Ask Big Ern: A Safe Withdrawal Rate Case Study for “Mr. and Mrs. Shirts”

Welcome to the 10th episode of our Case Study Series! Today’s case study is for Mr. and Mrs. Shirts. They run their own blog Stop Ironing Shirts and I encourage everyone to head over and check out their outstanding work. Mr. Shirts and his wife face a dilemma; they have already amassed a pretty impressive nest egg, probably large enough to retire later this year. But the temptation to work a little longer to cash in that next financial milestone around the corner (bonus, vesting date, etc.) is a pretty strong incentive to stay onboard for just a little bit longer. Otherwise known as the One More Year Syndrome. In fact, in the Shirt’s case, it’s only nine months (June 2018 vs. March 2019). So, what are the tradeoffs, what are the pros and cons of retiring in 2018 vs 2019? Let’s look at the details…

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Ask Big Ern: A Safe Withdrawal Rate Case Study for “Mrs. Wanderlust”

It’s time for another Safe Withdrawal Rate case study today! Believe it or not, but this is already the ninth installment of the series! Check out the other case studies here. Today’s volunteer is Mrs. Wanderlust (not her real name), a frequent reader of the ERN blog. She and her husband plan to retire in 2018 (more or less voluntarily) and asked me to run their numbers. One challenge in pinning down a safe withdrawal rate: large additional cash flows because they plan to purchase of an RV and then sell it a few years later. They will also have different budgets during different phases in retirement. And not to forget, a four-legged family member that’s factored into their planning. So without further ado, let’s start calculating…

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

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

Welcome! It’s time for another Safe Withdrawal Rate case study! Please click here for the other seven installments. Today’s volunteer is “Mr. Corporate Refugee,” not his real name, obviously. But as the name suggests he is ready to pull the plug on the corporate grind. He and his wife did everything right to prepare for early retirement. Pay off the mortgage on their house (as recommended by yours truly) and accumulate a nice nest egg close to seven figures. The only problem: they reside in a high-cost-of-living area in California and more than half of their net worth is tied up in their primary residence. Even a portfolio as large as $1 million will likely not be sufficient to cover expenses in your current location. What to do now? I’ll propose two routes to early retirement. Move to a cheaper location, a “secret” low-income-tax paradise – more on that below, and be able to retire now. Or work for only four more years and retire in the current location. Let’s go through the math…

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

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

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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