Sequence of returns risk & fear of retiring into a bear market

[daylatedollarshort]

My question is why do people want to retire too early, like in 30s and 40s. I might be considered old here, I retired at 55, but in real life, nobody I know or met retire that young. Except for one guy who graduated from UCLA in engineering and has not found a job since. He is mooching off his mom and rich brother.

I think the saying "My worst day fishing (or your hobby of choice) is better than my best day working" covers that question for many people.

 

[Fedup]

If work sucks and you don't have to work what's the alternative?

I know.: "Well then why don't you find a job you like doing?" HA! Good luck with that one. Talk about a roll of the dice. If that was even a useful concept and not a fairy tale everybody would be doing it. But you can see how how easy it is. Besides, if I don't have to work why look for a job? It's like worrying about where to go on vacation. I'm always on vacation. I don't worry about it.

You can create your own job. You don't have to work for anybody. You don't have to look for a job even. My kid has her own business for that reason. She takes off whenever she likes, she has one month vacation. But she really enjoys her work. It can get a bit stressful at crunch time but she's young and found her calling.

 

[Fedup]

I think the saying "My worst day fishing (or your hobby of choice) is better than my best day working" covers that question for many people.

I think as we age, we have less patience to deal with some of the problems at work. But I had several hobbies when I was single, married, and married with kids. Nothing stopped me from my hobbies.

 

[razztazz]

You can create your own job. You don't have to work for anybody. You don't have to look for a job even. My kid has her own business for that reason. She takes off whenever she likes, she has one month vacation. But she really enjoys her work. It can get a bit stressful at crunch time but she's young and found her calling.

It's all there in what I said.

I edited out a ref to "starting a business" or whatever you want to call it but again, why? No need to work? Wtf work? For the exercise? Why not just exercise?

And if these recurring blythe simplistic glib exhortations to create your own job were really worth anything everybody would be doing it and the unemployment rate would be zero. W.O.R.K. See?

 

[razztazz]

I think the saying "My worst day fishing (or your hobby of choice) is better than my best day working" covers that question for many people.

This!

 

[clifp]

Thank you Rodi & OldShooter and everyone else for your replies. I appreciate the honesty and candid feedback.

The one thing that I left out of the equation is future income. My wife will have a $1100 per month pension starting at age 60 with a 100% survivor benefit for me. I also looked at ssa.gov and factored in zeros for the number of years out of 35 we would not work and calculated our projected social security benefits based on that AIME. If i started social security early at age 62, my benefit would be $1400 and my wife $1100. I subtracted 25% from those amounts in case social security takes a haircut by the time we turn 62 - $1050 & $825. So in our 60's and going forward we would have almost $3000 per month in income. By that time, our mortgage would be paid off as well thus reducing expenses by $800 per month. In reality, my 4% withdrawal rate would only need to get us to about 20 years. This is also assuming that we bring in zero income during that time which is not likely. Do you think the 4% withdrawal rate is more doable if we're able to reduce withdrawals in a down market and have the income to look forward to in our 60's?

I really wanted to see if I could make this work by removing all future income out of the planning and just look at my assets. I'll have to check out the firecalc. Thanks for pointing that out.

Iretired earlier than most on the board 39. I did it with a lot more money than you guys and slightly higher expenses, but there is just one of me.

In addition to worrying about asset allocation, and the possibility of bear market early. You also have to worry about asset location.

You only have 400K in money outside of and you need to withdraw 40K per year. You need to be 59.5 before you can easily tap your 401K.

Plugging 400K assets and 40K withdrawal and 16 year into FireCalc gives only a 38% chance of success.

If you are planning on tapping your 401K, for planning purpose you really have to reduce the value by of it 10% for the penalty of early withdrawal, and probably the 15% for taxes.

 

[Fedup]

It's all there in what I said.

I edited out a ref to "starting a business" or whatever you want to call it but again, why? No need to work? Wtf work? For the exercise? Why not just exercise?

