January 13, 2022 – According to the most recent inflation numbers that came out yesterday (1/13), CPI inflation is now running at 7% year-over-year. From September to December, we saw a 2.2% increase, which is a 9.1% annualized rate. And it’s not all energy and food inflation. The core CPI is also elevated at 5.5% year-over-year.
What do I make of this? How persistent or transitory is this inflation bump? Should we adjust our portfolio? Or our safe withdrawal rate? Here’s a short note with my thoughts…
A favor to ask…
Before we get started, though, please make sure you check out my recent podcast appearance on “Hack Your Wealth” where I talked about inflation as well as other issues like equity valuations, floating-rate preferred shares, and crypto investing:
How current economic changes impact retirement safe withdrawal rates (via Youtube)
Transitory vs. persistent vs. permanent inflation
For the longest time, people have been telling us not to worry about inflation because it’s just transitory. Well, if someone tells me inflation is transitory and they keep telling me that every month and every quarter and every year, it eventually gets old. Late in 2021, FOMC Chairman Jerome Powell finally conceded that “it’s probably a good time to retire that word [transitory].” Note that this doesn’t mean that 7% is now going to be permanent. It simply means that the inflation shock will likely be more persistent than anyone had predicted, but at least for now, the working assumption is that in the long-term, we’ll see more contained inflation again. And the hearing in early December where this came up served as a heads-up to everyone that at the December meeting, the FOMC will project a slightly more aggressive interest rate path than before.
How long will this inflation shock persist, then?
In other words, will I get to see normal inflation again in my lifetime – to counter the classic “In the long-run, we’re all dead” issue raised by an old (now-dead) economist? Let’s check what the accumulated wisdom and prediction power of financial markets have priced in. TIPS-implied inflation rates are the spread between nominal Treasury bonds and the (real) TIPS yield, i.e., what TIPS owners will get paid over and on top of inflation. There are some problems when using this measure, of course. Notably, during market stress periods you might get “iffy” estimates because TIPS are not as liquid as Treasuries. But right now, I don’t think this objection applies.
As of January 13, here are the Yields and the implied CPI rates, all annualized, see the table below. Yes, the 5-year CPI estimate is elevated, at 2.8%. The 10-year rate is already down to 2.5%. And if we “back out” the TIPS-implied inflation rate for the years 6-10 as [1.0249^10/1.0282^5]^(1/5)-1, we get an implied inflation rate of 2.16%, not significantly different from everybody’s long-term 2% estimate. Indeed, the Federal Reserve uses the Core-PCE as their preferred inflation measure and that’s usually a bit below the CPI, this brings us right back to where we need to be!
Also, notice that this 2.16% figure for the medium-to-long-term inflation pressure is not at all outside of historical norms. If we plot the time series of TIPS-Implied CPI since 2003, we notice that 2.16 for 6-10 years ahead is below the historical average (2.25%) and certainly below some of the historical peaks (3+%). It’s about in the same ballpark as in 2018. So, if you wonder why financial markets are not yet panicking, this is it: Past inflation is “water under the bridge” and the outlook isn’t so bad.
But is this sanguine inflation picture even realistic considering the recent 7% YoY numbers? How quickly (or how slowly) do we have to move back to that 2.16% long-term figure and still be in line with the TIPS-implied measures? Glad you asked because I did some simple Excel calculations to check that. I looked at the most recent inflation figures and noted the 0.47% month-month CPI (almost 6% annualized). Let’s assume that over the next 10 years, the monthly CPI advances converge back to that 2.16% long-term target and they do so with a “half-life” of a specific number of months. I played around with different half-life parameters, and at 8 months we get future 5-year and 10-year predicted inflation numbers exactly aligned with the TIPS-implied numbers (well, within less a 0.01%, at least), see the chart below.
What’s astonishing is that even though we slowly walk the monthly inflation numbers back to the long-term target, the year-over-year measure is bound to go up for two more months and is likely to peak at 7.4% in February of 2022. That’s because we’re still rolling out the relatively benign CPI numbers in early 2021. Only later when the 8%+ annualized monthly CPI numbers from the Spring of 2021 drop off the YoY calculations would we see a decline. And a very slow one!
