Author: earlyretirementnow.com

The Entire Safe Withdrawal Rate Series: NOT to be published on TikTok! Happy April Fool’s Day!

April 1, 2021

The readers have spoken and I listened! A lot of folks have been asking for an easier way to digest the Safe Withdrawal Rate research on my site. It has now grown to 44 parts and even with the new landing page, it must still seem like a daunting task to navigate all the different facets of retirement planning. So, I’ve thought long and hard about a more accessible method to convey the complicated subject matter of advanced retirement withdrawal strategies. 

I can now announce that I’ve decided to – get ready for this – publish the entire Safe Withdrawal Rate Series on TikTok! I will split up the series, 44 posts and 100,000+ words so far into easy-to-digest bits and pieces. Each post in the Series will be made up of between 5 to 20 TikTok videos, each around 45 to 60 seconds long. I’ll kill two birds with one stone, 1) venture into new markets and meet new people in this exciting new medium, and 2) provide better access to my research for the folks with attention-span challenges. These days, who wants to read 5,000-word blog posts with charts and tables anymore, right? 

If you thought this was a big announcement, wait for the even bigger news. Instead of going this major step all by myself, I’ve decided to partner up with one of the top-100 TikTok content creators! So, who is that new partner, you may ask? It’s … drumroll … Continue reading “The Entire Safe Withdrawal Rate Series: NOT to be published on TikTok! Happy April Fool’s Day!” →

Principles of Retirement Tax-Planning – SWR Series Part 44

March 22, 2021

It’s tax season in the U.S. right now! Even though that deadline has just been pushed back to May 17, taxes are on everybody’s mind, so this is a good time to write about the topic in the context of the Safe Withdrawal Rate Series. Until now, I haven’t written all that much about taxes and the main reasons are:

  1. While I do have a combined 6 letters behind my name (Ph.D. & CFA), I’m missing the three letters “CPA” to write anything truly authoritative about the topic.
  2. My primary focus is on getting the Safe Withdrawal Rate right. It’s the first issue everyone should worry about. I did some case studies years ago for early retirees and some of them could actually raise their SWR to more than 5% if they do their accounting for future cash flows right. That’s 25% better than the naïve 4% Rule. If you start with a tax plan that’s already somewhat OK and close to optimal, I doubt that you can squeeze out another 25% in after-tax withdrawals through a truly “optimal” tax plan. Hence my approach: get your SWR right and factor in the tax optimization plan afterward to make sure you squeeze maybe another percent or two in the after-tax numbers!   (And likewise, if you have a 60-year horizon and not much in the way of supplemental cash flows and you’re looking at a 3.25%, maybe a 3.5% withdrawal rate, you’re not going to “tax-hack” yourself to a 4% withdrawal rate either!)
  3. Taxes are very personal and it’s difficult to give any generalized advice. As much as I would like to create a spreadsheet like the Google Sheet to simulate safe withdrawal rates (See Part 28 for the details) where you plug in your numbers and the sheet spits out a detailed plan, it’s not so trivial. Very likely, the tax analysis would have to be more custom-tailored!  And just to be sure, my Google SWR simulation sheet isn’t trivial either! 🙂

But of course, even if you first do your SWR analysis in before-tax terms, you will want to know how much of a haircut you need to apply to calculate your after-tax retirement budget. Some retirees can indeed make over $110,000 a year and don’t owe any federal tax as I showed in my post in 2019 (“How much can we earn in retirement without paying federal income taxes?“). And in the same post, I showed that to get to a 5% average tax you’ll likely need a $150k annual retirement budget. So, it’s a fair assumption that most of us in the FIRE community will likely get away paying less than 5% of our retirement budget in federal taxes. Add another 0-5% or so for most state tax formulas, and you will likely stay below 10% effective/average tax rate.

But I get the message: because we can’t completely ignore taxes, I wrote today’s post to talk about the general ideas and principles in retirement tax planning. In at least one additional future post (maybe two, maybe three) I will also do a few case studies to see the general principles in action. At that point, I will also include the Excel Sheet I use to perform the tax planning analysis because a lot of readers asked for that tool when I published the Case Studies 3+ years ago! And as I warned before: it’s not as simple as just putting your parameters and Excel automatically spits out your plan. It involves a bit more human input and analysis, stay tuned!

