Ten Lessons From Ten Safe Withdrawal Rate Case Studies

Last week, we published the Tenth Safe Withdrawal Rate Study! Amazing how time flies! I did about one case study every three weeks for the last 6 months! And I could even include another one if I were to count the one I did for the ChooseFI podcast back in 2017. In fact, the ChooseFI appearance (Episode 23R and Episode 26R) started the idea because our first volunteer reached out to me after he heard me on the podcast. Since then I’ve published 10 posts, worth almost 30,000 words that generated tons of clicks, feedback and encouragement:

  • “John Smith”: Seven-figure net worth, but not quite ready for FIRE yet. Big ERN would recommend a few more years in the workforce!
  • “Captain Ron”: Early retirement on a sailboat. How much can they withdraw from their $3m portfolio to stay afloat (pun intended) in retirement?
  • “Rene”: No need to worry about the recent layoff: You are more than ready for early retirement!
  • “Mrs. Greece”: More than ready to retire due to large portfolio size and moderate living expenses, especially if the husband keeps working!
  • “Mrs. Wish I Could Surf”: Alternative investments (real estate hard money loans). Keep the mortgage or pay it off? Either way, more than ready to retire!
  • “Mr. Corporate”: Geographic Arbitrage by moving to a low-cost European country. Roth Conversions and zero tax liability!
  • “Ms. Almost FI”: Your name is a misnomer. You are ready to retire now even when self-funding substantial long-term care expenses in the future!
  • “Mr. Corporate Refugee”: How to deal with a large portion of the net worth tied up in a house in a high-cost-of-living area?
  • “Mrs. Wanderlust”: Substantial supplemental cash flows due to buying an RV and then selling it later.
  • “Mr. and Mrs. Shirts”: Ready to retire this year, but should Mr. Shirts work for another nine months for some additional big payday?

But, alas, all good things have to come to an end! I have decided to take a break from the case studies, at least for now. I might revive the series again later but for next few weeks and months, I will pursue other topics! Thanks to all volunteers who submitted their data. And thanks to all other folks who didn’t get their case studies published. I’m not even sure I properly responded to everyone whose request was denied. I think I may have some inquiries from October last year that I haven’t responded to. If you submitted a request for a case study and haven’t heard from me back, sorry, I’m just a bit disorganized!

Sooooo, ten case studies: what have I learned from them? Plenty, because that’s the topic for today’s post…

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Our Net Worth as of 12/31/2017

Happy New Year! Another quarter-end, I can’t believe how fast time flies! And we all know what that means, right? Net Worth updates across the Financial Independence blogosphere! For us, this is a special NW update because it’s the last one before we both give notice at work in two months! And the last NW update before our apartment goes on the market! In other words, this better looks good, otherwise, we might get cold feet, also known as One More Year Syndrome. Soooo, where do we stand financially? Here are the numbers…

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The Ultimate Guide to Safe Withdrawal Rates – Part 22: Can the “Simple Math” make retirement more difficult?

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!

SWR-Part22-Chart05
Retirement dates when using a 50% savings rate, 100% equity portfolio, 25x savings target. Simulated retirement dates in red. Using the Mr. Money Mustache Method, you’ll only retire during a bull market!

How much of an impact will this have on Safe Withdrawal Rates? That’s the topic of today’s post…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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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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Ask Big Ern: A Safe Withdrawal Rate Case Study for “Mrs. Greece”

Welcome back to our case study series! To see the previous installments, please check out the first three parts:

Though, before we get started, I got a favor to ask: The nomination phase for the 2018 Plutus Awards is underway until September 8. Please take the time to nominate your favorite bloggers and podcasters to give them the recognition they deserve:

http://www.plutusawards.com/nominate/

You don’t have to fill out the entire form and you can nominate each blog/podcast in multiple categories. And if you like that one blog that does a lot of research on Safe Withdrawal Rates and publishes case studies for fellow FIRE enthusiasts and other fun personal finance content (wink, wink) please consider nominating it in one (or all?) of the following categories:

