Accounting for Homeownership in (Early) Retirement – SWR Series Part 57

April 14, 2023 – Welcome to a new installment of the Safe Withdrawal Rate Series. Please check out the SWR landing page for a summary of and a link to the other posts.

Today’s topic is homeownership. I’ve already made the case that not just rental properties but even homeownership can be a great tool in building assets (“See that house over there? It’s an investment!“). But what if you are already retired? What are some of the benefits of homeownership in the context of (early) retirement? Does homeownership reduce Sequence Risk? Do homeowners enjoy a lower inflation rate in retirement? If so, by how much can homeowners raise their safe withdrawal rate? How do we properly account for homeownership (with and without a mortgage) in the SWR simulation toolkit?

Lots of questions! Let’s take a look…

Do homeowners enjoy a lower inflation rate?

In my safe withdrawal rate simulations, I adjust the withdrawals and the portfolio values with the U.S. Consumer Price Index (CPI). It’s the most widely-used inflation gauge, and we also have decent historical estimates going all the way back to the 1800s, so I can run historical simulations long enough to cover some of the early market meltdowns, like 1907 and 1929.

So, is the overall CPI the correct measure for homeowners? As homeowners, we certainly have a different consumption basket because we don’t pay rent. Or, more precisely, a model-based estimate for owner-occupied equivalent rent indeed enters the CPI, but because homeowners effectively pay rent to themselves, any rental inflation will be a wash because it raises both your implicit expenses and your BLS-imputed income.

How big is the effect on your personal CPI when you’re not paying rent? Multiple people have reached out to me and asked me to comment on a recent phenomenon in the FIRE community that seems to have gotten a lot of buzz and attention, namely, the notion that homeowners enjoy a significantly lower CPI inflation rate and thus have an additional sizable safety cushion in their withdrawal rate.

My buddy Frank Vasquez at the excellent Risk Parity Podcast seems to be the origin of this new insight; see episode 209 (at around the 34:00 mark) and – so I have been told – at a breakout session at the March 2023 EconoMe conference. The story goes as follows: The housing component in the CPI makes up almost one-half (roughly 44%, to be precise), so if the long-term historical inflation rate was 3% for overall CPI and you are a homeowner, then your personal inflation rate is only 1.68% (=3% times 0.56) because you are not facing any rent increases.

Because the 4% Rule uses the overall CPI to adjust for annual spending increases in the historical simulations, we strongly understate the safe withdrawal rate of homeowners. Potentially by around 1.32 percentage points! Suddenly, the 4% Rule becomes the 5.32% Rule. Sweet, that’s a 33% increase in your retirement budget! And even if the decrease in the CPI rate doesn’t increase your SWR 1-for-1, but maybe only by 0.4x (see Part 47 for details), you still generate a major boost in your retirement finances. It sounds like a very intuitive and convincing story. Unfortunately, it’s also totally false. Here’s why…

The BLS is helpful enough to construct a special “CPI-Less-Shelter” series. In the table below is the average, annually-compounded overall CPI and CPI-less-shelter since 1947, which is as far back as the FRED data series goes. CPI was 3.53%, and CPI-Less-Shelter was 3.31% p.a.

Annual Average Inflation rates: All Items vs. All Items Less Shelter. 1/1947 to 3/2023. Source:

So, if you don’t pay rent, your CPI would have been 0.22 percentage points less, translating into a 6% lower annualized inflation rate. Better than zero, but it’s a far cry from the purported 44% reduction.

And even the 0.22 percentage points would be a bit of an overstatement. As a homeowner, I still have to cover other housing-related costs, such as maintenance, repairs, regular updates/renovations, property taxes, property insurance, etc. So, for example, in my current neighborhood, homes would fetch about a 6% rental yield. But as a homeowner, I’d likely have to budget at least one-third of that as my out-of-pocket expense for keeping, maintaining, and insuring our single-family home. If my bills for property taxes, repairs, and insurance roughly go up with shelter inflation, then I lose another one-third of the CPI advantage, and we are down to about a 0.14 percentage points advantage. Maybe a 0.06 percentage point in the SWR. So, in a nutshell, as a homeowner, you may enjoy a marginally lower inflation rate, but it’s not exactly economically significant.

Why is the difference in CPI inflation rates and safe withdrawal rates so small?

The difference in inflation rates computed by Frank & Friends (1%+) vs. the BLS (0.22%) boils down to three misunderstandings.

1: The 44% weight is wrong!

Let’s start with the smaller one, which is due to a quantitative misunderstanding: The shelter component in the current CPI (Feb. 2023) makes up 34.5%, according to the most recent U.S. Bureau of Labor Statistics (BLS) data release. The Housing component that Frank & Friends use has a 44% weight, but that’s because all other housing-related costs, namely energy (electricity & heating), trash collection, etc., are all rolled into that housing cost figure as well. And you can ask any homeowner: you don’t get electricity, natural gas, etc., for free just because you own your home. Sorry for being pedantic, but as a homeowner, you hedge out at most your shelter inflation, not your entire housing inflation. And as mentioned above, not even the entire shelter inflation because you still have inflation exposure through the repair/maintenance/tax/insurance costs.

Housing has a 44.5% weight. Shelter has a weight of 100%-65.527%, so only about 34.5%. Source: March 2023 BLS CPI report, Table 3.

Also, I’m the first to concede that the most recent 12-month window saw much higher overall inflation (4.99%) compared to only 3.44% ex-shelter inflation. So, the deviation between non-shelter and overall inflation can fluctuate substantially in any given year. The most recent runup in rental inflation is because rental prices initially lagged the overall inflation pressures post-pandemic due to rent price “stickiness” and are now in a “catching-up” mode right when headline inflation is already subsiding. But if we average over the last three years, overall inflation was lower(!) by 0.20 percentage points than CPI-less-shelter (5.35% for CPI vs. 5.55% annualized for CPI-less shelter, between 3/2000 and 3/2023). Over the last five years, we’re again back to CPI-less-shelter below CPI by about 18 basis points. So, don’t focus on any one year. Look at the longer-term averages, all about 20 basis points!

Annual Average Inflation rates: All Items vs. All Items Less Shelter. As of 3/31/2023. Source:

And just as an aside, here’s another fly in the ointment for Frank’s theory: CPI vastly overstates the importance of rental inflation because the headline CPI figures look at urban consumers only. The average nationwide expenditure on rent accounts for only about 15% of consumption expenses, see BEA Table 2.4.5, where Line 50 (Housing) was approximately $2.4t or 15% of overall consumption (Line 1, about $15.9t).

2: CPI math

The more substantial misunderstanding in Frank’s CPI calculations has to do with the way the CPI index and its subcomponents are constructed.

Let’s get wonky and note that the CPI index is constructed as a so-called Laspeyres Price Index. As such, it will generate inflation rates that are simply the weighted average of the underlying component price changes. Please see the derivation from my Intro to Macroeconomics class at UC Berkeley Extension below:

Laspeyres Price Index: the overall % change is simply the weighted average % change of the different components! Source: my Intro to Macroeconomics class at UC Berkeley Extension.

So, if we assume there are only two components, Shelter and CPI-Less-Shelter, the CPI %-price change is simply the weighted average.

And we can also reverse the formula and solve for the CPI-Less-Shelter component; see below:

Notice how this formula is different from what Frank & Friends use:

So, whenever you calculate a CPI index for a subcomponent, like CPI-less-Shelter or CPI-less-Food-and-Energy (=core inflation), etc., it’s not enough to take out the undesired components. We must also reweight/rescale the index, hence the “1-w” in the denominator.

Let’s look at the following numerical example to demonstrate how significant an effect the sloppy CPI calculation can have. Imagine shelter inflation was 3.5%, and all other categories had 3% inflation. CPI-Shelter had a weight of 34%. Then overall inflation was 3.17% (=0.34×3.5%+0.66×3.0%). We can now confirm that CPI-less-Shelter inflation was indeed 3% through our formula:

Frank & Friends would have used 3.17%x0.66=2.09%, almost a full percentage point error.

3: Adjustments to the personal CPI don’t translate into 1-for-1 changes in the SWR (added 4/17/2023)

And a bonus item: even with a 0.15% difference in your personal CPI, you can’t necessarily translate that into a 1-for-1 improvement in your SWR percentage. The direct impact on the SWR is likely much smaller. For example, in Part 47, I looked at how a CPI+x% spending drift would lower your SWR. For x=1%, you lower your SWR by about only 38bps. For x=2%, you reduce your SWR by about 73bps. Of course, the exact figures depend on a lot of parameters, chiefly the retirement horizon and the final bequest target. That’s the exact reason we have to run some simulations to gauge the exact effects.

+ + +

So, enough for beating up on poor Frank Vasquez! I met him at the 2019 FinCon in Washington, D.C., and he’s a really nice guy. So, let’s look at some case studies for how we should adequately account for homeownership in the Safe Withdrawal Rate simulations.