But before we even get to the messy parts, let’s take a look at some general principles…

Continue reading “Principles of Retirement Tax-Planning – SWR Series Part 44” →

Pre-Retirement Glidepaths: How crazy is it to hold 100% equities until retirement? – SWR Series Part 43

March 2, 2021

A while ago I wrote about the challenge of designing pre-retirement equity/bond glidepaths (“What’s wrong with Target Date Funds?“). In a nutshell, the main weakness of Target Date Funds (TDFs) for folks planning an early retirement is that if you have a short horizon and a large savings rate then the “industry standard” TDF is probably useless. 10 years before retirement, the TDF has likely shifted too far out of equities, likely below 70%!

The problem is that the traditional glidepaths are calibrated to the traditional retiree (who would have guessed???) with a sizable nest egg ten years away from retirement. In that case, you want to hedge against the possibility of a bear market so close to retirement from which you might have trouble recovering due to the relatively small contributions of “only” 10-15% of your income. But people planning early retirement with a small initial net worth and a massive 50+% savings rates should clearly take more risk to get their portfolio off the ground.

In any case, back then I mentioned that I had some additional material about glidepaths toward retirement for the FIRE community, to be published at a later date, which is today!

Why is this post part of the Safe Withdrawal Rate Series? First, today’s post is a natural extension of the FIRE glidepath posts (Part 19, Part 20) in this series. Moreover, the majority of readers of the series are not necessarily retired yet. Many seek guidance during the last few years before retirement. In fact, one of the most frequent questions I have been getting is that people who are almost retired and still holding 100% equities wonder how they are supposed to transition to a less aggressive allocation, say 75% stocks and 25% bonds at the start of retirement. Should you do a gradual transition? Or keep the allocation at 100% equities and then rapidly (cold-turkey?) shift to a more cautious allocation upon retirement? 

My usual response: It depends on your parameters and constraints. You can certainly maintain your 100% equity allocation much longer than the traditional TDFs would make you believe. If you are “flexible” with your retirement date you can even keep the equity weight at 100% until you retire. If you are really set on a specific date and want to hedge the downside risk, you probably want to gradually shift there over the last few years. So, let’s take a look at my findings…
Continue reading “Pre-Retirement Glidepaths: How crazy is it to hold 100% equities until retirement? – SWR Series Part 43” →

Is a short-interest ratio above 100% really that scary? The GameStop Saga Part 2

February 22, 2021

In late January, I wrote about my thoughts on the crazy wild ride in GameStop and some other meme stocks. Now might be a good time to do an update to talk about some of the other things I learned.  For example, how a short-interest ratio of more than 100% is surely disconcerting but it’s not quite as scary as it’s often portrayed if you do your math right – which seems to be a luxury good these days!

So, here are some more of my thoughts on the 100%+ short interest, market manipulation, GameStop valuation, and more… Continue reading “Is a short-interest ratio above 100% really that scary? The GameStop Saga Part 2” →

Q4 2020 GDP Update: Are we on track for a sustained economic recovery?

February 1, 2021

Last week on Thursday we got a new snapshot on how the economy is doing. The Bureau of Economic Analysis released the quarterly Gross Domestic Product (GDP) numbers that day and the headline number came out as +4%. So the economy grew at an annualized rate of 4% that quarter or about 1% quarter-over-quarter. Not bad! Considering the uncertainty about growth going forward after the blockbuster 33.4% third quarter growth number it’s reassuring that we kept some of the upward momentum in the fourth quarter.

But just to be sure, there is still a lot of economic pain and uncertainty out there. You ask two different people and you will hear two different opinions on how the economy is going. Unless, of course, they are economists and you will hear three different opinions, as the joke goes. 

Since I wrote my post about the Q3 GDP release three months ago and it was quite popular, I thought it would be a good idea to write another update. Is the recession finally over? How much of the pandemic-induced loss has the economy recovered? Do we have to worry about a renewed drop in the economy? Let’s take a look..

Continue reading “Q4 2020 GDP Update: Are we on track for a sustained economic recovery?” →

My thoughts on the GameStop volatility

Update (February 8, 2021): Well, there you have it, GameStop is back closer to reality at around $60 as of today. It lost 80+% from the peak value. Who would have guessed that?!

