Ten things the “Makers” of the FIRE movement don’t want you to know – SWR Series Part 50

January 3, 2022 – Happy New Year, everybody. I hope you had a relaxing and healthy Christmas and a good start to the New Year!

Last month was the 5th anniversary of the Safe Withdrawal Rate Series! In December 2016, I published the first part of that series. I had material for maybe four or five parts but one thing led to another and with new ideas, most of them due to reader feedback, the series took off. It’s been running for 5 years and I obviously opened a bottle of bubbly last month to celebrate.

So, what’s the deal with the title then? Very simple: Blogging 101. You need a catchy title! I might have called the post “What I’ve learned in 5 years and 50 posts” or something along those lines. But to shake things up and get everybody’s attention, this is the title I went with. Think of this post as a natural extension of Part 26 “Ten things the “Makers” of the 4% Rule don’t want you to know” or the equally “tongue-in-cheek” posts “How to ‘Lie’ with Personal Finance” – Part 1 and Part 2.

So, after 5 years, 50 posts, what have I learned? What do I think others in the FIRE community are missing? What can you learn from my series that you may not have seen elsewhere? Let’s take a look…

1: We’re taking the “Simplicity Mantra” way too far!

We are all familiar with JL Collins’ work “The Simple Path to Wealth” or Mr. Money Mustache’s post “The Shockingly Simple Math Behind Early Retirement“. I mostly agree with the “simplicity” part. I kept my retirement savings very simple, too. Invest in index funds. Automate your investments and take the emotions out and watch the money grow. If the market keeps rallying that’s great. But even if the market tanks like in 2007-2009, that’s not the end of the world either. Keep investing and make Dollar-Cost-Averaging work for you. Some of my best investments with the highest IRR are the contributions from March 2009, right around the market bottom! If this kind of simple index investment style is OK for someone with six letters (Ph.D., CFA) behind his name and years of experience in the asset management industry, it should work for the vast majority of FIRE enthusiasts.

But just to be sure, not everything is simple while saving for retirement! The more serious challenge during the accumulation phase is the psychological part. Staying on course, resisting the overconsumption and conspicuous consumption temptations, and not losing your nerves during volatile markets.

But in retirement, this all flips. The psychology of retirement is pretty simple. The math is more complicated than before as evidenced by my 50-part series. If there is a bear market early on, then the Dollar Cost Averaging effect that previously helped you in the accumulation phase will now hurt you because you are now selling shares at discounted prices and this will likely hamper your portfolio’s recovery. That’s the definition of Sequence Risk (see Part 14 and Part 15). But I often get the impression that a large part of the FIRE community misses this distinction and extrapolates the investing simplicity mantra into withdrawal math simplicity during retirement. After 50 posts and 5 years of my time dedicated to this issue I certainly don’t find the withdrawal phase simple!

Simple Math/Hard Psychology during the accumulation phase. The other way around in retirement!

Further readings: Part 27: Why is Retirement Harder than Saving for Retirement?

2: Passive investing? Don’t throw out the baby with the bathwater!

Related to the previous point, asset allocation considerations become more complicated in retirement. Even if you stay away from outright stock picking and use a simple index fund allocation, retirees should consider shifting the weights of those passive index funds over time. In other words, while accumulating assets, it’s not unheard of for people to just run with a 100% equity allocation (see Part 43 of the series). I did so while saving for retirement. But 100% equities may not work so well for the average retiree. A few years before retirement and, at the very latest, upon reaching retirement, you will have to make some decisions about shifting your asset allocation to take some risk off the table. And there is no generally accepted “passive index” for the Stock/Bond allocation. And much less the stocks vs. long-term bonds. vs short-term fixed income vs. commodities vs. real estate vs. crypto percentage allocations.

Even if you settle on one specific retirement asset allocation, it doesn’t mean that this allocation should be set in stone all the way to eternity. Quite the opposite, financial experts agree that Sequence of Return Risk can be slightly mitigated through an equity/bond glide path both before and after retirement. See Michael Kitces’ work on the “Bond Tent” and my work on pre-retirement and post-retirement glidepaths (Part 19, Part 20, Part 43 of this series).

And again, notice that this glidepath or bond tent over time has nothing to do with the often maligned and pooh-poohed stock picking or market timing strategies. It’s still an unconditional passive shift of asset weights, like in a target-date fund and the underlying assets may as well be index funds, so there is no stock picking either. I wouldn’t call this active investing.

Also getting lost in the whole simplicity/passive-investing craze is the opportunity to invest in some not-so-passive styles like real estate or trading options with very attractive return profiles and diversification potential and probably less sequence risk than your good old 60/40 or 75/25 portfolio or 100/0 portfolio.

3: The stock market is no random walk!

One of the most dangerous fallacies in the personal finance world and especially the FIRE community is the incessant claim that the stock market is a Random Walk. It’s not. The stock market is certainly hard and even impossible to predict on a day-to-day or month-to-month basis, but over longer horizons, returns are surprisingly highly correlated with equity valuations, like Prof. Robert Shiller’s CAPE ratio.

And here again, there is a stark contrast between young investors just starting out their FIRE path vs. people close to or in retirement. Expensive equity valuations shouldn’t pose too much of a headache for young investors. But retirement success is very correlated with the equity multiples at the start of retirement. In the chart below, I plot the inverse of the Shiller CAPE ratio on the x-axis (think of it as the earnings yield, i.e., low values indicate expensive equities) and the realized safe withdrawal of a 75/25 portfolio rate over a 30-year horizon on the y-axis. I simulate this for retirement cohorts starting withdrawals between 1926 to 1991. (and the last retirement cohort covers 1991 to 2021, which is the last year for which I have return data). All the failures of the 4% Rule occur when equities are expensive (low CAPE yield). And likewise, the 4% Rule is way too conservative if earnings yields are high. Because the stock market is no random walk!

Equity valuation (x-axis) vs subsequent 30-year safe withdrawal rates. Retirement cohorts 1926-1991, using return data 1926-2021.

The implication from this simulation exercise is that the unconditional failure probabilities like those in the Trinity Study or some of the online retirement calculators are meaningless if you currently find yourself in a high-CAPE world, i.e., a low earnings yield environment.

I always use the analogy of a researcher trying to calculate the probability of encountering a traffic jam. He studies the traffic patterns by leaving his home at the top of the hour each hour from midnight to 11pm. Out of the 24 attempts, he got into a traffic jam 6 times. Does that mean the probability of a traffic jam is 25%? If all the traffic problems always occur during rush hour, 7am, 8am, 9am and 3pm, 4pm, and 5pm, then the unconditional probability of 25% is pretty meaningless. If you already know that you drive to and from work during rush hour times you might face a 100% probability of a jam. And likewise, if you leave at 2am, you have a much smaller probability of traffic problems. Same with the failure rates of the 4% Rule! That’s why I built a tool (see Part 28) to report not just the unconditional failure probabilities but also those conditional on market conditions. For example conditional on high CAPE ratios and/or an equity index at or close to its all-time-high (asin early 2022!). Readers of my series know that the failure probabilities conditional on expensive equity valuations are very different from the crude and useless figures floating around in the Trinity Study and the FIRE blogosphere.

Failure probabilities: 30-year horizon, 25% final value target, 75/25 portfolio. No supplemental cash flows. Notice the huge differences in probabilities between the left column (All = unconditional) vs. the right column (conditional on expensive valuations)

In summary, the underlying confusion about failure and success probabilities is all based on the misplaced Random Walk assumption and the confusion between unconditional and conditional probabilities. For some additional evidence of the non-random walk properties of the stock market check out this post: “How much of a Random Walk is the Stock Market?

4: Rules are useless!