SWR analysis: renter vs. homeowner with a mortgage-free home

Can a homeowner still afford a larger safe withdrawal amount than a renter, independent of the whacky CPI calculations on the internet? The rationale would be that a renter has larger mandatory expenses (rent) than the homeowner, who must cover taxes, insurance, and maintenance. Thus, the renter may be more impacted by Sequence Risk, i.e., withdraw from the portfolio while the stock market might go through a potential bear market early in retirement.

Another way to rationalize the homeowner advantage in retirement is to observe again that if a house has a gross rental yield of 6% and 2% overhead from taxes and maintenance, you have an asset that pays out a net real, CPI-adjusted yield of about 4%. Because safe withdrawal rates for early retirees are often less than 4%, you will likely benefit from having an asset that pays a “safe,” bond-like, and CPI-adjusted dividend of 4%. Compare that to current TIPS yields of only 1-1.5% or the current I Bond fixed rate of 0.40%. And notice that I’ve budgeted pretty conservatively. Some folks in the real estate world plan for an annual 12% gross rental yield and 6% overhead for a net 6% yield on their rental properties. That would certainly help you even more with your safe withdrawal math! But I like to go with the 4% real net yield to be on the safe side.

As always on the ERN blog, there is only so much you can accomplish with bloviating, so we need to run some simulations to know for sure and to quantify the effects of homeownership. As usual, I will do so with my Safe Withdrawal Rate Toolkit; see Part 28 for the link to the Google Sheet.

Let’s start with a simple baseline case for a renter:

  • A $3m initial portfolio: 75% stocks and 25% bonds (10-year U.S. Treasury benchmark bonds).
  • 0.05% annual expense ratio on your portfolio holdings.
  • A 50-year horizon.
  • A bequest target (or safety cushion) of $1m at the end of the retirement horizon. This figure is in CPI-adjusted terms! So, I set the final portfolio target in the main parameter tab to one-third.
  • I model the rent as a monthly $2,500 outflow, to be adjusted by CPI inflation. Thus, it will show up as a “real” flow in the cash flow tab.
  • For simplicity, there are no other supplemental cash flows (like Social Security, pensions, etc.). Or we assume that those cash flows later in life are used to fund higher healthcare costs. Since they would show up in both the renter and homeowner versions of the sheet, those additional flows would really only be a wash when comparing the two.

Also, notice that the way I modeled the cash flows in the SWR toolbox, the safe consumption amount is the non-housing retirement budget only. That’s because the housing cost is already factored in as a negative supplemental flow (i.e., outflow), so we can later compare the safe consumption amounts for the renter vs. homeowner.

Let’s compare the renter with the following homeowner:

  • A paid-off home worth $500k.
  • A $2.5m initial portfolio with 75% stocks and 25% bonds (10-year U.E. Treasury benchmark bonds). Notice that the renter and homeowner both have the same initial net worth. We want to compare apples to apples and keep the net worth the same. Of course, a $3m portfolio plus a paid-off home is better than a $3m portfolio and no home. I don’t need to run a simulation to know that.
  • 0.05% annual expense ratio on your portfolio holdings.
  • Assume that the home appreciates in line with CPI inflation.
  • The same bequest target: $1m, which is now 40% of the initial financial portfolio. Notice that the house will count toward that bequest target. So, if the home is worth $500k at the end of the retirement horizon, we only supply another $500k from the portfolio!
  • I model the cost of homeownership as a monthly $833.33 outflow, to be adjusted by CPI inflation, i.e., a 2% annualized cost of owning and maintaining the house.
  • As in the case of the renter, there are no other supplemental flows.

And here are the results; please see the table below. Instead of safe withdrawal rates, I display the (fail-)safe withdrawal amounts for both the renter and the owner. As usual, I slice the data in different ways and also display the fail-safe for different market peaks (1929, the 1960s, 1970s, and 2000). Notice that for the 2000 dot-com market peak, I don’t have 50 years of return data, so I use actual data to 2023 and then conservatively calibrated constant real returns post-2023. Certainly, we should interpret the numbers with a grain of salt, but also note that SWRs are determined overwhelmingly by the first 10-15 years of return data, as established in my earlier research. Also, note that I’m not really after the absolute SWR figures but only the relative performance of renters vs. owners. Any error we make with the calibrated return data will impact both the renter and homeowner and likely be close to a wash. So, the relative performance of the year-2000 is still informative!

Failsafe ex-housing spending amounts: renter vs. homeowner.

In any case, if we calculate the failsafe withdrawal amounts at or close to the historical market peaks, homeownership easily beats renting. We can express the advantage of homeownership in three different ways, 1) in annual spending, dollar terms, 2) in %-gain over renting, and 3) in % of the initial Net Worth (i.e., the percentage point increase in the SWR). Owners can afford a roughly 9% higher non-housing budget than renters. The percentage point change in the safe withdrawal rate is somewhere in the low double-digit percentage range.

If the stock market is not close to its all-time high, the advantage slowly melts away and even reverses. If equities are 35% or more below their most recent all-time high, the renter comes out ahead. It makes sense because equities will be close to the bear market bottom, and in the subsequent recovery, your financial asset portfolio will likely outperform a housing asset with a puny 4% real return. Of course, we might want to use these numbers with a grain of salt. I wouldn’t necessarily recommend selling your house and putting all the money into the stock market. If the stock market is beaten down, then likely, so will the housing market. It’s not something easy to model because I don’t have historical housing prices going back far enough to simulate this property.

Also, a few words about the absolute numbers. The overall failsafe consumption budget of $65,640 and $71,283 translates into respective safe consumption rates of only 2.19% (renter) and 2.38% (owner) of the initial net worth of $3m. The reason these figures are so small is that this is the non-housing consumption basket only. If we were to add the $30,000 in annual housing services consumed by the renter (and implicitly by the owner as well), we’re again in the 3.19-3.38% safe withdrawal rate for overall consumption. That’s as expected for a failsafe withdrawal rate over 50 years with a sizable bequest target of one-third of the initial nest egg.

And finally, a quick word about the 1960s vs. 1972/73 market peak. Notice how the mid-1960s cohorts faced more severe Sequence Risk than the cohort right before the first oil shock. It’s not that the returns from 1968 to 1972/73 were really bad, but they were lackluster, and combined with several years of withdrawals, the 1968 cohort portfolio was already underwater when the 1973-1975 recession hit. So, the 1972/73 cohorts didn’t even come close to two of the other worst-case retirement cohorts in 1929 and 1968!

So far, so good. I also like to look at some more advanced case studies, namely, what happens when housing inflation outpaces non-housing inflation. This brings me to the next section.

What if shelter inflation exceeds overall CPI?

Now assume that housing costs have a 0.50% higher inflation than the overall CPI. Specifically, let’s assume that all housing-related costs – rent and also the owner’s housing-related cost – grow 0.5% above inflation every year. I also assume that the value of the house will appreciate at a real rate of 0.50% over the 50 years. Thus, I assume that your rent goes up by 0.50% more than CPI inflation on every retirement anniversary date. See the screenshot from the SWR toolkit, specifically the cash flow tab:

Housing costs go up by 0.50% in real terms on every retirement anniversary date.

How would this change impact the safe withdrawal amounts? Please see the table below. As expected, the renter is worse off than before. But the safe consumption amounts don’t change much for the homeowner ($71,069 vs. $71,283). The higher housing cost inflation along the way is balanced against the higher appreciation of the housing asset. Thus because the renter loses significantly and the owner is almost not impacted, the advantage of homeownership is now even larger. At the market peaks, we now see an advantage in the failsafe non-housing consumption of around 13%. We also push the crossover point of market drawdowns at which the renter will overtake the owner all the way to -45%. But also notice that the impact of the differential housing vs. non-housing inflation is tiny. In the base case, the homeowner had an SWR that was higher by 0.19 percentage points. Factoring in reduced non-housing inflation, we can expand the advantage by a “whopping” (sarcasm!) 0.08 percentage points to 0.27%, not exactly the 1+ percentage points as some folks on the internet are touting. But it certainly helps!

Failsafe ex-housing spending amounts: renter vs. homeowner. Assuming housing costs increase 0.50% faster than overall inflation.

Summary so far: Homeownership hedges against Sequence Risk to a small degree. But this effect is mostly independent of any inflation rate differentials between shelter and overall CPI. Specifically, even if all expenditure categories have the same inflation rate, you already get a slight boost in the historical failsafe non-housing consumption budget by about 8.6%. With the difference in shelter vs. overall inflation by about 50 basis points, you gain another 4 percentage points (a total of 12.86%) in your non-housing consumption budget. It’s nice to have, but no panacea for Sequence Risk.

Could we increase the effect with a mortgage? That brings me to the next section…

Accounting for a home with a mortgage

Let’s now compare a homeowner with and without a mortgage. Let’s assume our retiree has a $500,000 home but also a $300,000 mortgage with a remaining 25-year term and a 4% nominal interest rate. As before, I like to keep the initial Net Worth at $3m, so we can compare apples-to-apples. That means the retiree now has a $2.8m portfolio together with $200k in home equity.

