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.
So, there you have it: my views on the Suze Orman controversy. Hope you enjoyed today’s post! Please leave your comments and suggestions below!
Picture Credit: Pixabay, Business Insider
Thanks for the great post here Karsten! Was already hoping you would pitch one in this game too. You didn’t disappoint 😉
Thanks CF! Glad you liked my response! Several people had asked me privately what I think so instead of replying to 3 emails I just made a blog post out of it! 🙂
Hope all in well in the Netherlands!!!
Doing very well, we still have amazing weather with way above average temperatures and virtually no rain. One of the best year’s to be outside! So yeah, doing very well thank you!
How’s the house hunting going?
Wow, sounds great!
We finished our house-hunting trip and our offer is now pending. If all goes well we’ll be homeowners soon!!!
I am very curious where you’ve ended up. We are in a similar position of selling (imminently) our Bay Area house and plan to relocate. Like you were, I am waiting on a final payout before notifying.
I’d love to understand to what area your analysis steered you.
Will announce that in a future blog post. Don’t want to jinx it because we still haven’t finished the closing! 🙂
Cool, congrats!
A great analysis as usual ERN and a precautionary tale. I suspect, as do many others, that it was more a PR stunt for Suze rather than a serious dressing down for the FIRE community. Either way, I think more conversation about FIRE is a good thing all around.
Thanks! Agree, this was a PR stunt! 🙂
Key point – Financial discussions must be rooted in math.
Thanks, Todd! Hope all is well back in the U.S.! 🙂
I think another point in Suze’s favor: If you’re getting your financial advice from talking heads on TV (cable or otherwise) you probably should work until you’re 70.
Haha, great point! The same is true for using stock tips from Jim Cramer! 🙂
Wasnt there an analysis somewhere that Jim Cramer picks DOD no better than the index because he recommends so many…
I am pretty sure there is/was: For example https://www.ifa.com/articles/cramer_chasing_mad_money/
The best analysis of this event to date. Whenever I question the math, the methods, or the greater community, I know where to turn 😉
Thanks for your kind words! Still blushing!!! Glad you found this useful! 🙂
I like your NH analysis. Numbers don’t lie. 🙂
I think we all forgot who Suze is speaking to. Her audience isn’t the FIRE crowd. They are the regular people who have lots of problem with their finance. She probably thinks they need to be scared straight. Let’s fix the basic problem first before thinking about FIRE.
She isn’t speaking to us.
Absolutely, hers is a completely different audience. But my concern is about the people on the fence: they might have been potential FIRE enthusiasts but were turned off by her comments.
Let’s say I’m already over 27x expenses saved now. And even Suze would say I’m OK.
But with CAPE where it is…am I better off continuing to work, and while doing that rebalancing to a lower risk equity mix while I continue to work, then retire after CAPE is say 20% lower, and then make the move back to a more equity aggressive posture?
Yes it means my retirement date is uncertain because we don’t know when or if CAPE will be 20% lower. But if I’ve already got an appropriate 27x+ nest egg and not drawing down from it while working – is it better to not risk losing it in a downturn? Then switch to the more aggressive posture during drawdown in a lower CAPE environment?
I am a big fan of monitoring the CAPE, despite some of its shortcomings. But I would not tie the retirement timing to the CAPE level only. If you have 33x or 35x in expenses you can probably retire any CAPE ratio.
I LOVE it, LOVE it, LOVE it! It is so interesting to realize that she “won” with regular people and that we in the FIRE community need to look at the math to see what parts of her message do have some cause for concern. Once the “Playing with FIRE” movie arrives, we should be more prepared by this entire event to talk to regular people and address those fears with information. And you are the biggest source of that information out there. Excellent post!
Thanks! I so much prefer SuSAN’s positive attitude over SuZE’s “hate speech!”
I hope more people look past the PR stunt and check out the real numbers!
