Unless your internet was out or you’ve been living under a rock for a few weeks you must have heard about the earthquake created by the Suze Orman interview on Paula Pant’s Afford Anything podcast. Lots of people have weighed in already. I participated in a few discussions here and there on Twitter and on other blogs but I also have a few things to say that can’t be distilled into a short tweet or blog comment. So here’s a short blog post with my thoughts.
Well, you can’t blame her for beating around the bush; Suze started the podcast proclaiming that she hates the FIRE movement. And the reaction in our community was swift. And brutal! Suze Orman was called a buffoon and worse names. She just doesn’t get what we are all about in the FIRE movement! OK, let’s congratulate ourselves on what the royal smackdown we gave the Matriarch of Money… Are we done patting ourselves on the back? Great, so let’s face reality again. Sorry to tell you all, but we merely convinced the folks who need no more convincing, i.e., other members in the FIRE community. And I have the concern that, wait for it…
…to a neutral observer, Suze Orman won the argument!
That’s because she got the headlines in the popular media after the interview; Business Insider, Market Watch and Time/Money Magazine. Watch the YahooFinance video of Suze and the journalists making fun of us!
The average reader/viewer who’s never heard about the FIRE movement walks away with the impression that the great money expert Suze Orman just schooled a bunch of uneducated financial clowns. Sadly, people might get the false impression that early retirement requires such an insurmountable large pile of cash that it’s not even worth trying to pursue FIRE. I’m not saying that this is true because nothing could be farther from the truth but it might be the perception to a lot of people unfamiliar with FIRE. To me, it sounded like Suze wanted to ruffle some feathers and that’s why she approached Paula and volunteered to go on the podcast! Did she use us to get herself into the spotlight and sell her strange “work until you’re 70” narrative again?
So, we got a lot of work ahead of us dealing with the Suzes of the world! Notice I’m using the plural here. Most of us are probably not famous enough to talk to Suze in person. But we are still going to encounter a lot Suze lookalikes in our lives; relatives, friends, neighbors, colleagues etc. who have an equally unrealistic and bombastic “you need at least a gazillion dollars to retire early” mentality. Here are a few suggestions on how to discuss FIRE when encountering a skeptic like Suze…
1: Let’s not be out of touch with the realities of ordinary middle-class people, i.e., let’s not be a bunch of Suzes ourselves!
Suze, for someone who’s marketing herself as a money expert for the masses, you are so out of touch! You are flying around in a private jet. And you have a private island. Good for you! God bless American Capitalism! With your spending potential, you could certainly put your mother into a $30k a month nursing home. Though later in the interview you give everyone a discount and budget “only” $250k a year, thanks a lot! And eventually, when you will require care yourself you can probably buy an entire nursing home and fly it to your private island. But being rich beyond imagination also lowers your credibility! None of the numbers you throw around make any sense and especially with that $30k/month (Ritz-Carlton?) nursing home you outed yourself as an out of touch elitist TV talking head.
That being said, in the FIRE community, we have our own fair share of out of touch advice as well. Case in point, a fellow blogger called healthcare in early retirement a “comically tiny problem” (and threw in education and living in high-cost of living areas in the same category). The recommendation of that blogger for dealing with high-cost medical care is, let me quote:
“use personal relationships to get cheaper or free education or medical care in exchange for helping teachers and doctors with something they need from us.” Mr. Money Mustache, 10/5/2018
I recently had an MRI and a $3,000 copay. Maybe the radiology department at UCSF could use a safe withdrawal rate analysis? Maybe I’ll do some additional asset allocation analysis for UCSF and they’ll credit that toward little Ms. ERN’s future university tuition? But on the medical bill, I didn’t see any barter payment option. What am I doing wrong here?
But seriously, my recommendation: let’s not try to defend our position with almost equally asinine bumper stickers. Of course, health care is a great concern for everyone in the FIRE community! Of course, long-term care should be on everyone’s mind. Suze may be mindlessly pessimistic and cautious. But it’s not helping when we are mindlessly and unrealistically optimistic. If we discuss FIRE with a skeptic and healthcare or long-term care or other issues come up we should have better answers than a bumper sticker! And of course, we do have better answers:
- In my retirement plan, I budget for a high-deductible health plan plus the annual out of pocket maximum. That amount is a substantial sum of cash every year – definitely not “comically tiny” because I’m not laughing. But it’s not the insurmountable sum Suze Orman wants you to budget! Shop around in the FIRE blogging world and you’ll find a lot of material on this topic. Collectively, we’ve already spent a million times more time thinking about the healthcare issue than Suze.
- My blogging friend Fritz over at The Retirement Manifesto had a great post on dealing with long-term care and his rationale for self-insuring. Fritz correctly pointed out that long-term care is a lot less daunting because nursing home stays normally occur very late in life and for a relatively short duration only.