January 30, 2021

Wow, what a week! I was reminded again why I prefer to be an index investor (for the most part). I don’t have to live through the wild price moves as we saw in GameStop (GME) and the other “meme stocks”. And I don’t have to worry about trading restrictions. But it was entertaining to watch the drama, stocks going up by 100+% in one day and seeing short-seller hedge funds being driven to the brink of ruin. The media certainly loved this story of David vs. Goliath; a mob of Reddit users in the “Wall Street Bets” (WSB) group vs. the powerful finance establishment! My blogging buddy Retire in Progress wrote a nice post about the GameStop Short Squeeze. But I also wanted to share some of my own thoughts. Let’s take a look…

Continue reading “My thoughts on the GameStop volatility” →

The Effect of “One More Year” – SWR Series Part 42

January 13, 2021

Happy New Year, everyone! And welcome to a new installment of the Safe Withdrawal Rate Series. Today I like to write about the One More Year Syndrome (OMYS) – the fear of retirement and the decision to just work another year. What I find intriguing about OMYS is that procrastination normally works the other way around. You opt for the fun and easy stuff and promise yourself to do the hard work tomorrow. Only to repeat that charade again tomorrow and postpone the unpleasant tasks to the day after tomorrow. And so on. 

But why procrastinate a fun-filled early retirement and keep working? Physician on FIRE and Fritz at The Retirement Manifesto have written about their rationales. The number one reason is that you grow your nest egg and put your retirement finances on a better footing. That was certainly my main rationale, too. I could have retired comfortably in 2017, probably even in 2016 but I delayed that decision until 2018.

So, qualitatively it’s obvious. But can we quantify by how much the OMYS improves your retirement security? Is it worth the additional year in the workforce? How can we incorporate OMYS in the Big ERN Google Safe Withdrawal Simulation Sheet? Is it possible that OMYS will boost your retirement health so substantially that it’s not as irrational as it’s sometimes made? Let’s take a look…

Continue reading “The Effect of “One More Year” – SWR Series Part 42″ →

How to Beat the Stock Market

December 9, 2020

Right at the start, let me point out that, no, I’ve not gone to the bad side! I will not try to sell any actively-managed funds here. If you’re a part of the passive investing crowd, which is a large portion of the FIRE community, you might find the title a bit “click-baity.” Because the thought process of the average passive investor would go like this:

  1. Underperforming the VTSAX is a non-starter. That’s highly undesirable. The only assets we’d ever consider are those with an expected return equal to or larger than the VTSAX!
  2. But the problem is that due to efficient markets, nobody can beat the market!
  3. If we intersect the two sets above, i.e., constrain ourselves to what’s both desirable and feasible we’re left with the VTSAX (or whatever close substitute you might pick, e.g., FSKAX from Fidelity).
Beat the market diagram01
A very one-dimensional view of the world: How most folks in the FIRE community justify passive investing

That line of reasoning has some advantages: it has probably convinced a lot of folks to get rid of their irrational fear of the stock market and many have benefited from low-cost index investing instead of wasting money on actively-managed funds. My concern here is that I think that this thought process of “nobody can beat the market” is overly simplistic and (literally) one-dimensional. Of course, there are ways to beat the market! Here are eight ideas I can think of… Continue reading “How to Beat the Stock Market” →

What’s wrong with Target Date Funds?

November 9, 2020

Amazingly, after 4+ years of blogging and 200 posts, I haven’t written anything about Target Date Funds (TDFs). For some folks, they are certainly a neat tool. Your fund provider automatically allocates your regular retirement contributions to a portfolio that they deem appropriate for your age and/or the number of years you’re away from your retirement date. It’s a hands-off approach for people who don’t want to think about their asset allocation and simply outsource that task to a fund manager.

But I think not all is well in the TDF world. People planning for FIRE should stay away from TDFs. But even for traditional retirees, there are some unpleasant features. Let’s take a look…

Continue reading “What’s wrong with Target Date Funds?” →

What to make of that Q3 U.S. GDP number?

October 29, 2020

Today’s GDP release for the third quarter came in at 33.1%. Not a typo. After the disastrous second-quarter number of -31.4%, the worst quarterly number on record we now got the best quarterly reading on record. What’s going on here? What do I make of that number? Are we out of the woods now? I’m putting on my economist’s hat for today and share my thoughts in a short post. Let’s take a look…

Continue reading “What to make of that Q3 U.S. GDP number?” →