FIRE - A Guaranteed Decline in Standard of Living?

[bbuzzard]

It has been generally accepted in academia that that standard of living has been increasing in the western world for the past 200 years. William Bernstein indicates that rate over the past 100 years have been about 2%/year (See The Birth of Plenty at http://www.efficientfrontier.com/ef/404/CH1.HTM).

This does not bode well for those of us who plan on a long term retirement. General SWR methods propose constant dollar withdrawal rates adjusted only for inflation. If Bernstein and his ilk are correct, this means a long, slow decline in your relative standard of living of about 2%/year, unless you are willing to operate on a SWR of about 2%. While you may be happy with your current standard of living, you may feel a bit different in 30 years when your $40,000 income is only 55% of the average family income rather than 100% as it is today, and you cannot afford a flying car like everyone else has. OTOH, you may not have a problem with this. Does anyone think about this? Does it bother anyone? This is one of the factors, along with healthcare and fear that keeps me from dropping out.

Some examples I can think of that could cause problems. You retired in 1975 at age 40 with an income equal to the average American family, and you were happy. However, today at age 71 you would like to have cable, internet access, a computer, a cell phone, a netflix subscription, etc. However, this is not in the 1980s budget. Would this bother you?

 

[Nords]

It has been generally accepted in academia that that standard of living has been increasing in the western world for the past 200 years. William Bernstein indicates that rate over the past 100 years have been about 2%/year (See The Birth of Plenty at http://www.efficientfrontier.com/ef/404/CH1.HTM).

This is the quote you're referring to, right? That was an awful lot of reading to find a 2% reference.

"The Two Percent Productivity Cruise Control
The vigor of modern economic growth is astonishing. Throughout the 1800s, real per capita GDP growth in what is now called the developed world gradually accelerated to about 2% per year, then maintained that pace throughout the entire turbulent twentieth century. Table 1–1 lists the growth of real per capita GDP in sixteen nations during the twentieth century, dividing them into countries that were physically ravaged by world war or civil war and those that were not."

This does not bode well for those of us who plan on a long term retirement. General SWR methods propose constant dollar withdrawal rates adjusted only for inflation. If Bernstein and his ilk are correct, this means a long, slow decline in your relative standard of living of about 2%/year, unless you are willing to operate on a SWR of about 2%. While you may be happy with your current standard of living, you may feel a bit different in 30 years when your $40,000 income is only 55% of the average family income rather than 100% as it is today, and you cannot afford a flying car like everyone else has. OTOH, you may not have a problem with this. Does anyone think about this? Does it bother anyone? This is one of the factors, along with healthcare and fear that keeps me from dropping out.

I don't understand the problem. The economy may be growing by 2% but unlike inflation I'm not paying for it. In fact today's growth is also in making the same cubicle slaves produce more output productivity, which is essentially free profit that raises a company's stock price. So the portfolio isn't being eroded by inflation, it's actually being somewhat boosted by productivity's effect on stock-market returns.

Our standard of living isn't declining-- it's being raised for free by society.

I understand your comment about not being able to forecast the things you'll be paying for in 20 years. But you seem to imply that in 20 years we'll also still be paying for the same things we're paying for today.

In contrast, I believe that food prices have dropped dramatically as has the price of dining out. Telephone bills are way way down. Electrical-generation costs and appliance efficiencies may have combined to lower inflation-adjusted electricity & heating bills (although I don't have any data in hand). Inflation-adjusted gasoline prices have actually declined over the last three decades. Personally I wonder if a lower (inflation-adjusted) expense of maintaining a car, and a vehicle's longer lifespan, have reduced the $/mile transportation expense. In other words cars are lasting a lot longer and needing a lot less of what used to be routine maintenance like ring jobs, gaskets, carburetor tweaks, and distributor caps. ("Yo, Pops, what are carburetors and distributor caps?!?")

The cost of today's electronics... TVs, music boxes, and computers... is pennies compared to what they used to be in the 1970s. Yet entertainment is arguably a greater selection and more conveniently timed, if not necessarily of a higher intellectual quality. (Remember the TV show "Charlie's Angels" compared to "Baywatch"? Eh, never mind.) How many TVs did the average household have in the 1960s-70s? I couldn't afford a microwave oven in 1974 but I can't live without one today.

