ is a more controllable factor than looking for better valuations. If you have 20% more money, you can either withdraw 20% more money initially, or you can increase your security at the original withdrawal rate.

The board seems to be moving toward conservatism lately. Previously there was a lot of “Just do it!” talk. I don’t pretend to know what is best; I suspect it depends on who you are and how you rank things.

Clearly it will never be easier to pile up money than it is at the peak of a lucrative career.



Ha

 

[unclemick]

Re: A Financial Thought from an Early ER

Ha

Maybe some of us are afraid we're getting the whiff of some possible Bear poop and thus there might a you know what lurking in the woods.

The little 2000 - 2003 dipsy dootle might have heightened our senses.

heh heh heh - what? me worry! - I have balanced index. And a good supply of clean underwear like my Mama told me.

 

[donheff]

Re: A Financial Thought from an Early ER

. . . If I really have an issue with money then the only course will be consulting...which would be about as attactive to me as cleaning toillets in a public restroom.

I hear that. Friends and colleagues keep trying to convince me to consult. I tried it. It s#cks as far as I'm concerned. Yeah, you can make a lot of money, but the reason I saved and invested all these years is to be free of that need. Actually, I think I would prefer cleaning public restrooms.

ROTFLOL. Ding, Ding, Ding! That is why I stuck it out until all the lights were green. I always gave the appearance of a type A even though my real nature is laid back. Everyone assumed I would consult for the big bucks and a number of my former suppliers made inquiries. But I wanted to be free and rebuffed anything that even apporached a real job. I took on one short IT consulting project and all of the BS I left behind came back with a rush. I switched over to HR where I could do very short analytical projects I like. That was better but every project was still like a boat anchor around my neck. Retired is retired. I no longer need the affirmation of employment. And I do not regret the extra few years to make sure I won't have to go back there.

 

[wabmester]

Re: A Financial Thought from an Early ER

IMO, the ability to cut your spending to 2%, or lower, is the critical factor. But a 2% initial WR may not be the optimal solution.

The risk is due to stocks seeing something like another 1929, 1966, or Japan-1990, right? So, if you really want to ensure a 4% SWR, have you considered TIPS + high yield investments like real estate or dividend plays?

There are ways to insure against long periods of poor stock market returns, but most people want to shoot for the brass ring that a high stock allocation *might* provide.

 

[Gone4Good]

Re: A Financial Thought from an Early ER

The risk is due to stocks seeing something like another 1929, 1966, or Japan-1990, right? So, if you really want to ensure a 4% SWR, have you considered TIPS + high yield investments like real estate or dividend plays?

There are ways to insure against long periods of poor stock market returns, but most people want to shoot for the brass ring that a high stock allocation *might* provide.

I tried to model TIPS, but without a historic record its kind of a garbage-in-garbage-out kind of analysis. What I found was a TIPS allocation of 20% helped some, but it wasn't enough to make a meaningful difference.

To your point of increasing the portfolio yield, I think that has merit, within reason. Like I said earlier, keying your withdrawals off of the portfolio yield does seem to allow greater stability in real withdrawals - but I have to play around more with that.

 

[Gone4Good]

Re: A Financial Thought from an Early ER

3 Yrs to Go,

I understand what you are saying, but for me it is the opposite direction. I would not be cutting our spending, but having calculated what our reasonable spend rate is, continuing to work and hopefully grow our portfolio to the point where our uncut expenses equal the 2% SWR.

I think you and I are looking at different sides of the same coin. If you can build a portfolio to the point where you can meet your day to day needs on a 2% WR, anything withdrawn above that is completely discretionary. I'm of the view that it's worth it to spend that extra money traveling the world, knowing full well that if the markets and economy turn sour, I'll have to hand over my passport.

 

[shanjwa5]

Re: A Financial Thought from an Early ER

Wanted to share a personal experience which caused a major pause in my life and a thorough assesmet of my future retirement plan. Worked for a company in management for 16 years and the business that I worked in was sold. New owners and in 5 weeks I am gone. I decided to get back into the same field but at a level without the burden of managing a staff.
Salary cut by 60% but have benefits and enjoy the work. At 51 planning for retirement and loading up on 50% equities and 40% fixed, 10% bonds.
I am getting a 6.25 CD rate from Penfed for a 3 year period. I have found that penfed has this excellent program every January. My plan is to build a $100k ladder each year for three and always have $100k ready on tap on annual basis if needed. Unless I am missing something Bonds do not offer the safety nor the guarantee of a 6.25% rate. Anyone else passing on bonds and going the CD route.........

 

[Gone4Good]

Re: A Financial Thought from an Early ER

3 Yr to Go...... What about the variable of working longer to increase the size of the portfolio so that spending is equal in absolute terms? That is, 4% of 2 mil = $80K and 2.67% of 3 mil = $80K.

In our planning, we didn't find it possible to half our desired budget (as in your example) and still anticipate a happy RE.

That example was directed at someone who is targeting a 2% initial WR, and may not apply to everyone. But the earlier point was that a 4% initial withdrawal rate coupled with some kind of spending reduction rule (whether CPR or ESRBob's 95% rule) resulted in substantial decreases in real spending during the 70's . . . on the order of 40%-50%. However you prepare for that (COLA'd annuities, pension, lower WR, part-time work, shorter retirement horizon, etc) its worth thinking about ahead of time.

 

[youbet]

Re: A Financial Thought from an Early ER

However you prepare for that (COLA'd annuities, pension, lower WR, part-time work, shorter retirement horizon, etc) its worth thinking about ahead of time.

Yes indeedy!

And looping back to an earlier point in this thread, the pain of substantially cutting back on spending in real terms or of having to go back to work after several years off should not be underestimated.

Of course, your personal circumstances as you approach RE are key. You're making a huge salary and don't mind the job vs. you're making peanuts and every minute is hell, etc.

Ha's post was very insightful and summed up most of my feelings on the subject very well.

 

[Cut-Throat]

Re: A Financial Thought from an Early ER

The board seems to be moving toward conservatism lately. Previously there was a lot of “Just do it!” talk. I don’t pretend to know what is best; I suspect it depends on who you are and how you rank things.

Ha

A stock market drop of 50% would not even come close to the tradgedies that life can deal out to you. It pales in comparison to a divorce or death of a loved one. I think most people on this forum are very fortunate if their greatest fear is a stock market drop. I don't sweat a market drop, I plan on it! - That is why I am diversified into only 50% in the market. A 50% drop in the market would reduce my pile by 25% and give the stocks more room for growth. If I never thought the market would drop, I'd be 100% in stocks!

Of all the folks on this forum, I think Uncklemick has had the worst run of luck the last couple of years, and in the grand scheme of things, he may have loosened his purse strings a bit.

 

[haha]

Re: A Financial Thought from an Early ER

A stock market drop of 50% would not even come close to the tradgedies that life can deal out to you. Itpale in comparison to a divorce or death of a loved one.

CT, I sure agree with you on this!

Ha