And if these recurring blythe simplistic glib exhortations to create your own job were really worth anything everybody would be doing it and the unemployment rate would be zero. W.O.R.K. See?

I see for some people, they don't mind to see their brain rote. Regular exercise doesn't do that. What get you up every morning? Can't be doing the same thing for 60 years, assume this 30s something gets to live until 90s something.
I totally don't get the disdain attitude that this crowd over in ER is really older 50s something crowd vs the MrMustosomething crowd where people can retire in their 30s or 40s. I don't really follow MrMustachoSomething, but the last time I read it, I admit it was a long time ago was during the Great Recession or following it, where there were no jobs.
They scrim pennies to not relying on a job. I thought that was the real reason why the want to retire so young.

 

[Scuba]

Also - since you're familiar with the fidelity.com site - have you run your numbers through the fidelity retirement calculator. What's nice about that calculator is you can choose different inflation for different items... I use that to backcheck my plan with a higher inflation on medical costs.

+1

 

[Scuba]

Thank you Rodi & OldShooter and everyone else for your replies. I appreciate the honesty and candid feedback.

The one thing that I left out of the equation is future income. My wife will have a $1100 per month pension starting at age 60 with a 100% survivor benefit for me. I also looked at ssa.gov and factored in zeros for the number of years out of 35 we would not work and calculated our projected social security benefits based on that AIME. If i started social security early at age 62, my benefit would be $1400 and my wife $1100. I subtracted 25% from those amounts in case social security takes a haircut by the time we turn 62 - $1050 & $825. So in our 60's and going forward we would have almost $3000 per month in income. By that time, our mortgage would be paid off as well thus reducing expenses by $800 per month. In reality, my 4% withdrawal rate would only need to get us to about 20 years. This is also assuming that we bring in zero income during that time which is not likely. Do you think the 4% withdrawal rate is more doable if we're able to reduce withdrawals in a down market and have the income to look forward to in our 60's?

I really wanted to see if I could make this work by removing all future income out of the planning and just look at my assets. I'll have to check out the firecalc. Thanks for pointing that out.

I did run my plan through Fidelity's Planning & Guidance retirement analysis and it was successful through age 95 for both of us at a 90% confidence level but only assuming we both continue to bring in $1100 per month in income (or one of us bring in $2200) through age 55. That's $275 per week each. I'm a Justice of the Peace in NH so I can make much of that doing weddings and I wouldn't even mind bartending or landscaping a few days a week. My wife is a school teacher so she could substitute 3 days a week or tutor for some rich parents and charge them way too much.

Based on the responses here and the Fidelity planning tool, I think we'll really have to consider "partial" FIRE where we both work 2-3 days a week at jobs with lower pay but are much less stressful and feels less like an actual job. This would bring our withdrawal rate down about 2.5% annually.

We would also leave about 30k in cash/CD's for large purchases or emergencies.


I feel the need to address what OldShooter said about being "unemployable" if you have a lack of recent work history. In the early 2000's I went 2 years without working at a regular job (long term travel) and I managed to get my current job that is now allowing me to potentially retire in my 40's or at least partially retire. My father went a solid 8 years due to an illness and still managed to find work in his prior field before he was sick. I think employers look for much more than recent work history. If you're intelligent, well presented, reliable and trainable, you can get a job in a number of fields regardless of work history.

Not to be overly negative, but as we age it is harder to renter their job market. Technology changes and younger people will typically work for lower pay/benefits while having more potential to contribute over a longer time period.

I like your partial FIRE idea.

 

[jjonas]

Iretired earlier than most on the board 39. I did it with a lot more money than you guys and slightly higher expenses, but there is just one of me.

In addition to worrying about asset allocation, and the possibility of bear market early. You also have to worry about asset location.

You only have 400K in money outside of and you need to withdraw 40K per year. You need to be 59.5 before you can easily tap your 401K.

Plugging 400K assets and 40K withdrawal and 16 year into FireCalc gives only a 38% chance of success.

