Year: 2017

Meet Mr. Millionaire Math! (Plus Three Year-End Smart Money Moves)

Welcome! We hope everyone had a very Merry Christmas! Between the holidays when we are all still digesting all the excess calories there’s probably less demand for heavy-duty safe withdrawal rats simulations, so let’s do something on a lighter note today. I have always been wondering, what is it with MMM? Mr. Money Mustache started it all, of course. Now we have Mad Money Monster, Millenial Money Man, and Miss Millenial MD. Am I forgetting anyone? Even some obscure corporation up North, Minnesota Manafucaturting & Mining, jumped on that same MMM bandwagon, no doubt to leech off Pete’s fame. Obviously their lawyers were smart enough to put the label “3M” instead of “MMM” on their little post-it notes packages, otherwise, they’d probably get a nasty letter from the lawyers in Longmont. OK, just kidding about 3M. But still, it got me thinking, if I hadn’t picked “Early Retirement Now” as the blog name what would I have picked in the MMM universe? Easy!

Mr. Millionaire Math!

That seems to convey the essence of the blog pretty nicely, don’t you think? I also got a nice project for Mr. Millionaire Math: How much (or how little) effort and how much time would it have taken to become a millionaire by now? We’ll do some (light!) number-crunching on that topic today. And I’ll throw in some last-minute, end-of-the-year smart-money moves as well…

Continue reading “Meet Mr. Millionaire Math! (Plus Three Year-End Smart Money Moves)” →

Ask Big Ern: A Safe Withdrawal Rate Case Study for “Mrs. Wanderlust”

It’s time for another Safe Withdrawal Rate case study today! Believe it or not, but this is already the ninth installment of the series! Check out the other case studies here. Today’s volunteer is Mrs. Wanderlust (not her real name), a frequent reader of the ERN blog. She and her husband plan to retire in 2018 (more or less voluntarily) and asked me to run their numbers. One challenge in pinning down a safe withdrawal rate: large additional cash flows because they plan to purchase of an RV and then sell it a few years later. They will also have different budgets during different phases in retirement. And not to forget, a four-legged family member that’s factored into their planning. So without further ado, let’s start calculating…

Continue reading “Ask Big Ern: A Safe Withdrawal Rate Case Study for “Mrs. Wanderlust”” →

The Ultimate Guide to Safe Withdrawal Rates – Part 22: Can the “Simple Math” make retirement more difficult?

This post has been on my mind from day one and it’s also been a topic that was requested by readers in response to previous installments in the Safe Withdrawal Rate Series (click here for Part 1):

Is the FIRE (Financial Independence Retire Early) community setting itself up for failure by making retirement conditional on having reached a certain savings target?

If we specify a certain savings target, say 25x annual expenditures, as in Mr. Money Mustache’s legendary “Simple Math” post, we are more likely to retire after an extended equity bull run. And potentially right before the next bear market. Very few savers would have reached that goal at the bottom of a bear market! Don’t believe me? Let’s look at some of the calculations from my post from a few weeks ago: The Shockingly Simple/Complicated/Random Math Behind Saving For Early Retirement. Specifically, let’s assume that every month, starting in 1871, we had sent off a new hypothetical generation on their path to FIRE. They start with zero savings, then save 50% of their income (adjusted for CPI-inflation), invest in a 100% equity portfolio and retire when they reach 25-times annual spending. Even though the starting dates are perfectly spread out, one each month, the retirement dates are not. They follow the big bull markets with extended gaps in between, see the chart below. The endogenous retirement dates are in red. Using the Mr. Money Mustache Simple Math method, you’ll mostly retire during a bull market, and often during the last part of the bull market, right before the peak and the next bear market!

SWR-Part22-Chart05
Retirement dates when using a 50% savings rate, 100% equity portfolio, 25x savings target. Simulated retirement dates in red. Using the Mr. Money Mustache Method, you’ll only retire during a bull market!

How much of an impact will this have on Safe Withdrawal Rates? That’s the topic of today’s post… Continue reading “The Ultimate Guide to Safe Withdrawal Rates – Part 22: Can the “Simple Math” make retirement more difficult?” →

Nervous about sky-high stock prices? Five ways to cope with “CAPE Fear”

Another month, another record close for the major stock indices on November 30. How long can this go on? Is this a bubble? The Shiller CAPE Ratio certainly looks “bubbly,” now that it’s solidly above 30, see the chart below. It’s almost as high as in September 1929, right before the crash. And significantly above the 2007 peak right before one of the stock crashes in recent history. Should we scale back our equity positions now? It sounds tempting now that we are so close to retirement. As of Wednesday morning, while doing the final edits it definitely looks as though stocks are off to a bumpy start in December!

CapeChartNov2017
Shiller CAPE: Closing in on the 1929 peak!

