The Ultimate Guide to Safe Withdrawal Rates – Part 23: Flexibility and its Limitations

Talk to anyone in the FIRE community and ask how folks will deal with market volatility (especially downside volatility) during the withdrawal phase and everyone will mention “flexibility.” Of course, we’re all going to be flexible. Nobody will see their million dollar portfolio drop to $700k, $600k, $500k, $400k and so on and then keep withdrawing $40k every year no matter what. Rational and reasonable retirees would adjust their behavior along the way and nobody will really run out of money in retirement in the real world, as I noted in my ChooseFI podcast appearance. In other words, we’ll all be flexible. But is flexibility some magic wand we can swing to make all the worries about running out of money go away? Or is it BS? It’s a bit of both, of course. For example, I would put the following into the BS category:

  • I’ll do “something” with my asset allocation and recover the losses.   Good luck with that!
  • I will skip the Starbucks Lattes for two months until the market recovers! Ohhhh-Kaaayyy….?!
  • I will sit out one or two years of inflation adjustments.    Qualitatively, a good idea, but it won’t work quantitatively.
  • I will rely on Social Security.    That may work for middle-aged early retirees but not for 30-year-old early retirees!

But flexibility will work through significantly reducing spending. And again, let’s be realistic, foregoing a 2% inflation adjustment for a year is not enough. Flexibility would involve being prepared to cut spending by probably around 20-25%, maybe more. A different route and maybe a better solution might be the side hustle. Specifically, one reader, Jacob, emailed me with this proposal:

Your series is quickly covering a lot of financial acrobatics to discover and maximize safe withdrawal rates while working to reduce the risk of running out of money. However, so far the most tried-and-true solution to the “not enough money” problem has not been considered: Get-A-Job. I acknowledge that for most job-hating FIRE-aspiring people this is the nuclear option, but it’s still an option.

Great idea! Get a side hustle and solve the safe withdrawal rate worries and (hopefully) salvage the 4% Rule! But there are two very important limitations:

  1. The side hustle might last for longer than a few months or years. Withdrawals plus the market drop equals Sequence of Return Risk and might imply that the side hustle will last much longer than the S&P 500 equity index drawdown. How long? Try a decade or two, so if you want to go that route better make sure you pick a side hustle that’s fun!
  2. For some historical cohorts where the 4% Rule would have worked even without a side hustle, flexibility would have backfired; you would have gone back to work for years, maybe even a whole decade and afterward it turned out it wasn’t even necessary!

But enough talking, let’s do some simulations!

Being flexible… but in a quantifiable way

Jacob, the reader who contacted me via email even had a proposal for how to run this in practice:

Let’s take a “typical” early retiree (if there is such a thing) with [$1 million] in assets supporting a $40,000 per year spend at [a 4%] safe withdrawal rate. I would propose some sort of “Get A Job Guardrail plan.” If his portfolio hits 70% of its starting value, he commits to getting the equivalent of a full-time federal minimum wage job until his portfolio recovers to 80% of it’s starting value.

Wow! Amazing! That’s pretty much exactly how I would have set this up! I built a little Google Sheet to do exactly that, see link below:

Link to Side Hustle Google Sheet

(As always, please save your own copy first. You cannot make changes to my clean copy, for obvious reasons!)


  • Enter parameters in the orange-shaded fields. All else is computed by the sheet!
  • Stock/Bond/Cash portfolios. Stocks=S&P500, Bonds=10Y benchmark US Treasury, Cash=3M Tbills. I assume fixed portfolio weights.
  • We can also specify the horizon (in months) and the final portfolio value target (in % of initial value). Right now I use 600 months and a final value target of 0 (portfolio depletion).
  • As always, we can specify extrapolated return expectations for 2018 and onward, to accommodate more historical simulation windows. For example, we’d be able to calculate a historical simulation for a 1970 start date even though we don’t have the last couple of years of returns. The numerical results all hinge 99.99% on the first 48 years of returns and very little on the last two (think Sequence Risk!).
  • The main parameter tab looks very much the one used in the SWR Toolkit (see SWR Series Part 7):
Main parameters (similar to those in the Google Sheet from the SWR Series Part 7).
  • In the second tab, we specify more parameters and display the main results, see screenshot below.
  • In this first example, I use the peak before the Great Depression (Sep 1929), an initial portfolio value of $1,000,000, 4% withdrawal rate, guardrails of 70%/80% and $1,000/month of side hustle income.
  • Notice that in this case study the side hustle income was truly necessary because the actual SWR without a side hustle was only 3.2626%. In other words, without the extra income from the side hustle ($1,000/month), we would have depleted the portfolio for sure!
More parameter for this case study
  • The “target portfolio” used to derive the guardrails is the portfolio that we would have observed over time using a fixed (real) withdrawal and fixed (real) asset return to exactly match the final portfolio value, see chart below. By the way, if you think this looks like a mortgage amortization schedule, you’re right! That’s exactly what a risk-free withdrawal plan with a specific final value target would amount to!
  • Whenever the actual portfolio value drops below the lower guardrail, we go back to work in the side hustle, earning a real, inflation-adjusted wage.
  • Whenever the portfolio breaks through the upper guardrail we quit the side hustle. A quick sidenote: Why isn’t the upper guardrail always set to 100%? We could do that, too, but while playing around with the simulations I realized that with a 100% upper guardrail we’d work way too long into the stock market recovery and then subsequently over-accumulate. 80% seemed like a sweet spot for this parameter. Not sure if Jacob had done his own simulations already, but his initial intuition and guesstimate were spot on!!!
Target portfolio to exactly reach the final portfolio value target. Lower and upper guardrail below.