In other words, even in this optimistic scenario where inflation pressures slowly abate, the year-over-year numbers will get worse before they get better. And it’s going to take until 2024 for the YoY numbers to drop below 3%. The good news in all of this is that even with CPI numbers looking really rotten for quite a while, it’s still totally consistent with a relatively sanguine inflation outlook over the medium-to-long term, i.e., 5-year and 10-year TIPS-implied inflation estimates.
What does this all mean for investors?
As you all know, I’m an economist. I eat, sleep and breathe economics. And folks like me sometimes tend to annoy everyone else and pressure people into getting excited about the most recent economic trend (fad?). On inflation, I take the opposite view. We shouldn’t overreact in either direction. I’m reminded of that Bill Bengen paper circulating in late 2020, proclaiming that due to the low inflation rate at that time, we could all increase our safe withdrawal rate to 5%, even 5.5%. That didn’t age well. But even back then, I found this ludicrous and I took some of his claims to the woodchipper in “Can we raise our Safe Withdrawal Rate when inflation is low?” as part of my Safe Withdrawal Rate Series. The same goes for higher inflation: I’ll do what I’ve always done: I point to the risk of high equity valuations (much scarier than inflation!) and the potential of a bad sequence risk event. I would recommend people calibrate their safe withdrawal rates to hedge against some of the historical worst-case scenarios.
Of course, while I’m proposing we don’t do anything fundamentally different, we can certainly tweak a few of the details. The prospect of inflation certainly warrants revisiting your safe asset allocation, likely somewhere around 25% of the portfolio. Some people want to argue that due to the prospect of rising rates, it would be safer to shift out of longer-duration bonds and into short-term instruments. Well, not really: the future inflation and rate hikes and yield increases are already baked in. So, unless you worry about inflation and Fed rate hikes coming in worse than what is currently predicted, it’s already too late to make that shift. But I grant you that: if you believe that the Fed will raise rates faster than currently predicted, i.e., more than 150bps by the end of 2023, you should consider shortening your bond portfolio duration.
Another idea would be to use floating-rate instruments or fixed-to-floating rate preferred shares, as I do in part of my portfolio. Specifically, I hold a part of my margin cash in my options trading strategy in those floating rate shares, tied to the LIBOR rate. I won’t go into the details too much, but in the Hack Your Wealth Podcast I talk about that at about the 42:30 mark. I should also note that Preferred shares are significantly riskier than government bonds, so there is no free lunch, as I pointed out in Part 29, Part 30 and Part 31 of my SWR Series: Preferred shares have a significantly positive stock market correlation, they should never serve a one-for-one substitute for safe assets. But as a hedge against a nasty interest rate hike, they certainly work. Another plus is that most preferreds are issued by financial corporations whose business model often benefits from higher interest rates (ceteris paribus, at least!).
The pessimistic case
Just in case, I don’t want people to believe that I’m a Federal Reserve Cheerleader. There are certainly a few worries on my mind. They are all related to this saying/meme that many of you have probably seen or heard in one variation or another:
1: Weak men create hard times.
2: Hard times create strong men.
3: Strong men create good times.
4: Good times create weak men.
… and back to 1.
And I should stress that the quote is decades old and referred to men and in today’s world we’d probably keep that more gender-neutral. But you get the message, I hope. There are many examples of this natural cycle of building something valuable, and then complacency sets in and you squander what you built. Sometimes people go through cycles like this, sometimes corporations, even entire societies and countries. And this concept surely works for monetary policy as well. Because it, too, often goes through those 4 phases of building and squandering reputational capital:
1: A weak central bank creates out of control inflation.
2: Out of control inflation creates a hawkish central bank.
3: A hawkish central bank brings inflation expections back under contral.
4: Anchored inflation expectations create a weak and complacent central bank.