Cheers! 🙂
Thanks for taking on some of the unrealistic, flippant advice in the MMM blog. I would love to dive into the numbers of a university education, as I feel that his “earn more merit scholarships to get through even an ivy league school for free” or “simply start a business” advice was astonishingly poor advice for many families, including those with exceptional students. I have one freshman in college, so the financial and scholarship process is fresh in my mind. We have two more kids in 5th and 10th grade. I, like many of your readers, value education for my kids and would like to provide them with as good a financial and educational start in adult life as possible. Unfortunately, this costs us some serious money, but I am happy to do it, and feel fortunate that we have planned reasonably well for the expense. I have to wonder if, perhaps underpinning MMM’s advice is his knowledge that he does, in fact, have a lucrative post-retirement income as well as the entrepreneur’s luxury of adjusting his income for the years reflected on the FAFSA in order to qualify for need-based funds. There is nothing wrong with either, but one must acknowledge that either is a pretty awesome backup plan if the other routes he suggested don’t pan out or are not palatable for the kid. I’m not sure, but I am supposing that the average readers don’t have these types of backup plans. Thank you again, Karsten.
Thanks! And very true how much of a burden education can be. I’m always amazed how people put multiple kids through college! We have set up a 529 plan and will hopefully cover the basic (in-state) college cost. Depending on how our SWR exercise goes in practice we may even chip in more more a private college and/or grad school.
Thanks for sharing your experience because some of the rich and famous bloggers are at risk of becoming almost as out of touch as Suze! 🙂
Thanks Karsten! You are always the voice of reason. I like and read MMM myself, but did a retake and shook my head on medical expense bartering, and wondered if things were that different in Colorado.
I’ve thought about long-term care a bit myself. For the truly risk averse, you could always just buy LTC insurance in your mid-50’s. Using your inputs and the latest SWR toolbox you have made available, if I add $250/month or $3,000 per year for month 240 on out, it reduces the annual withdrawal by only around $800. I’m not endorsing it, necessarily, just demonstrating yet another solution to a problem that purports to be insurmountable.
I like and use your approach on healthcare cost budgeting as well! I’m not retired yet, but that certainly seems to me to be the best way to cover everything but the most pessimistic of scenarios. I’ve been told I’m too conservative, and appreciate the external validation.
I hope you are enjoying your world travels and settling nicely into early retirement, and thanks for interrupting them to prepare this post!
Thanks for sharing! That LTC insurance seems pretty affordable. Which tells you immediately that, from an actuarial point of view, LTC isn’t that much of a burden. It goes back the point that normally LTC is needed very late in life and lasts for much less time than the 7 years Suze mentioned.
Thanks for the kind words! That made my day!!! 🙂
Hi Karsten,
What a great article! I’ll have to save it in my files for the future reference.
Thank you for pointing out MMM’s strange note of offsetting medical care. He could probably do this with education, but medical care?! His wine glass or beer bottle was spiked up with something at the time of writing….
Actually I would never have known about Suze’s interview at all if not for the email-article from MMM. I must have subscribed on it years ago, though I don’t follow him or his cultists at all. This time the subject caught my eye in my inbox. I didn’t waste my time to listen to the podcast and I always prefer a written material unless I’m listening to music.
I liked your summary of the NH analysis. Very clearly presented…
Thanks for other links in the article. I’m sure I’ll visit Fritz’s blog soon.
PS. I hope all is well with you….You mentioned an MRI in your post.
Thanks, Mrs. Greece! Hope all is well!
Yeah, I appreciate MMM’s passion to defend FIRE but there must have been something in his beer that day, haha! Well said!
No worries about the MRI. A small accident only. Though, I had some worries initially about some strange symptoms but the MRI confirmed there’s nothing wrong. Whew!
ERN, I appreciate your take on her comments. Also, it seems as though there’s something about the time horizon (55 years of retirement versus 35 years) that is part of the objection, even if it is unconscious or not rigorously articulated. Is there any way to quantify what additional risk there is for two similarly situated parties other than that difference in their retirement time horizon? That could be useful to these discussions. If mathematically that risk delta can be quantified then that could take a fair bit of air out of her comments (or shed more objective light on them).
