Newbie might need a reality check

[Saintor]

In my 58th year, still working as a manager but can't wait to FIRE. Our business is going to the toilet.

I played a lot with different calculators (firecalc/********/ficalc/PF Vizualiser) but my reality is a bit different because.... ! When I can set AA. I cheat a bit to bring down the rate of return. I believe that 7% could be about it overall, so I usually use 45% stock (USA based) and 55% bonds

My actual AA is 83% stock returning 7.6% (36% USA, 35% Canada, 12% international) and the rest is cash-like investments that return minimally 4%. No bond. If in recession, I will pull from the cash-like investments, which are more than 5 years of expenses (if on a budget)

My PF is 2.8M and I will touch 40K in SS/pension at 65yo. No healthcare concern because.... ! Partly true, because slow traveling is in the plan, for up to 6 months per year.

Accounts:
74% tax deferred
12% non-taxable
14% taxable

Other goal; a 50% estate at death (presumably at 90yo)

Properties are paid for. No debt of any kind.

The plan is to withdraw 1.4% a quarter, with guardrails (Guyton-Klinger type). I am just fine with those calculations.

Up to 80yo, the hope is to get 170K/yr, taking in consideration the 40K starting at 65yo. From 80 to 90, 100K/yr would be fine.

Would you jump in the FIRE?

 

[equakesfan]

IMHO your expenses are too high to jump with that net worth.

 

[Lewis Clark]

One disadvantage of the Guyton-Klinger guardrails, combined with your proposed initial withdrawal rate, is the probability of large reductions in the dollar amounts of your withdrawals if you encounter a bad sequence of returns. Does your plan account for this possibility?

See parts 9, 10 and 11 of Karsten's Safe Withdrawal Rate Series for details.

The Ultimate Guide to Safe Withdrawal Rates – Part 9: Are Guyton-Klinger Rules Overrated? - Early Retirement Now

The number one suggestion from readers for future projects in our Safe Withdrawal Rate Series: look into dynamic withdrawal rates, especially the Guyton-Klinger (GK) withdrawal rate rules. The interest in dynamic rate rules is understandable. Setting one initial withdrawal amount and then...

earlyretirementnow.com

The Ultimate Guide to Safe Withdrawal Rates – Part 10: Debunking Guyton-Klinger Some More - Early Retirement Now

Last week’s post about the Guyton-Klinger Dynamic Withdrawal Rule only scratched the surface and we ran out of time and space. So, today we like to present some additional and detailed simulation data to present at least four areas where Guyton and Klinger are quite confusing and misleading: The...

earlyretirementnow.com

The Ultimate Guide to Safe Withdrawal Rates – Part 11: Six Criteria to Grade Withdrawal Rules - Early Retirement Now

After a three week hiatus from our safe withdrawal rate research, welcome back to the next installment! If you liked our work so far make sure you head over to SSRN (Social Science Research Network) and download a pdf version. It’s a free 47-page (!) pdf working paper covering parts 1 through 8...

earlyretirementnow.com

 

[Flyfish1]

I agree with the above comments. That's a pretty high withdrawal rate. It "could" work and then again it could become a mess if you hit a series of poor market years. So, reduce expenses, keep working and saving or go ahead and plan to work part time in "retirement". Many people also look at real estate or other avenues to create passive income.

 

[kgtest]

If I understand OP, they will draw 5.6% annually for 7 years and then they will SWR at what 4% for the next 20+?

It seems doable. Know that if SHTF you would need to scale SOMETHING back, sell a property?

 

[Sunset]

OP - First off you may not get a choice if the business fails.

While you don't have the health care concerns folks in USA have, you still have the expense hidden in your taxes.

You also probably have quite a bit of foreign currency risk, (usa - canada), but this could play in your favor due to the current rate of 0.71 value for cdn.

When you say you will "I will touch 40K in SS/pension at 65yo." Are you really meaning CPP and Old Age Security (OAS) ? And just tried to translate for us

I will say a withdrawal rate of 5.6% is steep, along with 4% at age 65.