How do the results look for this case study? Here’s the time series of the portfolio values relative to the guardrails for the 1929 cohort:

Time series of portfolio values. The side hustle saves the retirement for the 1929 cohort!
  • With the side hustle and just $1,000 of monthly income, or 30% of the monthly budget we pretty handily navigated the Great Depression.
  • But the big drawback: We would have to work in this side hustle for an extended period! It looks like after 296 months (almost 25 years) we’re finally done hustling! For me personally, as a 44-year old early retiree the prospect of working until I’m 69 sound very unappealing.
Main results for the 1929 retirement cohort: Be prepared to find a side hustle for 2+ decades!

Also notice that even with the side hustle, retirement wasn’t a total cake walk. If we look at the bottom part of the table, the funding status of the actual portfolio as a percentage of the smooth target drawdown portfolio value (blue line in the chart), even with the side hustle we’d spend decades with a seriously underfunded retirement stash. Still better than running out of money in retirement but it seems a bit scary!

Another case study: 1966

A second disaster scenario I always like to study would be the cohorts around 1965 and 1966. They would have faced some extended poor portfolio returns due to the 1970s and early 1980s (recessions = bad for stocks) and rising bond yields, which was bad for bonds. So let’s see how the January 1966 cohort would have fared. We keep the parameters the same, just change the dates, see tables and chart below:

  • Very similar results: The side hustle only finishes 25+ years into the early retirement. You would have worked a total of more than 16 years.
  • The side hustle is still better than running out of money, but just like before you would have spent a significant portion of your early retirement with a seriously underfunded portfolio. Even though everything worked out with the side hustle, I don’t think this would have been a very comfortable and relaxed retirement: 70 months with a <50% funded portfolio and 10 years with a 50-75% funded portfolio!
The January 1966 cohort. Work for over 16 years until 25 years after starting retirement!
Time series of the 1966 retirement cohort portfolio values. The side hustle would have prevented running out of money. But at the cost of having to work a substantial portion of the early retirement portion.

Flexifailure: Going back to work when it wasn’t even necessary (a.k.a. Type 1 Error, a.k.a. False Alarm)

One of the drawbacks of this side hustle method: Because we don’t know the SWR of our own retirement cohort in advance there is the possibility that folks go to work but then it turns out, after the dust settles, it wasn’t even necessary. Here’s one example: the 1972 retirement cohort. (actually, there were many different cohorts both before and after 1965 and 1966 where the 4% Rule ended up working but this simple side hustle rule would have sent you back to work for multiple years, even decades!)

The 1972 cohort was hit hard by the 1973-75 recession and then again by the 1980 and 1982 recessions. But it turns out, despite all those adverse events, the portfolio recovered so rapidly post-1982 that your side hustle pre-1982 was utterly unnecessary. But since nobody knew about the roaring 1980s you would have wasted 11 out of your first 14 years in retirement pursuing a side hustle that wasn’t even necessary! See table/chart below!

The 1972 cohort. The actual SWR (without the side hustle) was >4%, so was no need to go back to work. But you would have wasted 11+ years in the side hustle!
Time series of portfolio values for the 1972 cohort. The side hustle was unnecessary. But you didn’t know that in real-time, so you would have spent the 11 out of the first 14 years back in the workforce!

So, trying to salvage the 4% Rule through flexibility and a side hustle is a bit like squeezing a balloon: You reduce the absolute disaster scenario (Type 2 Error = running out of money) but now blow up a failure of a different kind: You go back to work for years, even decades when that wasn’t even necessary. But who knew that in the 1970s? Reading about the “Death of Equities” didn’t really inspire a lot of confidence, right?!

The Death of Equities Magazine Cover

Other results not displayed today

OK, this is still work in progress. And the post is already getting too long! I can definitely see a part 2 about this topic in the future. The 70%/80% guardrails with the $1,000/month income (=30% replacement ratio) seemed to work quite nicely in the two prominent deep recessions. But I haven’t done any comprehensive simulations over all the possible retirement cohorts and different parameter values. While playing around with the Toolbox, though, I came up with some other interesting findings:

  • If the side hustle is too small (say $750/month or less) no guardrail would have saved your retirement in 1929. The 1929 cohort would have worked in that side hustle for the entire 50 years in retirement and still run out of money! Pretty scary! I’m picturing myself 94 years old and I have to look for a full-time job. Maybe I’ll become a personal trainer?!
  • Larger side hustle incomes will shorten the amount of time one has to work. But not by much. $2,000/month (or a 60% replacement ratio) would have still required a 13-year work history (1929 cohort). If the side hustle pays for all expenses ($3,333/month=100% replacement ratio) that would still require a 6.5-year work history within the first 14 years of retirement for the 1929 cohort and 9.25-year work history (!!!) during the first 17 years of early retirement for the 1966 cohort! not very appealing!