I think a key component of ER, indeed of the worldwide standard of living, is leisure time. We have much more time to read, research, and think. The cost of research is way down, too-- imagine how difficult it would have been 25 years ago to have this conversation with a crowd of people. Those conversations on this board have saved me thousands of dollars. Ignorance is expensive and I don't mind paying for DSL if it helps me avoid wasting money elsewhere.

BTW I choose not to pay for a cell phone or a Netflix subscription. I think the former would actually lower my standard of living, and I can fulfill the latter at my local library...

 

[slepyhed]

...While you may be happy with your current standard of living, you may feel a bit different in 30 years when your $40,000 income is only 55% of the average family income rather than 100% as it is today, and you cannot afford a flying car like everyone else has. OTOH, you may not have a problem with this. Does anyone think about this? Does it bother anyone? ...

I'm visualizing a long-time retiree mulling over weather he should go get a job so he can buy an i-pod...

I don't think it would even cross his mind!

In my experiance, LBYM involves a certain amount of "letting go" of consumerism. Once you're immune, they can't suck you back onto the treadmill.

 

[youbet]

This does not bode well for those of us who plan on a long term retirement. General SWR methods propose constant dollar withdrawal rates adjusted only for inflation. If Bernstein and his ilk are correct, this means a long, slow decline in your relative standard of living of about 2%/year, unless you are willing to operate on a SWR of about 2%.

I think there is some truth to this and it was a consideration in my FIRE planning. I thought of it as "if worker bees are enjoying an increase in their standard of living how will I feel if I can only afford to maintain my initial retirement standard of living by increasing withdrawals to offset inflation?" That is "how will I feel if my relative standard of living decreases?"

Overcoming this dilemma, if it's a concern to you - that's personal, would mean saving enough to allow a less than 4% inflation adjusted initial withdrawal rate and increasing that rate over time to allow your real income to increase.

I never tried to quantify this. But it was a subjective factor we mulled over after completing the zillionth entry in our millionth planning spreadsheet. I would say it was a small factor driving what is turning out to be a conservative plan.

Other tough-to-quantify issues that I gave more consideration to included how I think I will age given my ancestry, health, desired activities and the need to be vigorous/healthy to enjoy them, unpredictability of future economic/political climates in the world........and on and on.

So, while I think it is possible that worker bees could enjoy rising standards of living during my retirement years and I will need to increase my WR beyond inflation and actually increase my real income to keep up, I can do that (with limitations). But even if I couldn't, it was time for me to RE!

 

[bbuzzard]

Our standard of living isn't declining-- it's being raised for free by society.

Nords,

You are absolutely correct if you state that the absolute standard of living of someone on a fixed income is not going to go down as a result of a growth in the average standard of living. However, the point is that your relative standard of living is certainly going down at 2% a year if your income is constant. For some people this may not cause any concerns or problems. However, when the average standard of living of society goes up 50% in 20 years, and your standard of living is flat, this will cause some people severe heartache.

BTW, I do not think may people believes that the overall cost of living is going down when measured in inflation adjusted dollars. While specific items are getting cheaper, I think the total basket is getting slightly more expensive.

 

[bbuzzard]

This also raises another issue, for which I will use my mother as an example. She certainly has been able to keep her housing cost flat by staying in the same house for 40 years. However, in that 40 years the neighborhood has changed from a decent middle class area to a ghetto (complete with a public housing project), where no one with any sense (or without a gun) walks the area after dark. She could move to an area that is equivalent to what she moved into 40 years ago, but that would require spending an extra $50k-$75k on a new house because society, as a whole, has decided that nice neighborhoods are more expensive (i.e. people are willing/able to spend more on houses today than they used to spend, and they do spend, so houses cost more if you want a given type of neighborhood).

 

[Nords]

You are absolutely correct if you state that the absolute standard of living of someone on a fixed income is not going to go down as a result of a growth in the average standard of living. However, the point is that your relative standard of living is certainly going down at 2% a year if your income is constant.