Very true! Around 30 years you still get a lot of impact from capital depletion. 50+ years you should target capital preservation for about the first 20 years. I’ve written about that in the SWR series!
Can you expand on this or point me to the SWR series posts? Is it just the second post in the series? I don’t recall a specific suggestion for targeting capital preservation after 20 years. Are you saying we should target 50% capital preservation after 20 years (or some other target that is less than 100%)? Based on my lazy simulations targeting 100% capital preservation in a worst case scenario after 20 years meant spending about 0.3%, but you can achieve capital preservation after 50 years at around 3% withdrawal rate.
See SWR Part 27: https://earlyretirementnow.com/2018/07/25/why-is-retirement-harder-than-saving-for-retirement-swr-series-part-27/
Especially the table at the end:
https://earlyretirementnowdotcom.files.wordpress.com/2018/07/swr-part27-table01.png
Over 30 years with 4% WR and 2% inflation you only need a target return of 3.3%. Much lower than the 6% needed for capital preservation. The gap between 6 and 3.3% is due to depletion of assets. Over longer horizons, you need almost 6% return. Very little impact from depletion!
Personally I don’t care if the rest of the population gets on board with us. As a matter of fact, our lifestyles are probably being subsidized by mindless consumerism and rampant materialism which keeps the corporations merrily chugging along. I’m happy that prophets of doom like Suze can throw up barriers to those who can’t think for themselves. The capitalist machine must grind on for this to work for a small percentage who are beating the system. I don’t quite understand the zeal of so many FIers to spread this movement with religious fervor. The 2% INTJ population can enjoy the fruits of the masses grinding it out, so enjoy it fellow nerds!
Haha, very true! Maybe all the FIRE bloggers insulted by Suze want to grow the community to generate more readers and more ad revenue? I can see the appeal of staying under the radar as a small minority! Excellent point!
Amazing post, because you addressed the weakest points of FIRE. Still we see they can be deffended. I got your point about NH, but how did you plan for long term disability ? Let’s say I FIRE and myself or someone in my family becomes disabled and in need of assistance for the next 40 years. Is that budgeted into health care ? cheers
Thanks!
Regarding your question, our parents are financially secure themselves, so no financial assistance necessary from us. Also, what’s your definition of disability? If we’re disabled to work, it’s not the end of the world. We’re retired.
Hallo, my question is kinda like Suze’s “shit-happens” philosophy: what if something really bad happens and you not only cant work (no more blog posts) but need assistance for many years ? It´s tough to think about it. I agree if that happens in your 80´s there´s not much impact as you have shown in this article, but what if you need assistance from your 50´s on ?
If you need serious help in your 50s, you will likely not live much past age 70. So you shorten your horizon as well. It might be a wash.
Ha, I actually kind of agree with “Marvelous913’s” comment. I think FIRE is like a diet. Unless you adopt diet as your new healthy lifestyle for the rest of your life, then you’ll be successful, but if you approach a diet as a terminal endeavor then I don’t think you’ll really succeed… Some people FIRE and then want to work again.
If people enjoy their jobs so they should definitely work. MMM’s message has kind of changed as well or at least in his rebuke to S.Orman. He stated that you shouldn’t quit your job if you love it because it implies you already live in your own early retirement. I don’t follow MMM, but I think initially he said to quit work as soon as you can live on 4% and that’s why it rubbed the public the wrong way. I think the FIRE movement did not have a clear mission or vision stated, and media does what it does best…turns it inside out in order to attract more eyeballs. So, now if you think about it, it sounds like that there are a lot of job haters in the USA. Why? Is it the fault of employees, employers, jobs themselves, capitalism, or something else?
Karsten, I just thought of a question. What kind of SS did you assume in your model calculations? If a person quits at 35 and instead of making another *fun* career decides to volunteer, s/he will not have a long history unless s/he started working in high school and through college.
