The Ultimate Guide to Safe Withdrawal Rates – Part 23: Flexibility and its Limitations

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:

  1. 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!
  2. 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”

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