My point is that if I'm not paying for it, I don't lose anything whether it rises at 2% or 4% or whatever.

I think you're equating "standard of living" with "inflation". I think they're different concepts.

This also raises another issue, for which I will use my mother as an example. She certainly has been able to keep her housing cost flat by staying in the same house for 40 years. However, in that 40 years the neighborhood has changed from a decent middle class area to a ghetto (complete with a public housing project), where no one with any sense (or without a gun) walks the area after dark. She could move to an area that is equivalent to what she moved into 40 years ago, but that would require spending an extra $50k-$75k on a new house because society, as a whole, has decided that nice neighborhoods are more expensive (i.e. people are willing/able to spend more on houses today than they used to spend, and they do spend, so houses cost more if you want a given type of neighborhood).

While this is great for scaring homeowners & renters & misbehaving children, I think that a neighborhood's decline is a much more complicated mechanism than "unwilling to pay for a higher standard of living".

For example if that neighborhood had a nice school then people would spend a lot more money on houses, which would risk driving people out if they couldn't pay their property taxes.

Buzz, if this is what's keeping you from ER, then I think you need to take another look at your portfolio and your ER plans. In my opinion you're worrying more about affording your putative future standard of living than you are about improving your current quality of life... a poster-child definition of paralysis by analysis.

 

[Khan]

I don't really understand the question.

Is something going to be invented and marketed that I can't live without?

My standard of living has always been below that of my neighbors and coworkers.

 

[Nords]

I don't really understand the question.
Is something going to be invented and marketed that I can't live without?

"An addiction to cocaine is God's way of telling you that you have too much money."

-- Robin Williams

 

[donheff]

This also raises another issue, for which I will use my mother as an example. She certainly has been able to keep her housing cost flat by staying in the same house for 40 years. However, in that 40 years the neighborhood has changed from a decent middle class area to a ghetto (complete with a public housing project), where no one with any sense (or without a gun) walks the area after dark. She could move to an area that is equivalent to what she moved into 40 years ago, but that would require spending an extra $50k-$75k on a new house because society, as a whole, has decided that nice neighborhoods are more expensive (i.e. people are willing/able to spend more on houses today than they used to spend, and they do spend, so houses cost more if you want a given type of neighborhood).

Sounds like the luck of the draw. All real estate is local and the changes can go both directions. My brother bought a Chicago two flat for $15K about 35 years ago. It is worth about $1M today. If your mother lived in my neighborhood, she would have seen similar rises in the last 40 years.

 

[Martha]

A quote from Bernstein that Nords found some time ago has stuck with me:

To the person who wants to retire at age 45 or 50, I say lots of luck; while it's possible he or she may be able to withdraw 5% per year of the intitial inflation-adjusted corpus, I can easily conceive of circumstances in which even 2% may be too much. Further, with a time horizon that long, one has to face up to the reality that "merely" keeping up with inflation will seriously disadvantage him or her regarding wage earners, whose earnings will be increasing along with productivity increases.

My advice? Forget about retiring at 45; you're better off being a productive human being as long as you can, and you'll certainly worry a lot less about your money running out.



http://early-retirement.org/forums/index.php?topic=4299.0

 

[youbet]

Let me ask bbuzzard's question another way..........

Say your retirement is funded by 4% inflation adjusted withdrawals from your portfolio and these withdrawals support a standard of living initially satisfactory to you. During your retirement years, average family income increases more than inflation, say by 2% annually. Over many years, this builds and you can clearly see that your income, relative to average, is now less than it was when you first retired. Would that bother you?

Don't consider ipods, apartment buildings or the cost of lap dances, just the fact that worker bees' incomes may increase faster than inflation while yours increases at the rate of inflation.

 

[slepyhed]

Let me ask bbuzzard's question another way..........

Say your retirement is funded by 4% inflation adjusted withdrawals from your portfolio and these withdrawals support a standard of living initially satisfactory to you. During your retirement years, average family income increases more than inflation, say by 2% annually. Over many years, this builds and you can clearly see that your income, relative to average, is now less than it was when you first retired. Would that bother you?