A byproduct of the simplicity mantra is that if index investing is so easy, then everything else in personal finance must be simple enough to distill into a bumper-sticker-size rule. Some examples:

  • The 4% Rule
  • “Pay down your debt first.”
  • “Keep X months’ worth of expenses in an emergency fund.”
  • “Keep bonds in a tax-deferred account.”
  • … and many more

All those rules are useless. Personal Finance should be custom-tailored to your personal needs. It’s called “personal” finance for a reason. I’ve been dealing with the 4% Rule fallacy for over 5 years now. I often make the case that the word “Rule” is actually more offensive than the 4% part. That’s because I have done some case studies for FIRE volunteers with significant cash flows later in retirement where I justified much higher withdrawal rates than 4%, sometimes North of 5% or even 6%. Who knows, some of the folks would still be working today to chase that dumb 25x rule if they hadn’t found me to do the math right!

And all the other rules are equally useless:

  • Pay down debt? Young investors tend to benefit from keeping the mortgage and turbocharging their equity investments early on to hedge the (sequence) risk of missing out on strong returns early during their investing career. And in retirement, reducing your mandatory expenses is also a hedge against sequence risk (Part 21). But even this “adjusted” conditional debt paydown rule may not be 100% universal.
  • I’m not a big fan of emergency funds, as many of you know. In fact, the first claim to fame of my blog was my controversial $0 emergency fund post back in May of 2016. For most young investors it’s more important to build up their equity portfolio as quickly as possible to hedge against Sequence Risk. And for most older investors who have a large enough portfolio, there isn’t really a need to have a designated emergency fund in a low-risk and low-yielding account (e.g., money market, short-term CDs, etc.) either. But just to be sure, I did concede in the most recent installment that if the need of tapping your funds is highly correlated with the stock market, you probably want to keep your emergency fund in a low-risk investment outside the stock market. I don’t want to replace a useless emergency fund rule with an equally nonsensical rule of my own. If you want to have an EF and how much money you need is again a function of your own financial parameters!
  • The often-cited rule of keeping bonds in the tax-advantaged accounts is also not 100% accurate, as I pointed out in Part 35 of the series. It depends on interest rates, expected stock gains, dividend rates, and certainly your current and expected tax rates. There are potential cases where it’s better to keep bonds in the taxable account!

5: Uncertainty does not justify “winging it”

As I outlined in Part 46 and Part 47, the presence of market uncertainty is no excuse to be sloppy with your retirement withdrawal analysis. Quite the opposite, the substantial market uncertainty and potential additional uncertainties, like idiosyncratic spending shocks and policy uncertainty about future Social Security benefit levels, tax policy etc., likely call for more precision in your analysis today, not less. That’s because “winging it” adds even more uncertainty to the existing one.

I always like to use the medical analogy of Dr. Wingit, MD who has to inject medicine into a patient. He looks up the dosage information, 3.5ml. But Dr. Wingit says, “3ml, 4ml, 5ml, this patient has a very uncertain outlook anyways, so who cares, right?!” Well, it’s the opposite; because there is already a lot of uncertainty about the health and survival chances of the patient, we want to be extra-cautious and not compound that risk even more by winging the dosage.

In other words, critics of my analytical approach try to sneak in the stereotypical Strawman argument: I never claimed that with my tools I can eliminate any of the market uncertainty. I merely don’t want to compound the risks even more.

6: We are not very good with percentage calculations!

Related to item #5, I often hear people say “3%, 4%, 5% withdrawal rate, who cares, it’s only a 1% difference, right?!” Or this one: “It makes no sense pinning the safe withdrawal rate down to the significant digits after the decinal point!”

Do you notice the flaw in these statements? Going from a 3% withdrawal rate to a 4% withdrawal rate is indeed a one percentage point difference in the rate. But it’s a 33.3%(!) increase in the withdrawal amount. For example, with a $1,000,000 initial portfolio, you’d raise your withdrawals from $30,000 to $40,000. The last time I checked, $40,000 is not 1% but 33.3% higher than $30,000.

So, did you notice what our mathematically inept Dr. Wingit did here? He claims that going from a 3ml dose to a 4ml dose is only a 1% difference. If it’s expressed relative to the 100ml bottle in the medicine cabinet! But the increase in the dosage injected into the patient was still a 33.3% increase! So, to all the internet influencers out there rolling their eyes when I display safe withdrawal rates with a 0.25% or even 0.01% precision: I roll my eyes right back at you for not understanding 5th-grade percentage calculations! 😉

If you’re still not convinced, take a look at this simulation from Part 27. Here’s the path of a $1,000,000 portfolio over 50 years for the Jan 1965 retirement cohort using withdrawal rates between 3.2% and 3.7% in 0.1% steps. Notice how sensitive the final outcome is when changing the withdrawal rates by a mere 0.1 percentage point. My best advice: Do the math right up to the last 0.01%. You can then always round it up/down later, folks!

From SWR Series Part 27: 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!

7: We can be nonchalant about failure probabilities. But you can’t!

I don’t remember exactly who it was but one fellow FIRE blogger once confidently declared that a retirement strategy with a 20% failure probability is totally fine for him. It’s certainly the kind of tough talk that invokes a lot of “ooooh”s and “aaaah”s from the podcast audience or at a FinCon cocktail party. But it’s also BS! The particular FIRE blogger who I think said this (99% sure) has a zero percent chance of depleting his portfolio because of his wife’s income and revenue from his blog. And don’t call me the “retirement police” because I have no problem with FIRE bloggers monetizing their blogs. I monetize my blog, though I still generate the overwhelming majority of our retirement budget from investment. If anything, we actually make way too little money in the FIRE community considering the services we provide. But we want to avoid giving 99.9% of the FIRE community the impression that we can all ignore Sequence Risk because the top 0.1% of the most profitable influencers face no such risk. It has a bit like Marie Antoinette’s “let them eat cake!”

If this blogger or anyone else indeed faced a 20% failure probability I have a hard time believing they would be OK with that. Ask yourself, would you be OK with a 20% chance of…

  • Being late for a flight? (not talking about a connecting flight, but going from your home to the airport to catch a flight)
  • Running out of gas?
  • Being late for a wedding? How about your own wedding?
  • Being late for a funeral? How about your own funeral? Oh, wait, that last one didn’t work so well!

Maybe some people will still maintain that they are, but I have never met anyone who has missed 20% of their flights or missed 20% of important family gatherings or shows up to work late 20% of the time. If you’re like me and you leave for the airport early enough to absolutely never miss a flight, it’s because there is an asymmetric risk profile. There is a small cost because you waste 15-30 minutes sitting at the airport gate, but missing a flight by 1 minute is asymmetrically costlier. If I’m not willing to accept a 20% chance of something as trivial as missing a flight, then why would I risk a 20% chance of running out of money in retirement? I know that I will likely end up with excess assets when I die, but that’s a good problem to have!

8: Flexibility in retirement raises more problems than it solves

The last resort of Dr. Wingit to push back against a more careful retirement analysis is that we can be flexible in retirement. Well, count me in on that one. I’m certainly flexible. We have a retirement plan with the flexibility to cut our budget by 15%, even 20%+ and still have a comfortable retirement. We also have the flexibility to go back to work. But flexibility is no panacea. Some really bad flexibility headaches are often ignored when living in the FIRE la-la-land where people can make sweeping claims about flexibility but never quantify anything. I made an honest attempt at measuring how flexibility would have worked out in some of the historical simulations and there are (at least) three unpleasant issues:

1: How flexible do I have to be? Skip the Starbucks Lattes for a while? Skip the CPI adjustment for a few years? I did the simulations in Part 23 and found that in order to have a meaningful impact on cushioning Sequence Risk, you’d have to lower your withdrawals by probably closer to 30%.

2: How long do I have to be flexible? A common misunderstanding is that tightening the belt only has to last until the end of the Bear Market, 1-2 years, right? False! If you start withdrawing your full initial retirement budget again at the start of the next bull market, keep in mind that at that point, your portfolio is still at the bottom, when you are facing the maximum Sequence Risk impact! To alleviate Sequence Risk, we’d need to wait until the portfolio has made up the losses plus inflation! And that can take a lot longer, sometimes decades. 30% lower consumption for 20 years is not really that palatable.