 

[Exchme]

You don't have $2.8M of spendable wealth since three quarters of it is in tax deferred. I don't know Canadian tax law, but a single person in the US with $2.1M in tax deferred would lose 20-25% of that in taxes, so the tax adjusted size of your portfolio would be more like $2.3-$2.4M. Try re-running FireCalc starting with a tax corrected number, you may still be able to retire, but at closer to the $100K number throughout retirement.

The worst cases in the historical record are not actually helped by going above about 75% stock, so your artificially adjusting your allocation in FireCalc is conservative for the median, mean and upside cases, but not the worst cases.

Does the pension have full inflation adjustment? If not, its value will degrade over time and you should tell that to the tool.

Your bucket strategy of trying to spend only cash in a downturn has no evidence that it actually works any better than holding a constant asset allocation. For every imagined scenario where it might help, you can construct an alternate scenario where it might hurt. It's probably mostly harmless, but it does nothing to alleviate sequence of returns risk, so you should not be looking at average historical returns, but looking at the broader range of historical returns in a tool like FireCalc and making sure you can live with the consequences. Make sure you tell FireCalc you are holding cash, not bonds, historically they've had very different returns, the current environment where cash is attractive has not typically been the case.

 

[Saintor]

All the figures I played with are pre-tax. Yes the pension & SS are indexed. QPP/OAS and pension.

The 170K mentioned above in reality 168K, from which 48K are discretional and trimmed according to the situation. No problem to live locally with 'only' 100K per year.

The attachment is a theoretical simulation. Real money and real default of return of 4% above inflation. Going with the same parameters in FIRECALC, I get a 1.06M instead of 1.48M. Not exactly a fail.

If I find evidence that Vanguard Dynamic Spending can have a better outcome than Guyton-Klinger , I might use it. No straight initial 3-4% SWR for me. Don't forget that I indent to half my PF in 22 years and don't intend to preserve the original capital.

Again, five years of expense 'cash' takes care of the sequence of returns IMO.

Bonds have been a straight disaster in the last 10 years, so no thanks. Historically especially in the modern times, on very long terms, stock markets just win. I find that lending money to governments with zero control on debts is a terrible idea. I don't see anyone like Dave Ramsey, Warren Buffet or JL Collins to ever mess with bonds. Good enough for me.

Your bucket strategy of trying to spend only cash in a downturn has no evidence that it actually works any better than holding a constant asset allocation.

Well, calculators with dynamic income strongly disagree with you.

Make sure you tell FireCalc you are holding cash,

Can you elaborate how to do this?

I see only

​

US Micro Cap​		US Small​		US Small Value​		S&P 500​
US Large Value​		US LT Treasury​		LT Corporate Bond​		1 Month Treasury​

Thanks

 

[Exchme]

Well, calculators with dynamic income strongly disagree with you.

I don't know which calculators you are referring to, but there is little in the literature about buckets in part because there are so many free parameters (how large, how fast to spend them down, exactly how to refill them and when). It's too easy to data mine a strategy that would have worked great in one particular downturn, but leave you hurting in another.

A smart and entertaining writer on the subject of safe withdrawal rates is Karsten Jaske (retired Fed economist) at earlyretirementnow.com, Here is a link to an article he wrote on the subject of buckets a few years ago:

Retirement Bucket Strategies: Cheap Gimmick or the Solution to Sequence Risk? – SWR Series Part 48 - Early Retirement Now

September 14, 2021 – Welcome to a new installment of the Safe Withdrawal Rate Series, dealing with Bucket Strategies. This is one approach that’s often considered a viable solution to the dreaded Sequence Risk Problem. Simply keep buckets of assets with different risk characteristics designated...

earlyretirementnow.com

His whole SWR series is worth reading and he has a free downloadable spreadsheet that has lots of interesting looks at safe withdrawal rates.

