November 12, 2023 – If I wanted to comment on every piece of bad advice in the personal finance community, my quiet, relaxed early retirement would be busier than the corporate career I left in 2018. So, I usually stay out of the daily Twitter/X spats. Last week, though, an incident caught my attention, and it was egregious enough that I weighed in. In a recent Dave Ramsey show (original video here, starting at the 1:13:50 mark, Twitter discussion here), Dave doubled down on his recommendation of the 8% safe withdrawal rate in retirement, calculated as 12% expected equity returns minus 4% inflation (his numbers, not mine – more on that later). And several people pinged me and wanted me to comment. Safe Withdrawal Rates are my wheelhouse, given that I wrote a 60-part series looking at the topic from almost every angle I can think of. So here is my analysis, more detailed than I could do in a tweet: Don’t use a 8% Withdrawal Rate! That recommendation is crazy in more than one way. Let’s see why…Continue reading “How Crazy is Dave Ramsey’s 8% Withdrawal Rate Recommendation?”
October 6, 2023 – There’s been a lot of chatter about the Bill Perkins book “Die With Zero” and its approach to life and retirement planning. Most recently, just yesterday on the awesome Accidentally Retired blog. After several readers asked me about my views on the “Die With Zero” idea, I finally relented and decided to write a piece in my Safe Withdrawal Rate Series on the topic.
I’ll briefly describe the areas where I agree with Perkins. But then I also go through all of the fallacies in this approach. Let’s take a look…Continue reading “How useful is the “Die With Zero” retirement approach? – SWR Series Part 60″
September 5, 2023 – Welcome back to a new blog post in the Safe Withdrawal Rate Series! It’s been a while! So long that some folks were wondering already if I’m all right. Nothing to worry about; we just had a busy travel schedule, spending most of our summer in Europe. First Italy, Switzerland, Austria, and Germany. Then, a cruise through the Baltic Sea from Sweden to Finland, Estonia, Latvia, Poland, Germany again, and Denmark. But I’m back in business now with a fascinating retirement topic dealing with Social Security timing: What are the pros and cons of deferring Social Security? If we set aside the ignorant drivel like “you get an 8% return by delaying benefits for a year” and look for more serious research, we can find a lot of exciting work studying this tradeoff. Earlier this year, in Part 56, I proposed my actuarial tool for measuring the pros and cons of different Social Security strategies, factoring in the NPV/time-value of money consideration and survival probabilities. A fellow blogger, Engineering Your FI, has done exciting work studying this tradeoff using net present value (NPV) calculations. And Open Social Security is a neat toolkit for optimizing joint benefits-claiming strategies.
But those calculations are all outside of a comprehensive Safe Withdrawal Rate analysis. How does Social Security timing interact with Sequence Risk? For example, can it be optimal to claim as early as possible to prevent withdrawing too much from your equity portfolio during a downturn early in retirement? In other words, if you’re interested in maximizing your failsafe withdrawal rate, you may feel tempted to pick a potentially suboptimal strategy from an NPV point of view. Sure, you underperform in an NPV sense on average if you claim early. But hedging against the worst-case scenarios may be worth that sacrifice.
Let’s take a look…Continue reading “Social Security Timing – SWR Series Part 59”
June 16, 2023 – I wonder if I’ll ever run out of material for the Safe Withdrawal Series. Fifty-eight parts now, and the new ideas come faster than I can write posts these days. This month, I initially planned to write about the effects of timing Social Security in the context of safe withdrawal simulations. But one issue keeps coming up. It’s almost like a personal finance “zombie” topic that, after I thought I put it to rest once and for all, always comes back when you least expect it. It’s flexibility. If we are flexible – so we are told – we don’t have to worry much about sequence risk. We can throw out the 4% Rule and make it the 5.5% Rule. Or the 7% Rule or whatever you like.
Only it’s not that easy. In today’s post, I like to accomplish three things:
- Provide a simple chart and a few back-of-the-envelope calculations to demonstrate the flexibility folly.
- Comment on a recent post by two fellow personal finance bloggers and showcase some of the weaknesses of their approach.
- Propose a better method for modeling flexibility and gauging its impact on safe withdrawal amounts. Hint: it uses my SWR Simulation tool!
Let’s take a look…Continue reading “Flexibility is Overrated – SWR Series Part 58”
April 14, 2023 – Welcome to a new installment of the Safe Withdrawal Rate Series. Please check out the SWR landing page for a summary of and a link to the other posts.