If you are planning on tapping your 401K, for planning purpose you really have to reduce the value by of it 10% for the penalty of early withdrawal, and probably the 15% for taxes.

Yes, you're right about that. From posting here and on Mr.MoneyMustache, I learned that you can only utilize the age 55 rule if you stop contributing to the 401k when your 55 for older. For some reason i thought you didn't have to be active in the plan to start withdrawals at 55. As another poster pointed out, I can rollover to an IRA and do a partial conversion to a Roth, just being careful with how much I convert every year for tax purposes. After 5 years I can take Roth IRA withdrawals. Someone provided a link to a website that talks about this strategy in detail.

The other option is a 72T or SEPP. This would lock me into withdrawals from my IRA for 5 years but based on what I know about the 3 calculation options, one of them would provide me with just enough income starting at age 55 and I would avoid the 10% penalty. I'm not sure which method would make the most sense from a tax standpoint. I have time to figure that out in my early retirement.

 

[MrLoco]

OP....I get your wanting to consider early retirement but honestly .....for a myriad of reasons.....I do not see this working.

$600k out of your $1 million in assets is in 401k plans ...inaccessible until 591/2 ( unless using IRS RULE 72t). So your withdrawals of $3300/month must come from the remaining $400k in assets. This amounts to a 10% WR?
Never mind about sequence of return....how is this WR sustainable?

Your biggest fear should not be sequence of return but healthcare costs. You and your wife are 2 decades away from MEdicare. 2 decades. I don't care how frugally you live, these healthcare costs will most likely be your biggest expense. And when you do reach 65? Lord knows what MEdicare will even pay for. We tend not to think about healthcare costs in our 40's cuz we are healthy....but as we age life happens. And part time work will not come with medical benefits.

I think your best course of action....if your jobs are truly stressful and unbearable( if this is the reason you are considering ER I am making an assumption here)....is to change careers. You are both young enough to do so.
Probably not what you want to hear...but realistic. Sometimes what we manufacture on paper in no way can work in life.

I don't mean to be a downer but honestly, I feel you are far too young with no where near enough money to retire at your ages. Too much can (and probably will) go wrong. But good luck in whatever you decide to do.

 

[Al18]

I occasionally read Mr Money Mustache and was surprised to find his wife is not really retired. According to this blog from March, 2017,his wife makes 5 figures on Etsy Inside Mrs. Money Mustache’s Top-Secret Five-Figure Etsy Shop

 

[jjonas]

My question is why do people want to retire too early, like in 30s and 40s. I might be considered old here, I retired at 55, but in real life, nobody I know or met retire that young. Except for one guy who graduated from UCLA in engineering and has not found a job since. He is mooching off his mom and rich brother.

Why? My question is why not? I have so many interests outside of what I do for a living. My job is just a means for me to make some money so i can further explore and pursue those interests.

Some people have asked me why I want to retire and what I would do. Here's the why part: one of the gentlemen that I work with is 54 years old. His net worth is roughly 2.5 million, no kids, no debt. There's a handful of other people in the office just like him. One day in the office we were talking about my trip to Vietnam. My wife and I enjoy traveling to off the beaten path locations that are typically very inexpensive. He's always asking me about my travels and where our next trip will be. So I asked him, why don't you just retire now and travel for a while and he replied "because when we're not traveling I'm afraid I'd get bored". And I said "really? I could think of at least 100 things I'd rather be doing right now than sitting in this office" And he said "well why don't you go do those things?" That got me thinking really hard. I compare him to Brooks in the movie Shawshank Redemption. He's become institutionalized. I'm leaving before that happens to me.

I don't rely on my job as a source of self importance or identity. I don't need to keep working to "use my brain" or work for the "comradery". I get plenty of that in the things I do outside of my job. So I hope that answers your question of why I want to retire in my 40's.