Don't consider ipods, apartment buildings or the cost of lap dances, just the fact that worker bees' incomes may increase faster than inflation while yours increases at the rate of inflation.

The textbook FIRE type person would be something like this:

49 years old, 40K per year expenses, 80K per year salary, $1 million nest egg. She retires at age 50 and starts withdrawing $40k per year for "income", and bumps it up every year to pace inflation.

So this is someone who has just choosen to slash her "income" by 50%, just so she can stay home all day if she wants to. She's already spending 1/2 of the money that her peers (people making the same salary) are spending every year, because apparently the average working stiffs blow all their money as soon as they get it. The early retiree has already choosen to live at a much different standard of living as compared to her peers. She has already mentally come to grips with the idea that she's not going to keep up with the joneses.

Seems like a non-issue to me.

 

[bbuzzard]

In my opinion you're worrying more about affording your putative future standard of living than you are about improving your current quality of life... a poster-child definition of paralysis by analysis.

I will have to accept that title, as I know it is true. OTOH, they say the first step is admitting you have a problem.

 

[bbuzzard]

Let me ask bbuzzard's question another way..........

Say your retirement is funded by 4% inflation adjusted withdrawals from your portfolio and these withdrawals support a standard of living initially satisfactory to you. During your retirement years, average family income increases more than inflation, say by 2% annually. Over many years, this builds and you can clearly see that your income, relative to average, is now less than it was when you first retired. Would that bother you?

Don't consider ipods, apartment buildings or the cost of lap dances, just the fact that worker bees' incomes may increase faster than inflation while yours increases at the rate of inflation.

Isn't that what I said?

 

[lazyday]

Don't consider ipods, apartment buildings or the cost of lap dances, just the fact that worker bees' incomes may increase faster than inflation while yours increases at the rate of inflation.

For how I would feel about falling behind, slepyhed mostly answered it for me in the next post.

On ipods and lap dances, I'm not concerned, but in 2040 I would like to be able to afford to fly to China for a life extension and youth rejuvination procedure.


I do think CPI inflation vs. wage inflation is a real issue. Willingness to fall even further behind average helps, and a conservative SWR will probably lead to a portfolio that grows over time--that is likely to help. But, it is still a real issue IMO.

 

[Independent]

Personally, I'll agree with the posters who have said that if you retired early you're probably good a LBYM, which includes "not keeping up with the Joneses". Hence, this isn't much of an issue.

However, I do have a technical comment for bbuzzard. I think there is some correlation between stock returns and real wage growth. It certainly isn't 100% (earnings generally lead wages).

However, if real wages really do go up by and average of 2% over 40 years, I think that you'll find your initial 4% safe withdrawal rate was way too conservative. It allowed for a period of severe recession or depression that never happened. So you will be able to increase your withdrawals and keep up with the workers, anyway.

 

[jdw_fire]

And then you are forgetting about Bernicke's study that says older (55yo+) people's spending doesn't even keep up with inflation; a fact not caused by limited resources, just that they spend less. Given this propensity once you reach 55 if you are taking an inflation adjusted WD your standard of living compared to other people your age is actually going up.

 

[Nords]

Don't consider ipods, apartment buildings or the cost of lap dances, just the fact that worker bees' incomes may increase faster than inflation while yours increases at the rate of inflation.

In other words, "What if (*gasp*) the ECI rises faster than the CPI!!?!?"

I'm finding that difficult to believe. My anecdotal evidence is based on my CPI-linked pension raises having beaten my spouse's ECI-linked salary raises for each of the last two years... in other words, the federal governement is paying me more to avoid work than it's paying her to seek work.

I will have to accept that title, as I know it is true. OTOH, they say the first step is admitting you have a problem.

No problem, it's easier for us ERs to stand around the cubicle and kibitz see the issue from a different perspective.

Start strappin' on Goonie's parachute, man, and head for the exit. We'll meet you there...