What I liked most about Fritz’ approach is that he puts some hard facts and numbers behind his reasoning. That’s much more credible than Suze’s estimates out of thin air. And this brings me to the second recommendation…
2: Let’s not be sloppy with numbers, i.e., again, let’s not be a bunch of Suzes!
Suze Orman’s style is to mix personal financial advice with some feel-good emotional mumbo-jumbo talk. Sometimes it’s actually 100% mumbo-jumbo. That may make great entertainment on cable TV but the only problem with this approach: finance and even personal finance is an inherently quantitative discipline. You can B.S. as much as you want but in the end, you have to give advice based on sound mathematical and financial principles like time value of money, opportunity cost, etc. And if you ignore mathematical principles you end up with questionable advice like her 8-month emergency fund, see here why I find that’s not a good idea. Or the 5-10 million dollars needed to retire.
But isn’t a part of the FIRE movement just using some of the same Suze modus operandi as well, i.e., mumbo-jumbo over analysis? I certainly remember seeing some mathematically suspect analysis:
- A house is a terrible investment because the Case-Shiller index appreciated by less than the stock market? But that ignores all the benefits of owning a house as I pointed out in my post last year.
- People prescribe a 4% Rule across the board when we should take into account idiosyncratic needs on a case by case basis, see my ten lessons from doing ten customized thorough safe withdrawal rate analyses.
- And the folks relying on the Trinity Study who point to the low (unconditional!) failure probabilities? They ignore that there is a clear correlation between stock and bond market valuations and retirement success that makes the failure probability conditional on today’s circumstances a lot higher, see my SWR series part 3.
- Just be flexible in early retirement and that will solve the problem with sequence risk, right? I used to believe that mantra, too until I ran the numbers. See parts 23-25 of my SWR Series on why I believe that flexibility is a bunch of mumbo-jumbo that would make even Suze Orman blush.
Notice a pattern here? Some of the advice for early retirees is just as devoid of math and common sense as Suze’s. We don’t win an argument against Suze’s pessimism with almost equally baseless optimism. Numbers and math win the argument! I won’t go through a lot of math in today’s post, but I do want to talk about long-term care because it’s been on my mind as well. I also addressed this very issue at the FinCon18 panel discussion on withdrawal strategies. Specifically, let’s look at the following numerical example:
- A 60-year retirement horizon for a 35-year-old.
- $2m initial investment portfolio (as mentioned by Paula in the podcast). 80% stocks, 20% bonds.
- Different consumption profiles over time:
- Model 1: A flat consumption amount for the entire 60 years, i.e., ignoring the potential for nursing home costs (or alternatively, having to cut other expenses one-for-one to afford care).
- Models 2-6: A nursing home stay starting at ages 70, 75, 80, 85, and 90, respectively, and lasting all the way until age 95. Assume the nursing home costs an additional (!) $8k a month ($96k/year) over and above the withdrawal amount starting at age 35. That’s quite a generous budget because if you were to start with, say, $60k initial withdrawal you’d add the $96k to that for a total budget of $156k a year. Not enough for Suse’s mom at the Ritz but it will suffice for most middle-class Americans.
- Model 7: assume the nursing home stay starts at age 80 (same as model 4) but it lasts for only 5 years. After that, we assume that the person passes away.
- To be super risk-averse I also assume that the additional income from Social Security cannot be used to lower the portfolio withdrawals. Instead, Social Security benefits go straight into higher health expenses in old-age, over and on top of the nursing home expenses above!
- To account for the fact that today’s stock and bond valuations seem a bit expensive, let’s assume our extremely risk-averse retiree wants to withdraw only the fail-safe amount that would have survived even the horrible Great Depression and the almost equally scary 1960s through 80s.
So, how much could this retiree have withdrawn under the seven different spending patterns assumptions? Let’s get the ERN safe withdrawal Google Sheet up and running, see Part 28 of the SWR Series for more details. The results are below:
- Even without the nursing home costs, let’s discard the idea of that $80,000 initial annual retirement budget, shall we? About $63k is the failsafe. The 4% Rule would have an unacceptably high unconditional failure probability (i.e., ignoring today’s expensive CAPE ratio) of 14%. Even 38% when conditioning on a high-CAPE-ratio environment! You don’t have to be Suze to consider this too high!
- Accounting for the nursing home expenses will, of course, lower the amount you can withdraw in year 1. But not by that much! For example, if the nursing home stay lasts only 10 years towards the end of the retirement horizon (ages 85-95) the safe initial withdrawal amount drops by only 5.67%. The key here is that the large expenses are so far in the future and are thus discounted by many years and even decades of compounding equity returns that the impact on today’s retirement finances is not all that large. Unless you retire in your 30s or 40s and immediately move to a nursing home you will likely have a decent retirement success with a $2 million portfolio.