3: How about false alarms (Type 1 errors)? In that same post, Part 23, I showed that some of the historical cohorts whose portfolios would have survived a 4% Rule in the end, still had a scary ride along the way. Take the example of the Dec 1972 retirement cohort using a 4% Rule. Less than 10 years into retirement, you had depleted roughly 70% of the portfolio (in real terms). But thanks to the stellar performance of the U.S. stock market during the 80s and 90s, your portfolio survived all the way until 2002. But this lucky (unlucky?) retiree probably would have done the flexibility thing, trying to find work in the 80s to supplement his/her retirement for 10+ years. That’s because nobody had any idea how well the stock market turned the corner eventually.

Dec 1972 cohort: Real, CPI-adjusted portfolio values with $40,000 p.a. withdrawals ($3333.33 monthly). 75% Stocks, 25% Bonds.

So, again, I’m onboard with flexibility, but it’s overrated once you look at the historical simulations. You don’t really eliminate the failures, you simply reshuffle them. You replace “running out of money” with “going back to work” for very extended periods. Even worse, you create false alarms, i.e., failures of sorts where the 4% Rule didn’t even fail in the absence of flexibility.

9: CPI adjustments in retirement may be insufficient!

The premise of the Trinity Study and much of my Safe Withdrawal Rate Series is that you adjust your withdrawal amounts by the CPI index. It ensures that you can keep your standard of living without slowly eroding your purchasing power over time. As I have previously pointed out, foregoing inflation adjustments for maybe one or two years is not a big deal, but over longer horizons, 30 years for traditional retirees and potentially 50 or even 60 years for early retirees, the purchasing power erosion would be disastrous!

But some retirees, certainly early retirees, might want to consider whether CPI adjustments are truly enough. Let’s look at the chart below for the 1991 to 2021 path of per capita real consumption. It increased by 70%, which means that if you had merely increased your consumption with CPI+0% only, the people around you would now be consuming 70+% more than you. Or, equivalently, you would have fallen 42% behind your peers, i.e., your neighbors, friends, and relatives. And foregoing even the CPI adjustments, you’d be 71% behind the average American, now that’s a non-starter! I can certainly see that a traditional retiree, at 65-years old, could feel comfortable slowly falling behind the average U.S. per-capita consumption path, at least in the absence of health problems. But as an active early retiree, I’d like to still participate in the per capita real consumption growth for a few decades and update my gadgets and buy improved creature comforts. In other words, I don’t want the same consumption basket from the 1990s today. Remember: there were no smartphones back then! And, likewise, in 2051 I probably don’t want the 2021 CPI consumption basket either!

30 years of real per-capita consumption in the US, vs. no real growth vs. fixed nominal consumption. Source: Bureau of Economic Analysis, Burea of Labor Statistics.

By the way, this CPI+x% creep in expenses will be even more pronounced for the folks who retire abroad in a (currently!) low-income country. The per-capita real consumption increases in some of the popular retiree destinations like Thailand, Cambodia, Philippines, Costa Rica, Panama, etc. are even greater than in the USA. I wonder what kind of apartment you’ll be renting in Phuket in 20+ years if you apply only a CPI+0% adjustment to your budget each year!

But just to be sure, my Safe Withdrawal Rate Toolkit has a feature for you to tweak the simulations and model withdrawals that grow faster (or slower) than CPI inflation. To my knowledge, my toolkit is the only one out there with that kind of modeling flexibility.

10: Reliance on the government may backfire!

A good chunk of the FIRE content on blogs and podcasts deals with optimizing government policies and benefits. Obamacare subsidies, Roth conversion ladders, the 0% bracket for long-term capital gains and (qualified) dividends, etc. And that’s all really helpful advice. I’ve written about the awesomeness of the 0% tax bracket and retirement tax optimization myself (Part 44 and Part 45). But I feel a bit uneasy about all this. Will this government generosity last? Have you looked at the government deficit and debt figures lately? Could there be a backlash against the FIRE community? Recall, that most of the media coverage of our community has been positive and admiring, even fawning at times. The “worst” coverage I recall was about that Seattle lawyer who took her frugality a little bit too far. But could there be a harsher backlash if people find out that multi-millionaire retirees in their 30s and 40s collect not just zero-tax qualified dividends and capital gains but also Obamacare subsidies and get low-income subsidies for their cable TV and internet? Maybe our FIRE community needs to hire some lobbyists in Washington D.C. to keep our party rolling?!

I certainly wish that we won’t become a target of any jealous social justice redistribution mob and we can keep our low-tax and benefit party rolling. But I wouldn’t bet my retirement security on it. Here in the ERN household, we don’t even receive ACA subsidies (yet), but the tax landscape certainly benefits us greatly. Let’s hope it stays this way. But if not, our retirement would still be safe and comfortable. But I am worried a bit about the folks who retire on a bare-bones budget and only just made their 25x rule of thumb work – but only because of ACA subsidies. You are setting yourself up for a rug pull by the government! My recommendation: try to be not just FI but aim for an even safer acronym. Here are some suggestions:

  • FINAL = Financially Independent, Not a Leech
  • FINDOG = Financially Independent, Not Dependent on Government
  • FINISH = Financially Independent, Not In State’s Hands
  • … any other suggestions, please post in the comments section and I will add to this list! 🙂 for sample:
    • Reader “Mapleton” came up with a nice acronym of what we don’t want to become: FIBBING = Financial Independence Blindly Based on Individual Naive Guessing. Very nice!
    • Reader “J Acorn”: Don’t be “FIDDLE (while Rome burns)” – Financial Independence Drained, Didn’t Listen to ERN. That’s awesome. Why didn’t I think of this?!


OK, let’s wrap it up here. Happy Anniversary! Thanks to all readers that have come along with me on this amazing 5-year run! Not sure I am going to make it to 100 posts over the next five years, but I got notes for at least another ten posts. Also, I hope I didn’t ruffle any feathers with today’s post. Again, I don’t mean to accuse any of my fellow-FIRE bloggers of any malice or wrongdoing. And for the three or so people who might still be offended, I like to point out that the concept of F-You Money worked not just when leaving my corporate job in 2018 – it works equally well or even better with the online outrage troll mob today. 😉

So, Happy New Year, everybody. Let’s have a healthy and prosperous 2022!

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!

203 thoughts on “Ten things the “Makers” of the FIRE movement don’t want you to know – SWR Series Part 50

  1. Dear BIG ERN, thanks so much for this beautiful and insightful post. I especially love the charts. Very “visual” and clear what you have to share. While simplification and rules may help, sometimes adjusting them for your own situation is something nobody should underestimate. A very HAPPY NEW YEAR 2022 to you and your family!!! Matthias

  2. This blog is becoming a disservice to the FIRE community. There’s no solution presented, only criticism and pessimistic views without alternatives being proposed. Unfortunately it’s being removed from my list of favorites. Happy 2022

    1. A disservice to the community is making vague accusations without saying what your specific issue is. You attempt to discredit the author, but add no facts/information to the discourse. Perhaps Karsten is telling some of us what we need to think about as opposed to what we wish were true. To anyone who sees this comment and uses that as a reason to discount some inconvenient truths I would caution you to be more thoughtful. Karsten has been kind enough to share his expertise. I for one deeply appreciate it. I am sure he has better ways of earning extra coin than the time he puts in to researching and writing this blog.

      1. Totally agree with your Tim, I have been following “Big ERN” for quite some time now and, even though I’m not USA based, 90% of his very informative insight has been a fantastic asset to me (a member of the retire at “normal” age community).

        If the critical responder wishes suggestions then I cant point to 50 posts that will serve everyone very well!

  3. Thanks for another marvellous article Karsten. I’ve been following you from shortly before the day you pulled the trigger, and I am now coming up to the first anniversary of my own retirement.

