Why is Retirement Harder than Saving for Retirement? (SWR Series Part 27)

Welcome back! It’s time to add another piece to the Safe Withdrawal Rate Series (see here for Part 1). After churning out over 20 parts in this series so far I wanted to sit back and reflect on some of the things I’ve learned from my research. And something occurred to me: Withdrawal strategies in retirement aren’t easy! Contrast that with Mr. Money Mustache’s Shockingly Simple Math of Early Retirement post and Jim Collins’ Equity Series that was rewritten into a book The Simple Path to Wealth. Very influential posts and they are among my favorites, too!  So, naturally, I agree 100% that saving for retirement is relatively simple!

Saving for Early/traditional retirement: three simple ingredients!

Disclaimer: Saving for retirement with a savings rate of 50% or more as is common in the FIRE crowd requires a great deal of discipline. Especially over a 10+ year time span. It’s not easy! Only the math behind it is simple! It’s a bit like dieting; conceptually very simple – healthy diet plus exercise – but it’s not that easy to implement and stick to the plan!

Then, shouldn’t retirement be just as simple? Why am I making everything so complicated? I’m approaching 30 parts in this series, many of them with heavy-duty math and simulations and still a few topics on my to-do list! Am I making everything more complicated than necessary? Am I just trying to show off my math skills? Of course not! Just because saving for retirement is relatively simple it doesn’t mean we can just extrapolate that simplicity to the withdrawals during retirement. And that’s what today’s post is about: I like to go through some of the fundamental factors that make withdrawing money more complicated than saving for retirement. Think of this as an introduction to the SWR Series that I would have written back then if I had known what I know now! 🙂 Ironically, some of the issues that make saving for retirement so simple are the very reason that withdrawing during retirement is more challenging! So, let’s take a closer look…

1: Saving for retirement has an ambiguous success criterion and “failure” is a lot less painful!

So, you want to save a million dollars over the next 10 years to retire? Would you call your plan a failure if after 10 years you make it to $900,000? It’s still a $900,000 success, not a $100,000 failure! The exact net worth target will likely be a moving target anyway! Likewise, I wouldn’t call it a failure if it takes you 11 or 12 years to reach your target! That’s still pretty impressive!

Not so in retirement. If you have a 50-year horizon and the money runs out after 40 years I would call that a failure, and a pretty painful one, too! If you look at the retirement research (Trinity Study, my SWR series, etc.) there is a mathematically unambiguous cutoff; if your portfolio runs out of money within 30 years that’s a failure. If you have even one single dollar left the Trinity Study would still call that a success.

2: Flexibility is a lot easier while saving for retirement!

Related to the previous point: Imagine someone’s plan to save a million dollars over ten years falls short by $100k or even $200k. It’s not the end of the world! Simply work an additional year or two. Especially for the early retirement crowd, it’s no big deal if you retire “only” 24 years before a traditional retiree instead of 25 years. Flexibility is a bit harder when you’re retired. If your money runs out at age 80, you can’t just “die a few years earlier.” Or just go back to work for a few more years.

Of course, critics would argue that most early retirees will use flexibility to save their early retirement way before they risk running out of money. But as I showed in some of the recent SWR Series posts (see Part 23, 24 and 25), this form of flexibility is not without pitfalls either. It’s certainly not as simple as some people want to make it! Everyone can tighten the belt by 30% or 40% or even 50% and consume less (or go back to work part-time) but my simulations in those previous posts show that the duration of your flexibility can be really unpleasant. In some of the cases, flexibility involved going back to part-time work not for years but two decades. Not really a workable solution for me!

3: A stock market crash is a lot more worrisome in retirement

The number one concern of equity investors is a bear market. But I’ve made this point on many occasions already (ChooseFI podcast episode 35 or my recent post on why the stock market isn’t exactly a Random Walk): under certain conditions, a bear market is not the worst thing that can happen to young investors. What do I mean by “under certain conditions?” If a bear market takes the shape of most previous ones: a sharp drop and a swift recovery, think 2008/9 and the strong recovery that followed. If you’re still in the accumulation phase and far from retirement you can even benefit from that temporary drop thanks to dollar cost averaging (DCA). That’s because if you keep contributing to your nest egg during the bear market you can really turbo-charge your net worth! I did that in 2008/9 myself!