… and back to 1
For example, we were in phase 1 under Burns and Miller. Then Paul Volcker (phase 2+3) reined in inflation and every FOMC chairman/chairwoman since then has enjoyed the benefits of that strong reputation. Inflation expectations have been anchored thanks to that. Certainly, they still appear to be, as evidenced by the low long-term TIPS-implied inflation expectations. But it makes me wonder: With the easy monetary policy that started potentially as early as Greenspan post-2000 and certainly under Bernanke post-2008, have we already entered phase 4? Will phase 1 be around the corner soon? It’s too early to tell. I certainly hope we’ll navigate those uncertain times and not squander the decades-long reputation of a central bank that cares about price stability.
There was also a brilliant op-ed in the Wall Street Journal by Thomas Sargent, NYU professor and 2011 Economics Nobel Laureate (who I’ve had the honor to meet and talk to several times during my academic career), and he and his co-author make similar points: 1) rebuilding a central bank’s reputation is a lengthy and often painful process and 2) financial market estimates can be wildly off around the central bank reputation turning points. Just like me, they don’t forecast bad things to happen, they merely worry about the prospect and want to raise awareness.
Conclusions
So far, I’m not losing sleep over the inflation numbers. No need to run for the hills. This is all still consistent with an economy that was shut down for an extended period and the eventual reopening caused some snags and supply issues. And reckless fiscal policy, which is also bound to end soon! But not all is looking rosy. I certainly cross my fingers and hope that inflation slowly subsides. Right now, financial markets firmly believe that the inflation spike is temporary. But if incoming data points don’t support that view, market conditions will change. As the old saying goes “You can fool all the people some of the time and some of the people all the time, but you cannot fool all the people all the time.” But then again, even if we find ourselves in an inflation spiral like the 1970s and early 80s, I should be safe because my withdrawal strategy would have survived that historical period as well.
Glad you stopped by today. Please leave your comments below!
Title picture credit: pixabay.com
Is it just me or are the economy and markets becoming more like our changing climate, too volatile to rely on historical patterns anymore.
You were not around in the 1970s, I guess? Those were volatile times, a lot worse than today. 🙂
The 70s get’s all the attention because many of us were alive then and it was a very bad period for investors, but in my simulations for a long haul early retiree (50+ years), the Ragtime/WWI cohort almost always fares as bad or worse…
It starts off with volatile markets with lousy returns coupled with high inflation, and then once the roaring twenties get you out of the hole, bam, smack into the Great Depression. You’re not “out of the woods” till nearly 30 years after the start.
That’s a bad cohort as well. Depends on the asset allocation and supplemental flows, though. For me personally, the 60s-80s would be the worst. 🙂
I think high inflation will be around for several years. 1) Consumers see inflation which means prices have gone up. 2) Business sees inflation which means they are going to raise prices. 3) Employees see higher prices which means they will demand higher wages. 4) Higher wages will cause business to raise prices even more. Go back to 1 The end of this spiral will come only with another severe recession and the Fed and the politicians do not want this and will delay doing anything to slow inflation as long as they can. Also government (at all levels) is one of the biggest beneficiaries of inflation. I am almost totally out of bonds and into dividend paying stocks.
Yes, that’s the wage price spiral. It will eventually break once the government’s generosity runs out. Potentially as early as right now due to the end of the child tax credit. We shall see.
WE NEED TO #ENDTHEFED
What’s the alternative? Bitcoin? Gold standard?
BTC… :-)))
Good one!
I lived through pretty massive inflation once in my life. I am not a fan of it. I always felt usage of “transitory” was b.s. from beginning. Central banks as you know have a nearly 100% record to overshoot in either direction. That’s said, I am on the same page that they will do a decent job of taming the beast.
Agree. Thanks, Karl! 🙂
Have we ever had a high-inflation, high CAPE environment?
Cynically, I do perhaps wonder if the path back to more normal CAPE valuations involves inflation driving up nominal earnings while prices stay relatively constant. Perhaps this would be less painful than a true market correction of the magnitude necessary to normalize CAPE.
Very true. The 1960s had slevated and rising inflation (not 7.9%, though) and the CAPE was only slightly above 20, which was high for the period, but nothing like today.