Today’s topic is homeownership. I’ve already made the case that not just rental properties but even homeownership can be a great tool in building assets (“See that house over there? It’s an investment!“). But what if you are already retired? What are some of the benefits of homeownership in the context of (early) retirement? Does homeownership reduce Sequence Risk? Do homeowners enjoy a lower inflation rate in retirement? If so, by how much can homeowners raise their safe withdrawal rate? How do we properly account for homeownership (with and without a mortgage) in the SWR simulation toolkit?
Lots of questions! Let’s take a look…Continue reading “Accounting for Homeownership in (Early) Retirement – SWR Series Part 57”
January 25, 2023 – Welcome to another part of my Safe Withdrawal Rate Series. Today’s topic: Bucket Strategies in retirement. As you know, my blogging buddy Fritz Gilbert has written extensively on this topic at his Retirement Manifesto blog, for example:
- How To Build A Retirement Paycheck
- How To Manage The Bucket Strategy
- Your Bucket Strategy Questions, Answered!
- The Bucket Strategy In A Bear Market
And likewise, I have written about my skepticism of bucket strategies in Part 48 of the series: “Retirement Bucket Strategies: Cheap Gimmick or the Solution to Sequence Risk?”
Fritz’s most recent post on the Bucket Strategy started a lively back-and-forth on Twitter, and it seemed appropriate to pursue a more detailed discussion with more than 280 characters per answer in a “fight of the titans” blog post. So if you haven’t done so already, please check out our awesome discussion over on Fritz’s blog:
The response was overwhelmingly positive, and we decided to craft a follow-up post here on my blog. We came up with two new questions, and we also need to address two major themes from the comments section in Part 1, specifically, the role of simplicity and behavioral biases in retirement planning.
So, let’s take a look…Continue reading “Discussing Retirement Bucket Strategies with Fritz Gilbert – SWR Series Part 55”
November 2, 2022 – In my post three weeks ago, I happily declared that the 4% Rule works again, thanks to the much more attractive equity and bond valuations. It’s always fun to deliver pleasant news. But keep in mind, everyone, that this refers to today’s retirees with their slightly depleted portfolios. But how about the folks who were unlucky enough to retire earlier this year in January 2022, when equities were at their all-time high? That cohort is off to a bad start, to put it mildly. Of course, it’s too early to tell what should have been the appropriate safe withdrawal rate for that cohort. We’re only less than a year into a multi-decade retirement. My recommendation back then would have been that due to the wildly expensive equity valuations and low bond yields one should have treaded a bit more cautiously. Maybe do 3.50-3.75% for a 30-year traditional retirement and 3.25% for a 50 or 60-year early retirement. And maybe raise that a little bit again depending on your personal circumstances, especially if you expect large supplemental cash flows from pensions and Social Security later in retirement, see my Google Simulation sheet (Part 28 of my SWR Series). Also notice also that with my estimates, I’m a bit more aggressive than the widely-cited Morningstar study recommending a 3.3% safe withdrawal rate for a 30-year retirement.
But recently, I’ve come across some rumblings that put into question all this cautious retirement planning. The reasoning goes as follows: First, the year 2000 retirement cohort actually did reasonably well with the 4% Rule. Second, the Shiller CAPE at the peak of the Dot-Com bubble was higher than in 2022. Bingo! The 4% Rule should do really well and even better for the 2022 cohort, right? I’m not so sure. That line of reasoning is flawed, for (at least) two reasons: First, the pre-Dot-Com-Crash retirement cohort experience wasn’t as pleasant as some people want to make it now. And second, I actually believe that the fundamentals in late 2021 and early 2022 were not very attractive at all. In fact, in some crucial dimensions, they were significantly worse than at the height of the Dot-Com bubble. Hence today’s post with the slightly scary and ominous title. Two days late for Halloween, I know.
Let’s take a look…Continue reading “Could 2022 be worse than 2001?”
October 12, 2022 – As promised in the “Building a Better CAPE Ratio” post last week, here’s an update on how I like to use the CAPE ratio calculations in the context of my Safe Withdrawal Rate Research. I have studied CAPE-based withdrawal rates in the past (see Part 11, Part 18, Part 24, Part 25) and what I like about this approach is that we get guidance in setting the initial and then also subsequent withdrawal rates based on economic fundamentals. That’s a lot more scientific than the unconditional, naive 4% Rule. In today’s post, I want to specifically address a few recurring questions I’ve been getting about the CAPE and safe withdrawal rates:
- Can a retiree factor in supplemental cash flows like Social Security, pensions, etc. when calculating a dynamic CAPE-based withdrawal rate, just like you’d do in the SWR simulation tool Google Sheet (see Part 28 for more details)? Likewise, is it possible to raise the CAPE-based withdrawal rate if the retiree is happy with (partially) depleting the portfolio? You bet! I will show you how to implement those adjustments in the CAPE calculations. Most importantly, I updated my SWR Simulation Google Sheet to do all the messy calculations for you!