Flexibility through going back to work and pursuing a side hustle will certainly solve some of the problems of the 4% rule. But the side hustle flexibility is no panacea. A side hustle could potentially last so long, we might as well consider it a multi-decade-long extension of our corporate career.

In addition, the flexibility of working a side hustle raises the issue of what we call a “Type 1 Error” in statistics. We now create failures – of sorts – that would have been considered a success under the inflexible 4% Rule. Specifically, some of the historical cohorts would have gone back to work because they didn’t know in real-time that a strong equity market rally was around the corner (e.g., the 1970s!). So, I have a bit of a dim view on this whole “flexibility” and “side hustle” mantra in early retirement. I’m glad I worked a few extra years beyond 25x spending and accumulated more assets to lower my effective withdrawal rate for my 2018 retirement! That last year before retirement in a nice cushy corporate career with a window office on the 39th floor: it lowered the chance of working as a greeter at Walmart at age 69. Cheers to that!

Thanks for stopping by today! Please leave your comments and suggestions below! Also, make sure you check out the other parts of the series, see here for a guide to the different parts so far!

Picture credit: Pixabay


100 thoughts on “The Ultimate Guide to Safe Withdrawal Rates – Part 23: Flexibility and its Limitations

  1. Every one of your posts gives me more and more food for thought – and more and more of a reality check. Thank you so much for this entire series, and for today’s post. Working “one more year” at my well-paying job, in exchange for not having to find something nearly full-time later, is where I always end up. I hope I don’t one-more-year myself to death, as my full-time work is very stressful for me and it does take a toll.

    In making these need to factor in just the wear and tear on my body, mind, and spirit – the stress level is pretty high. However, I’ve worked enough low-paying jobs in my life to know that those are far from stress-free!

  2. Pretty bold assumption that minimum wages will keep up with inflation.

    You know what else helps you avoid liquidating your principal by generating a consistent, reliable source of income even when the market is down? Dividends.

    It’s also not a very wild concept to assume that dividend distributions will outpace (much less just match) inflation.

    A dividend check is like a pay check, except you didn’t have to do anything for it.

    Maybe the cohorts could take up dividend growth investing as their “side hustle”.

      1. Academically yes.

        In practice for a retiree navigating cash flow and SORR issues I would argue they are very different. Share prices are much more volatile than dividend distributions.

        You have to build a portfolio of individual stocks though. Index funds will just pay a % yield which will bounce right around with the share prices.

        1. I agree that spending dividends is simple in practice, and less volatile than a straight percent. But spending dividends isn’t any safer than spending the same amount in manual withdrawals from a portfolio. If your portfolio is “generating a consistent, reliable source of income even when the market is down,” you are running the same risk as withdrawing a consistent amount from your portfolio. Dividends are not a magic bullet. The good thing about spending dividends is that they are usually less than 3% lately, so are likely to be safe.

          (Also, you’re incorrect about index funds: they simply pass on the dividends of the underlying stocks, not a simple % yield.)

          1. The “risk” part of sequence of returns risk is a result of volatility…i.e. share prices drop by some % and don’t recover quickly enough to support the withdrawal rate.

            So if dividend distributions are less volatile than share prices (which we agree they are) then the withdrawal mechanism of dividends is less risky then liquidating shares.

            How do you figure that withdrawing only dividends is “running the same risk”?

            (Okay you got me. I was being lazy about describing how funds pay dividends…yes they pass on the dividends…but the number of shares of the different stocks owned by the fund is bouncing around as a function of their weighting in the index which is changing with market prices so the only way one could hope to project a dividend amount is based on the distribution yield…which is not particularly helpful -IMO- for a retiree trying to manage cash flow to pay for groceries)

            1. I think you’re treating a dividend as something special. It is simply a forced withdrawal. The only reason that dividend checks are a safe way to spend from a portfolio is that dividend yields are only about 2%. Imagine a stock that paid a 20% dividend, and the checks didn’t get smaller when the market was down. If you spent the dividend checks, how long would that investment last? What about a stock that paid a dividend of 80% annually. Would those checks be “safe” to spend?

              1. What’s the payout ratio of the company with the 20% yield? How much net cash do they have on their balance sheet?

                Your extreme examples of high yielding stocks are irrelevant to my point because any discussion of yield % is a discussion about share price. It’s just another valuation metric like P/E or P/B or whatever. Equity yields haven’t always been this low, and they won’t necessarily stay this low forever:

                Where should we draw the line? What about a 6% yield? Is that inherently unsustainable just because it’s higher than the current market average?