That might mean what’s ahead for us in the next 15-20 years might look worse than the 1960s/70s/80s. Ughhh!
But you’re right, inflation is better than deflation. At least the nominal values don’t fall as much and we can “grow out of the hole”. It also works well if you own your home and you have some additional real estate investments.
The math makes sense, but in the current environment the market rates are endogenous to fed actions. You can’t point to market yields for treasuries as market expectations if the Fed is a major buyer of treasuries!
What would the market clearing rates be if Fed stop buying up debt? Impossible to know. The debasement argument is simple.
The have already slowly phased out the purchases and will finish that process in March. I don’t think it’s going to have a huge impact. 10-year yields will march toward 2.5-3% even in the best case. Maybe more if things blow up…
Fed holds about $6T of treasuries, vs $30T outstanding, 23.5 of which are ‘held by the public.’ No doubt interest rates would be somewhat higher without the fed but doubtful the overall narative would be changed substantially. There is still massive private demand for treasuries even at very low rates.
Yes, exactly. US Treasury bonds are still considered the one worldwide safe-haven asset. There will always be demand for them.
Big ERN,
What’s your withdrawal strategy? Or can you elaborate on “I should be safe because my withdrawal strategy would have survived that historical period as well.”
This: https://earlyretirementnow.com/safe-withdrawal-rate-series/
Hi Ern,
do you have a post about your asset allocation? Especially risky vs safe portion? I have read through all your posts about why you don’t have an emergency fund (thanks for these!). But (i) do you have a “safe” portion in your AA, (ii) that you invest in bonds still yielding something vs cash generating a ~0% return, (iii) or invest completely different?
Many thanks and kind regards from Munich,
Harald
The most recent update I posted on that issue was in this post:
https://earlyretirementnow.com/2021/10/18/passive-income-through-option-writing-part-8-2021-update/
Mostly Equities. 12% real estate
And 30% options trading.
Could you share the list of preferred shares that you are holding on to?
Please see the table in this post:
https://earlyretirementnow.com/2021/10/18/passive-income-through-option-writing-part-8-2021-update/
Inflation really depends on what one buys. If one owns their house, relatively reliable cars and cook most of their meals, many inputs into inflation are avoided. I almost think there should be separate inflation rates depending on one’s state in life.
Agree. But the CPI is what it is. We need a nationwide measure. But as an FYI it would also be good to have more customized measures.
ERN, elsewhere you have written about the preferred stock etf PFF and its 046% ER and how at that rate you “prefer” (heh) to invest in the shares directly. The Global X Variable Rate Preferred ETF (PFFV) with 0.25% ER is cheaper and seems like better fit given the focus on the floating rate ones. Just wanted to make sure you were aware of it.
Thanks for the pointer. Definitely better than the PFF or even PFFD. But very low volume.
But certainly a good starting point for smaller accounts.
Remove Biden. But Trump back. Inflation is his fault !
He pushed the mean ole inflation button because he couldn’t pass any meaningful legislation didn’t he!
Inflation would have hit either way. But that said: impeding US domestic energy production and the continuation of $$$ handouts to fuel demand and encourage people to sit idle at home made the problem worse.
I am not an economist and not familiar with Inflation calculations. Is there any way to distinguish between supply shock inflation and demand shock inflation or if both are at work? We can look back at the inflation in the 1970’s and assume it was probably a supply of oil shock that caused the inflation. Today, IMHO, supply constraints due to low labor participation, supply chain issues and COVID shutdowns indicate a supply shock while the foie gras monetary policy since March 2020 may indicate demand shock so both might be at play and more challenging to solve than in the 1970’s 🙁
Hard to disentangle the two. Very model-dependent!