Based on the statement “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!” I assumed Karsten put $0 into the simulation for social security.
FWIW, adding 12K social security benefits starting at age 67 doesn’t make much of a change in the simulation. It adds a little over $1,000 per year of safe spending. Disclaimer: this is using lazy CFIRESIM black box math, not BIG ERN approved spreadsheets. Would love to see confirmation from the man 🙂
In part 17, I calculated the haircut I have to apply to future benefits.
https://earlyretirementnow.com/2017/07/19/the-ultimate-guide-to-safe-withdrawal-rates-part-17-social-security/
With a 60-year horizon, each $1 in benefits starting 35 years in the future is worth as little as $0.157 in the worst possible case. So, $12k in SS might be worth only about $2k in additional withdrawals today.
Very good points about MMM/Suze!
In the calculations, I ignore SS. Assume it’s cut by politicians and/or spent on health expenses. Not that it makes a huge difference for a 35yo who gets max benefits at age 70.
Another great article. Thanks for the simulation regarding long term care. I have never done the simulation (or anything) as rigorously as you, but ended up with roughly the same conclusion. Using a 3% safe withdrawal rate should leave plenty of leftover in the event of extended need for long term care.
That said, I found your flippant disregard for the MMM’s thoughts on healthcare counterproductive, even if your comment is mostly accurate for consumers in the United States right now. Sure if you went to get healthcare services with your health insurance card without asking any questions in advance (as most people do) you end up with a bill that you have little option but to simply pay. But that doesn’t mean we should be encouraging a bunch of responsible, organized, out of the box thinkers to just accept a bad system. Is it possible to inquire about MRI pricing in advance? For those opting to self-pay (people using a healthshare) is it possible to negotiate for a cash/no insurance discount? Is an MRI something that could have been done during planned travel to an area with good healthcare and lower costs?
I appreciate the importance of planning financially for the expensive, opaque health care system currently in place in the United States. I am on the more conservative end of planning for healthcare related expenses, but at the same time I do not want to discourage others from exploring non-traditional options. It is a long way of saying, I come here for the math and I love it. But I appreciate MMM for the inspiration, and hope some folks in the FIRE community are inspired to improve a not that great and very expensive health care/health insurance system.
Thanks! Glad you enjoyed the NH cost simulations.
Regarding the controversy with MMM, let me be clear about a few things:
1) he started with the flippant comment and I responded with one.
2) MMM’s suggestion wasn’t about shopping around but about barter. I definitely like the idea of comparison-shopping. And for elective procedures we do that already, e.g., dental work while in Asia!!!
3) While shopping around is a great idea, it doesn’t help you at all in most situations and certainly not in the most expensive health crises, which are, by definition, not elective but emergency care. After you have an accident, stroke or heart attack you don’t tell the ER doctor that you want your MRI done in Mexico because it’s cheaper there.
4: But back to barter, MMM’s actual recommendation: The idea of paying in-kind for medical and college expenses is so utterly preposterous that I’d argue I exercised great constraint in my post! That’s because I too value MMM’s earlier posts on the FIRE philosophy enough to not be too harsh on him for his more recent musings. 🙂
So my combative nature is coming out and I get to take the unenviable position of trying to defend the barter system for medical care. I think the only time I have ever used this is with medical professional friends and Dr. Google to help me decide that I really don’t need to go to the doctor or get a series of expensive tests. That said, I am sure my NP and MD buddies would appreciate never having to give out medical advice to friends and family. Fine, so the barter thing is pretty limited and ridiculous, especially when taken out of context of MMM’s entire post.
But I am going to disagree with “While shopping around is a great idea, it doesn’t help you at all in most situations and certainly not in the most expensive health crises.” In one of the most feared and most expensive health crises–long term care–shopping around and negotiating can get you better care in a nicer place for a lower cost. We are in a low to mid cost area and looked into some pretty sad nursing homes that were going to run 8K+ for long term memory care for my grandma and wouldn’t guarantee a medicaid bed in the event that they ran through about $350K in savings plus 34K in SS and pension per year before she passed. Instead she is in a group home with 2 live in care takers, part time help from the RN/owner, and 5 other sweet but very forgetful ladies all for under 4K per month.