Bonds have been a straight disaster in the last 10 years, so no thanks. Historically especially in the modern times, on very long terms, stock markets just win.

Stocks can and have gone down and stayed down for 15+ years, so some failures start to creep into marginal retirement cases above about 75% stock, so your 83% is a bit above the historical optimum for folks around a 4% withdrawal rate. I am not meaning to talk you out of stocks, (we're currently at 82%), but know your risks.

On the subject of past bond markets, in the last year, Vanguard Total Bond Market has returned 8.2%, so maybe the bad bond market stretch is behind us and we'll have a nice run as interest rates are normalized.

In FireCalc, a 1 month Treasury would be a good approximation for cash.

 

[pb4uski]

... Bonds have been a straight disaster in the last 10 years, so no thanks. Historically especially in the modern times, on very long terms, stock markets just win. I find that lending money to governments with zero control on debts is a terrible idea. I don't see anyone like Dave Ramsey, Warren Buffet or JL Collins to ever mess with bonds. Good enough for me. ...

Very newbie thinking for sure.

If one has an overfunded retirement netegg like presumably Buffet does then one can chose 100% stocks, 100% bonds or anything in between. You don't have an overfunded retirement nestegg, not even close given your planned spending (though your discretionary spending gives you a little buffer).

So you have comparably significant sequence of returns risk that you need to mitigate. That is why FIRECalc suggests lower safe withdrawals than your planned spending (use the Investigate tab and select the last option). An easy way to mitigate that SORR is a bond ladder that funds your first 10 or so years of withdrawals.

 

[Exchme]

On the question of cash, here is a link to a video from Ben Felix a year or so ago about why cash is not a good long term holding:

 

[Saintor]

Stocks can and have gone down and stayed down for 15+ years, so some failures start to creep into marginal retirement cases above about 75% stock, so your 83% is a bit above the historical optimum for folks around a 4% withdrawal rate. I am not meaning to talk you out of stocks, (we're currently at 82%), but know your risks.

On the subject of past bond markets, in the last year, Vanguard Total Bond Market has returned 8.2%, so maybe the bad bond market stretch is behind us and we'll have a nice run as interest rates are normalized.

In FireCalc, a 1 month Treasury would be a good approximation for cash.

Thanks for the link above, I will use 45% stock and 55% 1 month treasury to emulate around 7% (25 centiles according to PF).

 

[Saintor]

Very newbie thinking for sure.

If one has an overfunded retirement netegg like presumably Buffet does then one can chose 100% stocks, 100% bonds or anything in between. You don't have an overfunded retirement nestegg, not even close given your planned spending (though your discretionary spending gives you a little buffer).

So you have comparably significant sequence of returns risk that you need to mitigate. That is why FIRECalc suggests lower safe withdrawals than your planned spending (use the Investigate tab and select the last option). An easy way to mitigate that SORR is a bond ladder that funds your first 10 or so years of withdrawals.

Yeap, Newbie that's me.

With a constant real 168K / 2.8M / 40K @ 65yo / AA as above, FIRECalc gives me a 87.7% success rate and an ending PO at 1.3M. Tweaking as suggested brings it to 95% 160K, not a big difference. In my initial post, I wrote that I will use dynamic income; adjusting for spending models with no less than 98% of previous year, it gets 100% with a too high average 2.3M ending PF that will make up for the eroding income.

As for bonds, the 1-yr average 8.2% masks VERY ugly facts;

(1) The 2022 return for BND was -13.11% so the 1 yr is only a partial recovery.
(2) If you calculate the average return for the previous years 2-to-10 (excluding the 1 yr) , it would be 0.5%.... meaning that you lost money for 9 years in real money.
(3) Balanced funds hide this, because the stock market was so strong.
(4) Finally, YTD 2024 for the bonds category is another abysmal 2.2%, even if the interests went way up.
(5) The financial situation of organisms that emit bonds deteriorated significantly, enough to be a time bomb.