                The fact that dividends are a “forced withdrawal” is exactly why they **are** special because of how the amount is determined. The board of directors doesn’t just decide to pay some % of the current market capitalization. The distribution is a specific dollar amount that is based on the economic viability of the business (free cash flow).

                Who is in a better position (and which is a better method) to decide what is a safe withdrawal amount from an equity investment? Pick one.

                1) You, the investor, guessing at a percentage of the current share price based on a bunch of historical market data you dumped into a google sheet.

                2) A board of directors with intimiate knowledge of their business’ current and future prospects for free cash flow generation choosing a specific dollar amount.

                Will the BOD sometimes screw up? Yes. Will dividends sometimes get cut? Yes.

                But overall, the dividend distribution (as a dollar amount) is going to be tied to the fundamentals of the business’ profitability as opposed to the wild machinations of short-term market sentiment. That makes it a far less volatile withdrawal mechanism than selling shares, which is why the retiree living off dividends alone should expect a lower probability of unsustainable drawdowns due to sequence of returns risk.

                1. Ok, I agree with your assessment of why many dividend-paying companies probably do a good job of determining the payout. Anyway, it seems we agree on more than we disagree.

                2. I think far too often, people think of dividends as a free lunch. Are you remembering that the stock price gets adjusted downward by the amount of the dividend? Over a number of years, dividends come at the cost of capital appreciation: were no dividends paid, stock prices in theory would be much higher.

                  Without dividends, then, you would have to withdraw more. How is this offset by the greater theoretical growth of the equity portfolio?

    1. If you’re willing and able to allow the companies to control their dividends as your income, then I think it’s a great plan. The “problems” with that plan are a) You have no control in the sense it can go down on it’s own and b) Taking dividends will generally give you substantially less income to start. Having said that, I’m still a fan of it. It gives the assurance and wiggle room that is generally lacking in a set SWR.

      I think to illustrate your point of safety: A 3% dividend is safer than a 3% withdrawal only because the dividend can be cut “when necessary”. In a vacuum a straight 3% is 3%, though. Sam is right in that sense.

    2. Ahh, that dividend discussion again! 🙂
      Recall that in my calculations I already used Total Returns (incl dividends). Also going forward I wouldn’t be surprised if some of the high-dividend stocks could underperform when interest rates keep going up.

  3. Great post! This fit with my intuition that if you have a high paying job roughing it out for a couple additional years if you can seems better than banking on an enduring long term and substantial side hustle. My plan (which admittedly is more based on feel versus crunching numbers) is to aim at three things: shoot for 33x current expenses (which I actually arrived at by 25x of 133% of current expenses, on a presumption originally that i may want to grow lifestyle some), try to prefund a big future expense (college education) separately, and aim to make option of retiring in current high cost location possible by retiring the mortgage so geo arbitrage is backup and not a requirement.

  4. A thought provoking add to the series, great work again. Though I have to admit I thought of the E-Trade Super Bowl ad while reading this. “I’m eighty five and I want to go home.”

  5. Yikes! This is a sobering look at “being flexible.” You didn’t even talk about the fact that everyone is going to be looking for a job during a recession. Who would the employer pick? Someone who hasn’t worked for 5 years or someone who has been working until recently.
    It’s best to have some buffer before retiring early. Also, if you’re going to side hustle or work part time, might as well get started before the economy tanks. If you wait until the stock market crashes, it’s going to be tough.

  6. Wow, great analysis! I’ve always thought that the idea of a minimum wage job as a safety net isn’t a great idea when working a little longer at a higher paying job before pulling the plug is an option. This definitely confirms that for me. Having the option to do some consulting or part time work at a higher rate of pay, especially if it’s something that you enjoy, does seem to be a good idea for those that are able.

    1. Thanks! Yes, consulting gigs definitely beats minimum wage work! You’re also lucky to be in the healthcare field. Much easier part-time and seasonal and contract work. My wife (Nurse/RN) might keep that option, too! 🙂

  7. Great article Big ERN… John Smith here from your first case study. I always thought that the risk of a ‘failure’ and needing to go back to work or to get a side hustle was still better than staying a job you already dislike. Maybe in that situation, the first few years off could give perspective and allow room for someone to find work they find more meaningful and fulfilling. So they may choose to work and make some money with some new-found lifestyle business. That seems like it would be a win to me. At least that is my fantasy version I play through in my head. 🙂

    I think the point of your article though is to warn people about the risks of using the ‘side-hustle’ as a catch all. Great job! Also, It will make people think about the benefits of staying in a less-than-desirable job a bit longer if it is helping to build up a bigger cushion.

    1. Thanks John! That’s exactly my thinking! If someone hates their job, maybe it’s a wash: work longer or retire and risk going back to a side hustle. But in many cases it’s better to pad the retirement stash.
      By the way, for some reason your comment was filtered out as spam initially. Glad I found it and restored it. 🙂

  8. A very sobering post. Thank you!

    My takeaway is that it’s best not to retire with just enough to cover your basic living expenses (lean FIRE). When disaster strikes, there will be no place to make a cut.