But in retirement, you face the flip side of DCA: Sequence Risk. Instead of buying more shares per dollar we’re now depleting the portfolio at a faster rate while the market is depressed. Let’s look at the following numerical example of a “typical” bear market:

  • 12 months of flat (real) returns,
  • A 40% drop over 18 months,
  • A new bull market over 7.5 years with a cumulative return of about 170% (just over 14% p.a.) to bring the average compound return to 5% (real) over the 10 years!
Numerical Example of a bear market and subsequent recovery. 1 year flat, 1.5 years bear market (-40% total) and subsequently 7.5 years of 14.2% annual returns. Total CAGR of 5%.

But remember, this is the cumulative return of a portfolio without withdrawals. Let’s assume we used a 4% withdrawal rate. Since the market returned a full percentage point more than our withdrawal rate we should not worry, right? Wrong! Let’s look at what happens with the portfolio if we factor in a 4% withdrawal rate, see below. Even after 10 years, the portfolio is still below the starting value, all compliments of Sequence Risk. By the way, the chart below is also a nice illustration for why that whole “flexibility mantra” (see point 3 above) is so misplaced. Flexibility, i.e., withdrawing less than initially planned due to a severely depleted portfolio can last much longer than the bear market. For example, when taking the withdrawals into account the portfolio value spends about 60 months below 70. Much longer than the 18 months of the bear market!

The market recovers. But the portfolio doesn’t even though the withdrawal rate (4%) is below the average return (5%), due to Sequence Risk!

4: While saving, returns and contributions pull in the same direction…

… and while withdrawing they pull in opposite directions. Why does this matter? I find the following analogy helpful. Imagine you’re paddling in a canoe. Downstream! It’s relatively simple to reach your destination. A combination of paddling and gravity will take you downstream. If you get tired from paddling you can rest for a while and let the stream take you. And, vice versa, if the stream slows down you can compensate with paddling a little harder. Simple! But it would be crazy to conclude that paddling upstream is also simple!

The danger of extrapolation: Paddling downstream is easy! That doesn’t mean that paddling upstream is easy as well! Picture credit: pixabay.com

How does this relate to personal finance? Think of the stream as the contributions and withdrawals and paddling as the portfolio returns. Saving for retirement is like paddling downstream and it’s pretty simple for the reasons mentioned above. Withdrawing money would be analogous to paddling against the stream and hoping the stream doesn’t take you too far back: over the waterfall = running out of money, arghhh! The unpleasant side effect of this: if your paddling speed is about as fast as the stream (capital preservation) or slightly slower than the stream (targeting capital depletion) then small changes to the withdrawal rate can have large and unpredictable effects to the final portfolio value.

To illustrate this, let’s look at the following case study. In the chart below I look at the evolution of the portfolio of the January 1965 retirement cohort using different initial withdrawals. Assume that we start with a $1,000,000 initial portfolio (80% stocks, 20% bonds) and vary the initial withdrawal amounts between $32,000 and $37,000. A relatively small range of withdrawal amounts (15%) but the final value after 50 years ranges from running out of money (i.e., a negative final value) to actually growing your (real, CPI-adjusted) portfolio by about 55%. Relative to the initial portfolio value that’s a range of about 170% and that’s all by varying the withdrawal amounts by 15%!

The January 1965 cohort with an initial portfolio of $1,000,000 and different initial withdrawals (subsequently adjusted for CPI). 80% Stocks, 20% Bonds. Small changes in withdrawals amount to substantial differences in final portfolio values after 50 years!

This would look very different when saving for retirement: If two savers start with $0 and one saves 15% more then the final value is also (roughly) 15% more (subject to some constraints, like contributions limits in retirement plans, etc.).

5: FIRE contributions vs. capital gains

The “miracle” of compound interest makes it possible to grow small amounts into large piles of money over the years and decades. Below is a chart of a simulated portfolio if you invest $1 in the first month, increase the contributions by 2% CPI each year and get an 8% (nominal) return p.a. The portfolio grows to over $6,000 over the 45 years (540 months). Less than $900 of that (14%) comes from your contributions and the bulk (86%) is from capital gains.

