Since I first published Part 7 of the SWR Series with the accompanying Google Sheet in early 2017, I’ve made several changes and enhancements. Sometimes without much explanation or documentation. So, it would be nice to do a quick update and itemize the changes since then. Whether this is the first time using the toolbox or you check it out again after more than a year, I hope you all find the new features useful… Continue reading “An Updated Google Sheet DIY Withdrawal Rate Toolbox (SWR Series Part 28)”
Welcome back! It’s time to add another piece to the Safe Withdrawal Rate Series (see here for Part 1). After churning out over 20 parts in this series so far I wanted to sit back and reflect on some of the things I’ve learned from my research. And something occurred to me: Withdrawal strategies in retirement aren’t easy! Contrast that with Mr. Money Mustache’s Shockingly Simple Math of Early Retirement post and Jim Collins’ Equity Series that was rewritten into a book The Simple Path to Wealth. Very influential posts and they are among my favorites, too! So, naturally, I agree 100% that saving for retirement is relatively simple!
Disclaimer: Saving for retirement with a savings rate of 50% or more as is common in the FIRE crowd requires a great deal of discipline. Especially over a 10+ year time span. It’s not easy! Only the math behind it is simple! It’s a bit like dieting; conceptually very simple – healthy diet plus exercise – but it’s not that easy to implement and stick to the plan!
Then, shouldn’t retirement be just as simple? Why am I making everything so complicated? I’m approaching 30 parts in this series, many of them with heavy-duty math and simulations and still a few topics on my to-do list! Am I making everything more complicated than necessary? Am I just trying to show off my math skills? Of course not! Just because saving for retirement is relatively simple it doesn’t mean we can just extrapolate that simplicity to the withdrawals during retirement. And that’s what today’s post is about: I like to go through some of the fundamental factors that make withdrawing money more complicated than saving for retirement. Think of this as an introduction to the SWR Series that I would have written back then if I had known what I know now! 🙂 Ironically, some of the issues that make saving for retirement so simple are the very reason that withdrawing during retirement is more challenging! So, let’s take a closer look…
For today’s post, I thought it was time to add another installment to the Safe Withdrawal Rate Series. 25 posts already! What have I learned after so many posts? Well, I started out as a skeptic about the so-called “4% Rule” and I thought it might be the time to poke a little bit of fun at the “makers of the 4% Rule.” Just to be clear, this post and the title are a bit tongue-in-cheek. Obviously, the “makers” of the 4% Rule, the academics, financial planners and bloggers that have popularized the rule aren’t part of any conspiracy to keep us in the dark. Sometimes I have the feeling they are still in the dark themselves! So here are my top ten things the Makers of the 4% Rule don’t want you to know… Continue reading “Ten things the “Makers” of the 4% Rule don’t want you to know (SWR Series Part 26)”
Welcome to the newest installment of the Safe Withdrawal Series! Part 25 already, who would have thought that we make it this far?! But there’s just so much to write on this topic! Last time, in Part 24, I ran out of space and had to defer a few more flexibility myths to today’s post. And I promised to look into a few reader suggestions. So let’s do that today pick up where we left off last time…
Continue reading “The Ultimate Guide to Safe Withdrawal Rates – Part 25: More Flexibility Myths”
It’s been three months since the last post in the Withdrawal Rate Series! Nothing to worry about; this topic is still very much on my mind. Especially now that we’ll be out of a job within a few short weeks. I just confirmed that June 1 will be my last day at the office! Today’s topic is not entirely new: Flexibility! Many consider it the secret weapon against all the things that I’m worried about right now: sequence risk and running out of money in retirement. But you can call me a skeptic and I like to bust some of the myths surrounding the flexibility mantra today. So, here are my “favorite” flexibility myths… Continue reading “The Ultimate Guide to Safe Withdrawal Rates – Part 24: Flexibility Myths vs. Reality”
Talk to anyone in the FIRE community and ask how folks will deal with market volatility (especially downside volatility) during the withdrawal phase and everyone will mention “flexibility.” Of course, we’re all going to be flexible. Nobody will see their million dollar portfolio drop to $700k, $600k, $500k, $400k and so on and then keep withdrawing $40k every year no matter what. Rational and reasonable retirees would adjust their behavior along the way and nobody will really run out of money in retirement in the real world, as I noted in my ChooseFI podcast appearance. In other words, we’ll all be flexible. But is flexibility some magic wand we can swing to make all the worries about running out of money go away? Or is it BS? It’s a bit of both, of course. For example, I would put the following into the BS category:
- I’ll do “something” with my asset allocation and recover the losses. Good luck with that!