 

[bbuzzard]

However, if real wages really do go up by and average of 2% over 40 years, I think that you'll find your initial 4% safe withdrawal rate was way too conservative. It allowed for a period of severe recession or depression that never happened. So you will be able to increase your withdrawals and keep up with the workers, anyway.

Good point. I did not think about this.

 

[youbet]

However, if real wages really do go up by and average of 2% over 40 years, I think that you'll find your initial 4% safe withdrawal rate was way too conservative. It allowed for a period of severe recession or depression that never happened. So you will be able to increase your withdrawals and keep up with the workers, anyway.

Ahhhhh........ Ummmmmm....... an extended period which has 2% growth in real wages and that same period containing a severe recession or depression is possible, not mutually exclusive as you imply.

 

[samclem]

My advice? Forget about retiring at 45; you're better off being a productive human being as long as you can, and you'll certainly worry a lot less about your money running out.[/i]

http://early-retirement.org/forums/index.php?topic=4299.0

Just two observations:
-- I wonder if Bill would feel the same way about working 25 more years if he were stuck in a cubicle cranking out the weekly reports. He's a neurosurgeon and talented author, he probably can pick and choose what he does to make money, and he likely enjoys these things. I know from reading his work that he's an empathetic guy, he should recognize that people with fewer options may be making a very rational decision to jump ship at the first opportunity.

-- Retired does not equal unproductive. Bill, you should know better!

 

[Lusitan]

It's a very interesting thought (especially the part about flying cars )

But even if my relative standard of living were to decline somewhat in FIRE, my relative (as well as my absolute) *quality of life* would be better. It's a trade-off I'm more than happy to make, since through my LBYM lifestyle I'm already well below the relative standard of living of my peers.

 

[magellan_nh]

This is an interesting topic. Thanks to bbuzzard for bringing it up.

A couple of things seem to be getting lost I think. The first is that the 20th century's supersonic growth in real wages and labor productivity is already baked into the SWR number. That number is based on historical results from a period when productivity of labor was going through the roof. If productivity had been stagnant, we'd probably be looking at a 2-3% SWR. So in this respect, there's reason to be afraid. Productivity growth may slow which would cause portfolios to grow at slower rates than in the past.

On the other hand, much of the increase in standard of living is not reflected in prices. New economic efficiencies and inventions result in people being able to spend less and have more. For example, consider what has happened to the price of a phone call to Europe in the past 5 years, or the cost of a bare bones computer system over the past 10 years. I'm probably paying around the same now for phone, cable, and internet than I paid for phone alone 10 years ago.

Finally, and this is probably the most important point, the 4% SWR is designed to give a high probability of retirement success (say 95%). As time goes on for the retiree living off an initial 4%, their portfolio should grow significantly (for maybe 80 out of 100 retirement outcomes). These lucky folks would probably have the opportunity to safely increase their withdrawals plenty to keep up with the Joneses.

Generalizing, the most vulnerable period for any retirement plan created to have a 95% probability of success is the first 5-10 years of retirement. After that time has elapsed, around 5% of the time the retiree will probably be in some trouble. In 10-15% of cases, it will probably be too close to call, and 80% of the time the retiree will be in fat city.

So the question becomes: Do you need to have a 95% chance of being able to keep up with the joneses, or is a 95% chance of not having ruin and an 80% chance of being able to keep up with the joneses ok?

Jim

 

[Khan]

The textbook FIRE type person would be something like this:

49 years old, 40K per year expenses, 80K per year salary, $1 million nest egg. She retires at age 50 and starts withdrawing $40k per year for "income", and bumps it up every year to pace inflation.

So this is someone who has just choosen to slash her "income" by 50%, just so she can stay home all day if she wants to. She's already spending 1/2 of the money that her peers (people making the same salary) are spending every year, because apparently the average working stiffs blow all their money as soon as they get it. The early retiree has already choosen to live at a much different standard of living as compared to her peers. She has already mentally come to grips with the idea that she's not going to keep up with the joneses.

Seems like a non-issue to me.

You got it.

I was stashing away about half of my income towards the end, and I am perfectly happy without a lot of 'necessary' stuff.