See that house over there? It’s an investment!

Few topics in personal finance and in the early retirement community stir up emotions as nicely as the pros and cons of homeownership. Some folks in the FIRE community are renters and swear by it and others are very happy homeowners and/or real estate investors. Neither side is wrong. Those with more nomadic lifestyles probably prefer renting and the those with kids in school and strong ties to the local community are apparently happy homeowners. Normally, the two sides just coexist peacefully but discussions normally get heated and sparks fly when one side accuses the other of doing something wrong. If I had to distill the arguments of the two sides into bumper stickers it would be:

  • Homeowners: Renting is just throwing away money!
  • Renters: A house is not an investment at all. Or it’s a terrible investment!

But of course, both claims are just that: bumper stickers. And both claims are demonstrably false and/or crude generalizations! Let’s look more into the math of the rent vs. own tradeoff…Read More »

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Ask Big Ern: A Safe Withdrawal Rate Case Study for “Ms. Almost FI”

Welcome to a new installment of our “Ask Big Ern” series with case studies on safe withdrawal calculations. This is already the seventh part, see here for the other parts of the series! Today’s volunteer is Ms. Almost FI and that’s not her real name, of course. She’s planning to retire early in 2019 and this causes a lot of anxiety: Does she have enough money? When should she take her pensions? What about long-term care insurance? All very valid questions, all impossible to answer without a careful customized analysis!Read More »

The Shockingly Simple/Complicated/Random Math Behind Saving For Early Retirement

One of my favorite Mr. Money Mustache articles is the “Shockingly Simple Math” post. It details how frugality is able to slash the time it takes to reach Financial Independence (FI). That’s because for every additional dollar we save we reduce the time to FI in two ways: 1) we grow the portfolio faster when we save more and 2) we reduce the savings target in retirement by consuming less.

That got me thinking: Is the math really that simple? How sensitive is the savings horizon to different rates of returns? What happens if we use historical returns instead of one specific expected return assumption? How important is the asset allocation (stock vs. bond weights) on the path to early retirement? How much does the equity valuation regime (e.g. the initial CAPE ratio when starting to save) matter?

So, in typical Big ERN fashion, I take an ostensibly simple problem and make it more complicated!

Let’s get the computer warmed up and start calculating…

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This fund returned over 100% year-to-date. I’m still not buying it!

I was hoping to tell you about a great new investment I researched recently. It’s an ETN (ETN=Exchange-Traded Note, similar but not identical to an Exchange-Trades Fund) with a phenomenal track record; year-to-date (as of October 20 when writing this) it’s up 141%! Since inception (November 30, 2010) it’s up by 1,079%, over 40% annualized compound return! But, as you can see from the title, I’m still skeptical!

Why do I even look at some exotic ETN/ETF? Aren’t we all supposed to be index investors? Buy your VTSAX and be done? Nope! I consider myself an index investor with an open mind. It’s very hard to outperform the index by picking individual stocks, but there are many other ways to deviate from index investing. For example, I like real estate investing and options trading. In both cases, it’s not really about beating the VTSAX but I like the return profiles and the diversification benefits.

So, back to that amazing ETN. The ticker is XIV and here’s the cumulative return chart since 2010. $100 would have grown to almost $1,200!

XIVstudy Chart02
XIV (inverse VIX ETN) and SPY (S&P500 index ETF) returns. 11/30/2010=100.

That looks like a pretty impressive run. It definitely got my attention! But after doing some more detailed analysis I realized this ETN is not for me. At least not right now. But what’s not to love about 1,000% return since 2010, when the S&P500 returned “only” 150% since then? That’s the topic of today’s blog post…Read More »

Ask Big Ern: A Safe Withdrawal Rate Case Study for “Mr. Corporate”

Welcome to the sixth installment of our “Ask Big Ern” series where I perform case studies in safe withdrawal calculations. See here for the other parts of the series.

Let’s make this Geographic Arbitrage Week because after Monday’s guest post on “Geographic Arbitrage,” I will now feature a case study with the same theme! Meet Mr. Corporate (not his real name) who reached out a while ago for advice on whether he’s ready to leave the corporate life. Just looking at his numbers I knew immediately that there is no way he and his wife can retire in their current location. But Mr. C found that moving to another country with lower living expenses will cut years off the time it takes to reach FIRE. And we’re talking about a country in Europe (he wouldn’t mention which one), with a high quality of life, nice climate, and a good healthcare system! Can he retire now? Let’s look at Mr. C.’s numbers…

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The Ultimate Guide to Safe Withdrawal Rates – Part 21: Why we will not have a mortgage in early retirement

Welcome back to the newest installment in our Safe Withdrawal Rate Series! If you are new to our site please go back to Part 1 to start from the beginning. And there are quite a few new visitors these days. That’s because our small blog is one of the finalists in the “Blog of the Year” category at the upcoming 2017 Plutus Awards. How awesome is that? Thank you to all of our faithful readers and followers for supporting and nominating Early Retirement Now!

But back to the topic at hand. It’s been on my mind for a long time. It’s relevant to our own situation and it’s come up in discussions on other blogs, in our case study series and in numerous questions and comments here on the ERN blog:

Should we have a mortgage in Early Retirement?