- With the recent market downturn, how much can we raise our CAPE-based dynamic withdrawal rate when we take into account the slightly better-looking equity valuations? Absolutely! It looks like, the 4% Rule might work again! Depending on your personal circumstances you might even be able to push the withdrawal rate to way above 4%, closer to 5%!
- What are the pros and cons of using a 100% equity portfolio and setting the withdrawal rate equal to the CAPE yield?
Let’s take a look…Continue reading “The 4% Rule Works Again! An Update on Dynamic Withdrawal Rates based on the Shiller CAPE – SWR Series Part 54”
July 5, 2022 – Over the last few decades, we’ve become accustomed to a negative correlation between stocks and U.S. Treasury bonds. Bonds used to serve as a great diversifier against macroeconomic risk. Specifically, the last four downturns in 1991, 2001, 2007-2009, and 2020 were all so-called “demand-side” recessions where the drop in GDP went hand-in-hand with lower inflation because a drop in demand also lowered price pressures. The Federal Reserve then lowered interest rates, which lifted bonds. This helped tremendously with hedging against the sharp declines in your stock portfolio. And in the last two recessions, central banks even deployed asset purchase programs to further bolster the returns of long-duration nominal government bonds. Sweet!
Well, just when people start treating a statistical artifact as the next Law of Thermodynamics, the whole correlation collapses. Bonds got hammered in 2022, right around the time when stocks dropped! At one point, intermediate (10Y) Treasury bonds had a worse drawdown than even the S&P 500 index. So much for diversification!
So, is the worst over now for bonds? Maybe not. The future for nominal bonds looks uncertain. We are supposed to believe that with relatively modest rate hikes, to 3.4% by the end of this year and 3.8% by the end of 2023, as predicted by the median FOMC member at the June 14/15, 2022 meeting, inflation will miraculously come under control. As I wrote in my last post, that doesn’t quite pass the smell test because it violates the Taylor Principle. The Wall Street Journal quipped, “The Cost of Wishful Thinking on Inflation Is Going Up Too”. I’m not saying that it’s impossible for inflation to subside easily, but at least we should be prepared for some significant upside risk on inflation and interest rates. Watch out for the July 13 CPI release, everybody!
So, trying to avoid nominal bonds, how do we accomplish derisking and diversification? Here are ten suggestions…Continue reading “Hedging Against Inflation and Monetary Policy Risk”
June 6, 2022 – In this year’s April Fool’s post, I marketed a made-up crypto coin that would completely hedge against Sequence Risk, the dreaded destroyer of retirement dreams. Once and for all! Most readers would have figured out this was a hoax because that complete hedge against Sequence Risk is still elusive after so many posts in my series. Sure, there are a few minor adjustments we can make, like an equity glidepath, either directly, see Part 19 and Part 20, or disguised as a “bucket strategy” (Part 48). We could very cautiously(!) use leverage – see Part 49 (static version) and Part 52 (dynamic/timing leverage), and maybe find a few additional small dials here and there to take the edge off the scary Sequence Risk. But a complete hedge is not so easy.
Well, maybe there is an easy solution. It’s the one I vaguely hinted at when I first wrote about the ins and outs of Sequence Risk back in 2017. You see, there is one type of investor who’s insulated from Sequence Risk: a buy-and-hold investor. If you invest $1 today and make neither contributions nor withdrawal withdrawals, then the final net worth after, say, 30 years is entirely determined by the compounded average growth rate. Not the sequence, because when multiplying the (1+r1) through (1+r30), the order of multiplication is irrelevant. If a retiree could be matched with a saver who contributes the exact same amount as the retiree’s cash flow needs, then the two combined, as a team, are a buy and hold investor – shielded from Sequence Risk. It’s because savers and retirees will always be on “opposite sides” of sequence risk. For example, low returns early on and high returns later will hurt the retiree and benefit the saver. And vice versa. If a retiree and a retirement saver could team up and find a way to compensate each other for their potential good or bad luck we could eliminate Sequence Risk.
I will go through a few scenarios and simulations to showcase the power of this team effort. But there are also a few headaches arising when trying to implement such a scheme. Let’s take a closer look…Continue reading “Hedging against Sequence Risk through a “Retiree-Saver Investment Pact” – SWR Series Part 53″