    My spending for this first year is far greater than I’d budgeted for, mainly because of home improvements. I take the view that if I’m going to do something that will improve my life for many years to come, better to do it as soon as the money is available (ie now).

    Happy New Year!

    1. Good point: home improvements don’t occur every year. It’s better to “amortize” that large chunk over several years, as you suggest.
      We have a $5k-$8k budget every year to account for repairs and improvements. 🙂
      Happy New Year!

  4. Thanks for all your content over the past 5 years. I really enjoyed it.

    One typo? – See Michael Kitces’ work on the “Bont Tent” I think you meant Bond Tent?

    And one disagreement. I agree that the maths is harder after retirement. But I also think the psychology is pretty difficult too. I am sitting with a lovely pile of equities due to several years of good returns with a feeling there will inevitably be some bad returns coming. What percentage equities to maintain in that scenario is taxing my brain and I am not sure how I will react if (when?) the market has a substantial fall.

    1. Thanks, fixed the typo!

      OK, thanks for sharing that concern. I never felt that way about the retirement psychology. But my main point, that the math is harder in retirement still stands. 🙂

      1. +1 to PJ’s comment re psychology; I am not sure if retirement psychology is really “harder” but IMO it is certainly different to the accumulation phase.

  5. Another great article! Thanks for being that person who taps me on the shoulder and whispers “don’t get lazy”😉
    I have to admit that in my own post FIRE world I have slipped towards ‘good enough’ rather than ‘fully optimized’ in making my financial decisions. I do feel that my hard work prior to FIRE allows me to do that just a little, and Big ERN is there to remind me not to get complacent!

    1. Thanks, Mrs. PIE! Good to hear from you and thanks for your kind words. Your FIRE experience makes us all realize that it’s not just the math part in retirement that’s challenging. Wishing you all the best in the New Year.

  6. Some great food for thought here, even for me as a “veteran” (lol) FIRE blogger and seasoned early retiree. That “CPI adjustments might not be enough” thing hit home. What will we be spending $ on in another few decades and will we have enough? Can’t say I know but I can say I’m glad I will probably have enough!

    Happy blog anniversary! And best wishes for you and your wife and the kiddo in 2022!

    1. Yeah, in the veteran and almost veteran FIRE crowd here we’re very blessed to have had a nice run in the last 3+ years. That will hedge against most things life will throw at us.

      Happy New Year and all the best back to you and your family! 🙂

  7. Hi Karsten,

    Excellent reminder how to be wise and tactical at all times. Then a reward is good to great wealth and excellent quality of life.

    One note on the CAPE ratio – we could go very well much higher than ever before before “system” in general sense of the word gets broken again (which of course it always does eventually)

    Than again to time it – we need lots of luck or no luck at all (adjusting risk down or going for a ride)

    The most beautiful part about your blog that once a person starts understanding your methodology and your writing style is a wonderful pathway of having a good life.

    One request – Can you convert your blog to a physical book? I want to be your first customer.

      1. What is your current thinking on “good rule of thumb” SWR at this point? Based on your 1.75/0.5 parameters the current preserving rate is just a hair under 3%, and using the “default” 1.0/0.5 it’s a concerning 2.25% or so.

        Admittedly, the horizon-final-value-drawdown WR is higher but still… a pretty hair raising experience if we see another 2000.

  8. Great article and Happy New Year.

    Random walk is an interesting one. In my Finance classes I was taught Random Walk and CAPE are not mutually exclusive. Ie random walk deals with the short term movement of the market. Cape is a long term phenomenon. I tend to agree with that philosophy albeit always with the caveat in Econ no one ever agrees on the definition of time span.

    1. That’s the sense I wanted to convey: RW in the short-term, long-term everything is driven by valuation and mean-reversion.
      And agree: it always depends on what’s the horizon length for “long-term”. 10-15 years seems to work best, but who really knows?! 🙂

  9. Thanks, Big ERN, for your pithy summary, and your blog in general. Couple of things re FIRE and this post.
    1. I guess I’m a traditionalist when it comes to defining retirement, so I’m going to go all retirement police (your term) here. If you’re engaged in an activity that a) provides you income and b) the amount of income is enough to make a meaningful dent in the quality of your retirement or otherwise reduce the failure risk by a significant amount, then you’re not ‘retired’. You may be financially independent, though.
    2. Maybe we need a new word for ‘retirement’ – I think it’s time we retired it anyway. I like to think of myself as a Time Millionaire. Yeah, that’s the ticket – I’m wealthy in time – I have no imposed demands on my time, no ‘have to’ stuff hanging over my head.
    3. Re flexibility and spending, have you written about prime harvesting approaches and variable withdrawal strategies? Seems like both of these are glaring omissions in your summary about flexibility.

    Happy 2022!! Gonna be….interesting.

    1. 1: good point. Needs to be taken seriously by the FIRE community.
      2: In German the term would be “Privatier” for someone independently wealthy, not necessarily retired. Translates loosely into “person of independent means”
      3: Yes! Prime harvesting = Part 13
      Variable spending rules: Parts 11, 24, 25

      1. Privatier hört sich soooo viel besser an als Rentner ;-). Danke für den tollen Beitrag. Alles Gute fürs neue Jahr.

  10. Hi Karsten –
    Many thanks for your awesome content and a Happy New Year to you and your family.

    I’ve been “early retired” since 2015 and initially our expected withdrawal rate was 3.0 – 3.5%. Our portfolio is ~ 100% in stock index funds and ETFs and has doubled since 2015 although our budget hasn’t changed much – now it likely will increase with inflation – and our withdrawal rate has decreased to 1.5 – 2.0%. I understand that the expected portfolio return is strongly correlated with the CAPE, and there also seems to be “an equilibrium” between withdrawal rate and CAPE / expected return such that even if my portfolio value decreases by 30-50%, my withdrawal rate is then higher but so is the expected return. I can see that the biggest concern would be retiring early today with the high CAPE and having a 4+% withdrawal rate.

    1. Yes, that’s exctly right. Most people who retire at the (then-)-All-Time-High will do fine if the market keeps rallying.
      But folks who retire today at the high with a 4% rateface a high risk of problems down the road. Seems like you (and we) are out of the danger zone! 🙂

      1. Big ERN,
        I’m trying to completely follow this thought process: “Most people who retire at the (then-)-All-Time-High will do fine if the market keeps rallying. But folks who retire today at the high with a 4% rate face a high risk of problems down the road.”

        I agree with the 1st sentence…everybody is fine when the market keeps going up, however, the 4% WR is quite arbitrary. Is 4% for the necessary spending or does it include the discretionary spending plus a small cushion? Perhaps it would be very risky for the former, but not the latter. A family retiring today on $2M whose budget includes home improvement and travel budget will do better than a different family with the same portfolio, but their defined ‘necessary’ expense of the same $80k (and living in SF or other HCOL location.) So many nuances go with this 4% WR.

        Also, why would say “Seems like you (and we) are out of the danger zone!”? If a person who retired at age of 30 with $1m 10 years ago would have $2m today. What’s the difference between him/her and a different person retiring today at age of 40 with $2m? The 1st person might claim FIRE freedom because retired from a hateful job whereas the 2nd one might claim that the job was just fine and saw no need to retire. So, mathematically speaking is there a difference between the two but maybe I’m missing something?

        PS. I think I’m still waiting for that “Enough” holy grail number so sometimes I do like to read more optimistic blogs of other people. I think it depends on the sensitivity of the audience reading your blogs and that’s why some criticize your posts as being too negative. If people are not unsure then they keep trucking even though the millions might be growing while waiting for that crash.

        1. All good points:

          4% is indeed arbitrary.
          The withdrawal rate refers to the amount you take out from the portfolio. How you spend it (discretionary or mandatory) doesn’t matter.
          Well it does matter in case you get hit with a bear market and you now have to lower you withdrawals. That’s easier to do with a lot of discretionary spending.

