Determing FI in Volatile MKT ?

[Trawler]

Hi All,
In planning to become both FI and REd In general I subscribe to the SWR 4% rule to cover expenses and need 25 X (annual expenses- any Retirement income outside of investments) as an asset base. Call this the magic number. Prior to the recent volitility we were almost FI with 23X and today about 18x. Yes down 4 years of expenses from recent highs in the market. So my question is for those planning or already pulled the trigger and used similar thoughts on assets needed. Did you you reach the magic number and pull the trigger when market was at highs lows or in the middle. Should assume that if the calculators such as FIRE say I am good to go even if market is high? Assume balanced asset allocation and good cash reserves.
Thanks

 

[TheWizard]

I'm still employed, probably FI, or close to it.
I think once you retire, you need a layer of insulation between yourself and mainly STOCK market volatility. The BUCKET concept works, where you keep two years living expenses in a savings account. In my case, $100K in an internet savings account earning 1% seems like wasted opportunity.
So I think I'd keep it in a short to intermediate BOND index fund instead.
IOW, in months preceding retirement, make a 10% change in AA toward bonds for that purpose...

 

[REWahoo]

Trawler, your question is a good one and a source of concern on this forum going back many years. Here is a post and a thread that may be of help - you may be aware that dory36 is the creator of FIRECalc and the guy who started this board:

http://www.early-retirement.org/forums/f28/explain-the-4-withdrawal-rate-19234.html#post354796

 

[walkinwood]

You have highlighted one of the biggest issues with the "% of initial portfolio adjusted for inflation" SWR methodology.

Some of us break up our expenses into non-discretionary and discretionary. To enjoy life, you need some discretionary expenses. To keep your sanity, you need a bit more than you think you need - so that you can sleep well when markets tank.

I considered us FI when our SWR was equal to our non-discretionary + a pretty healthy discretionary budget. You'll get into trouble if you don't have a bit of padding on your expense budget.

The SWR studies show it to work through some pretty rough stock market and inflation periods, but you've also got to take your emotional health into account.

Here's my experience. At the end of 2008, after our first 8 months of ER, our portfolio was down 24%. But, for 2009, we could still meet our non-discretionary expenses and have a pared down, but sufficient discretionary budget using 4% of our portfolio value (at the start of 2009). We didn't do everything we had planned to do, but were quite happy despite the lowered expense budget.

All the best with your decision.

 

[obgyn65]

I would also assume some of us only have an overall annual budget during retirement, including both discretionary or non discretionary expenses.

Some of us break up our expenses into non-discretionary and discretionary.

 

[rescueme]

I would also assume some of us only have an overall annual budget during retirement, including both discretionary or non discretionary expenses.

Some? Maybe. DW/me? No.

I'm retired (4+ years), DW to follow whenever she wishes – could be tomorrow or next year; that’s her decision.

Upon initial planning assumptions (both retire at age 59 at 100% of net income, adjusted for expected inflation - through age 100) we did not set up a budget that only allowed us to live as we wished in "good years", but to have a plan that would continue regardless of the flux of the marketplace.

Like Alan's post (below) we use FIDO's RIP software to give us an analysis of our retirement financials of both expenses and projections based upon future income streams (e.g. pensions, SS) along with current portfolio holdings. The only thing that differs from Alan (in our case) is that we do not label any expense as "discretionary". However, we do modify our expenses downward as we age (something RIP does well) to allow for expenses (such as travel) to be reduced decade by decade, but also increase expenses for medical and "home services" as we age.

That means under some assumptions given here, we may have been able to retire earlier; however we made the decision to stay in the wor*force until we felt our plan was "bulletproof". Not to say something could go wrong, but at least we attempted to plan for the "aw shi*" years in the market...

The success to our plan regarding market flux since my retirement (early '07) through the 2008/early 2009 and the "flux" of the last 3+ months is also the fact that we both have considerable holdings in our respective retirement cash buckets, used for current income outside any current market downward movement. There is no reason to sell on the downside (thus lock in losses) as is the case of short term movements within the last two weeks since a lot of folks are moving to cash (per a news item I saw yesterday).
Just what we do...

Remember, the overall market is down for the last 3+ months, but it is up overall for the last 12. Take your profits when you can, and sit tight while others are in a panic.

 

[Alan]

We also planned for ER with a discretionary and non-discretionary budget. We used Fidelity's Ret. Income Planner and not only do their expenses input screens make it easy to segregate the expenses, the charts showing projected income and expenses are easy to read.

We didn't RE until we had enough to cover all discretionary expenses with SWR (since we were planning for 40 years, we aimed for 3% WR)

 

[Koolau]

Trwaler,

The "4 % rule" and its ramifications have been discussed dozens of times here. You can search the forum for these.