- I will skip the Starbucks Lattes for two months until the market recovers! Ohhhh-Kaaayyy….?!
- I will sit out one or two years of inflation adjustments. Qualitatively, a good idea, but it won’t work quantitatively.
- I will rely on Social Security. That may work for middle-aged early retirees but not for 30-year-old early retirees!
But flexibility will work through significantly reducing spending. And again, let’s be realistic, foregoing a 2% inflation adjustment for a year is not enough. Flexibility would involve being prepared to cut spending by probably around 20-25%, maybe more. A different route and maybe a better solution might be the side hustle. Specifically, one reader, Jacob, emailed me with this proposal:
Your series is quickly covering a lot of financial acrobatics to discover and maximize safe withdrawal rates while working to reduce the risk of running out of money. However, so far the most tried-and-true solution to the “not enough money” problem has not been considered: Get-A-Job. I acknowledge that for most job-hating FIRE-aspiring people this is the nuclear option, but it’s still an option.
Great idea! Get a side hustle and solve the safe withdrawal rate worries and (hopefully) salvage the 4% Rule! But there are two very important limitations:
- The side hustle might last for longer than a few months or years. Withdrawals plus the market drop equals Sequence of Return Risk and might imply that the side hustle will last much longer than the S&P 500 equity index drawdown. How long? Try a decade or two, so if you want to go that route better make sure you pick a side hustle that’s fun!
- For some historical cohorts where the 4% Rule would have worked even without a side hustle, flexibility would have backfired; you would have gone back to work for years, maybe even a whole decade and afterward it turned out it wasn’t even necessary!
But enough talking, let’s do some simulations! Continue reading “The Ultimate Guide to Safe Withdrawal Rates – Part 23: Flexibility and its Limitations”
This post has been on my mind from day one and it’s also been a topic that was requested by readers in response to previous installments in the Safe Withdrawal Rate Series (click here for Part 1):
Is the FIRE (Financial Independence Retire Early) community setting itself up for failure by making retirement conditional on having reached a certain savings target?
If we specify a certain savings target, say 25x annual expenditures, as in Mr. Money Mustache’s legendary “Simple Math” post, we are more likely to retire after an extended equity bull run. And potentially right before the next bear market. Very few savers would have reached that goal at the bottom of a bear market! Don’t believe me? Let’s look at some of the calculations from my post from a few weeks ago: The Shockingly Simple/Complicated/Random Math Behind Saving For Early Retirement. Specifically, let’s assume that every month, starting in 1871, we had sent off a new hypothetical generation on their path to FIRE. They start with zero savings, then save 50% of their income (adjusted for CPI-inflation), invest in a 100% equity portfolio and retire when they reach 25-times annual spending. Even though the starting dates are perfectly spread out, one each month, the retirement dates are not. They follow the big bull markets with extended gaps in between, see the chart below. The endogenous retirement dates are in red. Using the Mr. Money Mustache Simple Math method, you’ll mostly retire during a bull market, and often during the last part of the bull market, right before the peak and the next bear market!
How much of an impact will this have on Safe Withdrawal Rates? That’s the topic of today’s post… Continue reading “The Ultimate Guide to Safe Withdrawal Rates – Part 22: Can the “Simple Math” make retirement more difficult?”
Update 12/4/2020: I’ve been getting a lot of inquiries lately: Has my assessment changed in light of the record-low interest rates? My answer: Not really. Mortgage rates are low but so are my equity expected returns and bond yields. Right now I see 2.375% for the 15y and 2.75% for the 30y mortgage, so we’re about 1.0% lower on the mortgage rate. But with the CAPE>30 we also have a 1% lower equity expected return. It’s almost a wash. So, the gist of the article is still intact: Ask yourself, are you comfortable with a mortgage and 100% equities? I would not. If you do have bonds and a mortgage, is the bond yield lower than the mortgage rate? (Currently, it is: <1% for the 10y bond used in my simulations.) So, you’re better off paying off the mortgage with the bond portfolio.
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. Or check out the designated landing page for the SWR Series here.
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… Continue reading “The Ultimate Guide to Safe Withdrawal Rates – Part 21: Why we will not have a mortgage in early retirement”
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:
- Some more details on the mechanics of the glidepath and why it’s so successful in smoothing out Sequence of Return Risk.
- Additional calculations requested by readers last week: shorter horizons, other glidepaths, etc.
- 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 …
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!
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…
Continue reading “The Ultimate Guide to Safe Withdrawal Rates – Part 19: Equity Glidepaths in Retirement”