As for what I would do: the list is too extensive but a few examples would be, grow food in the garden, mountain bike, paddle board, hike in the White Mountains, practice my guitar, slack line, learn French & Spanish, volunteer for habitat for humanity and the Appalachian Mountain Club, refine my photography skills, learn to draw, cook amazing meals every day, bake sourdough bread, maintain my car and house, repoint my chimney....

I haven't even mentioned the things my wife likes to do. I hope this answers the question of why and what.

This is an early retirement forum, surely most people can understand why I want to retire, no?

 

[pb4uski]

If you do move forward, then the liquidity issue might be addressed by relying initially on your taxable account money and during that time do Roth conversions... then access the Roth conversions once the taxable account funds are gone. You should model it out, but it might work, or in combination with a 72t once the taxable account money is depleted.

One of the conventional strategies to mitigate sequence of returns risk is to have an inverse AA (more bonds than stocks) initially and migrate to a more conventional AA over the first 10 years... or alternatively, a bucket strategy where you use a bond ladder for the first 10 years of spending and then invest the rest in a more conventional AA. So for example, if your WR was 3.5%, start with a 40/60 AA and migrate to 60/40 in the first 10 years... the 60 of bonds is 3.5%*10 years + 40%*[1-(3.5%*10 years)].

You might consider a muni-bond ladder in your taxable account to cover that first 10 years while at the same time giveing you plenty of room to do Roth conversions, and then tapping the Roth once the taxbale funds are depleted.

 

[jjonas]

OP....I get your wanting to consider early retirement but honestly .....for a myriad of reasons.....I do not see this working.

$600k out of your $1 million in assets is in 401k plans ...inaccessible until 591/2 ( unless using IRS RULE 72t). So your withdrawals of $3300/month must come from the remaining $400k in assets. This amounts to a 10% WR?
Never mind about sequence of return....how is this WR sustainable?

Your biggest fear should not be sequence of return but healthcare costs. You and your wife are 2 decades away from MEdicare. 2 decades. I don't care how frugally you live, these healthcare costs will most likely be your biggest expense. And when you do reach 65? Lord knows what MEdicare will even pay for. We tend not to think about healthcare costs in our 40's cuz we are healthy....but as we age life happens. And part time work will not come with medical benefits.

I think your best course of action....if your jobs are truly stressful and unbearable( if this is the reason you are considering ER I am making an assumption here)....is to change careers. You are both young enough to do so.
Probably not what you want to hear...but realistic. Sometimes what we manufacture on paper in no way can work in life.

I don't mean to be a downer but honestly, I feel you are far too young with no where near enough money to retire at your ages. Too much can (and probably will) go wrong. But good luck in whatever you decide to do.

Just before you posted this I addressed my asset location issue. I would have to utilize 72t or convert to a Roth.

Health care cost are certainly a concern but I'm just a concerned about the impact on my health from staying in a stressful career and sitting in an office 8 hours a day. If anything, I think our health care costs would decrease.

But I do think you're right. Almost twenty years is too long to go without having any income coming in. I talked to the Mrs last night and decided it would make more sense to leave our jobs in 2018, travel for 6 months and then work part time 3 days a week. I'm thinking that even part time employment might be enough to pay our monthly expenses so we may not even need to touch our assets for a while.

 

[MichaelB]

This is an early retirement forum, surely most people can understand why I want to retire, no?

Everyone here understands. That doesn't stop them from asking questions.

There's not much I can add to this discussion, but I would say that, with 2 decades to go 'til Medicare, sequence of returns is probably not the biggest risk you will face. There are others, and as MrLoco points out, health care cost is among the top few. Your budget and planned spending does not allow for significant health care spending.

This may be of interest http://www.early-retirement.org/for...-answer-before-asking-can-i-retire-69999.html

 

[REWahoo]

I occasionally read Mr Money Mustache and was surprised to find his wife is not really retired. According to this blog from March, 2017,his wife makes 5 figures on Etsy Inside Mrs. Money Mustache’s Top-Secret Five-Figure Etsy Shop

Another Jacob Fisker story.

 

[jjonas]

Everyone here understands. That doesn't stop them from asking questions.