So the truth is, I may just greatly enjoy that you still take the time to respond to all the comments. Thanks, Big ERN!
We found the same type home for my mother with dementia. $3500 per month for her and three others, 24 hour care and they are set up for end of life situations. They don’t advertise, word of mouth only. Came highly recommended. We are allowed to drop in at anytime, no notice needed. She has been there three years, is content, and we have been very happy with the care she has received.
Nice! Affordable LTC is out there. No need to spend a fortune!
Thanks!
I totally agree that we should shop around when it comes to LTC expenses. We did that when my mom needed it and in the end we opted for 24/7 home care that was actually cheaper and a more dignified experience for our mom.
The limitations of shopping around are in the realm of emergency care. If you have an accident, heart attack, stroke etc.
But for a lot of non-emergency care we will shop around. Both domestically and internationally. My wife has a lot aunt’s and uncles that are MDs in the Philippines!
So, we are pretty much in the same page! Not combative at all! 🙂
Hey there Karsten, all you need is optimism.
MMM will blast you with his optimism gun.
Pew! Pew!
Haha! I always thought of myself as an optimist. You gotta be when you trade ES puts on leverage…
Touché.
I hope also that my facetious tone was able to come across in my comment.
I was also baffled by MMM’s bartering comment.
You mentioned getting dental work in Asia in another comment. Which country did you get your dental work done, and how much was it for the procedure?
In Manila, Philippines! Haven’t done it yet but I will get a new crown for about $250.
Firstly, that is an awesome theme picture. Haha! This is probably the best rebuttal I’ve read surrounding the Suze Orman interview. Well thought out & written, Karsten.
Secondly, $3k on an MRI at a hospital is typical but not at stand alone imaging centers. There is one here in Cleveland that charges $550 if your self pay for an MRI with contrast. The key is making sure it is high density and the center has a radiologist on staff. Hope that helps!
Thanks! My wife designed that theme picture!
I’m also 100% in favor of shopping around. But sometimes we’re just stick with getting to MRI on the spot where the Dr. orders it. ChoooseFI had a nice podcast episode once about medical tourism and we plan to make use of that in the future! 🙂
The opening remarks in Paula’s post said it all when Suze’s PR person reached out to be on the podcast. It was simply a headline catcher to plug her book, podcast, speaking events, and to flaunt her expertise and ego. It was a simple excuse to get back into the news as she tries to get back into the arena. Not surprising, as she is very similar to a lot of the FIRE bloggers who have used the movement to make a living for themselves.
Yup! Very well said! Thanks for stopping by and your comment!
Finally some sane voice! Hyperbole from both sides is no good. No, you don’t need $30 million to retire early. Serious challenges shouldn’t be glossed over either. I can’t believe bartering for medical services was offered as a serious solution.
Thanks Harry! That’s right, no hyperbole here. Just some sane quantitative analysis! 🙂
Karsten, this post is 10 out of 10, as always. The quality you produce is top notch. Have you thought of doing a book? Successful like Suze but fact-based 🙂
Thanks OT! Yeah, maybe I should collect my thoughts and write a book about this! Once we settle down after our travel schedule! 🙂
Hi Karsten,
Thanks for another great post! I really appreciate that you always cut right though the noise, and keep us all grounded in reality.
You mentioned that you budget for health care by including both the premium, as well as full out of pocket maximum in your budget. This is my approach too. I think it’s the conservative way to go, but in the back of my mind I worry about health care inflation. Safe withdrawal rates by their very nature account for inflation. Health care cost increases seem to be moderating of late, but it still seems to me that it’s very possible, even likely, that these cost increases will exceed CPI or any other general measure of inflation. In your budgeting do you account for health care inflation separately or otherwise add in a cost factor for health care inflation.
