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?
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?
Despite the postponement of the deadline this year, April is still tax season for us! Oh, how much I dread this part of the year! And it’s not even the paperwork! If I could do twice the paperwork to cut my taxes in half, I’d gladly do so. So, certainly, for me, the problem is not the filing of my taxes! The discomfort of tax season is 100% due to paying income taxes. Sure, we moved to Washington State to eliminate the state income tax – a big plus compared to California – but that still leaves that pesky federal tax. Last year, we still ended up in the 22% federal tax bracket for ordinary income and 15% for long-term capital gains and qualified dividends. I still don’t the final, final tally yet but it looks like our total federal tax bill will be about $23,000. That hurts! And it hurts more having to pay taxes for the blockbuster year 2019, right around the time the market is melting down this year!
So we developed the ultimate tax hack! Move to a location without any(!!!) income taxes! At all! That location is Monaco, a tiny sovereign nation on the Mediterranean coast surrounded by Southern France. It has no income tax, no capital gains tax and no property tax, how awesome is that?
We did a reconnaissance visit to the Cote d’Azur last year, including Monaco, and we absolutely fell in love with the place! I mean, where else in the world can you watch a Formula One race looking out of your apartment window?
It’s sunny and warm year-round and the food and wine are outstanding.
Today we have another guest post, this time by our long-time reader “Gasem.” I’m sure most of you who have looked through the comments section here and at a number of other blogs would have noticed his comments. They are always highly insightful. He’s also a prolific writer on his own blog MD on FIRE, which I highly recommend. And if you’re not a Gasem-fan yet, I suggest you check out the What’s Up Next? podcast episode earlier this year where he was featured together with Susan from FIIdeas and VagabondMD.
In any case, we had a discussion about using Monte Carlo Simulations to gauge safe withdrawal rates following David Graham’s guest post two weeks ago. And Gasem volunteered to write a guest post here detailing his approach measuring retirement risks. So without further ado, Dr. “Gasem,” please take over…
David Graham recently wrote a great post on this site regarding the 4% rule. What is the 4% rule really? You save 25x your yearly need and put it at some risk in a portfolio and then try to extract 30 years of value from the portfolio by extracting 4%/yr. 25x is the target (initial) principal. You have to inflation-adjust the withdrawal, and then you risk the principal at some interest rate above inflation. Let’s say you have 1M, you pull out 4% above inflation (and SORR doesn’t eat your lunch) you will preserve your capital and thus still have 1M 25 years later. You can re-retire for another 25 years on that 1M (capital preservation!) and still pull out 4%. So if inflation is 2% you need to make 6% on your money to run this money machine. 6% is the leverage on your future, That’s the “math” behind the 4% projection.
What’s the problem you say? The problem is volatility. The problem is the market can not guarantee 6% return and 2% inflation. Return is all over the map as is inflation. One year you may make 12%, the next year lose 20%. One year inflation maybe 2% and 5 years later 13% (1979). If you’re lucky it’ll work out you tell yourself, probably will work out, I read it on the internet! So what’s the probability? That’s where “Monte Carlo Simulations” come in. Let’s take a look… Continue reading “A Different Way to Plan Retirement – Guest Post on “Monte Carlo” Simulations by “Gasem””→
You might have noticed that I haven’t published any guest posts for a while. I even explicitly state on my contact page that I’m no longer interested in publishing any guest posts. But every once in a while you make an exception to the rule. David Graham, actually, Dr. David Graham (FIPhysician), has been on a roll with a bunch of top-notch guest posts on other personal finance blogs; first writing for the White Coat Investor blog on Roth Conversions, then two guest posts on Physician on FIRE, first on Asset Location in Retirement, and then on Buffer Stock and Bucket Strategies to alleviate Sequence Risk in retirement. All really important topics! And after sending a few emails back and forth with the good Dr. Graham we agreed on a topic for him to publish a guest post here on the ERN blog, Instead of using backward-looking historical return windows, as I would normally do in my SWR Series, why not check the sustainability of the 4% Rule with forward-looking return projections? Vanguard and a lot of financial companies publish those every year. Sounds like an interesting exercise! So, without further ado, please take over Dr. Graham…
As we all know, ERN is the man when it comes to Safe Withdrawal Rate (SWR) and FIRE. Reading between the lines, he has a different opinion on SWRs for a 60-year retirement vs. a more traditional 30-year plan. Obviously, using only historical data, it is more difficult to study SWR with rolling 60-year stock and bond returns than 30-year periods. Nevertheless, FIRE often subscribes to the 4% rule despite a prolonged period of income demands on the accumulated nest egg. In order to further understanding of the 4% rule over a longer than usual planned retirement, let’s visualize the 4% rule over a 60-year period and see what we can learn.Continue reading “Does A 4% Withdrawal Rate Survive a 60-Year Retirement? (Guest Post by Dr. David Graham)”→
One of the idiosyncrasies of the ERN family early retirement plan is that it involves a relocation. It’s not that we don’t like our current location. But even with our nest egg solidly in the seven figures we likely couldn’t afford to retire here comfortably because of the insanely high housing costs. The state income tax rates are also unpleasantly high. So, if everything goes well we will relocate to another state with low or no income tax and lower housing costs.
The options we consider:
Own a house, mortgage-free
Own a house, plus mortgage. But what term: 30-years or 15-years?
Rent a house or apartment, long-term
Nomadic lifestyle: have no fixed residence, move from place to place with light luggage
Ok, I have to admit, I threw in that last option just for fun. Some people can pull it off (GoCurryCracker), but I doubt that the nomadic lifestyle is for us. I like to have a home base! The way I can tell is that as much as we love to travel, it’s always nice to come back home to sleep in our own bed. Even if I know I have to head back to the office the next day. Seriously!
Quantifying the tradeoffs
We can write as much as we want about the pros and cons of renting vs. owning, but in the end, it all boils down to the numerical assumptions, especially the rental yield (annual rent divided by purchase price):
If we can rent a house for only 5% p.a. of the purchase price or less it’s likely a no-brainer to rent. The opportunity cost of our money tied up in a house plus the depreciation and taxes would be too large. Unless, of course, we factor in huge property appreciation. But our baseline assumption is that property values appreciate with the rate of inflation. The last time folks were budgeting outsized returns in housing it didn’t end so well, remember 2008/9? So, renting can be much smarter than owning, see some examples at 10!Rocks and Millenial Revolution.
If the annual rent is 10% or more of the purchase price, it’s almost a slam dunk to buy.