          Out of the danger zone refers to folks who retired long time ago with a then-3% or 4% WR and now the portfolio is so much larger and the effective withdrawals have now dropped to 2% of the portfolio or below. Unless you recast your retirement budget now and double it to get to 4% again you’re out of the woods now.

  11. How trustworthy is the latest cfiresim.com calculator? How would you use it as a tool alongside your model?

    1. Nice tool. But the problem is that it is only at annual frequency (so you’d miss the 9/1929 retirement cohort) and cfiresim is not really very serious about conditional failure probabilities, so it also falls victim to one of the issues mentioned in this post, i.e., reporting unconditional probabilities.

  12. Thanks for another good read. One quibble – that fellow who retired in Dec of 72 would have to be of unbelievably stout heart to stay the course after seeing 70% of his retirement portfolio melt away. I know a couple of fellows now working at Wegman”s Market who panicked in 2008/2009.
    It’s a lot easier to stay the course when you have years to go until you will rely on the money, and you know that your new investments are going into the market at fire sale prices.

    1. That’s another challenge: what if this retiree had liquidated the equity portfolio at the bottom? Would have missed the recovery.
      That’s another issue not really appreciated in all those simulations! 🙂

  13. Hey Karsten,
    First, I want to emphasize that after binging multiple FIRE blogs back in 2015 and setting my course for FI, yours is one of the fee I haven’t unsubscribed. Your methodolgy and truth seeking are second to none.

    I find myself more and more leaning towards using the CAPE WR rather than the full cohort data. My question is, and this has been on my mind ever since you started the SWR series:
    Isn’t there an issue of “small sample fallacy” with the CAPE based WRs?
    Don’t recall if you adressed this, but with your expertise where would be a good place to learn more about this and what constitutes a “small sample”?

    1. Fintranslator,

      Something for you to remember (and for ERN to remind folks of more frequently): using the conditional probabilities absolutely is quite important when looking at failure rates above 0%, but is not important at all when choosing a “Safe” – i.e zero historical failures – withdrawal rate.

      The whole point of a SWR is one that has worked under *all* past conditions. Specifically the misfortune of picking the worst possible retirement date.

      Of course, nothing is guaranteed, as it is possible that the future will be worse than *anything* that has occurred in the past – but that would then also apply to literally every bit of financial advice ever, including ERN’s own excellent recommendations, absolutely including CAPE-based ones.

      So 100% agreed that if you’re planning to “wing it” or be flexible a bit and choose a WR with failure rates above zero, you’d better pay close attention to conditional probabilities. But if you stick with 0% historical failures, then that’s at least the one place where the answer is “simple”!

      P.S. For me, ERN’s site is the only *must read* FIRE site – heck, retirement planning site, period – that there is. Congrats, BigERN on five years of awesome SWR information.

      1. Thanks for the comment.
        Yes, true, the failsafe stays at 0% failure rate, no matter what.
        But when working with fail-safes it becomes important to look at the conditional failsafes if the market is not at the all-time high or not above 20. 🙂

        1. Well, you’re of course correct that the conditional failsafe WRs can be different from the unconditional failsafe WRs, of course. Because they might be higher!

          But they can never be lower. 🙂

          So as you point out, those retiring *after* bear markets can take advantage of the conditional probabilities to safely (based on historical date) use *higher* WRs.

          But for markets like now, after a 12 year bull run with one quick blip in 2020, where the kinds of folks who read this blog are naturally worried about the risk of running out of money in retirement, we can – and should – still safely(!) look at the relevant unconditional SWRs.

          IMO someone not *carefully* reading your recent blogs, including the post above, is quite likely to think that you’re saying that in these current high CAPE, near-S&P-500-peak times the failsafe WRs you’ve cited using complete, unconditional data are too high. Despite the fact you’ve not actually said that.

          1. Exactly! My point weas a moot point for the situation we have right now at or close to the the all-time high.

            And yes, people might misunderstand that concept of the fail-safe. I hope most readers see the point you made, though! 🙂

    2. Thanks for the words of confidence!
      The CAPE-based approach is very intuitive because it naturally factors in valuations. Since the formula was calibrated by using historical data, this approach suffers from the exact same issue as the other method(s): We have samples for only a number of recessions and bear markets.
      I;m confident that with the coverage of 1929 and 1960s we span the two bookends: a demand shock and a supply shock recession.

      1. I’ve been meaning to comment for a while — I was also pretty taken with the CAPE based approach for spending fences when you published it. I added the calcs in my spreadsheets to monitor and work with, and as time goes on I’m appreciating it even more. This series has been “must read” since the beginning. Thanks again for your efforts and care with it.

      2. Also, because of the limited size of the historical data set, the worst we’ve seen isn’t necessarily the worst possible. So, the conditional odds of ending up close to the fail safe percentage could affect the odds of doing worse than any historical example.

  14. I think your point regarding CPI vs average consumption is likely to be misunderstood by many people, especially since it is well-advertised that the CPI involves a changing basket of goods. If you’re taking requests, this may be a good topic.

    I like the idea to add wage growth rate+CPI growth rate to your intended withdrawal schedule, at least until traditional retirement age. This recommendation probably makes sense with our intended lifestyle, but may under/over represent for others. As you mention at the top of the post, the math during the working years is far simpler than the math during retirement, and we’re still a few years from needing to figure these things out.

    1. Thanks!
      Changing baskets won’t help you. Its exactly what causes the problem. What’s measured in the CPI is the deprexiation of the price for, say, one specific mobile phone. But then after 2-3 years it’s replaced and you have to pay the same amount in $, even though the CPI index went down for that category.

  15. To me FIRE often means keeping your mouth shut.

    Though, you can always just tell people you’re unemployed.

    I love doing so…then seeing how people treat me after I tell them that.

  16. Hi Ern,

    what an excellent article, you rock! I hope there will be another 50+ posts of SWRS. Happy blog anniversary and New Year!

    P.S.: FINDOG and FINISH are awsome acronyms LOL

  17. Another great post! It’s good to advice to be extra conservative when the CAPE is high as the last 3 peaks turned out to be horrible times to retire with the 4% rule.

    While I also agree that its good to have a plan for if the ACA subsidies go away for early retirees, I don’t see them ever going away unless the FIRE movement got so big that people were no longer shocked when you told them how easy it is to retire by 40. Its a popular program for traditional early retirees in their 50’s and early 60’s who are a big voting block that politicians wouldn’t want to upset. Even if they managed to add some kind of work requirement for those under 50, early retirees would probably just do some kind of freelance passion part time job to meet the requirement.
    In addition, we just had a pandemic that left millions without a job and health insurance and it would be difficult to come up with a one sized fits all rule to filter out early retirees by choice from the long term unemployed not by choice. Since the majority of Americans support some kind of universal health insurance, it seems more likely that we get ACA expansion rather than contraction.

    1. Yeah, it’s hard to take away an entitlement. I’m more worried about more means-testing that will make it harder to get the subsidy.
      Watch the political discussion about the “wealth tax”. Once we have to report our net worth on the tax return we may not have to tax it, but we may lose benefits.

      1. Yeah that’s certainly one possibility, though I think they would have pretty high exemptions at something near the eight figure range like they do for estate taxes. Being worth low 7 figures feels “middle class” in a lot of coastal areas.

        If they were to come after <50yo retirees, I bet the first thing they would come after is the Roth conversions and 72t distributions. These relatively easy ways to get tax advantaged funds out early don't exist in most other countries whereas the subsidized health care for millionaires is fairly common elsewhere.

        1. I’m from Europe with some experience in the “design” of a large generous welfare state. The math doesn’t work if you only tax the super-rich. The middle class will have to pay up, and pay A LOT, if (when?) we go down that route.

  18. Good one as usual! Would love to hear your thoughts on the latest Morningstar 3.33% SWR estimate published in Nov 2021 (30 years, 50% equity, diversified portfolio, 90% success rate).