  • Best New Personal Finance Blog (Yes, that blog was started in 2016!)
  • Best Financial Independence/Early Retirement Blog
  • Best Investing Blog
  • Best Retirement Blog

But now back to our case study. Mrs. Greece, not her real name, not even her country of origin, contacted me a while back and wanted me to take a look at her financial situation. Here’s Mrs. Greece’s background…Read More »

Ask Big Ern: A Safe Withdrawal Rate Case Study for “Rene”

Welcome! Today is the third installment of our Case Study Series. Please check out the other two posts here if you haven’t done so already:

Today’s volunteer “Rene” (not her real name) was laid off earlier in 2017 and is now living off her severance package. She wonders if she has enough of a nest egg to simply call it quits and retire in her late 40s. And many other questions: if/how/when to annuitize any of her assets and what accounts to draw down first? So many questions! As I pointed out in Part 17 of the Safe Withdrawal Series, a safe withdrawal rate calculation has to be a highly customized affair and that’s what we’ll do today again. Let’s see what the numbers say!
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Active Investing: Opportunity vs. Futility

Almost everywhere in life, the word “active” has a positive connotation. An active lifestyle, an active personal life, an active participant in a discussion, etc. In contrast, “passive” stands for low-energy, dull and boring. Imagine setting up a friend on a blind date with a nice gal/guy who has a really great “passive lifestyle” and see how much excitement that generates.

But investing is different. Passive investing is the rage right now! It is a noticeable market trend in finance overall and the Financial Independence blogging world seems particularly subscribed to the passive investing idea. For the most part, I agree with the superiority of passive investing. But then again, not all active investment ideas are created equal. And that means that we are at risk of throwing out the baby with the bathwater!

Has the Personal Finance Passive-Pendulum swung too far? Are we willfully ignoring some useful principles from active investing for fear of shaking the foundations of the Passive Investing Mantra? 

Take the following five examples of active investing. They all fall into different spots on the Futility vs. Opportunity spectrum:

  1. Stock picking.
  2. Style investing, i.e., tilting the portfolio toward a theme such as dividend yield, small stocks, value stocks, low volatility stocks, etc., or a combination of them.
  3. Allocation to different asset classes (e.g. stock, bond, cash, alternatives) in response macro fundamentals (P/E ratios, bond yields, volatility, etc.).
  4. Changing the major asset weights over the life cycle, e.g., using an equity glidepath to retirement and even throughout retirement.
  5. Setting the initial safe withdrawal rate in retirement and all subsequent withdrawal rates in response to changing market conditions.
FutilityVsOpportunity diagram
Not all forms of “Active Investing” are created equal!

It would be a mistake to apply the same passive investment mantra to all five aspects of personal finance. So, that’s what today’s post is about: Where should we stay away from active investments and where can we learn something from active investment principles? Let’s look at the five active investment themes in detail…

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Ask Big Ern: A Safe Withdrawal Rate Case Study for “Captain Ron”

A month ago, I did a case study for a fellow FIRE planner (“John Smith”) and the reception was awesome. So why not do more of those? Without even asking for volunteers, I already got two more fellow FIRE planners who contacted me via email and shared their financial parameters. Today’s case study is for “Captain Ron” and, of course, Ron isn’t his real name, though he is indeed a Captain. Not the “Captain Ron” from the 1992 movie, but just a captain. More on that later!

captain_ron_poster

Why are case studies so exciting? One of the most important lessons I learned from my Safe Withdrawal Rate research (jump to Part 1 of the series here) is that the safe withdrawal calculations are best performed on a one-by-one basis. As we pointed out in our post last week, a withdrawal rate strategy should respond to market factors like equity valuations and bond yields as well as personal factors like age, retirement horizon, and expectations about pension and Social Security benefits. Further complicating the whole calculation is also the fact that we all have different distributions of assets over taxable, tax-deferred and tax-exempt accounts. So, let’s take a closer look at Captain Ron’s situation…

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