$1 saved every month (and adjusted by 2% p.a. inflation) grows to more than $6,000! Thanks to compounding!

But saving for early retirement is (likely) quite different. If you save for “only” 15 years then a good chunk of your retirement net worth comes from your contributions, not capital gains. Let’s look at that same numerical example again but zoom in to 15 years: After 15 years, 54% of the portfolio is still from contributions (and it would be a whopping 67% after 10 years, at least in this example) see chart below. Achieving FIRE you’ll have to be 54% saving/frugality expert and “only” 46% investing expert.

Same calculation over a 15-year horizon: more than half of the final value comes from contributions!

What changes when we withdraw money? It depends on the horizon! Let’s look at the simple calculations below. Imagine we start with a $1,000,000 initial portfolio and an initial $40,000 withdrawal, adjusted for 2% inflation every year. Over a very long horizon, say, 60 years we’d withdraw a total of more than $4.5m. Why not $2.4m (=60x$40,000)? These are nominal dollars, so the withdrawals are adjusted for 2% inflation every year! In any case, if I start with $1m and I withdraw a total of $4.5m I’d have to generate at least $3.5m in capital gains to make sure I don’t run out of money. Out of every $100 of withdrawals, $78 come from capital gains and only $22 from the initial net worth. That’s much harder than traditional retirement where most of the withdrawals come from just drawing down the principal.

Because early retirees have to rely so heavily on capital gains they are more susceptible to asset return volatility, Sequence Risk, etc. and all that makes early retirement much more uncertain and unpredictable than accumulating assets!

$1m initial portfolio, $40k initial withdrawal, then adjusted by 2% inflation every year. Stats over 30, 40, 50 and 60 years when targeting capital depletion.


In one respect, saving for retirement is hard; 50%+ savings rates for a decade or more takes a lot of discipline, especially when everyone around you is living the high life! And retirement is pretty sweet and easy as yours truly can attest, sipping a bottle of Pilsner Urquell while staying in Prague right now as part of our ERN Family World Tour. But simple vs. complicated reverses when I look at the mathematical and financial aspects of accumulating vs. decumulating assets. Now, saving for (early) retirement is relatively simple. Start early and invest in passive index funds – mostly equities, especially for young investors. Rinse and repeat until you reach your savings target. Conceptually very simple! But withdrawing money is more challenging, as I have pointed out here on the blog so many times. I get the impression, though, that in the FIRE community this little “detail” is brushed over quite often. And thus everybody is looking for simple solutions: 4% Rule, flexibility, hand-waving, extrapolating the “simple math” to the withdrawal phase. But withdrawing money in retirement is a serious challenge and conceptually much harder than accumulating assets. Maybe this was already obvious to readers here on the blog but I felt that I should make this point very explicitly in a separate blog post!

PS: “Withdrawal Strategies for Early Retirees” was a topic interesting enough to be included on the program at the upcoming FinCon (make sure you register here if you haven’t already). There will be a “Money Conversations” session featuring Physician on FIRE, Jonathan and Brad from ChooseFI and yours truly, Big ERN. It’s scheduled for 10am on Saturday – make sure you stop by!

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

99 thoughts on “Why is Retirement Harder than Saving for Retirement? (SWR Series Part 27)

  1. Thanks for the good share. I still see too many early retirement advocates that bank on 7-9% returns.
    Both ignoring the sequence of return risk, and inflation.

  2. fyi-2 wording errors to bring to your attention:

    Out of every $100 of withdrawals, $78 come from WITHDRAWALS[?] and only $22 from the initial net worth. That’s much harder than traditional retirement where most of the withdrawals come from just drawing down the principal.

    Because early retirees have to rely much more heavily on capital gains than folks saving for EARLY[?] retirement they are more susceptible to asset return volatility,
    btw- always read your stuff. thanks for your work

  3. Have enjoyed your series. I would be grateful if you would consider the following two topics for future posts:

    1)The markets behave during the first ~ten years of your retirement. What rules are sensible to follow with regard to adjusting withdrawals to make the most of your good fortune.