The way to model this setup in the SWR toolkit is to enter the mortgage payments as negative cash flows in the “nominal” column; please see the screenshot below. Also notice that I maintain the other assumptions about the housing expenses: $10k annualized (or 833.33 monthly), but rising at 0.5% every year. And at the end of the retirement horizon, month 600, the house with 0.5% annualized gains compounded over 50 years enters the net worth again.

Modeling a mortgage and homeownership in my SWR Toolkit.

The reason why one might suspect this setup works better is that we indeed replicate some of the flavors in Frank’s story: first, the nominal mortgage payments are being eroded through inflation, and second, once the mortgage is paid off, there is an additional sharp decline in real out-of-pocket expenditures for the homeowner. So, the home with the mortgage displays the desired behavior of spending increasing much slower than the overall CPI.

But alas, it still doesn’t work. In fact, if you have a home with a mortgage, you will have a smaller failsafe than with a mortgage-free home. Specifically, if we compare the owner with the owner+mortgage case, we see that the home+mortgage will offer less hedging against Sequence Risk at or close to the equity market peaks. And as expected, the advantage of owning the home outright melts away the further the equity market is below its all-time high. It’s a point I already made a while ago in Part 21: the larger initial out-of-pocket expenses due to the mortgage will exacerbate Sequence Risk. But of course, more leverage helps you if you expect a sharp recovery in the stock market, for example, if the market is beaten down and the next bull market is right around the corner.

Failsafe ex-housing spending amounts: owner vs. owner with a mortgage.


Homeownership helped me to a degree in reaching FIRE; see my old post My best investment ever: Homeownership?! Owning a home in retirement – mortgage-free at that – also gives me a certain peace of mind because I own an inflation-protected asset with a safe real yield much higher than most other safe, diversifying assets. I’ve always defended homeownership against some of the unfair and often economically illiterate attacks from some corners of the FIRE and personal finance community (see How To “Lie” With Personal Finance – Part 2).

So, when I heard about Frank Vasquez’s interesting theory about how homeownership can pretty much solve all of your Sequence Risk headaches, I certainly wanted it to work. But it doesn’t work. I’ve pretty thoroughly debunked the idea of homeownership being the definitive cure for Sequence Risk. Homeownership probably helps you more consistently than some other whacky ideas I’ve come across (flexibility, the “Yield Shield,” a bucket strategy, and many others), but the small positive effect of a paid-off home on your safe withdrawal rate math has mostly to do with the respectable real yield of a home. Very little of the improvement in the SWR comes from the fact that shelter inflation runs a little bit hotter than overall inflation.

In conclusion, the renting vs. homeownership discussion is likely still a lifestyle choice. If you want to put down roots in retirement, you will find that there’s an advantage of owning over renting. But if you want to be a global nomad in retirement, I don’t blame you for renting. Just set your withdrawal rate a little bit lower to hedge against rental inflation.

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!

All the usual disclaimers apply!

Picture Credit:


Someone in the comments section asked if I could share the Google Sheets. Here are the links; please see below. These are “View Only,” and I will not grant permission for you to edit. You need to save your own copy of the sheet!

122 thoughts on “Accounting for Homeownership in (Early) Retirement – SWR Series Part 57

  1. Yay for homeownership. We spent $19k on a new AC unit and ductwork, and another $2k on a new water heater, last week. Yes, all within a week, because when it rains, it pours. Our renter friends were NOT jealous. 😂

    In a happy-for-us turn of events, our mortgage interest rate is 2.25% and my bank account is getting 2.35% in interest. When has that ever happened before?! So it’s definitely not all bad.

    1. Yeah, and the roof looks suspicious too! The good news is that if you spread this over the service life of the items, it will look more manageable.
      And you should look around for a better yield at the bank. Some CDs are now >5%. 🙂

      1. Well, you can split the difference and go for multi-family.

        Since we were negotiating for over a dozen buildings in out townhome development but re-roofing only one at a time our HOA was able to spread the cost of the last roof replacement over 5 years @ $100/month for each owner versus coming up with several thousand bucks for a traditional SFR.

  2. Well, there is one other aspect of homeownership that can affect your swr, and that is the overall value and increase in value of your home. I happen to live in a hcol area and own my home which has appreciated a great deal. If I look historically, the value of the home had increased at a rate commensurate to the s and p and now represents a good portion of our assets.

    In my model, I plan on selling the home in my 80s when I won’t want nor be able to take care of it and then renting. In the spreadsheet, this has the effect of greatly increasing the swr.

    I currently just use the current value of the home with the idea that cpi will adjust, but I think it would be nice if the spreadsheet could handle the concept more fully. One can look at the Schiller home value charts to get an understanding of home price appreciation. And then we could have a way of modeling the future price of the home for this purpose. Does that make sense?

    1. Historic data for at least the last 40 years has included falling rates and mostly low inflation.

      There is a huge structural advantage going forward with a large, fix-rate mortgage at under 3% when inflation seems locked in at 5% for a while.

      I tend to think the real answer is between you and Frank.

      1. No, the answer is not between Frank and me. I think the probable answer is that CPI+0.5% scenario. If you believe that the housing market doesn’t collapse and we lose some of the gains we made in the last 3 years. There’s no way we can push the effect of CPI adjustments much more than 0.08%, certainly not to 1% as Frank would make you believe.

    2. Yep, and that’s exactly what I can do with my sheet: pick any % gain for the home value appreciation. I wouldn’t push it too hard. CPI+0 is probably safe. CPI+0.50% is still OK, but CPI+1% is already pushing the envelope.

      1. So basically add 1% a year appreciation to the house and put it in the column that adjusts for inflation?

  3. Couple of questions

    – In the mortgage section, would I be right in thinking this only works if your desired net worth at the end of the retirement exceeds the value of the house. Otherwise your spreadsheet will “use” the net worth of the house to fund spending and you have nowhere to live 🙂

    – You test the scenario of mortgage retained for 25 years against no mortgage (presumably cleared from prior income before retirement) but with net worth the same. Another common scenario might be that you want to clear the mortgage at the start of retirement. In this case, other things equal, intuitively I would think your sequence risk is worse if you clear the entire mortgage from your portfolio as soon as you retire, than if you keep the mortgage running?

    1. 1: Yes. That’s why I set the bequest target larger than the likely final home value. Of course, most folks might sell the primary residence before then and move into a nursing home. But absent that, it’s hard to short a stock/bond portfolio.
      2: 25y vs. 30y ould make a huge difference, but all else equal, the 30y case will look slightly worse. Correct!

  4. Thanks ERN – do you have a link to this version of the SWR toolbox? I’d like to see what happens if the mortgage rate is 2.75% (my rate) instead of the 4% assumed.

    1. I guess my thought is: you show it makes sense to pay off a mortgage at 4% nominal (i.e. 2% real rate w/ your inflation assumption) if your weighted investment return (75% stock and 25% bond) only gets you 5.375% nominal and has uncertainty. (I used your next 10 year returns in the toolkit). You’ve got a 1.375% incremental return but at the cost of uncertainty. But what happens when your mortgage rate is only 2.75%? Then your incremental return is 2.625%. That might be enough extra return to pay for the uncertainty.

      1. Thanks! I ran it. Better but still didn’t pass the w/o mortgage option. For failsafe all it gave $70,827 vs $71,069 w/o mortgage.

        Still not going to pay off my 2.75% mortgage when I can buy a treasury yielding significantly more. I guess the takeaway for me is if you want to keep your mortgage pair it with an accordingly scaled glide path so you’re not leveraged into stocks at a market peak.

  5. Fascinating article. Thanks for all you do!!

    Love both your and Frank’s contributions. We, the unwashed masses, benefit when sharp minds disagree and present a thoughtful dissection of the underlying economics. Love this post and hope for more like it in the future. Cheers!

  6. Thanks for your great analysis on this! I always wondered how to factor in home ownership into our early retirement plan. We have yet to fully pay down our mortgage, though it is now only about 30% of our home’s value. So for now anyways, I have run scenarios based solely off of our liquid portfolio, and cash flow.

  7. “CPI was 3.53%, and CPI-Less-Shelter was 3.31% p.a.So, if you don’t pay rent, your CPI would have been 0.22 percentage points less, translating into a 6% lower annualized inflation rate. Better than zero, but it’s a far cry from the purported 44% reduction.”
    ERN I think you made an error in this paragraph in implying CPI or CPI-less-shelter applies to the person’s entire spending, when in fact the portion of the homeowner’s expenses that are fixed-rate mortgage P&I are contractually fixed to grow at 0%.

    For example, consider a person with $40k annual spending, $10k of which is mortgage P&I. Only $30k of their spending will increase with CPI. Thus after a year when CPI is 5%, their spending changes as follows:

    $30k * 1.05 = 31,500
    $10k * 0 = 10,000
    $41,500, an increase of 3.75% instead of 5%

    This is what it looks like to hedge against inflation! This homeowner has locked in 25% of their spending at a fixed flat rate, and thus experiences 25% less change in their personal spending than if all their spending was tied to CPI.