    Your Toolbox model (I believe) shows about 4.2% with similar assumptions (30 years, diversified, zero final value, 90% success, CAPE>20, SPX all time high). Seems Morningstar uses a 30-year forward return assumption that is much lower than actual past returns (assumes ~3.0% real portfolio return based on 50% equity). Bengen has already commented on that but I would love a fresh perspective from the doctor himself.

    Thanks. Happy 2022!

  19. Ugh… the “things THEY don’t want you to know” headlines are making me tired of living in the 20’s, and it’s only 2022. 🙂

    Regarding CPI+, I think before we budget and work extra years so that we can keep up with the Joneses, we should ask ourselves exactly what that spending growth in excess of CPI between 1991 and 2021 looked like. You could probably do a whole post on this subject, but I suspect it was:

    (1) Bigger Houses. The median new home in 1991 was around 600 square feet smaller than the median new home in 2015. At the same time, the number of occupants per home plummeted, meaning higher costs spread across fewer people. https://www.aei.org/carpe-diem/new-us-homes-today-are-1000-square-feet-larger-than-in-1973-and-living-space-per-person-has-nearly-doubled/

    (2) More Luxurious Cars. Remember when windows had cranks, AC was optional, and air bags were things that made your chrome-rimmed hoopty bounce up and down? Today’s base models have more luxury features and waaaay more quality/reliability than the cars of the early 90’s. My barebones 2012 Fit is more luxurious, spacious, durable, and reliable than a new 1991 BMW 3 series, unless you adore leather, and it’s much safer too. If you locked in your required luxury/safety level at BMW levels in ’91, you should be driving a barebones car today, and your cost of ownership should have decreased. If you kept up with he Joneses, though, and bought into the luxury full-size SUV craze…. well…there’s lots of ways to blow a budget and that’s just one of them. For an illustration of how complexity is driving cost increases, see https://www.hemmings.com/stories/2014/03/07/have-cars-really-grown-more-expensive-since-1965

    (3) Healthcare and College Inflation. To the extent that retirees paid these bills, they paid more than CPI.

    (4) Information Technology. Yes, most people spend more on their smartphones, data plans, home internet, and devices than people spent on landlines in 1991, but they don’t have to. There are plenty of 2nd tier wireless companies where you can get a free smartphone with a 2 year contract, and pay less than $50/mo. I pay less than $50/mo for home internet, and use a 12 year old computer. If everyone else buys a refrigerator that orders their groceries for them, or smartwatches that interact with your smart thermostat, or VR gaming systems do I have to do so as well? Frankly, our quality of life hasn’t gotten much better since 1991, despite all the electronics. I would happily go back. So why not say if you want the newest gadgets in retirement, you have to either cut back elsewhere or earn their cost?

    Out of these major cost drivers, I think your average 2020’s retiree would only face #3 for certain. Trading up to a bigger house, fancier car, or an even bigger TV is optional, even if all the neighbors are doing it.

    1. Chris B,

      I think you make fantastic points re: what’s likely driving CPI+. Also remember that CPI includes Owner’s Equivalent Rent as the housing component, and that has gone up likely faster than inflation even on a per sq ft. basis in much of the country as interest rates have gone down driving home prices up even further. So I strongly agree with you re: your points 1), 2) and 3), though as you point out 3) healthcare *is* likely to drive your personal CPI faster than the published.

      When you get to point 4) I gotta disagree on multiple points. IT costs have continued to come down over the years, massively with the adjustments for quality, but meaningfully even without those adjustments. That people *choose* to spend more on IT because they have a wider variety of interesting software and services to select from is a good thing, period. And this doesn’t even capture the huge benefits from all of the free and zero-cost to the consumer services available on the Internet.

      The idea that quality of life hasn’t gotten much better since 1991 is ridiculous. As but one trivial example, if you went back you certainly wouldn’t be able to enjoy this fabulous blog… 🙂

      1. Yes, the quality and functionality of IT equipment has increased exponentially, so in theory people are buying more because they’re getting more utility for their money. However, the quality of lots of things are better than in the past and will continue improving. Just as it should not be necessary for a retiree to sell their smaller home and upgrade just because the average new house size is getting bigger, and a retiree should not trade their Civic for a Chevy Tahoe just because others are doing it, it should be unnecessary for a retiree to plow ever-increasing amounts of money into the IT industry. Today’s craft beers have amazing quality compared to the swill that was available in ’91, so should I increase my beer consumption?

        At some point, a fresh FIREee has to lock down their lifestyle and say a certain level of luxury is good enough. There’s no way to budget otherwise. If we let product improvements drive our spending, we’re out of control, and our planned WR is irrelevant because we MUST buy all the new and improved gadgets.

        I just don’t know many retirees, or millionaires in general, who are paying hundreds of dollars a year for cell phone games and unlocking suits of armor or whatever in Roblox. Yes, these things are “new” and “improvements” but do you have to buy them just because they exist, or just because the average person starts doing it? Not if you’re serious about FIRE you don’t.

        I maintain that lots of things were better in 1991. Friends would meet up in the physical world instead of exchanging memes on Facebook or TikTok with people they haven’t seen for years, if ever. People benefited from quality investigative journalism that rooted out corruption in their communities, rather than the clickbait and celebrity Twitter we have today. Interest rates were much higher than inflation, so a person could FIRE with a bond-heavy portfolio. Housing and a college education was affordable, even despite the interest rates. People supported democracy because they hadn’t yet been radicalized by the internet. And mostly, less of people’s lives were occupied by staring at screens. People think we’re lucky to have such great screens to stare at, but I don’t think we are. Check your average screen time – that’s a lot of waste.

      2. Agree with you.
        It’s actually BECAUSE of the strong productivity gains that will likely need to to CPI+x. That’s because any given mobile phone phone will get cheaper, but in order to be able to run even the most basic operating system we’ll have to upgrade the quality constantly. In other words, in the fixed basket the expense for a mobile phone keeps going down but we regularly spend $600-$800 on a smart phone every 2-3 years.

        And yes, the quality of life has increased quite a bit! Due to the hedonic treadmill we may not “feel” it so much, but life is certainly better! 🙂

        1. Unless you are being “precisely imprecise” with your English, and not stating it or even implying that your “x” factor might be negative, then to maintain the same standard of living there is no guarantee that you will need to raise spending by a positive “x” factor each year.

          Now, if by “need to”, all you mean is “want to / will prefer to”, then of course that’s different.

          It’s certainly true that each consumer’s experienced CPI will be different than the official economy-wide number, and that the ability to substitute won’t always overcome said differences. [And the official number could be persistently understated and “wrong”, but I’ve not heard you tried to make that point]

          But even if I concede that in your example of mobile phone (to run apps) you will need to spend more money in order to have a “current” phone (and we ignore the quality – and so standard of living – improvements in that newer phone, or claim that you value any intrinsic improvements at zero), that phone is such a small portion of the total basket. Some things, like flat screen TVs, continue to come down in absolute price even as quality improves.

          And you are ignoring the reverse, where the quality improvements in durable and even non-durable good such as clothing mean consumers can spend less of their income on them, without sacrificing “quality of life”. See, for example, here: https://www.aei.org/carpe-diem/spending-on-clothing-and-footwear-falls-below-3-of-disposable-income-for-first-time-in-u-s-history/

          If your point is only that someone wanting to keep up with the Joneses and keep their consumption “ranking” constant, then I’d agree. And personal situation (owning a house you never want to moe from likely will lower your observed CPI, having high college and healthcare costs will increase it, etc.) will dominate CPI for most.

          So while I think Chris takes it too far when he says a “FIREee has to lock down their lifestyle and say a certain level of luxury is good enough”, it doesn’t follow that everyone *must* add a positive “x” to annual CPI increases just to maintain their lifestyle. Ever increasing economic productivity benefits almost all, including specifically retired equity holders, it does not harm.