    2)Is trying to protect a portfolio using put options a sensible strategy in early retirement

    1. Thanks!
      Both great suggestions!
      1: I’m working on a post like that: how to respond to market fluctuations to avoid running out of money but also now having to slash withdrawals for as long or deeply as in some of the sims in parts 23-25.
      2: I doubt this works well. Put options are way too expensive (https://earlyretirementnow.com/2016/09/28/passive-income-through-option-writing-part1/). But I can see how one could wait until (implied) volatility is low, then buy a few long-dated protective puts. But it’s hard to simulate this. I don’t have the option price data…

      1. Thanks for the reply. I felt that the >1% cost per annum of long puts to part protect would affect portfolio performance too much, but it is good to have you say that you think them too expensive.

        Once again, thank you for this series.

  4. The graph depicting success with withdrawls from 32k-37k from a $1mil portfolio for the 1965 cohort seems to not reflect the numbers i see from cfiresim?

    1. It’s created with my own Google Sheet. See part 7 for the link. Then do the case study (but extend the range to 600 months from the current 360).
      Small differences can be due to my assumption of monthly withdrawals and monthly portfolio rebalancing. But I’m 100% transparent with the calculations so my numbers are correct. I can’t vouch for cfiresim because it’s a bit of black box to me. 🙂

  5. I like seeing the chart of the 1965 retiree. Something that’s rarely addressed is how you’d FEEL when after 15 years of withdrawals your assets are worth half of what they were and “still going down”. Most people can’t deal with that sort of emotional stress and will react, almost always poorly.

    1. And by the way, even the retiree withdrawing only 32k saw significant drawdowns! Scary! Goes back SWR Series Part 26, #5 and the airplane analogy: THat’s like the pilot shouting “we’re all gonna die” Very unpleasant experience even though the $32k crowd still made it after all! 🙂

  6. What I find most interesting about the 1965 cohort chart is that a 4% withdrawal is clearly not sustainable over the long term, while a 3.5 or 3.6% is.

    Although it would require a lot of work, it would be fascinating to see what historical withdrawal rates would be sustainable for every cohort going back to – say – 1926 or so. Obviously past returns do not guarantee future results, but it would be nice to know the maximum historical withdrawal rate.

    1. PortfolioCharts already does this, but its data does not go back that far for various reasons.

      1. I know most FIRE people are too attacherd to equity investments and that involves the risks highlighted here. Consider real estate investment instead. Only spend upto your rental income every year and you will never have to worry about loss of principal. Yes there are some details to track, like maintain proper insurance that cover loss of rental income from fire/flood, umbrella policy, etc. and keep some funds for emergency repairs (always maintain that balance) and forget about market fluctuations. BTW, this is for all real estate being mortgage free.

        1. Very good point! I like residential real estate because of the stable cash flow. We’re shifting some of our investments into RE for that reason.
          But managing this yourself is much more active than a passive equity portfolio. It’s not for everyone!

  7. Turning 63 soon and planning to retire in 6 months. Until collecting social security at age 70 my withdrawal rate will be 5%, then it drops down to 2%. Have several years worth of expenses in cash and short-term bonds. Bond allocation is mostly VBTLX. Asset allocation is 45/55. Portfolio is in Vanguard who will send me monthly withdrawals to live on. They do this with an eye toward rebalancing, so taking from the asset class that has increased. So no explicit plan to spend from cash or short-term bonds if ‘x’ situation happens in the market (What would that plan be: Don’t sell equities if market drops ‘x’%? But isn’t that what Vanguard would be doing anyway?).

    Any thoughts about my exposure to sequence risk? Would you recommend buying some kind of floor (Invesco BulletShares? CD ladder? other?) to cover 2-3% of expenses until social security kicks in? Do you think it’s important to have some inflation protection (TIPs?)?

    Many thanks for any input on this. Recommendations gratefully accepted. Don’t know how concerned I should be about the 5% withdrawal rate for the first 7 years…..

    1. East Coast, please read section 12 regarding the cash cushion if you have not already done so.

      You can model how your plans would have fared in the past using cfiresim – I usually set the duration to my spouse reaching 105 to allow for longevity risk!

      My take on pretty much every form of risk protection is that one needs to see the impact it has on (sufficiently) long term returns. Wade Pfau appears to favour single premium deferred annuities.