    You seem to show this benefit in the cash flow calculations later in the post, illustrating how a person investing at all-time-highs can raise their SWR 0.27% by putting some of their portfolio into owning a home outright. Either type of homeowner has a significantly higher safe withdraw dollar amount than the renter. The people with paid-off homes have tied up even more of their capital into what is essentially pre-payment of some of their future shelter expenses, so they are less exposed to bear markets and have even higher safe withdraw amounts.

    Why not loudly proclaim that one is tangibly better off investing part of one’s portfolio in home ownership? This seems like one of the bigger hacks in the FIRE movement. How does a 0.27% higher WR compare to the benefits of the no-brainer strategies like rebalancing, low expense ratios, or a bond tent? Looks to me like you’ve found something big and said “meh”.

    1. ERN I think you made an error in this paragraph in implying CPI or CPI-less-shelter applies to the person’s entire spending,

      No, it’s not a mistake. The CPI is the CPI. It’s constructed by the BLS, and the numbers are what they are. Whether you still have a mortgage or not is irrelevant to the BLS. It’s up to us to decide what to make of the numbers. If you like to construct your own CPI factoring in the stale mortgage payments, you can do so. And I did so in my simulations. What you cannot do is victoriously proclaim that because your personal CPI is 125bps below the overall CPI, you can now increase your SWR by roughly that amount, which is what Frank and Friends are doing. I show that in my post. I show that differential CPI rates account for maybe 8bps. Ironically, you eliminate 6bps from the advantage again if you have a mortgage.

      Why not loudly proclaim that one is tangibly better off investing part of one’s portfolio in home ownership?

      I did. See the “Conclusion” section. But instead of spreading cheap bumper stickers about the wildly exaggerated effects of homeownership, I keep it scientific here and point out that a) the effect is small, b) the effect has almost nothing to do with the differential CPI rates, c) the effect has mostly to do with the high net rental yield of owner-occupied housing, and d) factoring in a mortgage again (and using the faulty CPI logic) will hurt your SWR again!

      So, again: I give homeownership the credit it deserves. And I tried to understand what’s the source of the advantage. That’s certainly something big. But I also want to make sure that I understand and folks understand where the advantage doesn’t come from, i.e., the whacky CPI calculation.

  8. “…the small positive effect of a paid-off home on your safe withdrawal rate math has mostly to do with the respectable real yield of a home.”

    I live in a place where it costs less on a monthly basis to mortgage a home than to rent. I understand many people – particularly those in bubbly HCOL locations – live in a place where it is less expensive to rent than to own. Said another way, I live in a place with positive real yield on homeownership, but many people live in a place with a negative real yield.

    HCOL area landlords accept negative cash flows in exchange for the option value of leveraged market appreciation, and they keep refinancing to cover the negative cash flows. This makes HCOL areas a better deal for renters (assuming they aren’t missing out on five-figure-per-year home appreciation like the landlords assume) and LCOL areas a better deal for homeowners.

    I suspect the benefit of home ownership works out to the extent that the real yield on homeownership is steeply positive, as it is in the scenarios modeled in your post. You would probably get the opposite effect using market numbers from places like L.A, Toronto, Brooklyn, or Honolulu. You might get an even stronger positive effect on the SWR in places like the Midwest or South where the real yield is even greater and the outright purchase of a nice SFH consumes less of the portfolio than elsewhere.

    Finally, you used 4% as the mortgage rate, but 30y mortgages at that rate are no longer available. Higher mortgage rates make the mortgaged homeownership option less attractive, all things being equal, although it may be possible to obtain fixed income yields with the proceeds of the mortgage that are close to the rate on the mortgage. E.g. 5% CD’s.

    An idea for a future post is to set up an algorithm that can be followed by people in the future. E.g. Pay off your mortgage if the risk free rate is lower than your mortgage rate, but keep your mortgage if the risk free rate is higher than your mortgage rate. Buy a house if comparable monthly rent is >=1%, rent when rent is <1%. Pay down your mortgage early if your mortgage rate is X% above the CAPE yield. Optimal asset allocations by CAPE regime, Etc.

    1. Yeah, HCOL areas might require different parameters. What’s crazy is that the low yield is compensated through higher appreciation which makes the HCOL even higher-COL. Sounds a little bit like a bubble to me, but who knows…

      I assumed the mortgage rate is grandfathered in. It’s pretty rare that people retire and then get a mortgage right then and there. Normally, there are a few years left on the mortgage.
      Of course, with today’s 6%+ mortgage rates, the advantage of the paid-off home vs. a home with a mortgage would be even larger. I wanted to give the Frank Vasquez arithmetic the best possible chance to work and it still didn’t. With higher mortgage rates, it would look even worse.

  9. Can you explain something for me which has never made sense, and seems to be a much clearer example of why one should pay off their mortgage?

    We have a little less than 300k left on our mortgage. Our mortgage (not escrowed) costs us 1,300 per month or 15,600 per year. To keep a SWR of 3.25% in retirement, we would have to invest ~$470,000 into our nest egg to cover the cost of our mortgage (15,600 x30).

    Based on first principals wouldn’t it just make more sense to pay $300,000 then to invest $470,000 (to cover our yearly mortgage expenses at a 3.25% swr)?

    It seems like the simplest calculation to see if you should pay off your mortgage (and not have to market time based on CAPE) or not would be to select the lower of the following: the needed $ in your nest egg based on 30x (swr) your current mortgage payment or the remainder of your mortgage.

    Maybe I am oversimplifying and missing more nuance. But I would appreciate any insights as to how this is not the correct way to think about it.

    1. No, the mortgage is $300,000. You don’t need $470k to hedge the mortgage payments for 2 reasons: a) the mortgage is not CPI-adjusted and b) the horizon is much shorter than your retirement.

      1. How do you know that ERN, you don’t even know their ages. What a shallow analysis from a ex-FED guy

        1. The mortgage is under 30 years and it’s nominal, i.e., payments are not adjusted for inflation. You will need much less than 25x the monthly payment. It doesn’t take a PhD Fed economist to figure that one out.
          Talking about shallow: you’re the same person that just left another (critical and stupid) comment under the name “Kasey” two minutes before. Same IP address. How shallow is that? Why can’t you post under your actual name? I can’t imagine that Frank Vasquez sent you. We’re buddies and I gave him the heads-up about this post and he’s OK with it. Funny how you feel the need to trash/spam my blog. I don’t think my readers leave comments like that on Frank’s site. If they did, I would disavow that.

      2. Thanks for the response. The mortgage has another 27 years. I supposed I could drop the multiplier to 25x, but it’s still a fixed cost that will be coming out of our nest egg. I suppose I could separate the other costs into a 3.25% withdrawal and the mortgage expenses in a 4% bucket but that seems unruly and less evidence based.

        Why does CPI matter? I have expenses and I have a nest egg that needs to cover those expenses based on my chosen swr.

        1. Again, the 4% Rule (with all of its weaknesses) is calibrated to generate 30 years of payments with CPI adjustments. But your mortgage payments are not adjusted by CPI. So you should not have to budget 25x annual mortgage payments.

    2. One riskless strategy you could do is “invest” it in treasury bond/CD ladder. Since it’s hard to lock in a 4%+ return for >5 years right now, I’d limit it to a 5 year cd ladder that would pay out $15,600 each the first 4 years then a final balloon payout at the end of the 5th year, if rates say above 4% roll it to another 5+ year ladder or if they fall back in the 2’s or 3’s just pay it off then.

  10. Thank you ERN for another great and number crunched post!

    After renting for 3 years, we are considering becoming homeowners again. Your post reassures me that homeownership is still a good financial decision. However, it is under the assumption that you live in the same home for the next 25 years. I played with your IRR spreadsheet that you posted previously. With my numbers (property, interest, yield…), owning was still a better option after 4-5 years of ownership.

    Thanks again!

      1. Also make sure you can live in the place forever. If you sell the house and move every few years, you get the worst of both worlds: You tie up cash in home equity instead of investments PLUS you fail to insulate one of your biggest cash flows from inflation.

        People are not used to either of these risks because between 2009 and 2021 house prices have only gone up (to unaffordable levels in many areas) and inflation was no big deal.

        1. Yep, good point. Most retirees, certainly traditional retirees stay put in the place where they feel comfortable. But due to the huge transaction costs, we would undo a lot of the advantage if retirees move frequently. It’s best to rent in that case.

  11. Thank you for another solid analysis! Although I am in the accumulating phase, your SWR series really helps a lot in terms of financial goal setting and how to set up my net value(reverse the cash flow and I can turn spending into accumulating, and utilize the SWR spreadsheet). Really appreciate your contribution to the community!