You will recall that the whole "4% rule" was based on past performance. Supposedly, if things get no worse than the past, you will still be alright. Those of us on the forum seem to fall into a couple or so schools of thought. Some feel comfortable with 4% when times get "bad" and other cut back during bad times - even though the 4% rule says we shouldn't have to cut back.

I used the 4% rule for planning only. It told me when I was FI - with some contingencies. In tough times (which I've lived through 2 major ones now since 2005) we had planned to cut back. It didn't turn out that way for a lot of reasons and we still seem to be just fine. Part of that is because we've never actually gotten to 4% spending even when we have splurged. I guess we sort of over planned.

I think the anomaly that no one has ever completely explained to my satisfaction is what you point out personally. One year you are at 25X and the next you are at 18X. If you had pulled the trigger during year 1, would you be okay in year 2? If you don't pull the trigger at 25X, what happens with 18X? Do you now have to wait until you get back to 25X? You have one less year to live. Why not "pretend" you FIRED in year one, even though you actually decide to retire in year 2 (at 18X)? Sounds like quantum physics paradox to me.

There is no easy answer here. FIRE is a leap of faith anyway you look at it. The 4% rule can give you some confidence to make the leap, but it is no guarantee. Never forget, YMMV.

 

[nvestysly]

More is Better Camp...

DW and I were not entirely comfortable with the 4% SWR even though it made perfectly good sense to us. We also track our expenses and have a good handle on discretionary and non-discretionary spending. But we still didn't have that SWAN (Sleep Well At Night) feeling. So we took a seat of the pants approach and said we need more cushion - for us that means we continued working, saving, etc. until we reached a 3% SWR. Somehow that 33X factor gave us a warm and fuzzy feeling. We'll try that a few years and see how it "fits."

 

[ERD50]

... Those of us on the forum seem to fall into a couple or so schools of thought. Some feel comfortable with 4% when times get "bad" and other cut back during bad times - even though the 4% rule says we shouldn't have to cut back.

One of the other schools of thought (the one I use - just personal preference) is to stick with something closer to 3.25% in good/bad times, no cutting back in bad times. It's just another way to buind in some buffer. I like it better for me & DW, because as LBYM people, we don't have a lot of extras we would want to cut back on.

If I saw a long term problem, I wouldn't cut down much on the few little 'luxuries' we enjoy, I would make some more radical shifts. We have a fairly large house and high property taxes. I'd look to downsize. The house made sense for us 20 years ago with three kids, I wanted a basement workshop & storage, a 3 car garage, DW wanted her 3- season room, and reasonably good schools means high property taxes. Those are not all priorities now.

I think the anomaly that no one has ever completely explained to my satisfaction is what you point out personally. One year you are at 25X and the next you are at 18X. If you had pulled the trigger during year 1, would you be okay in year 2? If you don't pull the trigger at 25X, what happens with 18X?

It has been explained, but it is a little tough to wrap your head around, it sure took me a while.

The 4% number relates to 95% success, and the failures are (by definition) the years that were the absolute worst entry points. So 4% WR gets you through OK for those 94% and better profile years. And you end up with a big stash for many other more favorable years. The outcomes are not all the same.

So, retiring at 18x can be OK if it followed a 25x year, because it isn't one of the worst years. The worst years are retiring at a market peak, and if you are down to 18x from 25x, you are not at a market peak. The more dangerous thing would be to retire at 18x at a market peak.

Another way to view it -

Guy A and Gal B each have $1M.

Guy A retires that year, taking $40,000 annually (port = 25x).

Gal B retires a year later, but the market has dropped 28%, leaving her $720,000. If she takes $40,000, that will mean her port = 18x.

But Guy A is in the same boat - this is the kind of volatility that FIRCALC factors in. The mistake that people make is assuming that retiring with $1M a year later is apples-to-apples. If you have $1M after the market dropped 28%, that means you had $1.388M the previous year. So if you go back to the same year, you are comparing someone with $1M versus someone with $1.388M.

Get it?

-ERD50

 

[rescueme]

Get it?

-ERD50

Just remember that the 4% "rule" applies to those retiring at a "normal retirement age", be it 65/66 or some other age, as related to the 30-year asumption of the study.

The fact is that many (if not all) on this board either retire (or wish) to retire at an early age, much in advance of a date that incorporates income as related to pensions, SS, or other vehicles.

If you ER (as I did), your portfoliio draw down rate may be in excess of the "magic 4%", but is completely responsible in planning.

For instance, since my retirement (at age 59), I've been withdrawing well in excess of 4%. However, at my SS age of 70, my/our portfolio witdrawl rate drops to well under 4%.

Would I/we live in a manner "much less" than expected in our ER years just to adhere to a rule of 4%? I don't know about you, but our answer is no.

It's not the immediate, but rather the "accumulated long term withdrawl rate" that counts.

