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Old 09-10-2008, 04:28 PM   #41
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Yea, I am struggling with the quotes when I parse a statement for simplicity.
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Old 09-10-2008, 04:28 PM   #42
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I don't understand how an unwinding of the last 2 years housing runup leaves us worse off than we were 2 years ago. It makes some indivuduals worse off, those who bought at the top, but I'm just not seeing the aggregate long-term deterioration of wealth.
What I believe you may be overlooking here is leverage. Whenever loans are written against collateral, the quality of the loans is hostage to the continued quoted value of the collateral. Those loans are assets on someone’s balance sheet; or assemblages of the loans are assets on many balance sheets.

So property value that starts at x, goes to x+.4x, and back to x can cause a great deal of havoc, which should be clear from the recent Fannie-Freddie debacle.

Ha
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Old 09-10-2008, 04:32 PM   #43
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What I believe you may be overlooking here is leverage. Whenever loans are written against collateral, the quality of the loans is hostage to the continued quoted value of the collateral. Those loans are assets on someone’s balance sheet; or assemblages of the loans are assets on many balance sheets.

So property value that starts at x, goes to x+.4x, and back to x can cause a great deal of havoc, which should be clear from the recent Fannie-Freddie debacle.

Ha
Can you expand on this some more? I'm trying to come up with how the wealth is destroyed when going from x to x+y and back to x. Aren't we roughly just back at x? How exactly are we worse off from when we started?
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Old 09-10-2008, 04:37 PM   #44
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Funny how people can be so narrow minded. My point is that moving forward ER may not be possible for some as the long term rate of return will be diminished to the point that a viable ER may not be achievable. Of course now I am going to hear about the how I did it crowd but I am not talking about now just looking forward.
I see a you're doing a lot of agonizing and a lot of carping at other posters but I don't see much of a constructive plan from you.

If you're asking "What should I do?" or "Will this work?" then you're going to get a better quality of answers than if you're just kvetching.

But, hey, if you're not going to find what you're seeking at Bogleheads then maybe you & Rodmail can find it at Raddr's board:
Raddr's Early Retirement and Financial Strategy Board :: Index

Or perhaps you should start up your own blog, where you get to choose the quality of the comments...
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Old 09-10-2008, 04:50 PM   #45
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Can you expand on this some more? I'm trying to come up with how the wealth is destroyed when going from x to x+y and back to x. Aren't we roughly just back at x? How exactly are we worse off from when we started?
For the time being ignore defaults. The problem comes from the fact that the mark to market value of the loan assets falls. Since these assets are owned by leveraged financial insttutions, many of these institutions become insolvent. Then credit runs scared, and many other institutions that may be solvent become illiquid. Given time, illiquid progesses to insolvent. This is the credit cycle.

Credit is like love- one day it's everywhere, the next you can't find it at all.

The process I described above is how every bank in Texas failed in the mid-80s. Oil went up, the ag markets went up, bankers made loans, oil explorers spent it on wells, ranchers spent it on cattle. Then these markets went down. along with real estate. The cash flow from projects that the money was spent on couldn't cover the loan service, and the collateral couldn't be sold at anywhere near the face value of the loans, so down went the banks.

As Howard Cosell once said,
"Down goes Frazshah!"

Ha
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Old 09-10-2008, 05:37 PM   #46
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I am not really asking a question. I am slowly moving towards the following statement.

The 4% withdrawal rule that seems so sacred may not work moving forward. In other words, many ER's who do not have sufficient capital and are relying on growth will find that in the long run their capital is diminished and their standard of living lowered or they are forced back to work.

I believe this is the gist that has recently been made by Scott Burns and William Bernstein.

Now don't get me wrong, I am an early retirement proponent. However, I think we all need to reassess the viability of ER moving forward.
That's exactly right, and you are also right to expect to be met with criticism for saying so.

ER people are a diverse bunch, but many make their decision to stop working based on exaggerated optimism, or out of necessity. For example, maybe the stress of the the work world is simply too much to bear, etc., and they're just losing it at work. It's easy to justify why someone is better off relaxing than working.

I agree that the 4% SWR may not be applicable these days, and I would add that it depends on other factors, as well, like one's level of expenses, savings, etc.

The more you research it, the more you'll find that not every ER is well thought out, and that there is a lot of willingness to live on the edge of poverty. Still, for others, ER is great and they live very well. Just depends on their specific situation and expectations.