      1. Thanks Ben. Appreciate your comments. I am considering a ladder of period certain annuities and/or CD ladder to cover those 7 years….. I thought Wade preferred SPIA’s , not deferred, could be wrong….

  8. Love your “paddling upstream” analogy 😀
    As a paid-up member of the 2000 cohort you discussed in your Potemkin Village post (SWR part 6?) I do find the “100% equity, draw 4% and it’ll all be fine” approach to the post-retirement phase terrifying.
    Your chart showing a simulated 100% equity 2000 cohort portfolio running out of cash in 2025 is somewhat sobering (or should be for anyone FIRE-ing soon, possibly towards the end of a good bull run for equities?). With a different portfolio mix and higher withdrawal rate, that could easily have been me….

    1. Wow! An actual sighting of a successful year 2000 early-retiree! Must be rarer than Sasquatch! 🙂
      Congrats on your success and the foresight to be more conservative back then! Thanks for the compliment and best of luck!

      1. let’s not call it foresight, more like blind luck 😎 Maybe there are other “team Sasquatch” investors out there with insights on how they survived?

        1. 97-98 for me, and still going strong. But of course, I’ve never been a fan of conventional passive asset allocation except when valuations/interest rates indicate favorable risk/reward.

  9. Hi, I just found your website and I love it. Lots of great info. One question with respect to Sequence of Return Risk. Have you ever investigated Trend Following to mitigate SRR? One simple model would be a system like Alpha Architect applies for its VMOT etf. They have 2 trend following signals, let’s call them “absolute” and “relative”. The absolute signal is whether stocks have outperformed T-Bills over the last 12 months. The relative signal is whether stocks are above the 10 or 12 month moving average. Dedicate half your equity position to each signal. So if your portfolio would nominally be 100% stocks, at any given time you could be 0%, 50%, or 100% depending upon whether 0, 1 or 2 of the signals are trend following signals are positive. The assets not in stocks should be invested in intermediate term government bonds. I’m pretty sure this would beat the glidepaths you detailed in Parts 19 and 20.

    1. Very good point! I have looked at simple trend following too:
      I also ran my own simulations (not yet published on the blog) on what happens in the context of SWRs when using trend following. It does raise the fail-safe SWR. But lowers the best-case SWRs. So, momentum is a sort of an insurance policy.
      Also notice that some of the glidepaths I used had something looking a bit like momentum: what I call an “active glidepath”:
      “Active means that we increase the equity share only when equities are “underwater,” i.e. when the S&P500 index is below its all-time high. We want to avoid shifting out of bonds too early, i.e., before the market peak and then having insufficient bond holdings when equities take a dive.”
      It might help a little bit with the SWR but not that much. I guess, a real strict trend-following approach is better!

  10. Hi Big ERN! Don’t know if you’ve seen a few comments (including one from me) that are further down after the initial comments? Don’t know why they’re separated from the rest and just want to make sure they’re on your radar? Thanks for your good work!

  11. Yay! Someone is intelligently discussing the math of decumulation and how it differs from accumulation! Well done! I always say the only people who advocate the 4% rule and conventional safe withdrawal rate strategies are the people who’ve never actually lived off of them through a few market cycles. As you wisely stated at the beginning, that which makes accumulation easy is what makes decumulation far more difficult when deeply understood.

  12. “If your money runs out at age 80, you can’t just “die a few years earlier.”

    I’m laughing so hard. Can’t. Stop.

  13. In my opinion, the reason few people talk about this is because it’s so complex and unpredictable. There’s no correct answer to the question of how to handle various scenarios. Everyone lives different lives and nobody can predict when a crash will come or how long it will last. It’s impossible to solve a problem that you cannot define. Plan for the worst case situation? Define worst case.

  14. Great post as always.

    I’m really looking forward to best of strategies mentioned that takes into account all the articles and helps with the 5 years out and then in withdrawal phase.

    Also, interested in part three of article that continues the signs of recession…

  15. This is why I prefer to be more conservative. I’m working a little bit after early retirement so we don’t have to withdraw yet. Just put off withdrawal until we’re in our 50s and we’ll be in a great shape. I’m too conservative to start withdrawing in my 30s and 40s.