  12. This discussion again? It’s tiring!!! I usually skip to conclusions on your articles as I give jack about the math IDU. But I got to say, you really like busting Vasquez’s balls. He’ll certainly refute your conclusions and I’m looking forward to his podcasts.
    I for once follow the millennial-Revolution approach and will never buy a house because I don’t believe in it. Even at 48yrs old, I don’t think it would be beneficial for me to set roots somewhere and also imobilize a big chunk of my net worth on something that will depreciate a lot when I finally pay as it will be at least 30yrs old by then (which is something most overlook on their “real estate inflation” calculations for some obviously bias reason). Also, I don’t like to follow the tradicional crowd approach, I like to do things differently.

    1. There are two possibilities:
      1: this is satire, because the reference to Millennial Revolution and the “I skip to the end because I don’t even want to hear opposing view/analysis” is clearly too shallow and naïve for an actual ERN blog reader. I got a good laugh out of this one.
      2: But if you’re really serious: as I said, if you’re not ready to settle down, absolutely, you should rent. No disagreement here. And just use that Yield Shield and increase your SWR to 10%+. Best of luck!

      1. hmmm…I like Millennial Revolution. Don’t tell me you’re against their Yield Shield? Now I’m concerned because I’m using that strategy.

  13. Interested by your comment on include imputed rent for homeowners within the SWR calculation. Generally, if I’m a homeowner should I include imputed rent in my budget when considering the SWR. I get that it makes sense conceptually, just never heard it done practically.

    1. Imputed rent changes with CPI-shelter (technically the specific rent hikes for your area).

      But as a homeowner, you lock in your P+I portion of home ownership costs (at zero for full equity or at the mortgage P&I if you have a fixed rate loan), and only face inflation for maintenance, taxes, insurance, yard flamingos, etc.

      This is a case where analyzing these shelter-related cash flows separately makes the most sense, which is what Big ERN did.

  14. “Au contraire! Don’t be saucy with ME, Big ERN!” — Count de Monet

    Now here’s an interesting analysis that a little Kay-Jay bird alerted me to check out. While I don’t quibble with the numbers as presented, we must address the parade of straw men. “How about a little FIRE, scarecrows?”

    First and foremost, I am not sure where you got the calculations at the beginning of your post that you are attributing to me. My observations are based on Morningstar’s recent December 2022 report on what happens to your safe withdrawal rate if you account for the fact that your personal inflation rate is lower than the generally assumed CPI. Morningstar concluded that if your personal inflation rate is [CPI – 1%] – which is now considered “average for a retiree”, your SWR goes up about 0.5-0.6% in the kind of standardish portfolios they were analyzing. Obviously, if your personal inflation rate is even lower, your SWR will go up more – but it will not be a 1-to-1 ratio. It might be closer to a 1-to-2 ratio as they suggest, but I doubt it’s a linear relationship. If you believe their calculations are inaccurate, you’ll probably need to take it up with them. Wade Pfau has said similar things in the past year (check out his podcast #34).

    Next, let’s clarify what I have observed and said (or at least intended to say if it was not clear). To set the stage and looking at the big picture, all safe withdrawal rate calculations are based on three fundamental components: (1) an asset allocation, along with re-balancing and re-allocation rules for it; (2) a base withdrawal rate, either fixed or variable; and (3) a methodology for adjusting the base withdrawal rate over time. In addition, a time frame must be chosen and a residual or “left over” amount can also be selected if one is so desired. Thirty and zero are the usual default figures chosen for those to allow for apples-to-apples comparisons.

    In practice, (2 – the withdrawal rate) is largely dependent on what is assumed for (1 – asset allocation) and (3 – adjustment method). For reference and example, in Bengen’s original research, the (1) asset allocation was a simple S&P 500/10-year treasury bond portfolio of something like 60/40 (he did a range) with annual rebalancing and no reallocation; the (2) base withdrawal was input at various levels and ended up being slightly over 4% for no failures; and the (3) withdrawal rate was assumed to be adjusted annually by the CPI.

    The first strawman to address is that there is no reason to be using the simple two-asset portfolio that Bengen used originally or anything like it, such as the default 75/25 version of this presented in the toolbox calculator. We live in the 2020s, not the 1990s and know a lot more about this that we did 30 years ago. So we should not be effectively riding around in cars with carburetors and drum brakes. Last week, Bill Bengen himself said on the “Money With Katie” podcast that a better diversified portfolio would yield a safe withdrawal rate of 4.8% if put through the same analysis he did in 1994 today. But he also said that he did not have the long-term data for gold, so he did not include it.

    Fortunately, we know from the SWR series post #34 right here in River City that historically, the optimal allocation of gold in a portfolio is about 10-15%. Per discussions and emails we’ve had in the past, I would propose a baseline “standard” portfolio that is 55% in stocks, with half in the S&P 500 and half in small cap value, (that’s modeled with 55 in row 8, 30 in row 17 and 27.5 in row 18 of the calculator), 25% in long-term treasuries (or intermediate if you prefer), 5% in t-bills (just for you bucketeers) and 15% in gold. This has an SWR of over 5% since 1926 (all available data for Fama-French factors) using the toolbox and the Bengen assumptions for time period (360 months) and money left over (zero), just for reference purposes.

    Now that we’ve lit that scarecrow on FIRE, let’s move to the next one and the real issues we are addressing here. The real issue is about “what is the appropriate methodology for the adjustment factor?” and more importantly, “what impact does that have on the safe withdrawal rate?” Bengen’s use of the CPI was always just a proxy that did not really capture anyone’s personal experience in particular. PERSONAL INFLATION IS PERSONAL! Fortunately, as referenced above, a lot of good work has been done in the past decade in this area by David Blanchett and others. Blanchett found that a typical retiree – albeit a “standard” one, not an early one, spent in accordance with a “retirement spending smile”, which can be modeled as an adjustment factor of [CPI – 1%]. Morningstar did a nice analysis of this in December 2022 and concluded that applying only that assumption to a standard kind of 60/40 stock/bond portfolio will increase the projected safe withdrawal rate by about 0.5-0.6%.

    Now here’s where I come in. Sorry for the big windup, but everything above is not my work, just information I’ve collected from others along the way. My observation is that FIRE-type people are much better than “average American retiree people” in managing their spending habits. Indeed, this sort of thing has been known also since the 1990s. If you go back and read Thomas Stanley’s “Millionaire Mindset” from that era, which was the sequel to “The Millionaire Next Door”, he describes his surveys of the habits of such people – our worthy antecedents. Principal among them were owning a modest residence compared with their net worth and driving cars for longer, along with a bevy of other information like a tendency to reupholster furniture rather than replace it and attend their children’s performances for entertainment. However, the main theme was clear – one of the fundamental methods for preserving/increasing wealth is simply to lower one’s replacement rate for expensive consumptive items, whether those be connecting with housing, transportation or anything else. Translated to this context, the effect is to lower one’s personal inflation rate.

    It is obvious that most FIRE-flies do or have done this before and/or after achieving FI, including the author of this blog. A good recent example for readers to listen to would be Bill Yount of the late-to-FI crowd (check out the “Catching Up To FI” podcast), who went from spendy middle-aged doctor people with no savings in endless-renovation house in Chicago to “zeroing in on FI” people in much less expensive digs in Tennessee. Their personal housing inflation has been negative for the past decade.

    The next stop was to look at the components of the CPI itself, which you can get from the Bureau of Labor Standards. What the BLS pie-chart says is that 44% of the CPI is housing costs, 17% is transportation, 14% is food and beverage, 8% is medical, 6% is education, 5% is recreation, 2% is clothing, and 3% is other (yes, I am missing 1% in rounding and no I did not need to go further into the numbers for the purpose of this observation). Now while it is clear that this breakdown describes almost no one in particular – particularly with respect to medical and education, it is also clear that by reducing the growth rate of the Big 3 (housing, transportation and food), a resourceful FIRE-fly might not just go from “average [CPI – 1%]” to perhaps [CPI – 2%} or even better. In fact, our own personal experience in three years of retirement is that our personal inflation rate is roughly negative 3% so far and will continue to go more negative in the future as certain family-related expenses abate over time. (Everyone that has kids they instead to stop supporting at some point will experience this kind of deflation.) In any event, once you reduce your inflation adjustment or get rid of it altogether, the math says your safe withdrawal rate is going to go up. “How far up” is just a math equation.

    One obvious way (among others) is to fix or reduce your housing costs – as you, yourself have done. If you own your home or have a fixed rate mortgage, whatever the reported CPI inflation is on housing will not affect you as much because your personal “imputed rent” (how they largely calculate this) will not change in terms of money out of your pocket, even if the imputed CPI number goes up. Exactly how much of an impact it will have is going to be very idiosyncratic to your particular situation, though. More importantly is simply to recognize that one of the reason the CPI is higher than a FIRE-fly is likely to personally experience is that the average American is glued to things like HGTV and is repeatedly, continually and unconsciously overspending on housing and everything else – much like the unreformed Drs. Yount. So its not really hard to reduce one’s personal inflation rate – one just needs to be intentional like the Millionaires Next Door from days of yore. Geo-arbitrage, as you have also done, is also a good option for many (also exemplified by the good Drs. Yount, along with essentially trading an overly costly boat for a more economical, yet still fabulous, hot tub. That might also be a time machine. But I digress.)