I would say look at ngdp or rgdp for a clue. high demand would tend to lead to high ngdp growth, and normal to high rgdp growth as the economy runs hot. Supply shock should tend to lead to lower (or possibly negative) rgdp growth. But agree with ERN that its not clear cut… especially right now… there is probably a bit of both going on and the economy is recovering from a pandemic so many things could be driving these numbers…
The 1970’s also had a demand “shock” with the baby boomers entering the workforce and starting to have children which drove up demand for houses, cars, appliances, energy, etc. It was basically an “echo” of the post-world war II supply and demand driven inflation shock that their parents experienced.
The 1970s was we had the youngest average age since world war II and we’ve continued to age as a population and are expected to continue this trend for the next few decades so I think inflation will eventually come back down.
The only additional goverment programs are child tax credits, how much effect do you think that is having on the economy? I mean most of the developed world has had paid parental leave for a long time.. doesn’t seem much different.
Seems like inflation is more due to 1) supply chain issues and 2) companies raising prices, even when seeing record profits. I do think that rising wages will string out inflation longer than the financial market’s predicitions, although that’s going to be very job and industry dependant. Service jobs will have to raise wages, higher paying jobs will rely more on improved flexibility (remote work, etc.) and working conditions.
1. I always hear a ton about Fed Rates and inflation and what not…but what about rest of the world? I hear a lot of thoughts – many of which seem to be very convincing – about weakness of USD, our national debt, how the Fed is ‘trapped’ with cost of inflation and rising rates which will crush stocks and slow economy……..
I can never find any information about rest of world, but as bad as USA might be, basically aren’t we the “least bad” currency/economy? So even if things are bad here, if they are as bad or worse in Europe, wouldn’t that have some impact on the rates and everything?
Hope you get the general idea of what I’m asking.
2. You mention in a line inflation spiral of 1970s/1980s…. but what about from what I’ve gathered the way its calculated is now different than it was then? For instance, I see on social media how inflation is really ~13-14% if it was calculated in the same way it was in 1970s/1980s. One thing that really stands out on how ridiculous the government inflation number is to me is the ‘owners equivalent rent’ which they quote as like 3.8 or 4.8%? When zillow/redfin/apartments.com all have put out rent prices increasing ~12-20% off top of my head, and housing prices of ~20%+.
1: Agree. Among all the developed country central banks we are in the best shape. We are the least drifty shirt in the dirty laundry hamper.
2: CPI would not be 13-14% “if calculated the way it was in the 70s/80s” I’m not sure who made that claim and where the calculation came from.
3: Rent is not increasing at 12-20% nationwide. If you want to calculate your own personal CPI in your specific area, sure go ahead. But the CPI is calculated to take into account nationwide data.
4: House prices are not counted in CPI. Only the rent or imputed rent.
5: Also notice that because the CPI is for urban consumers paying 30+% of their basket on housing. While in nationwide spending, that share is only less than 20%. So, CPI will likely overestimate inflation due to housing costs.
Thank You for the question. To get back to Jack’s question, the European Central Bank is in a lot more uncomfortable position. Christine Lagarde, the ECB head continues to emphasize the transitory impact of inflation but all countries within the EU and the Eurozone are not affected in the same way. Germany recently decided to increase minumum wage by 25% while Spain is doing the same with a 31.8% hike. France is granting occasional checks on a selective basis but ahead of the presidential elections there is pressure to increase the minimum wage as well. In a nutshell, because of that dilemma, the ECB will most likely react in a more gradual way than the FED. This should have an impact on the EURO/USD parity in the medium term. This increased volatility historically always caused ripple effects on other emerging countries which follow a basket made of USD and EURO.
The ECB is a mess. I’m sorry to say that, but the Bundesbank should have just taken over the affairs in the late 1990s. Lagarde doesn’t have a clue. She should go back to running a law firm. Not monetary policy.
Indeed, the ECB and the Euro remains a work in progress. It’s very challenging to manage a monetary area which such diverse fiscal and macroeconomic policies. I remember very well that the Euro parities were fixed on assumptions that were misunderstood and still ignored up to this day. Robert Mundell warned us back in the days https://www.nationalreview.com/2021/04/remembering-robert-mundell/
Yeah, very good article! Thanks for the link!
