An Updated Google Sheet DIY Withdrawal Rate Toolbox (SWR Series Part 28)

Since I first published Part 7 of the SWR Series with the accompanying Google Sheet in early 2017, I’ve made several changes and enhancements. Sometimes without much explanation or documentation. So, it would be nice to do a quick update and itemize the changes since then. Whether this is the first time using the toolbox or you check it out again after more than a year, I hope you all find the new features useful…Read More »

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)

Welcome back! It took me two weeks again to put together a full blog post. That’s what early retirement does to you! Especially while we travel – pretty much permanently between now and December – I figure I will scale down the blog frequency to every 2 maybe 3 weeks. I hope people don’t mind. If two weeks is what it takes to come up with quality content then so be it!

CruiseSunset
Safe Withdrawal What? I’m on vacation here! I will finish the post next Wednesday!

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…Read More »

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…Read More »

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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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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Inflation Risk for Early Retirees – Part 2

February is “Macroeconomics Month” on the ERN blog! And the topic of inflation fits right in. My blogging buddy Actuary on FIRE suggested doing a series on the “Inflation Risk for Early Retirees” and I like that idea because this topic hasn’t gotten all that much attention in the FIRE community. Even though inflation is a top concern for 78% of retirees, according to this recent article.

In addition, the topic is not just extensive enough to span multiple blog posts, but it also greatly benefits from the viewpoints of two experts in their respective fields: An actuary and an Econ Ph.D. each with their own expertise in number crunching. AoF started the series last week with the introductory post, Part 1, and this week it’s my turn. Just like AoF, I like to start setting the stage and give a little bit of an overview – think of this as another introduction to the inflation topic, just by a different kind of numbers geek. So, today I’ll take a brief look at the U.S. inflation history and the different ways inflation can ruin our retirement. Let’s jump right into this…

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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!Read More »