Either way, suggesting that anyone who retires early may be mistaken in their assumptions, or that someone may not be as well prepared to retire as they hoped for, would constitute fighting words around these parts, that's for sure.
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Old 09-10-2008, 05:57 PM   #47
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Either way, suggesting that anyone who retires early may be mistaken in their assumptions, or that someone may not be as well prepared to retire as they hoped for, would constitute fighting words around these parts, that's for sure.
The most vocal ER cheerleaders have COLA pensions, usually taxpayer supplied. That is an cheap viewpoint for them to hold.

My own POV is that a reasonably good job that isn't tearing you up is better than retirement, at least until you are old. I was not a contented worker, I admit it and have no apologies for that. But I also admit that very early ER is an exercise in thin-ice skating, unless one is quite well fixed and has no taste for heavy spending. There are plenty people here who also fit that description.

But people ride motorcycles, climb mountains, sleep with tarts- why not retire early if you want to? Not everyone is extremely risk averse, and the modern job environment can really suck.

ha
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Old 09-10-2008, 05:57 PM   #48
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CaseinPoint:

You just may be right about the coming apocalyspse. If we move into a few decades of no growth or very slow growth then we are in trouble. Ask me in a few decades and I'll let you know.

However, your statements about SWR depending on expense and savings isn't really accurate in that you may be confusing a withdrawal rate with a "safe" withdrawal rate. The SWR only depends on how fast you decumulate a nestegg and its' long term viability. It is independent on the size of the nestegg or your expenses and is measured in percent per year.

Ha:

I concur. Any paying job that allows one to defer ER nestegg decumulation moves one into a more secure position. SWRs and asset allocation are ways to cope in ER but they will never give you the security of a secure job along with a large nestegg. Security and ER freedom are in many ways a trade-off.
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Old 09-10-2008, 06:32 PM   #49
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Absolutely. If Canadian Grunt knows to a substantial certainty that we will have 4.5% CPI inflation long term with 6% nominal returns from equities, then he should just go out, snap up as many inflation protected securities as possible that pay more than 1.5% real yield and be done with it. Simple as that. Today's low return bond environment can still provide that in the US (not sure about the case in Canada though).

So what is there to argue about? You can beat the market without all that crazy volatility.
Hmmm - I seldom hesitate a chance to razz a Canadian - BUT I did endure the fun filled period 1966 -1982 starting out my investing career - so the faint voice of Yogi Berra's - 'it's De Ja Vue all over again' is echoing in my mind.

Probably won't repeat my efforts of yore - raw land, timberland, rental real estate, mining stocks, collectible and bullion gold, silver platinum coins, foreign closed end fund fixed income, Vanguard Trustee's International, warrants, preferred stock, convertible stock/bonds, and last but not least after 1970 - Psst Wellesley. I skipped commodity futures, single malt scotch LLC's, art, guns, stamps, but tentatively started collecting semi precious stones but the 'oooh why don't you mount that(for me)' put the lid on that idea. Paid my dues on many -and did so so on others.

This time around - defense is the SEC yield and offense is three yards and a cloud of dust until Mr Market beats the crap out of everyone dollar cost averaging for 15 to 20 years and the sun finally comes back out.

Now I expect the environment for rental real estate cats to become more competitive before too long. I suspect value ala dividends and interest to get some attention. TIPs and inflation protected securities are new this time around and I suspect they may moderate some of the high yield and high interest speculation of the 70's and 80's. And no I ain't gonna try STRIPs - zero coupon bonds.

Defense is SEC yield(Target 2015 = about 3+%) and offense is 5% variable of whatever the portfolio gives me. Note that Vanguard changes the mix as the clock ticks on.

heh heh heh - as an EX engineer I enjoy reading the Bogleheads and remember when the 2nd and 3rd decimal place used to thrill me a lot. As an ER I don't 'do' numbers anymore - handgrenades yes/numbers no. .
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Old 09-10-2008, 06:50 PM   #50
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The most vocal ER cheerleaders have COLA pensions, usually taxpayer supplied. That is an cheap viewpoint for them to hold.

My own POV is that a reasonably good job that isn't tearing you up is better than retirement, at least until you are old. I was not a contented worker, I admit it and have no apologies for that. But I also admit that very early ER is an exercise in thin-ice skating, unless one is quite well fixed and has no taste for heavy spending. There are plenty people here who also fit that description.