I wonder how much we can trust the wisdom of a bond market that has been massively distorted by a price-insensitive buyer who has purchased trillions of dollars worth of assets. It is said that nominal bond yields include “expected inflation”, but this is obviously not true. Over the past two years, as made the transition into an inflationary environment, the 1 year treasury has only ticked up to 0.57% when clearly we all “expect” inflation to be much higher than that.
I divided up the amounts of monthly QE vs. the total treasury market volumes in 2021. The Fed amounted to about 1% of the liquidity, despite its huge QE actions. I no longer think they were price-setters.
Sure, take it with a grain of salt.
But keep in mind that TIPS are indeed bought primarily by non-public investors.
I have faith in CPI numbers looking better later this summer. I think GDP will take a hit already this quarter and the stock market has at least another 5-10% to fall. That will pour some cold water on CPI.
Hello, I have been following your posts over the years and have a question. I know you talk about different ways to adjust for inflation during retirement. I never thought that I would see 7% inflation rates during my retirement. Would you personally ever increase your yearly withdrawal rate to keep up with inflation that high? I have been planning on 3% max yearly increases on my withdrawal.
I keep up with inflation regardless of how high it is.
There is a different issue though: Maybe my personal basket isn’t even going up 7%.
We use very little energy.
We are healthy.
We own our home.
So, we keep spending what we need. If it goes up by 7%, then so be it. But I doubt our personal CPI is that high.
Ones personal inflation index should be much less than the CPI when one is retired. Because all the essential expenses, food, utilities, health insurance, transportation are not increasing at CPI rate. All the big ticket items should be fully owned before retiring, specifically house and car(s) unless one is a nomad/expat in a low cost region.
Not true. Who says that “food, utilities, health insurance, transportation are not increasing at CPI rate”???
Is investing in I-series bond a viable hedge against inflation? Thank you for your thoughtful analysis.
Yes. Currently you get a guaranteed real return of 0%. I.e., you make exactly the CPI+0%. Good deal when inflation is 7%. Also, when CPI goes bac to a more normal ~2% that’s still a decent nominal safe return.
Scared to death of inflation and wildly overvalued stock market!!
68 years old, wife 67, SS at ages 70 ($81K total),15K pension, $6.1M in savings (35% stock, 55% Tips bonds, 10% cash. been retired 7years. The only change I may make is add to Tips bond exposure.
$81k in total SS, which is giving you COLA for life. You shouldn’t be scared! 🙂
I apologize if this is too simple of a question. I’m just becoming familiar with your site. Should the projected future real rates of return that are part of the EarlyRetirementNow SWR Toolbox v2.0 be adjusted because of the current inflation rate? Thanks.
Well, you enter the real, inflation-adjusted returns. If you believe it’s 7% nominal and 2.5% inflation, then enter 4.5% real equity return.
I think that high inflation is here to stay for longer. Since it is the most convenient way (for the government) to decrease real debt. The worst part is that entire costs of this operation are passed on to savers.
Mentioned 2,49% TIPS implied inflation translates into 22% decrease in purchasing power of savings over 10 years period (accordingly to this report https://calcopolis.com/saving/inflation/a_10000000-i_249-m_120 )
I am glad that I invested in real estate 5 years ago when the prices were more reasonable. At least I have a better hedge against inflation than TIPS give.
First, under 2% inflation you’d lose 18% of purchasing power.
So, going from 2%->2.49% is not that dramatic.
Second: that site miscalculates the numbers. 100,000/1.0249^10 = 78,196
They seem to calculate 100,000*(1-0.0249/12)^120 which is not proper. Never trust websites like that with any calculations. They are often designed by people who don’t know what they are doing.
I agree with your view on real estate! It’s a good inflation hedge.
Thank you for your explaination. Can you recommend some other website which does similar calculation right?
Not sure you want to use a website. It’s best to just get out the calculator yourself. 🙂
The fed needs to nip this in the bud. We need another Volcker to come through and raise rates no matter the short term pain. I want to retire early in the next 3 years and hate typing this but maybe a fed induced recession is what the dr. needs to order? Unfortunately, with social media and the 24 hour news cycle, I don’t see any chair/policy holding fast with high rates like Paul did in the early 80’s, I foresee a potentially hawkish fed succumbing to pressure, like what happened with the last unneeded rate reductions.