–Jolly Greybeard
Thanks! Glad we have the same approach! And it’s even a bit conservative because I’m sure we won’t hit the max out of pocket every year and even when we do we probably have less in other discretionary spending.
One way of modeling runaway medical spending CPU is to account for the additional spending via the supplemental cash flow columns in my Google Sheet.
Dear ERN,
Thanks for the great post. To expand on Jolly Graybeard’s comment, can you go into more detail about how you built this number into your SWR?
My wife and I are figuring a similar calculation and are considering our FI number at a 3% SWR. Max out of pocket medical will still keep us at or under 4% SWR. Does your current (3.25%?) SWR build into a current max spend or does it just assume that at such a conservative rate, capital should grow until to support a max spend down the road?
I hope this question makes sense and apologies if you discussed this in another post but I don’t think I’ve seen/read it yet. Please point me there if I have missed it in my past readings.
Thanks and regards,
Jeff
Thanks! I used my SWR series Google Sheet to add the negative cash flows (= cost of a nursing home) in the “Cash Flow Assist” tab. See SWR Part 28 for the details and some examples.
Again, since the nursing home expenses are so far in the future there is really not that much impact on the SWR.
Finally got around to reading some responses to Suze’s interview, only to find that this post had a legitimate long term care analysis hidden under the guise of an interview response! The post would have been much higher in my read list had I known it was going to actually have actionable analysis. 🙂 Personally, my long term care plan is simply to do an asset transfer to my beneficiaries (my kids’ special needs trusts) at the onset of symptoms and have enough to afford 5 years of care and then qualify for Medicaid. My grandmother and my great grandmother both died in nursing homes suffering from dementia. I’m under no illusion that this might be my fate as well. I also recognize that the level of care given to medicaid patients is really no different than the level of care given to self-pay or privately insured. I’m not super happy depending on a government program for my long term planning, but I’m even less happy with the idea of pulling money out of my kids’ inheritance to cover nursing home expenses when I’m not really in a condition where I’m able to perceive the value of that expense.
Thanks, William! And thanks for “advertizing” my post on the FB group!
Great plan for the LTC expenses. I’m sure for most folks, 5 years should be enough to cover LTC expenses and there wouldn’t even be a need to rely on the government at that time (who know what they’ll cover at that point).
Thanks for sharing!!!
K.
Her statement: “If you think you will be able to live on 80k a year when you are 70 80 90 years old I have a bridge to sell you.” That means she can sell a bridge to 80% of US retirees. Where is she living?
Yea, she’s out of touch! Quite ironic given that she’s considered the financial expert for the masses!
Great post as always. Love how you challenge everything, including Big MMM!
Suggestion – can you move your “leave a reply to the top”? Too many comments to scroll through to get to the bottom (good problem to have). Cheers and hope you’re enjoying your travels.
Thanks! Not even sure how to re-order the comments. But I also like it when you see other comments first before leaving your own comment. Have to think about that! 🙂
Heh – nice picture. I agree she’s right about the FIRE movement
Thanks!