    On the other hand, if your retirement budget allocates 20% for travel then you have a 20% buffer that you could cut out should times get tough. I suggest that people take a look at their retirement budget and make an honest assessment of where they can easily make cuts without making life miserable.

    1. Agree with that! But then again, If I had to cancel all travel for the first 10-25 years of my retirement (i.e., replace the work schedule in this post with “no-travel, no fun, etc.”) that wouldn’t be much of a fun retirement either. Though it might beat going back to work, hehe!

    1. Definitely. “In the worst case scenario I’ll just go back to work” always struck me as the worst kind of fact-free hand waving.

      This is my favorite entry in the series. The rest of it was a basically straightforward extension of existing work & ideas. It was well done but — other than being popular in the FIRE blogosphere — I didn’t feel that it was a massive advance over things that had already been written about before.

      This entry in the series is different and sheds a light on something that hasn’t been talked about much and is especially under-analyzed in FIRE circles.

      “When Should Retirees Retrench? Reducing the Needwith Part-Time Work and Annuitization” by Gordon B. Pye is one of the only other things I’ve seen that talks about part-time work and its impact on retirement sustainability.

      I think between ERN’s research here and Pye’s you could probably make a pretty good case for an early retiree taking 6-12 months off of work and then looking for some kind of seasonal work for next 2-5 years of early retirement. (e.g. working for 3 months during the summer at a local tourist trap).

      1. Some interesting points but I feel you are cherry picking situations to make the “go back to work” scenario look as bad as possible here.

        You are comparing working a full time job earning I am guessing at least $6000/year (otherwise you wouldn’t be able to save up enough to make a dent in your SWR in One More Year of saving) to then dropping to only earning $1000/year side hustling… of course you are going to end up “working longer” if you do the side hustle route. Then you compare it to one in which you only just cover your expenses.

        Why not compare it to earning say 80% of what you were previously earning in your full time job? Thus allowing you to not only cover your expenses but top up the portfolio as well.

        I would guess if you could do that you would be only working 2-3 years max?

        Personally, I think this is a pretty good trade off for pulling the plug a bit early and seeing how things play out with the market.

        Then there are the thousands of other possibilities of earning money even when you aren’t really trying to once you are “retired” or you might actively want a hustle straight away, even if you don’t initially need one, making the whole analysis above moot (because by the time you would have hit the sequence of returns low tide, you have already made more than enough to keep it above it).

        Then there is the point that history cannot predict the future, there is no such thing as a proper 100% bulletproof SWR going into the future, because you just don’t know.

        I get the point of the post and it’s great advice for those that want a guarantee of never having to earn another penny in their lives again, but I think those sort of people are actually quite rare both in the FI community and in real life. I could be wrong though of course 🙂 and appreciate reading the series here… thanks!


    2. A fail-safe plan?…maybe not. Copout? I don’t agree necessarily.

      What if your plan is to make your side hustle a main hustle in retirement? What if your side hustle is not a min wage blue collar job, but rather takes the form of hand-picked consulting clients or side businesses that you wish to grow/scale with more time in retirement?

  9. Another eye-opening post, ERN. So much for picking up a short side gig to ride out the storm. These are some extreme examples, but the point is made – maybe it’s better to put in a few extra years with a higher-income stream and start out with a “safer” withdrawal rate to begin with. It does make sense when you pull back from it – earning more now, saving it and letting it grow into the future beats earning less later without any advantages of compounding growth. Look forward to your part 2.

  10. “Flexibility would involve being prepared to cut spending by probably around 20-25%,”

    I think the key here is to give yourself enough buffer to be -able- to cut spending. If you’re running down to the wire with thinking “The moment I hit 25x my spending, I’m done!” it’s a recipe for stress, at a minimum. Do a job you actually like, make some decent money, and have some extra! And if you’d rather have that buffer be a intermittent job, so be it. I myself would rather increase my stockpile a little bit before pulling the plug, however.

    Stockpile. That’s right. See what I did there? 🙂

    1. Haha, great point! I’m afraid about the “25 and you’re done” mentality, too. We don’t train airline pilots and let them graduate when they are just roughly capable of flying. Better have a buffer! 🙂

  11. Our view of retirement is to have large doses of fun which may or may not involve large doses of travel (flying family of 4), which in all likelihood will eat a decent chunk of budget. Even with copious travel hacking. I suspect we may want to do even more international travel once we really kick it into gear. Hence the OMY syndrome and a projected SWR just north of 2.5%. Moving that up to 3.0% will not phase us at all IF travel plans suggest we do that. Buffers can be real good, not only in biological assays…..

    1. Exactly my thinking as well: All of this concern about side hustle and false alarms for a side hustle made me build up more of a cushion. If you’re doing 3% initial SWR the portfolio can fall by 25% and you’re still at a 4% WR. After a 25% fall from the equity market peak the 4% SWR never failed!
      Thanks for stopping by!