The case for having a mortgage is pretty simple: You can get a 30-year mortgage for about 4% right now. Probably even slightly below 4% when you shop around. Equities will certainly beat that nominal rate of return over the next 30 years. Open and shut case! End of the discussion, right? Well, not so fast! As we have seen in our posts on Sequence of Return Risk (Part 14 and Part 15), the average return is less relevant than the sequence of returns. Having a mortgage in retirement will exacerbate your sequence of return risk because you are frontloading your withdrawals early on during retirement to pay for the mortgage; not just interest but also principal payments. In other words, if we are unlucky and experience low returns early during our retirement (the definition of sequence risk) we’d withdraw more shares when equity prices are down. The definition of sequence risk!

How badly will a mortgage mess with sequence risk and safe withdrawal rates? That’s the topic for today’s post…Read More »

Our Net Worth as of 9/30/2017

Time flies! It’s been six months already since our inaugural Net Worth report. For some reason, we never did a Q2 update! Actually, there is a reason. Watching the ERN family portfolio progress is a little bit like watching paint dry. It’s slooowwww, at least in percentage terms! Every year in the first quarter, we get a nice noticeable bump when the annual bonus rolls in, but outside of bonus season, we feel a bit like living paycheck to paycheck! OK, that’s an exaggeration because we still max out our 401k contributions and pay down the mortgage principal (which we consider savings). But about half of our savings come from one single paycheck and the other half is spread over the remaining 23 paychecks. That’s the privilege of working in the finance industry! So in Q2 and Q3, we might have added a little bit of savings, but the growth in our net worth came mostly from the pretty solid returns in our different investments.

Let’s look at the numbers in detail…Read More »

Ask Big Ern: A Safe Withdrawal Rate Case Study for Mrs. “Wish I Could Surf”

Welcome to a new Case Study! This time, Mrs. “Wish I Could Surf” (not her real name) volunteered to open the doors to her finances. And every case study brings up something new to learn for yours truly. Today’s challenge: How would “alternative” investments factor into the Safe Withdrawal Rate exercise? Peer Street, Hard Money Lenders, Lendingclub, Prosper, etc. have gained a lot of popularity, especially in the FIRE crowd. When calculating safe withdrawal rates, I have only worked with stock/bond/cash portfolios because they are the asset classes with returns going back 100+ years. Doing the SWR exercise for a portfolio of Peer Street loans will require some “hacking” in my Safe Withdrawal Rate Google Sheet!

Further challenges come from the fact that Mrs. and Mr. Surf keep their finances separate (similar situation as in the Case Study for Rene) and Mr. Surf will still be working for a number of years, so we have to make some assumptions on how to assign the tax burden between Mr. and Mrs. Surf. Lots of work to do! So let’s get started and look at Mrs. Surf’s finances…

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The Ultimate Guide to Safe Withdrawal Rates – Part 20: More Thoughts on Equity Glidepaths

Welcome back to the 20th installment of the Safe Withdrawal Rate series. Check out Part 1 to jump to the beginning of the series and for links to the other parts! This is a follow-up from last week’s post on equity glidepaths to address a few more open questions:

  1. Some more details on the mechanics of the glidepath and why it’s so successful in smoothing out Sequence of Return Risk.
  2. Additional calculations requested by readers last week: shorter horizons, other glidepaths, etc.
  3. Why are my results so different from the Michael Kitces and Wade Pfau research? Hint: Historical Simulations vs. Monte Carlo Simulations.

So, let’s get to work …

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The Ultimate Guide to Safe Withdrawal Rates – Part 19: Equity Glidepaths in Retirement

One of the most requested topics for our Safe Withdrawal Rate Series (see here to start at Part 1 of our series) has been how to optimally model a dynamic stock/bond allocation in retirement. Of course, as a mostly passive investor, I prefer to not get too much into actively and tactically timing the equity share. But strategically and deterministically shifting between stocks and bonds along a “glidepath” in retirement might be something to consider!

This topic also ties very nicely into the discussion I had with Jonathan and Brad in the ChooseFI podcast episode on Sequence of Return Risk. In the podcast, I hinted at some of my ongoing research on designing glidepaths that could potentially alleviate, albeit not eliminate, Sequence Risk. I also hinted at the benefits of glidepaths in Part 13 (a simple glidepath captures all the benefits of the much more cumbersome “Prime Harvesting” method) and Part 16 (a glidepath seems like a good and robust way of dealing with a Jack Bogle 4% equity return scenario for the next 10 years).

The idea behind a glidepath is that if we start with a relatively low equity weight and then move up the equity allocation over time we effectively take our withdrawals mostly out of the bond portion of the portfolio during the first few years. If the equity market were to go down during this time, we’d avoid selling our equities at rock bottom prices. That should help with Sequence of Return Risk!

GlidepathPlot
Static Asset Allocation vs. Glidepath in (early) retirement. 80% static equities vs. a glidepath going from 60% to 100%.

So, will a glidepath eliminate or at least alleviate Sequence Risk? How much exactly can we benefit from this glidepath approach? For that, we’d have to run some simulations…
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