Why is Retirement Harder than Saving for Retirement? (SWR Series Part 27)

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!

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Saving for Early/traditional retirement: three simple ingredients!

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…

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A Reader Case Study: Whole Life Insurance

Welcome back! I hope everyone had a great 4th of July Holiday (U.S. Independence Day for non-U.S. readers)! Before we get started I have a small favor to ask: At the upcoming FinCon in Orlando in September, it’s time again for the Annual Plutus Awards. As you may recall, last year, my small blog was one of the finalists in the “Blog of the Year” category, thanks to the support of the many faithful readers. If you like what I’m doing here on the blog please nominate the ERN blog again in the relevant categories! Please head to the Plutus Award Nomination site and enter your ballot! You can nominate up to three choices per category and you don’t even have to fill out all categories. Only one submission per IP address, please! Thanks in advance for your support!

Today I have a case study about whole life insurance. Not the most popular investment vehicle among the FIRE enthusiasts, see, for example, an excellent summary of the disadvantages of Whole Life by White Coat Investor (though, for full disclosure, I don’t agree with all of his claims and calculations). But let’s face it: a lot of folks have policies and now wonder what to do about them. Here’s a case study about the tradeoffs when considering either cashing out the policy or keeping it intact. Let’s look at the numbers…

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Ten things the “Makers” of the 4% Rule don’t want you to know (SWR Series Part 26)

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)”

The Ultimate Guide to Safe Withdrawal Rates – Part 25: More Flexibility Myths

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…
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The Ultimate Guide to Safe Withdrawal Rates – Part 24: Flexibility Myths vs. Reality

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”

Market Timing and Risk Management, Part 2 – Momentum

I started a new series in February on Market Timing Risk Management (part 1 was on macroeconomics) but never got beyond the first part. So, finally, here’s the second installment! Part 2 is about momentum (sometimes called trend-following) and this is a topic requested by many readers in the comments section and via email. Specifically, many readers had read Meb Faber’s working paper on this topic, which by the way is the Number 1 most popular paper on SSRN with 200,000+ downloads. I always responded that read that paper and found it quite intriguing but never followed up with any detailed explanations for why I like this approach. Hence, today’s blog post!

And just for the record, I should repeat what I’ve said before in the first part: I have not suddenly become an equity day-trader. I am (mostly) a passive investor who likes to buy and hold equities. But with my early retirement around the corner and my research on Safe Withdrawal Rates and the menace of “Sequence Risk,” I have that nagging question on my mind: Are the instances where an investor would be better off throwing in the towel and selling equities to hedge against Sequence Risk? At the very least, I’d like to have some rules and necessary conditions that need to be satisfied before I would even consider reducing my equity exposure. I think of this as insurance against overreacting to short-term market volatility!

So, without further ado, here’s my take on the momentum signal…

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How crazy is it to invest an emergency fund in stocks?

I thought I had written everything I wanted to write about emergency funds. Especially why I don’t like them! For example:

But this topic just keeps coming back. Most recently in the ChooseFI podcast episode 66 and the discussion that ensued afterward. One unresolved issue: the pros and cons of investing the emergency fund in the stock market. As I’ve mentioned before, I am not against having an emergency fund. Quite the contrary, if you’re on your path to Financial Independence (FI) you strive to accumulate 25 years (!) (or better 30+ years) of expenses – much more than the 3-6 or even 8 months of living expenses normally recommended to keep in the emergency fund. In other words, I view our entire portfolio as one giant emergency fund invested in productive assets (mostly equity index funds) and I don’t see the need for keeping a separate bucket of money in low-risk assets. One could view this as having an emergency fund that’s invested in stocks! 100%! How crazy and/or how irresponsible is that? That’s the topic for today’s post. Let’s look at the numbers and quantify the tradeoffs…

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Inflation Risk for Early Retirees – Part 4: Hedging

Here’s the next installment of the inflation series, joint with my blogging buddy Actuary on FIRE. Check out the other parts here:

Today’s post is about one issue I raised in the post last month: What asset classes – if any – are useful in hedging against inflation? Simple question, not an easy answer. It all depends on the horizon!

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My best investment ever: Homeownership?!

Sometimes folks ask me what has been my best investment ever. I normally answer that this is not the right question to ask. We didn’t have one lucky break that made us rich overnight. We never owned the FAANG stocks (Facebook, Apple, Amazon, Netflix, Google/Alphabet) outright, only through index funds. No lottery winnings, neither literally nor figuratively (tech company stock options, IPOs, etc.). Building our Net Worth is mostly the result of many years of small and large contributions to brokerage accounts, never losing our nerves and staying the course through volatile periods.

But the other day, I ran the numbers on how well we did with the apartment we just sold in January (not pictured above!!!). Over a period of just under 10 years, the IRR was almost 16% and beat stocks pretty handily! Again, this did not single-handedly catapult us into Financial Independence, but in the ranking of good investments, it’s clearly way up there, probably even at the top!

Of course, all this assumes that we do the math right. And that’s what today’s post is all about…

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Guest Post: Farmland Is The New Gold

Happy Wednesday! I have been busy with the move this week so this is a good time to run a guest post! Today, we feature a guest post by Scott, who runs the Basic Capital Forum. I don’t really feature guest posts very often despite getting tons of proposals – my fellow bloggers probably know what I’m talking about! But a guest post about an alternative asset class with pretty cool return stats is actually something I like to publish. So, take it over, Scott…

Are the boom times back? Judging from investor sentiment, it looks like they are. Despite some recent volatility, the bull market is still in full swing and according to data from fund tracker EPFR Global, markets attracted $102b into equity funds over the past four weeks. Behind the curtain, the euphoria might be unjustified – there are a few warning signs that investors may be ignoring. Firstly, stocks are over-valued by many measures. The Shiller CAPE hit 31 in January – the same vicinity of its peak in 1929. Warren Buffet’s measure states that stocks are overvalued by 40% as of November. The most over-weights stocks are FAANGs (Facebook, Amazon, Apple, Netflix, Google) with forward-PE-ratios even higher than those in the overall S&P500.

Secondly, the level of private debt is enormous. According to the IIF, global debt hit $233 trillion this month. If global GDP is roughly 73 trillion, the global debt is 310% of global GDP. To put this in perspective, private debt to GDP only surpassed 150% in 1929 and 2008. In this time of overvalued stocks, one could make the case for investing in gold. The issue with gold, of course, is that it produces nothing and it has no inherent value. The enterprising investor, however, could invest in the 21st-century gold: Farmland. Continue reading “Guest Post: Farmland Is The New Gold”