If I had a 60/40 AA, I would be appalled and feel that I made a grave mistake.

 

[ncbill]

Thanks for the link above, I will use 45% stock and 55% 1 month treasury to emulate around 7% (25 centiles according to PF).

Thumbs down on bond funds for me as well.

Short-term Treasuries for my fixed income...roughly 10 years worth of expenses.

 

[tulak]

Personally, I like TIPS.

 

[Al18]

In 2022, I dumped all bond funds and will never own any again. I can get far better rates from CD’s and Money Market funds. Many on this forum did the same.

I checked Portfolio Visualizer and over the past 10 years, BND has averaged 1.46% return per year.

 

[Koolau]

Based on age at retirement and WDR I'm thinking too aggressive though it might w*rk - especially if you're willing to make significant cuts and changes as needed. YMMV as always.

 

[Diogenes]

As others noted, the proposed annual spending is too glaringly high, given the size of the portfolio. The WR is too far above the SFR.

That said, the OP has a prime advantage relative to many folks in the FIRE community: age, and opportunity cost. From what we can glean, the OP's career is winding down. The business is winding down, and jumping to something comparable elsewhere, is presumably not forthcoming. The OP is also about to turn 58... so, not far from something like a canonical retirement age. These two factors mean, that retiring now, vs. sometime in the future, isn't a huge leap. It's not like some 40-year-old neurosurgeon earning $900K/year who burns out and yearns to permanently go fishing!

So whereas the numbers are fraught, the psychology behind FIRE for the OP is actually very compelling. Not much is surrendered by retiring now, vs. waiting. So, if the expenses can be brought down a bit, the "jump" into retirement gets the nod.

 

[Jerry1]

All the figures I played with are pre-tax. Yes the pension & SS are indexed. QPP/OAS and pension.

The 170K mentioned above in reality 168K, from which 48K are discretional and trimmed according to the situation. No problem to live locally with 'only' 100K per year.

The attachment is a theoretical simulation. Real money and real default of return of 4% above inflation. Going with the same parameters in FIRECALC, I get a 1.06M instead of 1.48M. Not exactly a fail.

If I find evidence that Vanguard Dynamic Spending can have a better outcome than Guyton-Klinger , I might use it. No straight initial 3-4% SWR for me. Don't forget that I indent to half my PF in 22 years and don't intend to preserve the original capital.

View attachment 52922

Again, five years of expense 'cash' takes care of the sequence of returns IMO.

Bonds have been a straight disaster in the last 10 years, so no thanks. Historically especially in the modern times, on very long terms, stock markets just win. I find that lending money to governments with zero control on debts is a terrible idea. I don't see anyone like Dave Ramsey, Warren Buffet or JL Collins to ever mess with bonds. Good enough for me.



Well, calculators with dynamic income strongly disagree with you.



Can you elaborate how to do this?

I see only

​

US Micro Cap​		US Small​		US Small Value​		S&P 500​
US Large Value​		US LT Treasury​		LT Corporate Bond​		1 Month Treasury​

Thanks

It looks like the $168K is your max income projection which seems like you’re planning on spending 100% of that. You said 1) that you have no debt and 2) that you could live comfortably on $100K. So, I have to ask, what are your actual planned expenses?

 

[Saintor]

That said, the OP has a prime advantage relative to many folks in the FIRE community: age, and opportunity cost.

Thank you for trying to make me feel young, but I actually feel old. lol.

It looks like the $168K is your max income projection which seems like you’re planning on spending 100% of that. You said 1) that you have no debt and 2) that you could live comfortably on $100K. So, I have to ask, what are your actual planned expenses?

168K is pre-tax, net would be 122K, 48K of it is discretionary and mostly for traveling 4-6 months per year.

I use & love this app and I think that we have a very good grip on our expenses.

Budgeting App - Spend Tracker - Apps on Google Play

Budget planner and expense tracker to help manage your personal finance.

play.google.com