Careful what you wish for. Volcker would mean that the Fed Funds Rate would now have to be at around 9-10% to take care of this inflation problem.
At the Fed they are probably sweating bullets and hoping/praying/lighting candles that CPI will moderate again later in 2022. 😉
Quite astonishing that the most “hawkish” member right now (Bullard) wants to raise rates to 1% by July. Duhhh?!
Hi Karsten – long time reader here. I’m 54 this year; and I’ve been struggling with if/when I could possibly ‘pull the plug’ and choose to work either part time or retire early. I’ve had an initial goal for my number, but as I’ve learned more through your blog and podcasts with other community, I’ve pushed that goal out to a new number. Once I got there – I set another goal… I’m now heading toward my 3rd goal, but have already set an additional 3 after that. I’m wondering if you do any more case studies, even at a high level? I’m in WA state, and if needed – I would pay for your time and we can discuss you using the information for a blog post if you’d like.
I feel so close, yet – there are things I want completed before I leave the workforce (house repairs, etc…) – I feel confident that my goal number 4 or 5 in my list is an acceptable number. I’ve been avoiding ‘de-risking’ and taking advantage of the bull run we’ve had… but maybe these final months/years I work I can add new money to lower risk assets.
Just wanted to open the conversation, I’ve not been able to find a way to direct message you via other sources (such as Twitter) …
Any answer is good with me (yes, no or shot discussion), I just wanted to take my shot.
Thanks in advance,
Steve (NWOutlier – North West Outlier)
If you keep listening to financial advisers, you will never have enough to retire. If you have an IRA or 401(k), you can take money out under the SEPP and not have to pay penalties and deplete that if necessary to delay taking SS until you are 70. You, like me may be in an even higher tax bracket when you retire and are getting SS and MRD. If you are retired, you will have more time to do the house repairs yourself. You will have more flexibility to travel when there are good deals to be had. And most important, you are likely not to be able to do things later that you can still do now. I speak from experience
A ince compromise would be to work until 55 and then be able to tap the 401k already penalty-free.
Ever try crowdsourcing your case study either on the forum on here or a similar one like the /r/financialindependence subreddit?
I know ERN has limited time and can’t run everyone’s specific situation, but you can learn a lot from the hivemind of all the experts on the internet.
Also, there’s a lot of powerful calculators out there like ERN’s spreadsheet and others like cfiresim that you can pretty easily plug in your numbers and see how well you’d do historically. It’s pretty easy to set up more complicated rules such as having a higher withdrawal rate initially then dropping it when SS to see if your plan would’ve survived the historically tough times for retirees such as the great depression and 1970’s inflation.
Hi FIGUY, well, I don’t want to share my numbers to a broad group – so the hive is off the table. I’ve run most calculators, including cfire and firecalc and others.. by the numbers, it looks decent.. but fear I really believe is my issue. I’m old enough to have seen what happens over long periods of time with inflation and market fluctuation.
I’ve never de-risked though.. I believe I’m 99% stocks VTI / VTG.. I can’t seem to stomach the low to negative returns bonds, savings, cds provide – although my stocks could be negative as well (recently purchased, all my old ones are pretty solid).
I could be panicking for no reason; it’s the set a goal, hit it, decide it’s not enough, set another goal, hit it, decide it’s not enough, set four more goals and I’m rapidly hitting the 3rd goal… I guess this is called “OMY” One More Year syndrome. But to be honest, my first 2 goals were too low.. 3rd goal and above, considering lifespan, I should be ok…. I think… and there is the rub… 🙂
Thanks for the reply FIGUY!
Yeah, good point. I wonder if Steve has even used the SWR sheet. That would be the first step! 🙂
Hi Steve.
I don’t do personal consulting and I don’t do case studies either.
I suspect you have less of a mathematical and more of a psychological barrier. The old “one more year” syndrome.