But people ride motorcycles, climb mountains, sleep with tarts- why not retire early if you want to? Not everyone is extremely risk averse, and the modern job environment can really suck.

ha
And then there is the question, what is ER? The people who retire at 32 with 400k to a foriegn country are one extreme, and then there are those of us who will be happily labeling our retirement at 55 with 1)paid off house 2) couple mil in the bank 3) company pension 4) SS only 7 years away (we hope) as ER and see the ice as plenty thick. I enjoy my job at times, but 36 years of working will be enough!

So what does the OP mean by ER? What scenario is under threat? Not everyone can ER, even with good intentions and fiscal discipline. Health issues and/or a disability may derail my plans.

I was into some conspiracy books for a while, "Creature from Jekyl Island" -things like that. All stating we were being manipulated by a cabal of dark hooded masters and/or financial disaster was looming. But again and again, when it got to the (usually) very thin chapter on what you should do to save yourself, the advice was always the same. Pay off debt, save money, diversify, keep expenses low....
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Old 09-10-2008, 07:12 PM   #51
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And then there is the question, what is ER? The people who retire at 32 with 400k to a foriegn country are one extreme, and then there are those of us who will be happily labeling our retirement at 55 with 1)paid off house 2) couple mil in the bank 3) company pension 4) SS only 7 years away (we hope) as ER and see the ice as plenty thick. I enjoy my job at times, but 36 years of working will be enough!

If someone in this position is in trouble, so are we all. Yesterday a woman maybe few years younger than I started chatting me at a bus-stop. I sat by her on the ride, and she told me her story. She quit a fairly good job in her mid 50s to follow her true love to Seattle. He ditched her. She had no luck getting a similar job, and her old employer had moved on. Besides, she likes it here. For a while she afforded an apartment in my fairly expensive neighborhood, but she finally got priced out. So she found a very nice studio in a senior rent-subsidized place in an excellent neighborhood. She feels quite safe, she can bring guests up, cook, has nice laundry facilities, and has the OK Seattle public transit system to get around wherever she can’t walk. She described it as similar to dorm living- a lot of people around to do things with when she wanted, but who weren’t on top of her all the time. My guess is that she lives on SS, or maybe on a claim to an ex’s SS.


She looked happy and cheerful to me, so I really don't think the downside is likely to be all that bad, for anyone with a little resourcefulness. Not that I would want to plan on this, but it really isn't sleeping in a doorway either. The key is, you have to have some income, and you can't be raving crazy or an alcoholic or drug user.

Ha
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Old 09-10-2008, 07:27 PM   #52
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As Howard Cosell once said, "Down goes Frazshah!"
LMAO!!!!!!!!

I just saw good old Howahd the other night -- we rented and replayed "When we were Kings."

Great movie!
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Old 09-10-2008, 08:52 PM   #53
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Ha, your lady friend sounds like she's agonizing a lot less about her financial position that so many folks that are "better off" financially than her. And maybe that is the key, at whatever burn rate, if you are happy with what you are spending, then you are happy. If you are scrimping and you notice it, then you forsee gloom and doom around every corner.
I have the job that doesn't suck, but DH's does, so Ha's Law says he gets to FIRE first.
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Old 09-10-2008, 09:44 PM   #54
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I agree with Unclemick, there have been extended periods of recession, inflation, depression, various crisises, and all around sucky times before, all in the time periods FIRC takes into account. Add in the calculators that run Monte Carlo sims, and there are many really negative situations that are assumed.

Therefore, I don't agree with the OP, if he is still around. I do think that people who ER'ed on a shoestring might fail, or at least struggle. I also think that many individuals are in for tough times, due to overspending and undersaving for many years. However, if you planned and allocated appropriately, with a number of years in cash set aside, and especially if you built in a budget buffer, I don't see an reason why the concept of ER or individual ERs would suffer.
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Old 09-10-2008, 10:29 PM   #55
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Can you expand on this some more? I'm trying to come up with how the wealth is destroyed when going from x to x+y and back to x. Aren't we roughly just back at x? How exactly are we worse off from when we started?
x=x+y-y, true. I think Hah was just referring to the multiplier effect

Multiplier Effect

Keynesian economics - Wikipedia, the free encyclopedia
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Old 09-10-2008, 10:42 PM   #56
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The key is, you have to have some income, and you can't be raving crazy or an alcoholic or drug user.
I find it interesting that your posts occasionally have an anti-drug theme and yet your avatar is a human that is vocally pro-cannabis in real life...
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Old 09-10-2008, 11:15 PM   #57
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I find it interesting that your posts occasionally have an anti-drug theme and yet your avatar is a human that is vocally pro-cannabis in real life...
Well, he isn't trying to get into rent-subsidized housing, now is he?