4% is a target, but it should be looked at as a long-term (not immediate) goal, IMHO...

Just my $.02.

 

[ERD50]

Just remember that the 4% "rule" applies to those retiring at a "normal retirement age", be it 65/66 or some other age, as related to the 30-year asumption of the study.


For instance, since my retirement (at age 59), I've been withdrawing well in excess of 4%. However, at my SS age of 70, my/our portfolio witdrawl rate drops to well under 4%.

Would I/we live in a manner "much less" than expected in our ER years just to adhere to a rule of 4%? I don't know about you, but our answer is no.

It's not the immediate, but rather the "accumulated long term withdrawl rate" that counts..

I agree. The 4% is for 95%/30 years, one should adjust for longer and/or more conservative outcomes.

And yes, the WR needs to be looked at relative to changes in pension/SS income, etc. FIRECALC does this for you if you enter future pensions (cola-non-cola) and SS, and any anticipated increase/decrease in spending in future years. The 'answer' will be presented in a percentage of your STARTING portfolio.

For an extreme example, here's a 10% WR with ZERO failures for 30 years:

FIRECalc: A different kind of retirement calculator (hit SUBMIT on that page)

A $1M portfolio, $100,000 spend, and a $80K cola pension starting a few years into retirement. EZ!

-ERD50

 

[Hobo]

I don't have any firm statistics, but from what I can observe, some people are good at keeping expenses low, others spend money that I consider to be excessive, but they consider necessary. For example, I drove a good quality used car for about 15 years. Then I shopped around to find another unpopular, but good quality car, and am nursing it along for another 15 years. I have one suit for weddings and funerals and don't ever plan to buy another.

I have a budget, but always try to spend a little less. In other words, I have a frugal personality. I also keep myself busy selling things on E-bay, and have found numerous ways to make extra money while in retirement. I really enjoy what I am doing. After all, you need something enjoyable to do all day. So, despite the long-term retirement program I set up upon when I retired, my asset base falls at a lot slower rate than I intended.

I was kind of obsessive for the first couple years after retirement - suddenly feeling "poor". But after a while I was pretty comfortable that my extra-curricular activities were going to supply me a with a safety margin that I hadn't planned for. When I was a businessman, I lived the high style - with fancy car, 5-star hotel rooms, and tailor made suits. But when I retired, I realized living and traveling like a student makes me more happy than the fancy high-life.

I guess this is a long way to say... a lot depends on your personality and how you live your life in retirement. I discovered my new life required a lot lower monthly income than I had anticipated.

 

[DblDoc]

Hi All,
In planning to become both FI and REd In general I subscribe to the SWR 4% rule to cover expenses and need 25 X (annual expenses- any Retirement income outside of investments) as an asset base. Call this the magic number. Prior to the recent volitility we were almost FI with 23X and today about 18x. Yes down 4 years of expenses from recent highs in the market. So my question is for those planning or already pulled the trigger and used similar thoughts on assets needed. Did you you reach the magic number and pull the trigger when market was at highs lows or in the middle. Should assume that if the calculators such as FIRE say I am good to go even if market is high? Assume balanced asset allocation and good cash reserves.
Thanks

Something is wrong here. You are down 22%? What are you invested in that is so volatile, the markets are not down that much from their peaks this year, more like 12%.

DD

 

[haha]

It has been explained, but it is a little tough to wrap your head around, it sure took me a while.

The 4% number relates to 95% success, and the failures are (by definition) the years that were the absolute worst entry points. So 4% WR gets you through OK for those 94% and better profile years. And you end up with a big stash for many other more favorable years. The outcomes are not all the same.

So, retiring at 18x can be OK if it followed a 25x year, because it isn't one of the worst years. The worst years are retiring at a market peak, and if you are down to 18x from 25x, you are not at a market peak. The more dangerous thing would be to retire at 18x at a market peak.

This appears to be a very imprecise and indirect way of figuring in valuation. I cannot see the point unless there is some kind of devotion to the idea that one should never directly use valuation.

When I first joined this board and began to understand the assumptions, I wrote that the market value of a portfolio has much less to do with success that the earnings power of the portfolio. It is true, it can't help but be true.

This is why that intelligent dividend startegies are safer than % of port value strategies. Not safe, just safer. And this does not mean to go out and find some stocks yielding 6%.

Ha

 

[REWahoo]

This appears to be a very imprecise and indirect way of figuring in valuation. I cannot see the point unless there is some kind of devotion to the idea that one should never directly use valuation.

When I first joined this board and began to understand the assumptions, I wrote that the market value of a portfolio has much less to do with success that the earnings power of the portfolio. It is true, it can't help but be true.

This is why that intelligent dividend startegies are safer than % of port value strategies. Not safe, just safer. And this does not mean to go out and find some stocks yielding 6%.

Ha

I can condense the above into two words: Pssst - Wellesley.