  12. 2 things are needed to combat SORR

    1 A big enough pile at the start
    2 A small enough yearly draw down

    I get a big kick out of the “side hustle” delusion. Go back to news reels looking at work conditions in 1929. There won’t be any “side hustles”.

    I don’t want any side hustles in my life. I’ve been experimenting with a “how low can you go” lifestyle to understand where my economic choices turn from annoyance to real pain. I found it wasn’t hard to cut 30% so now I live on 30% less. Big blow to SORR. in 5 years when SORR is receding into my rear view mirror I’ll consider re-inflating my lifestyle. In the meantime if I want an extravagance like a trip to Europe, I just plan for it like I did wen I was working.

    Another factor was to retire with a big pile. Even before cutting back I was a bit under 3%. Another factor was to consider tax consequence LONG before the drop dead date. Efficiency to the portfolio includes Roth conversion, post tax investments and tax loss harvesting. For my 5 years of Roth conversion I cashed out 60 months of living expense near the market top and put it in Muni’s So I have 5 years of zero taxable income which allows me to Roth convert with maximal efficiency. There is an opportunity cost to pulling out the 60 months, but I consider it insurance. SORR kills when it happens early in a portfolio, in the first 3 years. Having money in the bank tends to negate some of that SORR since I don’t book a loss until I sell. Since I had tax loss harvested, the cost of converting stocks to cash was zero. The point being battling potential SORR is a different game than multiplying by 4%.

    1. Exactly my thinking! I wouldn’t like a side hustle and, even worse, the job opportunities are correlated with the economic cycle. Especially in my line of work (Finance). Might be different for folks in, say, the medical field, though…
      Thanks for the excellent comment!

    2. Big Ern,
      This brings up a good point. What about having a nice stash of cash in the event of a downturn and being able to tap into that along with a possible side hustle in the event of a downturn? I can see it being reasonable to have 1-2yrs of cash on hand to tap into while looking for an ideal side-hustle all the while leaving principle alone. Sort of hitting the pause button and not drawing down until returns…return?
      I’m newer to this so be kind if this was already covered.

  13. I’ll be interested in seeing the historical statistics on false positives which no doubt are coming in Part 2. Without any calculations, I’m going to guess that for assumptions similar to the main ones in Part 1 (hustle 30% of expenses, start at 70% funded by 4% rule, stop at 80% funded) at least twice as many years will be spent in side hustles which would have been unnecessary with a crystal ball as in ones which prevented running out of money.

    Thanks again for all the effort you’ve put into this. I find it comforting as I approach retirement to see this level of detail as I second guess the parameters to use (especially since I did my initial calculations using Monte Carlo and was getting ready to redo them using historical data before I found your site).

    One misc suggestion for future research: While most of the data suggests that retirees’ spending grows at an average rate slower than inflation (with “smile” variations), that data is on older retirees. I generally model spending at younger ages as growing at the pace of average wages, since that is the rate at which the spending power of others of the same age is rising and therefore the target to which new products and services will be designed. Even for those who don’t want the new products and services which get introduced, it’s not a given that one’s 2018 lifestyle will be viable in 20 or 30 years. For a silly example, imagine that almost everyone drives a hovercar in 2040. You might be able to get a (used) car with wheels for next to nothing, but how much effort will be spent on road maintenance under those conditions.

    I have some thoughts on the implications of spending which grows faster than inflation, but they are based on my Monte Carlo simulator. If you’re interested in a guest post on it, I could clean that work up and see how easy it would be to switch to a historical approach so that the results would be compatible with yours.

    1. Thanks! Yes, I will explore with more quantitative rigor what’s the % of Type 2 errors.
      Regarding the faster/slower than CPI adjustments, that’s something I wrote about in part 5 of the SWR series. Rule of thumb: for every % you add/subtractfrom the COLA you have to subtract/add that same percentage to the SWR.

      1. I haven’t done the calculations, but my intuition is that this is not symmetric around 0% real growth. As you said in part 5:

        So, the unpleasant fact is that the COLA-x% works best when we need it the least. That makes perfect sense: because we have such a front-loaded consumption pattern we get hit by the dreaded Sequence of Return Risk!

        Since COLA+x% is significantly back-loaded, I would expect it to lower the SWR by well under the average increase in withdrawals because it is less subject to Sequence of Return Risk.

        To put some numbers to this, the long term growth rate in productivity (which ties to average wages) is a little over 2% since 1950 ( If real spending rises with productivity at 2% per year, then it will be 81% higher after 30 years.

  14. Hello ERN,

    I wonder if you have considered a retiree with a paid-off house and an untapped HELOC who tries to ride a bad sequence of returns by borrowing from HELOC in bear markets.

    Let’s say one has a HELOC line of credit of 3 times the annual expenses at the start of the retirement. Let’s assume the house appreciates at the rate of the inflation and one can periodically update HELOC so that it always stays at 3 times the annual expenses.

    How does this resource help with SWR? And what is the optimal strategy of using HELOC?