There's not much I can add to this discussion, but I would say that, with 2 decades to go 'til Medicare, sequence of returns is probably not the biggest risk you will face. There are others, and as MrLoco points out, health care cost is among the top few. Your budget and planned spending does not allow for significant health care spending.

This may be of interest http://www.early-retirement.org/for...-answer-before-asking-can-i-retire-69999.html

I'm not discounting the fact that health care costs can or will increase over time but I do think that since health care has become such a hot button major news issue lately, we're assuming the worst and that health care costs can and WILL only sky rocket from here. I remember when oil was trading at $147 per barrel in 2008 and some parts of the country paid almost $5 for a gallon of gas. Many people assumed we'd never again see gas at $2 a gallon. In New Hampshire we've been paying between $2-$2.50 for a couple years and possibly a couple years more. I know oil prices can rebound but my point is, industries are cyclical. It's possible health care costs could decline for a period of time. I'm not going to plan on that decline but I'm just saying some people might be over estimating the costs of health care a bit. But who knows, I'm just a naive youngster, still a little wet behind the ears.

My budget includes and extra $400 per month principal payment on my mortgage so it's paid down in 15 years. If health care costs increase that much, I can allocate that $400 to those costs. When my mortgage is paid, I'll have an additional $800 per month to apply toward health care premiums if necessary.

I'm hoping that we continue to be healthy. We don't eat processed food and both of us exercise very regularly and we take care of our teeth. We don't smoke and only drink socially, maybe 3-4 drinks a week. I meditate regularly and my wife does Yoga. I'm not saying this life style is a guarantee we won't incur health issues but I think it puts the odds in our favor.

Much of the health care cost people see in this country come from a poor diet, lack of exercise and high stress. I'm trying to eliminate the high stress part.

 

[Another Reader]

You might want to look at FUEGO's blog, Root of Good. He's doing ER at a similar age, with 3 kids, on a similar budget. The kids are on Medicaid for health insurance, so that helps a lot. One important difference is housing cost. His house in North Carolina is paid off and the taxes are quite low. He has some blog income, which was not in his original plan, and he hacks all his expenses - food, clothing, repairs. One thing he is a champion at - travel hacking. I think you are of a similar mindset, and now more of your plan is known, you could make this work.

However, in your shoes, I would work long enough to pay off the house. IIRC, you have a substantial property tax in your home state, and a mortgage on top of that would be too much for me. No way to hack a mortgage, unfortunately.

Another interesting ER blog with similar portfolio numbers is Living a FI. The author is in a similar situation to you with no kids. As part of his ER, he and his wife sold their house and became renters.

In addition to housing, most if not all of the retired ER bloggers relied on the ACA as part of their plans. Premiums are reasonable for younger people, and subsidies, which are income, not asset based, were readily available. Under the ACA, insurers were allowed to charge people in their 50's 3 times as much as younger people. From what I understand, the bill that passed in the House last week raises that to 5 times. It's also not clear how subsidies will work and whether a lot of people will end up in high risk pools. Whether this bill or some other bill becomes law, it looks like health insurance will be more expensive in the future, especially for older people.

In your shoes, if I wanted to take on the risk of very early retirement, I would pay off the house before I jumped. I would also keep a close eye on health care costs and insurance eligibility. You or your wife will likely want to go back to work with employer paid insurance if the outcome of the insurance debate leaves you unable either to get or afford health insurance.

 

[Another Reader]

"Much of the health care cost people see in this country come from a poor diet, lack of exercise and high stress. I'm trying to eliminate the high stress part."

There is some truth to this. However, your genes and other factors play a part. I know plenty of people that followed "the rules" and ended up with debilitating diseases or conditions in their 50's. I would be cautious with the "I'm going to live to 100 in perfect health and die in my sleep" thinking.