- Moreover, if we assume that the health disaster that sends you to the nursing home will also correlate with your life expectancy (Model 7) there is no noticeable difference in the initial fail-safe withdrawal amount! How amazing is that? The higher expenses between ages 80 and 85 (lowering the SWR) are exactly offset by the shorter time horizon (increasing the SWR)!
Remember, Suze called for “Retiring early? Hope for the best but plan for the worst” and that’s what I did here! With $2m in the bank, you are prepared for the worst, namely, a macro disaster like a repeat of the Great Depression in conjunction with adverse personal spending shocks. You should be able to retire on a middle-class budget! Be a little bit more cautious than the naive 4% Rule, though, but you will enjoy a worry-free retirement with much less than what the Suzes of the world want to make you believe! Even if you’re as risk-averse as Suze this still works!!!
Sorry, though, that my line of reasoning doesn’t fit on a bumper sticker. But without careful analysis like this, we will all talk past each other until the cows come home. 2 million? No, 10 million! No, 2 million, No, 10 million etc. Luckily, appreciation for more thorough analysis is increasing. For example, yours truly was quoted in a recent Wall Street Journal article:
Karsten Jeske, a [CFA charterholder] and author of the Early Retirement Now blog (earlyretirementnow.com) has written a 28-part (and counting) series about safe withdrawal rates. In short, Mr. Jeske is no fan of the 4% rule; rather, his articles look closely at, and make a compelling argument for, withdrawal strategies that are tied to “changing economic and financial conditions.” WSJ 9/6/2018: Why the 4% Retirement Rule Is Just a Starting Point
Eventually, the FIRE doubters will get the message, too!
3: Use Suze’s own arguments in our favor
People get into trouble due to unforeseen events. Very true, I couldn’t agree more with Suze’s warning. Not acknowledging that would again violate principles 1 and 2 above. But many of Suze’s worst-case scenarios that would jeopardize someone’s early retirement (illness, accidents, etc.) will just as easily derail your working career and plans to work until age 70. There isn’t a greater rationale in favor of pursuing FI than the various curve balls that life throws at you. In other words, getting into financial trouble is likely not the result of retiring early but it’s a function of people not having enough savings. So, a lot of Suze’s disaster scenarios are, at the very least, a great selling point to get people started on the FI part. And once you’re FI, why not go FIRE as well? In June this year, I retired at age 44 and if I were to get hit by a bus today I’d be thankful for the time, albeit a short time, of awesome early retirement adventure with my wife and daughter.
Also, for the record, some of the disasters mentioned by Suze are not really as disastrous as she wants to make them. Hurricanes, fires, etc. wiping out your home or your rental property empire? We’ll make sure we enough insurance on our property!
4: Concede something to Suze.
Even in a pile of rubble, you may find some diamonds. Here are a few things that Suze pointed out that are probably true:
- Suze is right about applying the Precautionary Principle in this context. I wouldn’t want to step on an airplane that has a 3% probability of crashing. I also design my withdrawal strategy around the principle that I like an essentially zero probability of failure. But of course, I don’t want to go so gung-ho on the risk aversion that the Precautionary Principle morphs into a Paralyzing Principle!
- Suze is right about the 4% Rule: Don’t retire with $2m and expect you can withdraw $80k a year (adjusted for inflation) for the next 60 years. That’s likely too aggressive for extremely early retirees even with a flat spending profile, see my calculations above and my safe withdrawal rate series! And again, I don’t think that being “flexible” in early retirement is an easy solution either, see parts 23-25 of that series.
- Dividends can be cut. The dividend yield is often sold as the perfect way around Sequence Risk. I have my doubts. Dividends have been cut in the past, see Part 12 of my SWR Series.
- Compounding is less useful over short horizons. Yup, that’s true, see section “5: FIRE contributions vs. capital gains” in Part 27 of the SWR series (and you may remember me making this point if you attended the CampFI meeting in April). Because early retirees have less time to save they also rely less on compounding returns and more on contributions.
5: Compliment Suze
We all heard the saying “love your job and you never work a day in your life” and I’d concede that Suze fits the description of a person living that dream. She seems to be extremely passionate about her job and she even came back from a multi-year mini-retirement to continue her gig. Who would blame Suze for wanting to do her “job” until and even beyond age 70? But not everyone has the luxury of doing a job we love. So, here’s how I’d sell my decision to retire early to Suze: Imitation is the greatest compliment, thus, I’d tell simply tell her:
“Suze, girlfriend, I just want to be like you”
Let’s see if she still hates that. Notice the similarity I’d have with Suze: I gave up a demanding and stressful job so I can travel more and spend more time with my loved ones. And I pursue my passion for helping others with their finances. Not sure if I’ll be quite as successful as Suze Orman with my little ERN blog here but I may eventually even make some money with the blog to even help with the bills. I don’t plan to become a Cheeto-dust-covered caricature of a lazy unproductive early retiree. My plan is to stay mentally and intellectually engaged in the personal finance world.