The ERN Family Early Retirement Capital Preservation Plan

Fritz at The Retirement Manifesto suggested we start a series covering how different FIRE bloggers plan to implement their drawdown strategy. I realize we are a bit late to the party given how many fellow bloggers have already contributed:

The Anchor: Physician on FIRE: Our Drawdown Plan in Early Retirement

Link 1: The Retirement Manifesto: Our Retirement Investment Drawdown Strategy

Link 2: OthalaFehu: Retirement Master Plan

Link 3: Plan Invest Escape (PIE): Planning for Success: Drawdown versus Wealth Preservation in Early Retirement

Link 4: Freedom is Groovy: Freedom is Groovy

Link 5: The Green Swan: The Green Swan

Link 6: My Curiosity Lab: Show Me The Money: My Retirement Drawdown Plan

Link 7: Cracking Retirement: Our Drawdown Strategy

Link 8: The Financial Journeyman: Early Retirement Portfolio & Plan

Link 9: Retire By 40: Our Unusual Retirement Withdrawal Strategy

Link 10: Early Retirement Now:  The ERN Family Early Retirement Captial Preservation Plan (This will land you back in this post. Make sure you don’t end up in an infinite loop! 🙂 )

Link 11: 39 Months: Mr. 39 Months Drawdown Plan

Link 12:  7 Circles:  Drawdown Strategy – Joining The Chain Gang

Link 13:  Retirement Starts Today:  What’s Your Retirement Withdrawal Strategy?

Link 14: Ms. Liz Money Matters: How I’ll fund my retirement

Link 15a: Dads Dollars Debts:  DDD Drawdown Part 1: Living With A Pension

Link 15b: Dads Dollars Debts:  DDD Drawdown Plan Part 2: Retire at 48?

Link 16: Penny & Rich: Rich’s Retirement Plan

So, better late than never: here’s the ERN family contribution. To begin, we are intentionally not calling this a drawdown plan. We will draw from our investments but hopefully never significantly draw them down. So, we are more in the PIE camp, trying to maintain our capital. Even if we were comfortable with leaving nothing to our heirs and charitable causes in 60 years, the drawdown over 60 years would be so small (especially early on, think of this as the initial amortization in a 60-year mortgage!) that we might as well plan for capital preservation rather than drawdown.

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Good Advice vs. Feel-Good Advice

Surfing around in the personal finance blogging and podcast world, there is no shortage of advice. Mostly good advice and some not so good advice. Oftentimes, advice that may be appropriate for some or even most investors would be completely inappropriate for others due to different risk aversion attitudes, investment horizons, and so on.

Occasionally, however, I come across examples of truly and irredeemably bad advice. Recommendations that are suboptimal under any and all circumstances I can think of, irrespective of the preferences and parameters of the individual. What’s worse, the financial experts spreading this nonsense do so not because of ignorance or incompetence. Rather, they are fully aware of the suboptimality and against better knowledge spread something that’s less than ideal. And the rationale? It may not be good advice but it’s feel-good advice. Let’s take a look at the two examples of feel-good advice I recently came across:

  1. The debt snowball: While paying down multiple credit cards, start with a card that has the lowest balance, even if that’s not the highest interest debt. Achieving a “win” of paying off one debt in full is more important than paying down all debts as fast as possible.
  2. Keeping an emergency fund in a money market account while still having credit card debt: Apparently, cash sitting around in a money-market account, earnings essentially zero interest is more important than tackling high-interest credit card debt.

In both cases, the rationale is that it makes you feel good. The “easy win” of completely paying down one debt or the sense of accomplishment of a having a $1,000 cash cushion certainly feels good.  Of course, those two measures probably make you feel better than the status quo, i.e., not tackling your debt at all or not having any savings at all. But wouldn’t the average person feel even better if they knew a faster way to get out of debt? Does anyone else find this troublesome? Do the financial gurus view their readers and listeners as a bunch of feeble financial fruitcakes? Is this some sort of personal finance edition of “You Can’t Handle The Truth” with Jack Nicholson / Colonel Jessup?Read More »

The Ultimate Guide to Safe Withdrawal Rates – Part 16: Early Retirement in a Low-Return World (and why we don’t worry about Jack Bogle’s return prediction)

A while ago I read that Jack Bogle predicts that equities will return only 4% over the next decade. And that already includes dividends and it’s nominal, not real! People call me pessimistic with my equity return assumption for stocks, but good old Jack takes it down another notch. Here’s the quote, reproduced on CNBC:

“Just for mathematical reasons, the dividend yield is 2 percent, a little under 2 percent in fact, and the long-term dividend yield on stocks is pretty close to 4 … the earnings growth on stocks has been a little over 5, that’s going to be a very tough target in the future so let’s call it 4 … 4 and 2 percent give you a 6 percent investment return, but then you have to take … the valuations in the market. …You take that 6 percent return and maybe knock it off a couple of points perhaps for a lower valuation, slightly lower valuation over a decade and you’re talking about a 4 percent nominal return on stocks. And that’s low, lower than history. History is around 6 and a half.”

Wow! That’s a bummer: 4% nominal means about 2% real with a generally agreed upon 2% annual inflation rate. Or another way to look at this return prediction: If we assume that equities pay around 2% in dividend yield, then the equity price index will go up by only the rate of inflation. For ten years!

Everyone in the FIRE community should take notice. If you’re still in the accumulation phase you’ll likely need longer to reach FIRE. If you’re already retired and apply the good old 4% Rule then a Bogle-style scenario will likely put some strain on your portfolio. So, in today’s post let’s look at what the Bogle scenario means for Safe Withdrawal Rates in Early Retirement.

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