 

[Fedup]

I occasionally read Mr Money Mustache and was surprised to find his wife is not really retired. According to this blog from March, 2017,his wife makes 5 figures on Etsy Inside Mrs. Money Mustache’s Top-Secret Five-Figure Etsy Shop

I wade over there last night and he is a Canadian from a Toronto. Healthcare is not a concern.

 

[REWahoo]

I know plenty of people that followed "the rules" and ended up with debilitating diseases or conditions in their 50's. I would be cautious with the "I'm going to live to 100 in perfect health and die in my sleep" thinking.

Yep.

Remember this recent thread? http://www.early-retirement.org/forums/f38/ones-cancer-could-just-be-bad-luck-86031.html

 

[Fedup]

Why? My question is why not? I have so many interests outside of what I do for a living. My job is just a means for me to make some money so i can further explore and pursue those interests.

Some people have asked me why I want to retire and what I would do. Here's the why part: one of the gentlemen that I work with is 54 years old. His net worth is roughly 2.5 million, no kids, no debt. There's a handful of other people in the office just like him. One day in the office we were talking about my trip to Vietnam. My wife and I enjoy traveling to off the beaten path locations that are typically very inexpensive. He's always asking me about my travels and where our next trip will be. So I asked him, why don't you just retire now and travel for a while and he replied "because when we're not traveling I'm afraid I'd get bored". And I said "really? I could think of at least 100 things I'd rather be doing right now than sitting in this office" And he said "well why don't you go do those things?" That got me thinking really hard. I compare him to Brooks in the movie Shawshank Redemption. He's become institutionalized. I'm leaving before that happens to me.

I don't rely on my job as a source of self importance or identity. I don't need to keep working to "use my brain" or work for the "comradery". I get plenty of that in the things I do outside of my job. So I hope that answers your question of why I want to retire in my 40's.

As for what I would do: the list is too extensive but a few examples would be, grow food in the garden, mountain bike, paddle board, hike in the White Mountains, practice my guitar, slack line, learn French & Spanish, volunteer for habitat for humanity and the Appalachian Mountain Club, refine my photography skills, learn to draw, cook amazing meals every day, bake sourdough bread, maintain my car and house, repoint my chimney....

I haven't even mentioned the things my wife likes to do. I hope this answers the question of why and what.

This is an early retirement forum, surely most people can understand why I want to retire, no?

I wish you luck with your plan. But honestly I've done all those while my kids were young, they are now grown up. My husband and I got married late. We're done playing by the time we got married, so our focus was on the kids. So that's what I did while raising my kids and travelling of course. We've been joking last night, after reading your thread, that had we not had kids, we'll be having too much money and time, unpuposedly. So the kids are a blessing in disguise.
Retirement sounds good at first, I was elated, but honestly, I've been retiring for nearly two years and there are time that I thought I was under utilized. And I'm the DYI type of person. So my advice is to make sure you have enough money before you pull the trigger.

 

[littleb]

It is easy to think being healthy in your 40's will continue throughout your life. However, this is not realistic at all.

We (age 57 and 61) are extremely healthy for our age. We exercise, eat healthy, no smoking and have no major health problems nor take any prescription drugs. All of our friends and family around the same age group are taking between 1 and 11 drugs daily. None of them have a major disease but they are not healthy by any means.

After tracking our expenses in Quick Books for 3 years we know what our actual expenses are today and which ones might continue into retirement. We have no mortgage and no debt and live in a low cost of living state. We live a nice life and enjoy low cost activities like hiking, cycling and tent camping. Like you we cook and eat at home most of the time.

Currently we pay 21,000 a year for health insurance through the ACA and during our retirement this will be 1/3 of our expenses. This cost for health insurance is most likely going to increase for people our age. This cost does not include the additional 500-1000 yearly for dr or dentist visits. We pay everything out of pocket due to a 6500 per person high deductible plan.

 

[Fedup]

Even with two health insurances, BCBS FEP and Medicare, we pay about $10k a year if you count ever little knick knack. Dental cost is included in there. I'm reasonable young and healthy with good teeth. See a doctor once a year for check up.