  16. Very interesting article Karsten. I think you highlight a reason that it is important to try and diversify income streams in your early retirement if possible. Whether that be a blog that may generate some money, real estate investments, or an easy side hustle (I use the term “easy” lightly).

    This certainly gives me something to think about!

  17. Thanks Karsten! Always great to get your perspective as you put theory into practice – never let it be said that you lack the courage of your convictions! 🙂

    Guess what we are working on now – Withdrawals and Tax efficiency.

    Also we tried to make it easier for users to understand what we are working on here: https://www.newretirement.com/pricing

    I’ll ping you shortly.



  18. Always love reading the series. We make a very conservative assumption on our returns while in the accumulation phase and are planning on slightly less than a 4% withdrawal rate. We have not lived through a major downturn in our investing lives(we were 18 in 2008) but all your posts are helping me put together a plan that we can confidently execute.

  19. Wonderful article. Are you going to write an article on the recent changes to individual tax rates and whether it is a good idea to convert pretax retirement accounts during this period before the rates may revert back for people with income being taxed at 22 or 24 rate?

  20. Great article and blog. It would be nice to have a blog from a little bit different perspective: how long does it takes to reach FIRE in accumulation phase for each cohort? How does median accumulation duration (i.e median salary with different saving rates) correlate with SWR that each cohort experiences? Are cohorts which reach FIRE fast due to favorable equity returns at more risk? (Should a person assume a more conservative withdrawal rate who had median salary, very high savings rate (i.e 60%) and reached FIRE target quickly due to very favorable equity returns late in the accumulation phase?)

    This could be a little bit more holistic approach leading to more (different?) conclusions.

    1. A bit more clarification:
      “Mr. Money Mustache” in “The Shockingly Simple Math Behind Early Retirement” blog assumes a real 5% investment return when calculating the time needed to reach FI. I guess there is also a “sequence return risk” during accumulation period. i.e a strong bull market late in the accumulation phase will help the saver to reach his/her “number” faster, but this may lead to higher CAPE at the beginning of retirement and therefore probably a lower withdrawal rate is wise choice?

      With other words, if a saver in a cohort noticed that he/she reached FIRE very quick (assuming median salary, constant savings rate), is there more risk for this cohort during retirement?

  21. Quick question on the sequence risk graph. I’ve opened your Google Docs file but can’t quite tell. Are you factoring in the dividend yield on the S&P?

    The S&P 500 yielded around 3% in January 1965. Muni bonds were 3.2% so I’m assuming corporate bonds were at least 4-5%. So even for someone who is withdrawing 3.7%, that should have been nearly covered by dividends and interest depending on what type of bonds the person held in the 80/20 portfolio.

    So what actually happened if their expenses were covered by dividends and interest? Seems pretty conservative to me. There was a big drawdown in the stock market in the years ahead, sure, but they were not selling shares – only living off dividends and interest.

    Is the key fact that their expenses grew dramatically with the higher inflation levels in the 1960s and 1970s?

      1. Thanks. But as I pointed out, with the dividend yields and interest rates at the time, their expenses were covered by dividends and interest on the bond portion. So no underlying stocks or bonds needed to be sold. At least in the first year – perhaps inflation caused their expenses to increase over time such that the dividends and bond interest didn’t cover them.

        In other words, sequence risk doesn’t matter at all if you’re never actually selling any shares and just living off dividends as it appears they were initially. Something seems wrong with your data.

        1. But dividends can be cut. See the two dividend time series in this post:

          Bond portfolios and interest can be inflated away by inflation.

          In addition, with today’s dividend yields and bond real yields (2.8 to 3.5% nominal yield = 0.8-1.5% real yield), you’d have to amass such a large net worth, much more than 25x to pull that off.

          1. The current dividend yield is much lower than at any other point in history. Currently bond yields are lower than stock yields which is a modern phenomenon. In all previous generations investors demanded a much higher risk premium for stocks: thusly dividend yields on stocks were higher than bond yields.

            As such your future returns may not match anything we had in the past.

            The current low yield environment plus companies prefer to buy back stock instead of increasing dividends and the current stock yield are at the lowest point in history, I strongly believe that you would not be able to have your portfolio last over 50 year period.