          1. Maybe it’s less a question of what we ought to do (increase consumption or not) but a question of what we will actually do. Every source I’ve read says that retirees spend, on average, 80% or less than they did while working.

            Frankly, the retirees I know start caring a lot less about fashion, electronics, and home renovations as they go through their 60’s and 70’s, and without a commute their cars last 15-20 years. We haven’t even mentioned mortgage payoff as an upcoming budget cut.

            To Zoomers, spending money to unlock video game features is a normal and typical “bill”, but to me (because I’m in my 40’s) it seems like a colossal waste. I’m also uninterested in the latest $1,000+ iPhones that millennials are drooling over or integrating my car/house with my cell phone beyond playing music through Bluetooth. The concept of paying for a premium YouTube or Pandora subscription is beyond me – only someone in their 20’s would do such a thing.

            Thus my prediction is I’ll fall behind in my experience of tech, just like the elderly people still walking around with flip phones today. I’ll leave my house outdated rather than update it. My clothes will be 20 years out of style and have food stains on them. This is normal, because as we get older we get more set in our ways, less open to experiences like new tech products, and more resistant to learning.

            1. All good points. But please note:
              The mortgage payoff is something you should have already factored into your SWR plan. Or, even better, you shouldn’t have mortgage in retirement at all.

              We can all point to all the things that we stop spending money on, but beware of the things that will creep in that you never thought about:
              Preference for more luxurious travel
              Kids will become more “expensive” – help with wedding, college, grad school, house down payment. Then grandkids.
              And more health expenses with a long-term CPI rate about 1 percentage point above CPI.

            1. Thx.

              I look forward to a future SWR series post on the tradeoffs of building in a “+x” factor and the impact on withdrawal rate, and perhaps compared to the (probabilistic) alternative of raising your consumption amount whenever your portfolio exceeds the old inflation-adjusted high.

    2. Thanks!
      All really great points.
      I think we are personally still subject to all of them. Including college inflation because we like to help our daughter with that expense.
      For example cars: even if we wanted to a car with manual windows, I don;t think even Honda produces those anymore.
      Same for housing: materials are getting better and we will likely enjoy more space, incl disability-firendly wide doors (if we need it). Nobody wants to build houses like in the 1990s anymore.

      So, I’m steadfast in my belief that it’s going to be CPI+x. 🙂

  20. Despite all the lovers above, this post made me very sad to start 2022. I don’t think FIRE is even worth all the trouble anyway. For every happy thing, there’s 10 negative things to think about and consider in your plan. Nah, I’ll just spend my way into traditional social security retirement.

  21. I’ll echo all the positive comments above – easily the best investing/withdrawing analyses available. Great work Dr. ERN!

    Leo’s comment above is pretty humorous since it seems that the conclusions from the Safe Withdrawal Series are fairly (shockingly?!) simple. Maybe a Cliff Notes page is in order?

    * 4% is only safe at modest CAPE valuations
    * At high CAPE 3% to 3.3% is more realistic
    * Widely-touted “flexibility” and “side hustles” are virtually impossible to implement in a mathematically relevant fashion
    * A 60->100% equity glidepath will historically get you an additional 0.2%
    * A 15% allocation to gold can get you an additional 0.3% or so
    * Don’t parrot the early retirement bloggers who are living off their blog income, unless you plan to do the same

    Anybody intimidated by the series can pretty safely shoot for the “3.3% Rule” and happily go back to Reddit!

    1. 100% equity?? And I’m the humorous ! lol 3.3% is more reasonable for my 50/50 (and quite risky for my taste) allocation.

    2. Bob,

      I think your Clff Notes summary is *really* good (though the 2nd bullet should be tweaked to append “for 45+ year horizons”)…

      … except the very first point!

      Depending on other cash flows and how high a final value target you desire, 4% can be safe for 30 year horizons independent of CAPE.

      And as you point out in a couple of your other bullets, if you use an equity glide path starting at 60%, and have a healthy allocation of gold, that additional ~0.5% can easily get you to 4% over 30 years independent of additional cash flows, and even with 25%+ final target values. In fact, ERN’s Google sheet shows you get there even without the glide path.

      Iif you wanna keep your Cliff’s notes to the same length it is now, maybe just substitute: “4% is frequently not safe at all”

  22. Thank you Karsten for your effort and for sharing this series. It has materially and positively benefitted my knowledge on this topic and my family’s future security. Best, Dan

  23. All great points. Congrats on 5 years! I think your last point about ACA subsidy reliance is spot on. That could really be a rug that gets pulled out from under any of us. This is why I chose to invest in a web business to provide steady cash flow versus a more fingers crossed approach to sequence of return risk. I’ll take my chances running my own business even if it means my retirement is less than relaxing for the next few years!

  24. FINAL – made me laugh!
    I enjoyed reading this. I retired a year ago at age 57. Maths is certainly not my strong suit, but your post made me look at what % my first year’s spending has been and I was able to play along at home with the charts. Last year’s spending was inflated – renovating 2 bathrooms will do that – but now that my home is ‘retirement ready’ I should be fine.
    While I was working I cash-flowed the improvements to the house, and the bathroom renos were paid for using my Long Service Leave – something I don’t think the US has.
    Thanks for making this post so clear and easy to follow. 🙂

  25. If you read ERN’s posts on this, you’ll see that the 60% –> 100% glide path ensures that you are “all in” on equities in the case that you have bad luck and the market tanks soon after your retirement, since that’s precisely when you need to have primarily equities in order to support the initial withdrawal rate.

    In fact, whenever the market gets back to new highs (at least when adjusted for inflation), you are better off resetting back to 60% equities and repeating the process, to best continue to mitigate SORR. And you’ll be able to do so with a higher withdrawal rate.

    If you don’t reset, and don’t raise your withdrawals, you’ll usually (but not always) end up with a higher ending value. But it’s clear to me that ~80% – ~90% of the time, you will want to reset back to 60% at least once, if not multiple times, during the process.

    It’s a similar concept to the “bond tent” Kitces discusses, and somewhat similar to using an initial cash bucket.

    Whether you go from 40% to 80% or 60% to 100%, it’s actually safer than a static 50-50 allocation.

  26. Here’s a possible new acronym: FIBBING
    (Financial Independence Based Blindly on Individual Naive Guessing)

  27. Hello Karsten,
    very interesting article thank you!

    I have a very serious question for you that no FIRE blogger actually talks about and that is becoming a concern for a lot of people watching the recent events in the US. (last 10 years really, but mostly last 4-5 years).

    The Trinity study looks at a fairly short history, and there is no guarantee that what worked in the past will work again in the future.

    Have you thought about the risk of the US democracy dying in the coming years? It certainly looks like a real risk and the Rule of Law would certainly be gone if that happens.

    Buffet always said that the US was the best place to invest because of democracy and the Rule of Law (and that Rule of Law being separate from the political arm-which can not happen in a autocracy).

    What if they are both pretty much gone in a few years? do you think a strong stock market is possible under an autocratic regime? how would that affect how you would invest and where? would there be a sudden crash or it would be an erosion over many years as it becomes clearer and clearer that the people in power will stay there and drag the country down (+ inevitable rising of corruption in institutions and corporations)?

    I know these are complex questions but I would really value what your take is on this.

    1. I can see your point, but also keep in mind: The 150 years of return data cover
      2 world wars
      Wilson, FDR, Nixon, Carter. 3 of them scary dictator types and of them utterly incompetent.
      I think we’ll make it through the next 100 years just all right.

      But I agree, there are challenges in how nasty the climate has gotten and how politicians are trying to take blow up safety mechanism like the filibuster, or the 9-seat Supreme Court, etc.