    So getting to the calculations, while I appreciate the extensive efforts that went into them, they essentially apply to nobody in particular but some carefully stuffed scarecrows designed to generate specific outcomes — and the math says that you can get different results by changing the assumptions. Some of the assumptions make little sense on their face – such as planning a 50 year retirement with 40% of your assets required to be left over and more or less constant living expenses. If you take an average early retiree, that’s a 40 year old who is going to live until 90. People who live until 90 have very reduced costs and almost no requirements of leaving any money to anyone else – because their children are probably already retired, too. In fact, someone who is acting intentionally and gets to those ages is likely to experience severe but very lumpy DEFLATION in living expenses. I’ll give you two real world examples – my in-laws and my own parents. My in-laws are in their 80s. A few years ago, they did a Swedish death cleaning, sold the big old house and now rent an apartment and have relatively few possessions. So they have experienced massive deflation in their cost of living. In fact, they barely spend more than their social security and other residual income. Now my parents are 94 and 89. They live in a house we own and that we bought in 2008. Which was a very good thing, because it’s in the Mountain West and doubled in price during COVID. If we did not own it, their rent would have gone through the roof. But it has not gone through the roof and our personal inflation there has been modest, especially when considered over the entire 15 years (so far). Moreover, when they pass, we’ll be able to sell it at a profit, recoup our own expenses and then our personal inflation rate will deflate again. None of this is rocket science and all of it is easily achievable with a modicum of planning skills – mostly the same ones you probably used to reach FI anyway. Thus, the idea that you suddenly lose control of your housing and other expenses after FI and should be applying ridiculous “average American idiot” inflation rates to your personal situation just doesn’t fly any more than using the intentionally straw-constructed two-asset portfolio as your asset allocation. It’s a scarecrow and the worst kind of a straw man. If it only had a brain.

    To continue briefly on that soapbox, repeatedly sliding in overly pessimistic assumptions whenever possible is effectively putting a thumb on the scale and compounding it. It only yields distorted results and erroneously tells people they need to work longer than they need to and don’t have as much control as they do. We should be using assumptions that reflect and correspond to the portfolios we actually are able to hold in the 2020s and the personal inflation we are likely to experience or can create, not brainless scarecrows pretending they don’t have any control over their situations or they are stuck in a dystopian toolbox.

    Getting back to the topic at hand, what would be more useful for the question of how personal inflation affects an SWR would be something more generally applicable to the real point I’ve been making (the Morningstar point), which is not about housing per se but that “personal inflation is personal” if you did not get that memo the first time. (Also, your TPS reports are due this Friday.) So instead of trying to model some imaginary scarecrow person with pre-fixed yet imaginary stuffing at odds with real-world experiences, if we could just have simple calculations that show how a safe withdrawal rate would be affected if the personal inflation component were reduced by certain amounts (or cut in half or eliminated) like what Morningstar did in their December 2022 report with [CPI – 1%], this would really give us another generally applicable lever to pull in our efforts to assess how we can IMPROVE our safe withdrawal rates and manage withdrawals. This way we don’t have to argue about owning vs renting, which was never the forest, but only one tree and only an illustration of a potential method of reducing personal inflation beyond [CPI – 1%] so as to get even more benefit than that calculated by Morningstar.

    The real point is PERSONAL INFLATION IS PERSONAL – however you approach it. Unfortunately, I cannot say that I know how to modify the toolbox sheets to do that. For that I must simply beg your indulgence.

    But let’s now get to the punchline: If you really wanted to do a case study that did not involve scarecrows, you should use your own lived experience by updating the San Francisco-living post you linked to, but this time put numbers into the toolbox. But instead now let’s assume that instead of moving to a lower cost area and buying a less expensive house – which were extremely deflationary for the Big ERN family and has reverberated in continued lower experienced personal experienced inflation to this day — , you stayed in San Francisco and rented instead like some average American consumer-type might do. THAT should be your but-for comparison with your actual current lived experience. And I think your results are going to look a whole lot different. (“Am I right or am I right or am I right?” – Ned Ryerson). But that’s how reality works – lifestyle factors are often related and its misleading to only focus on one aspect of personal inflation.

    As we know from the Diderot Effect, a tendency to inflate one aspect of one’s lifestyle often leads to other personal inflation in other aspects (see HGTV again). But the same is true in the opposite direction – a deflationary move in something like housing — which is what you actually did in the real world and what most FI people can duplicate in one way or another – can lead to even more deflation and a much lower personal inflation rate to use in your personal safe withdrawal rate calculations. Using your actual portfolio of course. I have a catchy title for this proposed update post – “The Reverse Diderot Effect.” Brilliant, I must say. Ausgezeichnet, if you prefer.

    And now you owe me a beer on your way to becoming the wealthiest man in the graveyard, my most pessimistic friend. I’ll get the second round. 😉 Cheers, in any event.

    The Great And Powerful Oz Has Spoken. (But pay no attention to the man behind the curtain.)

    1. Thanks for the long reply. We are trying to find out if/how homeowners are better off in retirement. So, 99% of what you wrote is irrelevant to the renter vs. homeowner discussion but rather a general rant and venting about the mainstream FIRE community. Some of the points I agree with, like “personal finance is personal” – exactly, that’s why I have my blog to study how SWRs differ if you deviate from the generic 30y retiree, 50/50 or 75/25 portfolio, 0% final value, no additional cash flow Bengen/Trinity calculation.
      But I will briefly address the issues that need to be:
      You claim that the whacky CPI calculations are not your invention. Let me help you out and refresh your memory: You make this incorrect point in your podcast Ep. 209 around the 34:00 mark. You also apparently made the point again at the EconoMe conference in March; at least, that’s what people reported to me.
      Specifically, you intertwine your incorrect calculations with an unrelated correct calculation (that retirees start to spend less post-age-65 or 70) and falsely attribute your incorrect calculation to that accurate empirical observation. It’s an elegant yet ineffective way to redirect the discussion. I know that folks spend less, but that’s a real reduction in spending because folks slow down as they age, not because of the CPI of homeowners being less. You may notice that in the Morningstar report and in the Dave Blanchett research on spending patterns, nowhere say that their results are only true for homeowners. They are true for homeowners and renters and reflect the average spending patterns over the lifecycle.
      Also, the spending smile is largely a red herring. As an early retiree at age 40, the fact that your real spending will likely wander down a bit after age 70 has a tiny impact on your SWR at age 40. Also, it would again have an equal impact on both renters and homeowners. So, the Blanchett spending smile calculations are irrelevant for the renters vs. homeowners calculations. (besides, I expect to spend more as I age due to healthcare costs and taxes rising and also because as I age, I will still want to travel, just in more comfort, at a higher cost)
      The rest of your reply is just a red herring. If you don’t think the assumptions apply to you, please change them. I can’t simulate 1,000s of different assumptions for each one of my different readers. I must pick one generic case. But be assured, changing the assumptions will change the absolute SWRs only, but the relative results (homeowner vs. renter) will see very little change.

      1. ERN,
        A couple of points:
        a) CPI is an aggregate measure and each household will have its own scenario, which may vary quite considerably from the aggregate view;
        b) Blanchett and similar US studies (e.g. Banerjee) tend to concentrate on just the spending of older folks; so it is no surprise that they identify drop offs in expenditure in later life; however as they exclude all of the lifecycle up until older age they could miss the age at which peak consumption (in aggregate) occurs. We discussed this point previously in the comments to your Part 47.

        1. a: True. And it has been pointed out that retirees tend to have slightly higher CPI rates because they focus more on healthcare (higher than overall CPI) and less on electronic gizmos (lower than overall CPI).
          b: And yes, I still maintain that between your 40s and 60s you will likely RAISE(!) your real consumption during FIRE, i.e., about in line with per-capita real consumption growth (likely ~1.5% faster than inflation) before potentially scaling back in your 70s. See SWR Part 50, item 9.

            1. Yep, that’s a well-known fact: About 70% of GDP is consumption.
              The PCE deflator is a good measure of consumption price changes. We don’t want to use the GDP Deflator because that would miss in a lot of other stuff, not related to the average household budget.
              I found some of the other slides more important: Note the weight differences between CPI and PCE: CPI vastly overstates the shelter component, as I noted in my post.

              1. Oh it’s ON !! The FIRE FEUD is finally heating up. Vasquez x Karsten ! Who would win? My money in on Vasquez but let’s see

                1. Foodfight! But of course, I already won because I got Math on my side. Frank is just pivoting to other grievances to deflect from his lack of math and economics training. Sorry to hear that your money was on Frank. I can send you a Venmo link to send me your cash.

