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…Read More »

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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…

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