      1. Think the current situation is probably worst than this. It is actually the first time that democracy and the rule of law are actually in danger. The cause is a mix of foreign and domestic misinformation, politicians that do not show any shame for lying, and of course citizens who are not curious enough to see through all this or just don’t care because they take democracy for granted. Not sure at all democracy/rule of law will survive the next few years and if not, no idea where this would leave the stock market in the US in the mid term but it would not be in a good place. I sure hope your optimistic view prevails but I am very worried because once those winning conditions are gone, they are very difficult to put back in place!

  28. Hi Karsten,

    Great post as always.

    One question on the SWR Toolbox mechanics.

    In this post, under point #9 “CPI adjustments in retirement may be insufficient!”, you state: “But just to be sure, my Safe Withdrawal Rate Toolkit has a feature for you to tweak the simulations and model withdrawals that grow faster (or slower) than CPI inflation. To my knowledge, my toolkit is the only one out there with that kind of modeling flexibility.”

    Could you point me to some detailed instructions on how to use that feature in the toolbox?

    I’d like to modify my simulations to show withdrawals growing at 2% above inflation (so COLA + 2pts) to keep up with general economic growth and the Joneses.

    I’ve looked through the other blog posts, and I haven’t found anything.

    Any help would be greatly appreciated.


    1. Great question. The scaling can be done with column P in the sheet “Cash Flow Assist”.
      It starts with a scaling of 1.00 in P11. If you grow this number at a rate of 2% p.a. then you achieve what you want to do.
      For example, set P12 to “=P11*1.02^(1/12)”
      Then copy this formula down all the way.

  29. Liked this post, as I’m struggling with withdrawal rates too. I’m in my first year of retirement, living off pensions and investments and it’s much, much harder than saving for retirement. How much cash should I hold? Or bonds or gold versus equities? Which should I sell when I need to convert to cash? Should I take out a year’s expenses in one go, or take a monthly withdrawal? I find myself becoming impatient with the future, wanting to know what it is going to turn out like, and have to remind myself to enjoy the moment and count my blessings as opposed to just my money!

  30. Karsten,
    The series is obviously fantastic. Can I offer another suggested approach to Safe Withdrawal Rates? What if I let the actuaries at the IRS determine my safe withdrawal rate each year?

    That is, if I use the Single Life Expectancy Table for Inherited IRAs, the IRS has already (presumably) told me what my portfolio can withstand at each age. The benefit I see here is that the math truly is simple and I’m guaranteed not to outlive my portfolio. The downside, of course, is that it creates the “flexibility” problems that you’ve mentioned in multiple posts. If the portfolio declines due to market returns, and therefore my subsequent withdraws decline, I may be forced to cut expenses to an undesirable level. That is a substantial problem, but the withdrawal rate is still SAFE, which is the ultimate problem we are trying to solve.

    The bigger problem, “market declines,” can be mitigated with diversification, spending cutbacks, and return to work possibilities, but it can never truly be solved. Am I on the right track? Thanks for all your work!

    1. Dan,

      The IRS withdrawal rates, which as you note are based on actuarial data, are designed to ensure that the government gets its tax money, not designed at all for what SWR targets. Actuarial means average, roughly, by definition, so if you live longer than the average than you’ll not meet your inflation adjusted target withdrawal amount as you near the (original) expected retirement date.

      So it’s only “safe” in the sense that you will never withdraw all the money. It’s “safe” like Guyton-Klinger rules, or fixed percentage of portfolio rules, are “safe”. True, you won’t ever run out of money, but your standard of living has a very high chance of going down dramatically.

      In our context, all it really is is a slightly better “fixed percentage of the portfolio” withdrawal formula (better because the percentage increases as you age).

    2. ANDYG42 already replied very thoughtfully..

      My additional 2 cents: At age 44 when I retired, my life expectancy would have been way too long to afford a reasonable WR. I’t be withdrawing ~2% if considering the joint life expectancy with a 35-yo wife. You can do much better with my procedure.

      1. Thanks for the reply, Karsten, but this now becomes confusing. Andy’s point was that my proposed methodology is not truly safe because it runs a higher risk of substantially impacting my standard of living. He said, “So it’s only “safe” in the sense that you will never withdraw all the money. It’s “safe” like Guyton-Klinger rules, or fixed percentage of portfolio rules, are “safe”. True, you won’t ever run out of money, but your standard of living has a very high chance of going down dramatically.” And you said he replied, “thoughtfully.”

        But then you said if you personally relied on the IRS’s tables (joint life and last survivor expectancy), it would be TOO safe because you’d end up with a sub 2% WR and “you could do much better with your procedure.”

        So I am at a loss for understanding if my suggestion is too risky or too safe.

        My personal situation: I’m 52, retired for almost 4 years, and the single life table says I can safely withdraw 3.1%. This appears reasonable to me (though the real life circumstances have been that I have had a much lower WR [sub 1%] because many things happened in my favor that I could not account for. But real life has a habit of doing things like this. So I have zero complaints!)

        Thanks again for all your work…it is very much appreciated!


        1. At age 52 with future cash flows like pensions and Social Security, 3.1% seems crazy low. How would you account for future cash flows in the RMD-SWR exercise?

          I can’t speak for ANDYG42, but what he’s likely alluding to is the fact that if you got a 3.1% this year, and maybe a 3.2% next year, then if your portfolio drops significantly in between, then your withdrawal amount drops almost 1-for-1 (although slightly adjusted by the 3.1->3.2 increase).
          Your withdrawals become almost as volatile as your portfolio. It’s better to adjust for asset valuations.

          1. I agree with ERN (unsurprisingly! 🙂 ).

            When you’re younger, the IRS calculation will be too low – and that’s independent of other cash flows you might have, as ERN also points out. ERN is correct, here, but I confess I wasn’t focused on this.

            Throughout, you will have highly volatile withdrawal amounts, which few people seem to prefer. And that is indeed part of my point.

            My other point, though, was that once you are over ~80, the RMD calc is likely too *high* a consumption amount (assuming no other cash flows), if you want to protect against “longevity risk” [e.g. living to 95 or even longer]. Because the calculation is targeted at the mean/expected lifespan, and there’s presumably about a 50% chance you will exceed that; moreover, even if the chance were only 10% or 15%, that’s not a risk most people would want to take.

            So in addition to likely being highly volatile in the middle of your retirement, your suggestion is both way too “safe” when you’re younger, and probably way too risky when you are older.

            1. Andy,
              Those are all good points and I appreciate your contribution. That said, I think you and Karsten have convinced me! However, in my defense, I do want to point out that I was only using those tables as a guideline of what would be considered “safe.” In fact, after nearly 4 years of retirement, my ACTUAL withdrawal rate has been sub 1% per year. And this has been due to a number of factors most of which I hadn’t anticipated (but all have been in my favor!).

              I think this is partly what makes the concept of Withdrawal Rates so nebulous and hard to force into a formulaic structure. That is, I don’t think I’d ever start the year and decide a specific withdrawal amount or percentage for that year. That doesn’t mean I’m “winging it,” it just means that life is uncertain, desires change, portfolio returns fluctuate, inflation is variable, and our expenses ebb and flow. And so while there is some serious math involved to provide proper expectations and guidelines for withdrawals, there’s also an “art component (i.e., NOT math)” that comes into play as well that accommodates for all of life’s uncertainties and changes.

              Karsten asked how I would account for future cash flows (like Social Security) in the RMD-SWR exercise, and I guess the answer is to treat them as if they were a “bonus.” While working, I never counted on a “bonus” or salary increase but I did receive them from time to time. But they never had an impact on what we spent money on…they simply got added as additional savings. The portfolio growth (from contributions and investment gains) is ultimately and solely what impacted our spending decisions. But I’m sure this answer lacks all of the mathematical precision that most folks on this site prefer–so my apologies.

              Thanks again,

              1. Dan,

                You’re clearly being conservative in your approach, so doesn’t seem like you’re at all at risk with your “winging it”! 🙂

                In terms of better accounting for your future cash flows for help determining how much you can safely spend, may I suggest using ERN’s excellent Google sheet? It’s helped me tremendously.

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