Also, what do you think is the retirement budget as a % of your current portfolio value?
Hi Karsten, Which ever goal I end up at, I’m pretty focused on 2.8 – 3% withdrawal rate (and would not mind going as low as 2.6% for the first 5-10 years of retirement); I guess I can give some round numbers to paint a better picture. My issue is; our lives avg around 7k/mo with some spikes if there is something that needs done on the house; so my final goal would be 3 – 3.5M (again this is 99% in VTI and VGT approx 75/25 split. If I stick with my withdrawal rate at the low end, I would need 2.6% of 3M. I’m not at 3M… yet. At 2.5M I could use your 3.2% and be close to the 7k. Not at 2.5 yet either. (close, but market is wonky right now, so yes – OMY or buffering is what I’m looking at by adding extra shares.
another view I’ve taken is ‘number of shares @ some price per month’ so, I would target no more than 15-20 shares a month sold to meet my financial needs, but for this to happen VTI and/or VGT would need to be 350/sh x 20 shares to meet the need, what that would calculate in withdraw rate would vary from month to month. but this turns into an oversimplified way to look at shares as “credits”… 20 shares a month x 12 months x 25, 30 or 35 years…
I think you nailed it Karsten; this is all in my head, I’m close – but just trying to mathematically gain the confidence (which my math skills are pretty basic).
To respond to your question, yes – I’ve used a couple versions of your SWR sheet… it’s been a few months, maybe a year… I will sit down again and go through it… Most all calculators tell me I’ll make it just fine, but I want to be “sure”, not fine. I do want to leave money to my son as well. My parents passed in Sept and Dec of 2021, I watched for more than a year the costs of care (as well as the lack of it) that can hit a families bottom line, so I am trigger shy… I don’t want to “barely” make it.
Thanks for the response, love the blog – I look forward to my early Saturday mornings to see what you may have posted. I still dig through the SWR series, because there is always something there for me to learn.
Best Regards,
Steve (NWOutlier)
A 54-yo with Social Security not too far away should go well above the extremely conservative 3.2% WR.
So, there’s your problem: you should factor in your future cash flows (Social Security, Pension if applicable). Maybe add some large cash flow needs for age 88-90, just to hedge the possibility of a nursing home. But you should still be well above 2.6%.
If you got your SWR sheet done and want me to (privately) take a quick look, please share the link with “ernretirenow (at) gmail.com” and I can take a quick look. But again, this is not a case study or personal consultation. Just a quick 5-minute opinion! 😉
Got it, on it. May be during next weekend.
Done. Delivered.
Ok, spent more time back in the withdrawal series, I can see 3.0% as being a safe place to be, instead of 2.6%. If I understand it correctly – I may even be able to go higher for the first 7-13 years until social security kicks in (estimated age 65 to 67) (depends on when I stop earning income)… I prefer to start low and work my way up the % scale… I figure I’m landing between 1-5 years remain for W2 income… We will bring the house up to full repair while I’m still working…. That should bring me to about 2.5M-2.75M w/3.0% withdraw and that should cover my expenses…
I’m hopeful me choosing to work a few more years allows for our inflation and market impacts to normalize… that sequence of return risk really got in my head (hence the reaction to shift even lower than a 3.25% WR).
I keep a pretty detailed spreadsheet of all dividends, deposits, estimates of income based on total value, etc.. it is not as organized since it was created over time.
Anyway – thanks for all the work – this blog helps people gain the confidence to make a choice or see where their target really is.
Steve (NWOutlier)
Hi Karsten,
What’s your take on the numbers since you had written the post ?
Gotten a little bit more pessimistic. It seems that the day of inflation decline is pushed further. Crossing my fingers that gas prices stabilize and even go down slightly in April and we get the fist decline in Y/Y headline CPI numbers.
The day has come. Went down a bit. Hope it’ll continue this way.
That decline in the YoY number mostly came from rolling out the high April 2021 number. Overall, not a very reassuring CPI release. Core CPI is up 0.6% monthly. Ouch!