              2. Re: “that’s a well known fact” – OK, I am not an economist.
                However, as you say, what really caught my eye was that the CPI was generally higher than PCE over the period examined. At face value this seems to be somewhat at odds with your part 50 conclusion. I wonder if the per capita analysis [in SWR Part 50] might be explanatory, as inflation is compiled at a household level as is PCE.

                1. You’re confusing the PCE deflator with per capita consumption. The chart in the PPT is the PCE Deflator (price index). It’s another well-known fact that the annual rates of inflation derived from the PCE deflator are slightly lower than the CPI due to a different construction (Fischer vs. Laspayres price index). So, this has nothing to do with my Part 50 discussion about per-capita consumption. That point in Part 50 is still valid.

                2. I do not think I am confusing them.
                  They are clearly two different things (PCE & per capita consumption).
                  And, at a top-level I understand that the CPI and PCE use different methods to construct their respective indices with different weights and input sources, etc.
                  My question in its most basic form is why is per capita consumption the more suitable indicator for the scenario in question?

                3. Good. So, we’re on the same page.
                  When you refer to the “scenario in question,” which one are you referring to? We may be talking about two different things.
                  In Part 50 and here in Part 57, when talking about retirement budgets for people aged 40-65 or maybe even 70, I made the case that the average young/middle-aged consumer in the U.S. does not adjust their spending with only CPI but CPI+x%. Otherwise, you’d fall behind your peers in terms of living standards. I presume most early retirees don’t use flip phones anymore. But 75+-year-olds may indeed, so maybe they enjoy CPI+0% or even CPI-y%.
                  If we agree on that: x is about 1.5-2% per year. That’s “+” not “-” as Frank & friends might want to argue.

                4. I do not think you can categorically say from any US studies I have seen that aggregate US household consumption continues to grow through your forties and fifties. This may of course be the case, but that conclusion is not deducible from Blanchett, Banerjee et al – as they exclude/ignore consumers <55 (or oftentimes even older). The UK (which of course is not the same as the USA) household consumption data (that I linked to in Part 47) seems to show aggregate household consumption peaks in your forties in the UK.
                  Having said that, each household is unique to some extent and it may be perfectly sensible to tune things for your own situation.

                5. Blanchett only looks at retirees. It’s not informative here.
                  If the overall per-capita consumption rises at around 1.5-2% p.a. and retirees scale down, then where do you think the growth per capita happens?
                  Consumption grows strongly in your 40s up to a peak in your early 50s, and then slowly declines into your 60s. Post the traditional retirement you see a more rapid decline. That’s the empirical evidence from economic panel data.
                  As you said, it’s a matter of personal parameters. I plan to keep my consumption in line with overall growth, not just CPI+0% because I like to upgrade my consumption basket. As mentioned before: I no longer use a flip phone. I use the most recent goods and they each include technological advances that wouldn’t be affordable if adjusting only by CPI+0. That’s different from a traditional retiree in their 70s and 80s.

                6. Thank you for the thoughtful reply.
                  I agree that there is apparently a conundrum but am somewhat surprised that there is no US study that shows aggregate consumption across the lifecycle – as that might help clarify the matter. Do you have any favourite references for the empirical evidence you mention? Also, might it not be the case that the apparent conundrum is, in part at least, one of definitions, assumptions, and data collection rather than reality?
                  The flip phone example you cite is IMO a bit of a red herring as technology is often cheap in absolute terms and certainly in relative terms compared to [US] medical care – the need for which generally increases as one ages.

                7. We have reliable and precise aggregate data. We can compute consumption per capita. That’s easy, that’;s just a simple ratio.

                  But data per household to monitor how each household evolves over time is hard to come by. There are no datasets that follow fixed households over their entire life. Normally you can get snapshots or in the best case a shorter panel over time, but you’d have to cobble together families over time that are not really the same. Lots of data headaches.

                  The reference that I recall best is from two friends from grad school working on this topic:
                  I use Figure 7 (page 559) and the “high education” subcomponent, most applicable for folks in the FIRE world. Consumption peaks in early 50s and starts declining again. But note that C(60) is still > than C(40).

                  Yeah, healthcare is the elephant in the room. The number 1 reason why most retirees could face CPI+x% in retirement.

                8. Yup, there are lots of problems getting this picture together. Long term longitudinal survey data is mostly absent and even if it did exist it would inevitably suffer from the usual biases, etc.
                  When you mention reliable and precise aggregate data I assume you are referring to the GDP data. However, how reliable is the population data? In the UK there is a full population census once per decade and estimates in between. The estimates are influenced by many factors, including immigration and emigration which [in the UK] is known to not be very reliably estimated.
                  Then there is the issue of [equalised] households (as used in CPI & PCE) versus per person in GDP per capita. Lastly, I know that debt/borrowing (interest & capital), and investments in general are excluded from the definition of consumption used in the UK CPI but I suspect they probably find there way into the GDP numbers – though I am not too sure about this latter point.
                  Thanks for the link – which I look forward to perusing.
                  Tricky indeed!
                  I suspect the best approach is to know your own situation and to take a view as to how it may evolve. Whilst inevitably this will be wrong, it will at least provide a baseline to monitor/revise as time moves on.

                9. Population data is sow moving. If you make a 0.1% p.a. error that would be huge. So if the per-capita consumption growth is off by 0.1% p.a., you’re still getting pretty solid numbers. But I agree, population tracking in the U.S. is not very precise.

                10. ERN,
                  Thanks for the excellent link; I have only very briefly skimmed the paper but was very pleased to see it seems to use a very similar data approach to that adopted by the UK paper I linked. Having said that there are, of course, some subtle differences in data selection/filtering and presentation.
                  I was also extremely happy to note that your friends paper explores equivalencing too.
                  I really look forward to taking the time to read this paper thoroughly.
                  Thanks again.

                11. Consumption peaking in your early 50’s seems to match my anecdotal experience. It’s when your income is the highest and wealth is close to the top as well. I generally see more luxury drivers in their 50s than 40s. It’s typically when someone is paying for their kids college, etc. If their kids are gone, they might buy a second home or move near the beach etc.
                  It seems like once someone gets to their 60s things to diverge based on one’s health. If they’re physically and socially active then they continue to consume vacations, luxury cars, home improvement, etc, but if one’s health is in decline, they just spend most of their time on the couch watching TV and stop buying new things.

                12. I will push that peak to well after 60 because that’s when our daughter is still in college. And if she needs help with a downpayment etc. we might see our expenses go down when I’m way past 60 or even 70. Right when health care expenses start creeping up.

                13. FWIW, I would summarize ERN’s friends paper (linked above) as it relates to this discussion as follows:
                  a) controlling for time & cohort effects, but not for family size, aggregate total US household spending peaks at mid to late 40’s (from Figure 1);
                  b) depending on which common equivalence scale is used [to control for family size] the peak spending reduces and is postponed to late 40’s or 50’s [age of the household reference person, I assume] (from Figure 10);
                  c) alternative demographic adjustment methods can seemingly advance peak spending (from Figure 11); and
                  d) cutting the data different ways, e.g. by educational attainment, can impact the results too (from Figure 7).

                14. Another partial explanation of the apparent conundrum highlighted above [essentially GDP vs CEX data] is that the US CEX is well known to under-report household spending. Seemingly, this was a key impetus behind the US Bureau of Labor Statistics setting up the Gemini Redesign Project. As far as I can ascertain, the extent of under-reporting could be significant and is a common feature of other countries equivalent surveys too.

  15. Hi Frank – Just want to make sure – (In summary)

    You are proposing a portfolio that is 55% in stocks, 25% in long-term treasuries, 5% in t-bills, and 15% in gold, which has an SWR of over 5% since 1926. Then, the appropriate methodology for the adjustment factor and suggest that FIRE-type people are better than average American retiree people in managing their spending habits.

    If I am incorrect, please correct me.

    1. It’s always a worthwhile cause to seek higher returns and push up your SWR that way. But I doubt that this RP portfolio will perform really well going forward. A lot of Frank’s model portfolios posted on his own site have hopelessly underperformed recently. If I gauge real expected future returns as:
      5% for equities
      1% for LT Treasuries
      0.5% for t-bils
      1% for gold
      then the weighted average expected return is only 3.175%. Even if you could guarantee a fixed 3.175% real return, you shouldn’t reach a 4% SWR over 50 years, even with capital depletion.

      So, all this chatter about risk parity is mostly people backward optimizing portfolios that got the best returns but without guarantee that this will work in the future. I like the idea of keeping a traditional portfolio but doing the put-selling overlay to boost returns. Much more reliable alpha. Much more scalable.

    2. Yes, according to the toolbox BigErn has provided, that is correct. The only thing you are missing is that the stock index component should be half S&P500 and half small cap value, which is similar to what is recommended by Merriman, Swedroe and others. Bengen and Wade Pfau have also recognized that superior portfolios for accumulation involve small and value tilts. You can model that in the toolbox with the figures I provided above.

