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Old 04-23-2008, 01:06 PM   #21
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Originally Posted by rogersteciak View Post
During those 10 to 15 years, why not figure out how to earn additional investment income from sources other than the stock market? There is no shortage of books and seminars (and scams) on wealth building. The best approach is to take something you love doing (such as a hobby) and figure out how to make decent money at it. The 4-Hour Workweek by Timothy Ferris describes an approach that might work for some people.
My goal of ER'ing would be to not work. I'm sure I could stumble onto the secret to passive income and wealth along the way, but it would involve work. I'd rather just keeping working at my current fairly high salary for a while longer if I'm going to work anyway.

Unfortunately, I don't think anyone will pay me to do what I love doing. If I had found my avocation, my calling in life, I would probably be pursuing it right now instead of posting on a forum centered around retiring early (and not working). I may stumble upon something someday that could potentially earn me money, but it takes effort to earn money (client relations, advertising/publicity, paperwork, collections, AP/AR, legal issues, employment/compliance issues, etc). It takes effort, that is, if I'm serious about making money.
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Old 04-23-2008, 01:17 PM   #22
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... what's the bottom line? Thanks.
I meant to put a little abstract in here somewhere. Thanks for the reminder!

Basically it is this: About 10-15 years into your retirement, look at your portfolio balance in inflation adjusted dollars versus what it was when you retired. If you have less than 50-60% of your portfolio remaining at that point (adjusted for inflation), you are very likely to run out of money or have a very low portfolio balance at some point in the future. In other words, I'm proposing a FIRE check-up about 10-15 years into retirement. If your portfolio value at 10 to 15 years is less than 50-60% of the initial value, start thinking about earning income from some other source, or reducing expenses, or both.

It more or less boils down to common sense. Don't continue blindly following a plan if signs start showing that you are headed to failure. I haven't really seen other research showing what signs might indicate failure well before the failure event actually occurs. With this rule of thumb, you can be a bit more certain of whether your retirement falls in the 90% of cases where you will do just fine (historically), or the 10% of cases where failure was reached or closely approached. If you find yourself in the 10% of cases where failure is imminent, you can do something to remedy the problem before it is too late. (ie - go back to work for 5 years in your 50's instead of working for the rest of your life once you are in your 60's+).
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Old 04-23-2008, 05:32 PM   #23
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FUEGO - In many ways your thinking and reasoning is echoing my own thoughts...

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...<snip>...Unfortunately, I don't think anyone will pay me to do what I love doing. If I had found my avocation, my calling in life, I would probably be pursuing it right now instead of posting on a forum centered around retiring early (and not working). I may stumble upon something someday that could potentially earn me money, but it takes effort to earn money (client relations, advertising/publicity, paperwork, collections, AP/AR, legal issues, employment/compliance issues, etc). It takes effort, that is, if I'm serious about making money.
The following is a valid concern.
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...<snip>...In "high" tech, at least, the technology would have changed so much in 10-15 years, I'm not sure you could count on going back to w*** in your same field... <snip>
Luckily for me, I have no intentions of getting another high tech job once I am done with this one (or whichever one allows me to ER). If I have to go back to a full time job it will be doing something completely different.


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....Maybe the main takeaway here is "stay flexible". And the younger you call it quits, the more flexible you need to remain.
So true...
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Old 04-24-2008, 09:21 AM   #24
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Thanks for a very thoughtful post. I need to set a portfolio value that will send me back to work. I plan to use the 4/95% method advocated by ESRBob in his book.

A decline in portfolio in the first few years is a good reason to rethink ER especially for those like me, who are in their late 40s or younger. There is a better chance of getting back to your old salary levels than if you wait 10-15 years.

However, I think if you did the analysis, the false-indicators would overwhelm any meaningful guidelines.

I think I'll set it to 20% below initial value in the first 5 years. There is no science behind that number - just a feeling of comfort.
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Old 04-24-2008, 12:05 PM   #25
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I need to set a portfolio value that will send me back to work...