    1. It’s not exactly the same as you suggest but I did a similar exercise to see if using margin in the late-60s/early-70s improved outcomes:

      The short version is: no, it didn’t help. From that investigation I came away feeling that there were a few main problems with the approach:

      1. In some bad scenarios, interest rates will shoot up sky high. That means the interest payments on your HELOC could be massive.
      2. There is no clear, obvious strategy for when to take on debt and when to repay it.
      3. It is pretty easy to end up in situation where you have pretty large amounts of debt. Purely from a behavioural perspective, I think most people aren’t going to be happy with significant debt once they no longer have a regular paycheck.

      Using margin to “juice” returns is one of those things that works 95% of the time. But in those scenarios, you’re likely already doing way better than your worst case planning expected anyway. These are made up numbers but it is probably something like: “I planned for 3.25% withdrawals but the market has been better than ‘the worst in history’ so now I’m able to do 5% withdrawals. But thanks to margin I can do 5.8% withdrawals.”

      1. I took a quick look at your study. It is a good start but very far from being an optimal strategy.

        1. The strategy you explore tries to keep the portfolio value at 100%. That is a much more ambitious goal than the final portfolio value target of zero.

        2. Instead, at a minimum, the loan should not be taken when the portfolio value is above the blue line in ERN’s first chart (portfolio target).

        3. In fact, just like in ERN’s study, the loan should not be taken when the portfolio value is above some lower guardrail – perhaps, 70% of target value (red line).

        4. When the portfolio value rebounds to an upper guardrail, at some point the loan principal should be reduced by paying extra from the portfolio, especially when loan rates get very high. So, ideally, upper guardrail should be loan rate-dependent rather than fixed at 80%.

        There is no doubt that a good HELOC (or a margin loan) strategy would help. The question is how much would it increase SWR and what is the optimal strategy. I hope ERN and you will explore it further.

        1. I agree, we should not use the margin loan too early (before the equity portfolio has fallen by at least 20-30%). You want the withdrawals at the start of the bear market when the stock index is still close to the top. Helps with Sequence Risk!

      2. All excellent points! A simulation exercise with a HELOC will be tricky because I have to make assumptions about margin/HELOC loans. And it raises the issue of when to pay back the loan as you point out.

        1. Well, jp6v mentioned in his post that “we can get a margin loan at the effective Federal funds rate + 1.5%. That’s approximately what Interactive Brokers currently offers.” (Just a sidenote, they use the spread of 1.5% for the first $100k of loan and 1% thereafter.)

          After making that assumption on margin loan rate, the exercise is very similar to what you have done with a side hustle and the guardrails.

          Considering that taking a margin loan is much easier than doing a multi-decade side hustle, I think it would be a very interesting study. I hope will do it in one of your future posts. Thank you.

  15. Big ERN,

    Thank you for another well thought out post. I’ve never bought the whole side hustle argument either, and it is great to see you apply some math to it and show how it’s not a magic “fix all.” I put this together with your November 1, 2017 “Shockingly Simple…” post, which led me to another analysis by Go Curry Cracker. As I’m sure you’ve seen, he found that using historical data and a 50% savings rate, an average of 3 additional years were required to go from 25x to 33x savings. So unless one is completely miserable, or forced into early retirement, that is a very compelling reason to go beyond 25x and maybe shoot for 33x, which in my mind is a pretty much bullet proof 3% SWR. Whatever indignity one may have to put up with in a white collar desk job (which is probably most early retirement candidates) is nothing compared to a few years in a low-paying “side hustle.” Sure, I’d try to get a job that uses my college degree, but as another poster pointed out, those may be hard to come by in an economic downturn.

    If you look at Go Curry’s charts, it looks like the 1929 50% saver only needed another 6 years, and the 1966 saver only needed another 2-3 years to get to 33x. Talk about turning lemons into lemonade by being on the good side of SRR! And both of those sound better than a 16-25 year side hustle.

    One still has to be careful they don’t “one more year” themselves to regular retirement age. But suppose you are at 25x, and you decide to stick it out the earlier of 5 more years, or 33x, which on average should take just 3 years. Even if you hit the 5 year mark and are still below 33x, you’ve reduced your time frame , which should increase your SWR.

    As always, I’m looking forward to your next post!

  16. Big Ern!

    Me again. I did a little CFIRESIM hacking. If you run the default $1m portfolio and 40k withdrawal rate over 50 years, no SS, you get around an 80% success rate. If you trick it for a “4 more years scenario” by putting in 80k of income for the first 4 years ($40k to offset the spending, since you are still working and cover that with wages, and another $40k for Go Curry Cracker’s assumed 50% savings rate), you get to a 100% success rate with a lowest ending portfolio of just over $600k – 50% capital preservation! If you work just 3 more years (same assumptions) you get to a 98% success rate.

    I’m sure you could model it much more elegantly, but my take-away is 4 years after hitting the 25x mark ought to do it. It seems that by working a little past hitting the 25x mark, one of two things happen. The market crashes bad, and you reap the benefits of saving during a down market, or the market just keeps going up, so you’re fine anyway.