      And just to be clear, all I am saying is that in the year 2023, this is a more appropriate baseline portfolio to begin with because its easily available at a low cost — and its proven in spades by the toolbox here itself. There is no reason to be using a portfolio to model safe withdrawal rates based on only the S&P 500 and 10-year treasury bonds just because that’s all the data somebody had available 30 years ago. That would be a “foolish consistency.”

      There are many options for the adjustment factor, but the easiest one to implement would be based on adjusting personal expenses to reduce personal inflation.

      1. Indeed! Small-cap and Value can be modeled with the Fama-French style factors in the toolbox. At least post-1926. Historically, this has worked phenomenally well. But I see only limited use going forward. I think these style factors have now been arbitraged away:
        Time will tell, of course. See more thoughts here:

        1. Why do you think that? What crystal ball are you looking at? Most professionals don’t think that — Swedroe and many others. You are an outlier with an idiosyncratic set of crystal balls. And what is this crystal ball you have that says you can selectively include some factors that have proven to be failures in predicting (notably CAPE ratios based on only ONE PORTFOLIO AND ONE PORTFOLIO ONLY — and if you are not holding that portfolio IT CANNOT APPLY OTHER THAN BY CORRELATION), and not others that have a much better track record?

          Truth is, you arbitrarily only include the pessimistic assumptions you wish to include. “As I see” is not an analysis, never has been and never will be. Try to refute all the papers cited in this book if you like:

          1. Don’t get me wrong, Frank. I totally agree that there ought to be styles that enhance portfolio returns. And I agree with some of the eight styles they identify as the good ones.
            For example, the market beta (a.k.a., AQR’s “betting against Beta” factor) is really neat. There is not just empirical evidence but also a theoretical justification: margin-constrained investors crowd into the high-beta portion.
            Also kudos for referencing the Warren Buffet style analysis (also done by some AQR folks). Not really a lot alpha, but mostly cheap leverage plus the market beta style and quality-over-junk.

            I’m also glad that the book debunks the dreaded dividend and dividend-growth styles, even though the dividend investor Taliban will likely never be convinced.

            But also consider this: doing these kinds of macro studies of checking out 100+ styles for effectiveness, you’d expect a large number of ineffective styles to jump over a 5% significance hurdle. You will still hide a lot of false-positive, ineffective styles in that final list of 8 because of that. And how were they able to explain away the horrific HML factor returns since 2005 or the flat-lined SMB since 1980?

    3. You need to change the makeup of the equity holdings. I am proposing a baseline portfolio where the equities are half S&P 500 and half small-cap value. Make the appropriate adjustments in lines 17 and 18 of the calculator.

  16. Great post, as usual. Thank you, and keep bringing the math!

    The only criticism I would have is not with the modeled aggregate risk of renting vs. buying, but the idiosyncratic risk of your particular local real estate market. On the one hand, folks can just move if they are retired, but I would consider NEEDING move in retirement for monetary reasons to be a form of retirement failure, less severe to be sure than running out of money, but a failure nonetheless.

    To that end, ownership (even with a mortgage) offers far more stability against wildly unpredictable outcomes like random gentrification, zoning changes that encourage landlords to kick out renters, rapid market changes, etc. And while it might not help with your SWR much, it’s rare that you can lower fat tail risk while helping your SWR at all!

    So to that end, I would have enthusiastically endorsed homeownership in retirement rather than what I would characterize as your more lukewarm endorsement. I would also love to see you exploring what happens if a person buys even MORE real estate in retirement? What if a person buys, for example, 100% of the value of their home as a rental in the same market, so that if their taxes go up, so does their rental income? Does that help?

    To expand on your scenario above, how do your models turn out if a person has a $2M stock/bond portfolio, a $500K house, and two $250K rentals?

    1. Very good point. Ownership is a hedge against falling behind if rents in your area go up by more than you budgeted. Of course, the risk could also go against you if you own and the area gets wrecked by crime and homelessness.
      I generally like the real estate investment angle and I’m putting some money into that. Good returns so far. But I would like to spread that risk and diversify away from my current area. That’s why I use multi-family private equity real estate funds.

  17. Another timely post as my fiancé and I are deciding about buying or renting at the moment in the bay area.

    I would like to get your insight on my current housing situation. I currently have a home in the bay area that I moved out of to live with my fiance in a rented apt temporarily. The house is currently rented out but the tenants have decided to not renew their lease in mid May. Once they move out I plan to do a light remodel but I’m debating if I should keep renting the property or just sell it for a gain.

    I still qualify for the $250k capital gains exclusion and I dont plan to ever move back into the property. Although I have a very low interest rate of 2.875%, I only owe about $200k left and the house is valued at $1250k. The house can be rented for about $5200/month if I decide to keep it. I ran the numbers and it looks like I get about a 3.5% return on equity before appreciation so it’ll probably only make sense to keep it if both rent and appreciation goes up at least 5% each per year over time. What do you think?

    If I decide to sell, I would use part of the proceeds for a down payment on a home in the San Mateo county area. We are also debating if its better to just rent for the time being due to the very high home price to rent ratios. I’m seeing some houses for rent that are at a 25x ratio (1.5 mil home that rents for $60k annually) to even as high as 30x ratio! It seems the housing market is betting on appreciation to continue like it has for the last 10+ years for these ratios to make sense.

    Please let me know your thoughts. I can provide more specifics if needed. Thanks!

    1. A 3.5% real yield isn’t that bad. But not sure if that’s worth the hassle of having an out-of-town rental. You probably need an appreciation of more than CPI to make that work.
      Another thing to consider: have you locked in a low property tax bill? From CA Prop. 13. Might be worthwhile to keep it if so.

      1. Yea, kind of in line with what I was thinking. I still plan to live up to 30 mins away from this house so I can self manage but I would need to bake in a premium on top what I can get from putting in index funds to make it worth my while. I could also sell and use the proceeds for a REIT, out of state rental, or even increase my net liq to your SPX put selling stategy.

        Yes, I have locked in a really low property tax bill since I bought it in 2010. Property tax would probably double from my current $8400 to over $16k at its current accessed value. I would lose out on the $250k capital gains exclusion though.

  18. These articles could be as significant as the articles found on this Site. The Site is fascinating to me. While I appreciate your work on the rest of your website, this one is amazing.

  19. I’ve enjoyed this article. Here’s my approach in my 20s. I bought a duplex and a lower cost of living area. I live in one unit and rent the other one out. I had it paid off by the time I was in my 30s. The state I’m in if money ever got bad and I had to file bankruptcy or something horrible happened. My homestead is exempt so that whole rental property would be. My fixed expenses, utilities, property taxes, insurance and all that I could have paid for by the rental income. The rent is gone up, a fair amount. It’s now at $1,000 a month. So I feel like if you owner occupy a rental property like this that is a whole other factor to consider. I still get the tax breaks, the income generation, the write offs all that stuff so I have something that’s going up in value and generating money at the same time. I don’t own any other properties and I’m not really interested in expanding, but this duplex has been totally worth it. Just thought I’d bring a different perspective to this.

    1. Congrats. That worked out well for you. I also like real estate as an asset class and investing in it beyond just the primary residence is always a good idea. I never tried the duplex route but I have some other RE investments and they are doing very well.

  20. Beyond the debate of renting vs home ownership, lifestyle preferences etc, I think owning a fully or mostly paid off home provides a unique benefit. That is, you can severely cut your spending to bare bones if you need to. As long as you’re paying property tax and insurance if there is a protracted downturn and your SWR needs to come down you can really cut it down to a very low level fairly safely. No worrying about paying rent and possible untimely landlord drama such as not getting lease renewed at a bad time.

    There are risks of course, your house could be destroyed in disaster of some sort and in some extreme cases you could even lose your house without any insurance payout (for instance living in an area prone to wildfires, or with climate change flood zones, insurance in FL is already a mess from that). Or you could have some expensive repairs, but I’d imagine you could get along without a lot of things in a true emergency. Also if you’re somewhat handy you can do the work yourself if need be.

    Personally I bought and sold for a tidy profit, currently renting, planning on using geo arbitrage to move to a much cheaper area and buy a forever home. I really enjoy home ownership and projects, so the lifestyle preference also matches.

    I also intend to use a mostly paid off house as a sort of bond tent for SORR due to the potential for cutting expenses so low if needed. Which also will help with my ACA subsidy qualification, staying below the cliffs.

  21. Hello Karsten,

    I am thinking of writing summaries to all your SWR Series articles for myself first.
    Will you allow me to post these summaries in the German “” (with appropriate links to your blog posts, of course)? What about the charts in your posts?

    Best regards,

    1. Thanks for asking. Depends on your definition of summary. If you only translate my posts and repost them as is in German, that would not be right. If you rephrase and shorten to no more than 1/4 of the word count and give proper attribution to the source, then it’s OK to post that on your site. That would seem like a win-win: people can get an abbreviated German version but if they want to full and complete article they’d still have to come to my site. Hope this makes sense.

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