The man has more choices. Anyway, what I like about him is not his drug usage.

BTW, I am not really talking about the multiplier effect, though that may be important. I am talking only about the purely financial effect of destroying collateral held as assets by leveraged financial institurions. It seems to me that right now anyway, very little money in the sense of M1 or something has gone anywhere. But credit has been wrecked.

I don't spend much time thinking about economics per se.

Ha
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Old 09-11-2008, 09:04 AM   #58
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x=x+y-y, true. I think Hah was just referring to the multiplier effect

Multiplier Effect

Keynesian economics - Wikipedia, the free encyclopedia
Well, it seems to me that net wealth is only destroyed if a number of banks overextend themselves when they receive y, causing them to fail. Capital requirements (and subsequent equity infusions) have prevented most banks from outright failing. Was there something specific in the Keynesian economics wiki that points me toward my question about net wealth? Or perhaps you can explain why the multiplier effect works asymetrically, which is what I assume you are asserting.
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Old 09-11-2008, 09:17 AM   #59
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We have been retired for 6 years. This has been a buoyant time for the markets and our spending went along with it. Now we are using 4% for our inflation and 7% for our aggregate investment returns.

You can retire during any market conditions. You just need to be flexible in your expenses. You no longer need to live in an expensive area because of your work. You can spend more time cooking and shopping for bargains because you have the time.

Worst case, you move to a mobile home park in Arizona or New Mexico. (Or in our case, a condo that we bought in PV: Mi casa in my signature because of US taxes on resident aliens.)
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Old 09-11-2008, 09:37 AM   #60
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I agree with Unclemick, there have been extended periods of recession, inflation, depression, various crisises, and all around sucky times before, all in the time periods FIRC takes into account. Add in the calculators that run Monte Carlo sims, and there are many really negative situations that are assumed.

Therefore, I don't agree with the OP, if he is still around. I do think that people who ER'ed on a shoestring might fail, or at least struggle. I also think that many individuals are in for tough times, due to overspending and undersaving for many years. However, if you planned and allocated appropriately, with a number of years in cash set aside, and especially if you built in a budget buffer, I don't see an reason why the concept of ER or individual ERs would suffer.

Still here, just letting some discussion flow.

Let me qualify my statement. I think a 4% withdrawal rate going forward is suspect. There are some smart people on this board so I hope they will pick up where my inadequate delivery leaves off.

The problem is for those retiring in their late 30's early 40's and relying on a 4% withdrawal rate. If the market goes sideways for an extended period of time or we get stagflation there will be problems for them moving forward if they put too much trust in Monte Carlo predictions.

Monte Carlo simulations are based on statistical returns over the last 100 years. Going beyond 100 years is a fool’s folly as there were not enough stocks in the market to get an accurate projection. There is not enough variance in the date after 100 years to even bother making a statistical model.

Monte Carlo predictions are based on market statistics broken into monthly/weekly/and daily (depending on the model) slots to provide enough variables. Statistically, there is not enough “usable” data. As an investor you need 1 yr, 5yr, and 10 yr distributions to make an accurate model to project distributions into the future. What I am trying to say is, that a Monte Carlo prediction would not merit statistically. It is a financial tool to make estimates.

1 yr distributions only give 100, 1 yr data points (nothing statistically unless you are flipping coins), 5 and 10 year distributions are slightly less. It is statistically wrong to shift the data points by one day to get a second set of variables as returns are historically measured on a yearly basis not a daily basis. Statistically, there is not enough variance to predict future performance. Add on the fact that the stock market has fundamentally changed from 1929, and 1987, due to regulation and market controls the case for Monte Carlo predictions breaks down.

Realistically, Monte Carlo simulation is just a prediction used to aid people who are going into normal retirement and have shorter time horizons. The shorter life spans aid to reduce variance in the models by smoothing the distributions.

As another point, Monte Carlo predictions do not take into account survivor bias. You can guarantee that returns were lower than predicted due to this variance alone.
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