    I’m looking forward to tomorrows post!

  17. I have enjoyed your series very much. I do wonder if you have made an assumption of convenience that does not apply in real life throughout your series. Specifically that of taking the inflation “off the top” of the annual return. Because of the impact of taxes I would suggest this is not practical.
    1. Taxes are on real (not inflation adjusted) returns. So, in an average year you may get a 6.66% yield, and take 3% off the top for inflation presuming a yield of 3.66%, however you would owe taxes on the 6.66% (Assuming 33% tax rate, you actually realize 4.44% yield and subtract 3% (giving a yield of 1.44%). Similarly in a good year, you may experience a yield of 12% (and thereby end up in a higher tax bracket of 40%) for an after tax pre-inflation yield of 7.2%. Furthermore, inflation may be higher than the average in those years, but even in a stellar year, assuming average inflation, you would only gain 4.2% in real terms.
    2. The classic answer is to delay selling and defer capital gains taxation, which is partially helpful, but as time goes on a larger and larger portion of your investments will consist of capital gains, and a larger portion of your investment income will be taxable (rather than return of capital).

    1. Well, you answered your own question: the tax situation is too idiosyncratic and it can’t be easily addressed in a SWR study.
      But that said, one could argue that for many early retired you can structure your withdrawals completely tax-free. You can get up to $24k/year for a married couple, as ordinary income, then $77k in cap gains and interest. For 0 federal tax.
      But to account for taxes, check out this interesting article:

      Also: I would never structure my investments so that I have to pay taxes on all the gains every year (in that case you’re right, there is an issue about nominal vs, real returns).
      But if you hold equities only in taxable accounts and withdraw the dividends (and maybe a little bit of cap gains) and bonds and equities in tax-deferred accounts you’ll make sure you only pay taxes on what you withdraw. And even that is taxed at a very low rate! 🙂

  18. Hi Big ERN!

    I recently discovered your series on safe withdrawal rates and have been reading your posts (and comments) non-stop for the past 24 hours, stopping at times do some real work while I save for early retirement. Your analytical models are a massive breath of fresh air for me, as I always felt the vagaries of the side-hustle parachute plan were a big stumbling block. It’s really amazing that you’ve given us a tool to analyze these situations for ourselves, so I just want to say THANK YOU!!

    Since my personal FI plan involves more of a 2-stage retirement, I was curious how a more aggressive side hustle would fare, so I started using your tool to analyze hustles that produce 75-100% of necessary monthly funds in retirement. I found that if you set the guardrails at a much lower 50/60 (low/high) level and commit to at least 75% side hustle income, it’s hard (impossible?) to tip the working years past 7 (which happens right at Sept 1929). 1965-7 seem to be under 7 years as well.

    In my own situation I view this as a very intriguing proposition, and am wondering what a full analysis would look like over all years for these types of parameters (50/75/100% side hustle income and 50/60 guardrails). I would imagine the rate of Type 2 failures would be much lower with the 50/60 guardrails, as it essentially sorts for the worst-case scenarios while still giving you enough time to dig yourself out of the hole.

    How would you quantify the efficiency of such a strategy (and associated side-hustle years and Type 2 failures), especially as compared to the alternative of working gauranteed extra years to achieve 3.25% SWR instead of 4% (this takes me about 3 more working years at the full-stress regular job and 30% savings rate)?


  19. Although in theory it is possible to go back to work or start a side hustle, I have always thought it was a bit of magical thinking. This may work well if you have a very low monthly spend, but for higher income more specialized careers, it is often impossible to find work after being out of the field for an extended length of time.

    The other problem is that when a standard portfolio is experiencing stress (recession) this usually coincides with a very poor job market. There were no jobs to be had in many industries during the last market crash. Even low paying jobs were impossible to find. I had friends and family suffer through this period and it was not easy. These were capable people in the prime of their life. If you are in your 50’s and have been out of the job market for a decade, good luck finding any sort of meaningful work in a deep recession or depression.

    Another problem is health. I work in health care and see medical disasters every day. I know this is confirmation bias, but there is truth to it. One simply can not know if they will be able to work in their 60s or even 50s in some cases.

    Unless you are miserable, just work an extra year or two knowing that you are probably FI and can walk away at any time. Worst case scenario you end up with too much money and have to inflate your lifestyle a bit or decide which charity to fund.

    1. I’ll remember this as the post where the Happy Philosopher mentioned HAVING to inflate your lifestyle :).

      But I agree on the extra year or two if you’re not miserable. That’s called a contingency, a cushion, a better night’s rest. I’m a big fan of that. And if you -are- miserable, get out now!

    2. Very true! Completely agree with the limitations of finding work in early retirement! Thanks for sharing!
      Just like you, I found it preferable to just work a few more years to pad the portfolio (my definition of flexibility). It was a job I actually enjoyed, just not enough to do it until age 67. 🙂

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