 

[ERD50]

This appears to be a very imprecise and indirect way of figuring in valuation. I cannot see the point unless there is some kind of devotion to the idea that one should never directly use valuation.

Ha

Agreed - I'm just trying to put it in FIRECALC terms, which doesn't attempt to make any judgments on valuation. But history shows relative valuations, and FIRECALC reports on that history. So yes, I'd say it is an indirect way of looking at valuation.

I hope that made sense - i'm not sure I said it clearly at all.

-ERD50

 

[Safe Harbour]

Hi All,
In planning to become both FI and REd In general I subscribe to the SWR 4% rule to cover expenses and need 25 X (annual expenses- any Retirement income outside of investments) as an asset base. Call this the magic number. Prior to the recent volitility we were almost FI with 23X and today about 18x. Yes down 4 years of expenses from recent highs in the market. So my question is for those planning or already pulled the trigger and used similar thoughts on assets needed. Did you you reach the magic number and pull the trigger when market was at highs lows or in the middle. Should assume that if the calculators such as FIRE say I am good to go even if market is high? Assume balanced asset allocation and good cash reserves.
Thanks

Here is an article I found that has some interesting info that discusses this issue. I found the concepts useful.

http://www.kitces.com/assets/pdfs/May_2008_Kitces_Report.pdf

 

[CyclingInvestor]

I considered myself FI when the dividends on my stocks passed my take-home paycheck (adjusted for taxes / mortgage / health insurance / savings). This happened a little over two years before I actually retired, so I had a considerable safety margin.

This made the years before I retired easier, as I could see the constant progress towards FI without having to worry about current market prices.

 

[Chuckanut]

A quick question on the 4% withdrawal rate.

Is that 4% of the amount invested at the start of retirement
or 4% if the amount invested at the start of each year.

Example:

Assume I take ER with 1,000,000 dollars in a mixture of stocks and bonds. I take 40,000 out in January of year one.

We hit a bear market and my investments go down to 800,000 dollars by January of year 2. Do I take out 4% of the 800,000 dollars - $32,000 or keep taking the original amount of $40,000?

Which does FIRECACL assume?

 

[REWahoo]

A quick question on the 4% withdrawal rate.

Is that 4% of the amount invested at the start of retirement
or 4% if the amount invested at the start of each year.

The rule says withdraw 4% of the value of your nest egg the day you retire, and using the initial value, adjust the annual withdrawal amount for inflation each succeeding year.

Example:

Assume I take ER with 1,000,000 dollars in a mixture of stocks and bonds. I take 40,000 out in January of year one.

We hit a bear market and my investments go down to 800,000 dollars by January of year 2. Do I take out 4% of the 800,000 dollars - $32,000 or keep taking the original amount of $40,000?

If inflation in year 1 ran 3%, you would take out $41,200 in year two.

Which does FIRECACL assume?

FIRECalc uses actual market history, not the 4% rule. It also adjusts your withdrawal amount annually based on inflation. You can read the details of how FIRECalc works here: FIRECalc: Why another retirement calculator?

That explanation also gives some good insight into why retiring into a bear market can be 'interesting'...

 

[Chuckanut]

Thank you Mr. REWahoo. I now understand more. I have not yet retired burt am seriously thinking of pulling the trigger next year. Looks like the BEAR market is my greatest fear at the moment so I will have to make sure I have several years worth of living expenses put aside (along with a small pension) so I can survive that and not degrade my principle by hitting withdrawals hard in the first few years. Of course, if the BEAR goes into his cave and hibernates for a few years, things will be different.

 

[REWahoo]

Of course, if the BEAR goes into his cave and hibernates for a few years, things will be different.

True. If you look at the examples on the FIRECalc link, achieving FI and retiring just as a bear market is ending is about as close to bulletproof as you can get. Problem is, you won't know if you managed to do it until a few years after pulling the trigger.

 

[Chuckanut]

True. While most of us will know we are in a bear market in 'real time', we certainly don't know what is around the next corner, much less in the next town. That is why the initial pile of cash, just in case the Bear leaves the cave in a predatory mood.

 

[youbet]

That explanation also gives some good insight into why retiring into a bear market can be 'interesting'...

And also why retiring into a period of inflation can be even more interesting........

But the most interesting thing about FireCalc's historical portfolio survival tests is the variability. Many folks seem to think that a 100% survival rate implies smooth sailing with predictable FIRE portfolio values that move along through time relatively smoothly. In fact, looking at either the FireCalc output graph or creating your own with the available spreadsheet data shows we're likely to have a wild ride. You might end with with much, much more than you thought you would (and possibly regretting not having done some things you thought were "too expensive") or you might have FIRE portfolio values plummet like a rock off a cliff early in RE (and cause sleepless nights). These outcomes are more likely than ending with "average" results.