I think I'll set it to 20% below initial value in the first 5 years. There is no science behind that number - just a feeling of comfort.
Wow. 20% drops are pretty common. I think I would work a few more years before retiring rather than pull the plug with a fair to good chance of having to undo.
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Old 04-24-2008, 04:29 PM   #26
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I meant to put a little abstract in here somewhere. Thanks for the reminder!
Thanks Fuego, this is perfect. I will let you all know in 9 or so years.
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Old 04-24-2008, 07:27 PM   #27
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Thanks for a very thoughtful post. I need to set a portfolio value that will send me back to work. I plan to use the 4/95% method advocated by ESRBob in his book.

A decline in portfolio in the first few years is a good reason to rethink ER especially for those like me, who are in their late 40s or younger. There is a better chance of getting back to your old salary levels than if you wait 10-15 years.

However, I think if you did the analysis, the false-indicators would overwhelm any meaningful guidelines.

I think I'll set it to 20% below initial value in the first 5 years. There is no science behind that number - just a feeling of comfort.
Fuego,
This approach is intuitively appealing but I am not sure it is useful as the principal 'Go-NoGo' indicator for deciding whether to give up on ER and go back to work, since it is based on very specific mining of historical market prices. In other words, it is based on hoping that the specific bad string of market returns that got you in the pickle will unwind similarly to the 2 or 3 previous market slumps/inflation scenarios in the historical data.

Clearly if you've lost 40% or 50% of your capital, it would be high time to cut back on your regular inflation-adjusted withdrawals. But why wait that long?

I much prefer the method of making annual adjustments to spending based on actual market results. By taking a straight % of your portfolio value each year, you'll be making the annual micro-adjustments to portfolio withdrawal that improve survivability, while giving yourself lots of time to adjust to the reality of needing to earn a little extra cash or cut back on spending if need be.

But most importantly, if fortune is kind, you'll be able to safely increase spending each year in step with your rising portfolio balance. You don't have to 'bank' any increases against future losses since, in effect, every year is Year #1 in the traditional withdrawal scheme sense, and no one ever worries about running out of money in the first year of retirement, right? (Of course if you don't need the money, don't spend it, but it's nice to know if you can).

Some other threads here go into the details, but it basically is the way institutions/foundations manage their grants and disbursements, and is merely adapted to the needs of long term retirees. Our needs for a system to ensure annual spending within bounds (not identical real spending each year, but close) while keeping the portfolio intact for the long run are quite similar.
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Old 04-24-2008, 07:37 PM   #28
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ESRBob,

I tend to agree with your thinking. I am planning on doing something with my withdrawal scheme that considers portfolio value each year when determining what my annual withdrawal will be. Maybe 4% of balance each year, maybe some modification of that. Maybe 2% of the "traditional" withdrawal w/ annual inflation increases plus 2% variable withdrawal based on value of portfolio each year (a "hybrid" approach).

My goal in looking at the 4% fixed scenarios and trying to figure out what indicates failure is primarily for those folks actually employing that withdrawal scheme.
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Old 04-24-2008, 09:22 PM   #29
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I am planning on doing something with my withdrawal scheme that considers portfolio value each year when determining what my annual withdrawal will be. Maybe 4% of balance each year, maybe some modification of that.
I agree with this approach. In speculation and trading, it's referred to an anti-martingale strategy and is used as a form of risk management (Martingale (betting system) - Wikipedia, the free encyclopedia):

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One activity where money management based on an anti-martingale approach has a recognized value[2] is speculation and trading. Many financial markets have some cyclical component to them, and the approach of an individual speculator or trader may only be appropriate for one portion of that cycle. Using an anti-martingale risk management scheme will increase profits during time periods when a trading approach is working well, while automatically decreasing exposure during portions of the cycle where trading is unprofitable. This is believed to decrease the risk of ruin for trading.
For the 4% SWR, when the market keeps going down for a prolonged period of time, you reduce the amount of money you withdraw from your portfolio each year (and figure out how to make ends meet some other way -- either by reducing your living expenses or finding other sources of income to take up the slack).

When the market keeps going up for a prolonged period of time, you can increase the amount of money that you withdraw each year (but probably no more that 4% of the portfolio value to be on the safe side, but that is your call to make).
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