But hold your horses! Let’s look at some of the reasons not to throw in the towel yet…

Continue reading “Nervous about sky-high stock prices? Five ways to cope with “CAPE Fear”” →

Ask Big Ern: A Safe Withdrawal Rate Case Study for “Mr. Corporate Refugee”

Welcome! It’s time for another Safe Withdrawal Rate case study! Please click here for the other seven installments. Today’s volunteer is “Mr. Corporate Refugee,” not his real name, obviously. But as the name suggests he is ready to pull the plug on the corporate grind. He and his wife did everything right to prepare for early retirement. Pay off the mortgage on their house (as recommended by yours truly) and accumulate a nice nest egg close to seven figures. The only problem: they reside in a high-cost-of-living area in California and more than half of their net worth is tied up in their primary residence. Even a portfolio as large as $1 million will likely not be sufficient to cover expenses in your current location. What to do now? I’ll propose two routes to early retirement. Move to a cheaper location, a “secret” low-income-tax paradise – more on that below, and be able to retire now. Or work for only four more years and retire in the current location. Let’s go through the math…

Continue reading “Ask Big Ern: A Safe Withdrawal Rate Case Study for “Mr. Corporate Refugee”” →

Happy Thanksgiving!

This is going to be a short post today. With the Thanksgiving holiday around the corner, who wants to think about Safe Withdrawal Rate research, when you’re digesting vast quantities of turkey breast, turkey legs, fillings, and beer? So, on a lighter note, I want to say Thanks to all the folks who have made blogging such an enjoyable experience over the last year!

Specifically, … Continue reading “Happy Thanksgiving!” →

See that house over there? It’s an investment!

Few topics in personal finance and in the early retirement community stir up emotions as nicely as the pros and cons of homeownership. Some folks in the FIRE community are renters and swear by it and others are very happy homeowners and/or real estate investors. Neither side is wrong. Those with more nomadic lifestyles probably prefer renting and the those with kids in school and strong ties to the local community are apparently happy homeowners. Normally, the two sides just coexist peacefully but discussions normally get heated and sparks fly when one side accuses the other of doing something wrong. If I had to distill the arguments of the two sides into bumper stickers it would be:

  • Homeowners: Renting is just throwing away money!
  • Renters: A house is not an investment at all. Or it’s a terrible investment!

But of course, both claims are just that: bumper stickers. And both claims are demonstrably false and/or crude generalizations! Let’s look more into the math of the rent vs. own tradeoff… Continue reading “See that house over there? It’s an investment!” →

Ask Big Ern: A Safe Withdrawal Rate Case Study for “Ms. Almost FI”

Welcome to a new installment of our “Ask Big Ern” series with case studies on safe withdrawal calculations. This is already the seventh part, see here for the other parts of the series! Today’s volunteer is Ms. Almost FI and that’s not her real name, of course. She’s planning to retire early in 2019 and this causes a lot of anxiety: Does she have enough money? When should she take her pensions? What about long-term care insurance? All very valid questions, all impossible to answer without a careful customized analysis! Continue reading “Ask Big Ern: A Safe Withdrawal Rate Case Study for “Ms. Almost FI”” →

The Shockingly Simple/Complicated/Random Math Behind Saving For Early Retirement

One of my favorite Mr. Money Mustache articles is the “Shockingly Simple Math” post. It details how frugality is able to slash the time it takes to reach Financial Independence (FI). That’s because for every additional dollar we save we reduce the time to FI in two ways: 1) we grow the portfolio faster when we save more and 2) we reduce the savings target in retirement by consuming less.

That got me thinking: Is the math really that simple? How sensitive is the savings horizon to different rates of returns? What happens if we use historical returns instead of one specific expected return assumption? How important is the asset allocation (stock vs. bond weights) on the path to early retirement? How much does the equity valuation regime (e.g. the initial CAPE ratio when starting to save) matter?

So, in typical Big ERN fashion, I take an ostensibly simple problem and make it more complicated!

Let’s get the computer warmed up and start calculating…

Continue reading “The Shockingly Simple/Complicated/Random Math Behind Saving For Early Retirement” →

This fund returned over 100% year-to-date. I’m still not buying it!

Update February 2018: Credit Suisse will shut down this fund after the heavy losses on February 5. Told you so!!!

Short Vol gone bad!
XIV is down 96% from the peak! (as of 2/8/2018)

I was hoping to tell you about a great new investment I researched recently. It’s an ETN (ETN=Exchange-Traded Note, similar but not identical to an Exchange-Trades Fund) with a phenomenal track record; year-to-date (as of October 20 when writing this) it’s up 141%! Since inception (November 30, 2010) it’s up by 1,079%, over 40% annualized compound return! But, as you can see from the title, I’m still skeptical!

Why do I even look at some exotic ETN/ETF? Aren’t we all supposed to be index investors? Buy your VTSAX and be done? Nope! I consider myself an index investor with an open mind. It’s very hard to outperform the index by picking individual stocks, but there are many other ways to deviate from index investing. For example, I like real estate investing and options trading. In both cases, it’s not really about beating the VTSAX but I like the return profiles and the diversification benefits.

So, back to that amazing ETN. The ticker is XIV and here’s the cumulative return chart since 2010. $100 would have grown to almost $1,200!

XIVstudy Chart02
XIV (inverse VIX ETN) and SPY (S&P500 index ETF) returns. 11/30/2010=100.

That looks like a pretty impressive run. It definitely got my attention! But after doing some more detailed analysis I realized this ETN is not for me. At least not right now. But what’s not to love about 1,000% return since 2010, when the S&P500 returned “only” 150% since then? That’s the topic of today’s blog post… Continue reading “This fund returned over 100% year-to-date. I’m still not buying it!” →