            Therefore I believe you need to draw only income without selling any shares for as long as possible to improve your odds. Unfortunately you can’t extrapolate our historical returns even from 19871

            1. I slightly agree: because the CAPE is high I expect slightly lower equity returns going forward.
              But low dividend yields are actually the reason for relying more on capital gains. Profits can grow faster becuase of the higher share of retained earnings. In contrast, there was a time when corporations paid out eseentially ALL of their earnings as dividends, and, sure enough, price returns kept up only roughly with inflation.

  22. Just found your site and love it. IT took me a couple of days to read the 27 articles and most of the blog. This is a work of passion and yours come through. BRAVO!!

    Retiring is about managing BOTH your spending (SWR) and your investment portfolio. We talk about dynamic SWR, but use static investing allocations. How about a future article on some approaches to dynamic portfolio allocation:
    – reducing equity allocation as one ages
    – reducing equities when CAPE >30

    What is so magic about Shiller’s CAPE – basically a 10 year moving average. I struggle with a few issues:
    1. it is backwards looking (how does earnings 10 years ago help predict future returns?)
    2. It is equal weighted for real earnings (why is earnings 10 years ago given the same weight as earnings last year?)
    3. Why 10 years (could be 5 or 20)?

    How can options and shorting impact the returns and SWR? If CAPE>30 , then we could short equities.

    I understand we are looking for a “crystal ball” to predict future rates of return, but if you or I had one, we would be investing differently. CAPE may be slightly correlated (I have not seen the regression for how correlated), but …. So many have written about the folly of market timing.

    Love the dialog and all of your hard work.

    1. Thanks!
      I have written about equity glidepaths, see part 19-20. Intriguingly, you want to start with a lower equity share and then move it up!

      I also like shifting the equity allocation in response to changing equity and bond valuations. But the devil is in the details. It’s not that easy to do it consistently and correctly.

      There are limitations to the CAPE. I personally prefer using the FORWARD-looking earnings estimates, not the backward-looking CAPE. But’s it’s what we have available and we have a long time series (since 1871).

      Why 10 years? You want it long enough to cover an entire business cycle or more.

      Maybe you could assign a higher weight to recent earnings. But maybe you shouldn’t if recent earnings are way above normal and unsustainable.

  23. I wanted to say thanks for an absolutely outstanding blog!

    I also feel that there is waay oversimplification out there with respect to withdrawal rates and your post really brings out the nuances related to this topic that everyone should be aware of.

    I fear that with the CAPE ratio above 33 (and other related measure just as high, example: https://seekingalpha.com/article/4202120-s-and-p-500-median-price-free-cash-flow-ratio-now-34_66 ), a 40% bear market in the medium-term should probably be folks’ baseline rather than worst-case scenario. As your calculations how, this sort of event can be devastating to a portfolio. Unfortunately, implementing an effective hedging strategy against such an scenario (at a reasonable cost at least) can be a complex undertaking, certainly for the typical retail investor who mainly invests in index ETFs.

    Personally, I am mostly invested in real estate using a portfolio of properties in high-demand areas as I find the return from rent to be much more stable over time than the return generated from other types of assets, but it’s always interesting to read and learn more about how those other assets actually behave.

    In any case, if there is something to be learned from your posts it’s that the “devil is in the details”. Using “rules of thumb” is not always sufficient.

    Thanks again for the post!

    1. You can design a low beta portfolio with over 4% yield that is growing 2-3% annually that will have shallow drawdowns but limited upside. My portfolio has 60 beta and high Sortino ratio that means my risk adjusted returns are better than the market.

      I hold 10% in REITS. I prefer passive real estate vs handling tenants and risk of capital investment. It’s hard to plan on free cash flow from direct ownership.

      The author mentioned that dividends could be cut so he doesn’t want to rely on this income. It is much rarer for many companies to cut dividends at the same time than for the market to decline by more than 20%. So sequence of return risk is much higher if you sell shares for income than just harvesting dividends and interest.

      My portfolio has many asset classes. I try to minimize concentration risk for income producing asset classes.

    2. Thanks! 40% down would be devastating for most (early) retirees. I wouldn’t call that my baseline (yet) but it’s something I would consider a, say, 20% probability event. So, diversification is key. I also like real estate! Cheers!

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