Thoughtful analysis. I have a hard time making heads or tails out of Suze because her thought process is so opaque, but she has one thing nobody in FIRE land has. She has thousands of letters regarding retirement failure. Understanding failure is the means by which success is assured. I’m sure thousands of failure letters would color one’s opinion, and I’m also sure each failure is specific to an unaccounted for risk or risk sequence. Also FIRE is not one narrative, but a hodge podge jumble of narratives, some sound and some quite audacious. Also most FIRE blogs are about portfolio accumulation. Using something like a Bogelhead technique the risk is pretty well automatically accounted for in accumulation. Plus during accumulation your “life risk” (health care, vacation, benefits) are off loaded on your employer so your perceived risk is less than your actual risk, (just get laid off to understand this) and your W2 covers any mistakes. You screw up, you just work a little longer. Retirement however is a different matter. It is not accumulation but deflation. A deflation in need of control to last over decades, and your only protection is a good plan. 4 x25 is not a good plan for 5 or 6 decades IMHO. If you go through your SWR series what you are describing is adding granularity and control to deflation. For example I agree with belt tightening is not a solution unless you have made specific contingency to fund belt tightening in the face of increased risk, because increased risk is the trigger for belt tightening. So you may for example need to lighten your equity exposure just when that dividend stream is necessary. I like the idea of belt tightening to start with. Then you get used to living with a tight belt, and extra spending becomes a splurge, a one off and not a way of life. Also when you retire you take back all of your life risk. You no longer have the shield of the W2 and employer benefits. My point is your retirement plan is very granular and has actual contingencies not just some vague “tighten the belt” solution. Most FIRE narrative is not so robust. Suze may be opaque but she isn’t stupid and is quite successful and just that fact deserves some deference. I just finished a book called Nomadland and it full of stories about middle class failure secondary to 2008. Those people who had 401K’s, professional careers, home ownership are living in their cars at age 70 working gigs at Amazon fulfillment centers because 70 year olds actually show up to work. These people had the tighten the belt scenario as their solution and that tight belt is turning them blue.
So thank you for something beyond a political answer which is mostly what I’ve read about this. Suze screwed with a lot of denial, and the response has been telling. It’s a data point not to be ignored IMHO. I haven’t really met anyone who fired at 40 and successfully lived to 90 on something like 4 x25. I’d like to talk to that person and see what it was really like.
Thanks, Gasem! As always, a very smart and thought-provoking comment! I hadn’t heard about the Nomadland book but it’s on my wish list. Ironically, on Amazon! 🙂
Also, agree: we could learn from Suze’s vast experience, essentially a database of “financial failures.” A lot of what’s going on in the FIRE community is confirmation bias and everybody is sitting in an echo chamber writing how well FIRE is working out for them. And the failures will probably stop writing! More confirmation bias! So, it’s not a bad idea to do some robustness check/kicking the tires and see how FIRE works out when the crap hits the fan!
Thanks for stopping by, Gasem!!!
My reason for interest in FI/RE has a few factors. #1 They keep raising the retirement age, so yes I want to RE. 3 of my 4 grandparents passed by age 72 (but they got to retire ~55!). I do not plan to work til 67 or 70 and only have a little time to enjoy retirement. (In theory we are more than our genetics but my grandfather and uncle and father had a similar medical thing occur at the same age.)
#2 I watched my dad be early retired out of a job after 30+ years at the same place. Who wants to hire someone who will only leave in 4-6 years when they reach retirement age, who will be asking for a significant salary too? I work in a field known for mergers and buy outs. Through nothing I do, there is a chance later in my career I will find myself redundant and out of work. If I am FI, I have the option to accept this with grace, as my dad did. My mom retired a little early when the bureacracy of a job she loved was destroying not only her passion for the work, but those around her as well. Being FI allowed her to say “Enough”, and exit. I want that option too.
#3 I have seen coworkers pass unexpectedly, (sepsis, car crash, cancer) each time a reminder our time here is short. I want to spend it with friends and family making good memories! Therefore I am actively crafting a life / life style towards FI, with the independence being flexibility from sitting in an office M-F 9-5 because I am dependent on the income.
I am modeling my plans for FI and RE on personal successful cases, and my own values, not private jets or islands. My parents have demonstrated their ability to plan ahead, I’m not worried about expensive care for them right now.
Wow, that’s great! Couldn’t agree more! Thanks so much for sharing! You see, for every one of Suze’s disaster scenarios there are other people who have valid reasons to plan FIRE.
Also, regarding your #2: if you plan this right and get yourself laid off instead of quitting on your own, you can even get all the perks such as displaced worker package, etc. Try not to smile too much while walking out of the HR office! 🙂
Best of luck and thanks again for sharing your unique perspective!!!
Cheers!