We’ve made it. Through careful analysis, data crunching, and charting, the SuperPlan has been validated.
What exactly did we accomplish along the way? We determined that our asset allocation works, health care is affordable, most taxes can be sidestepped (given modest annual spending), and cash buffers can protect our stash somewhat against sudden market drops.
Perhaps most importantly, we observed our plan absorb practically everything the US Market threw at it over the past 140 years. If history has anything to say about the future, we’ll be fine.
1. Cash Can Work
In our examples section we found that holding a cash buffer did absolutely nothing to protect against the Great Depression, modestly helped to protect against the 70s bear market, and was very effective in combating the twin cliffs of both 2000 and 2008.
Holding cash will limit growth when the market is roaring up, but there’s some real protection when those numbers are plummeting. Overall, it can act as a decent buffer and help you sleep at night, knowing that there’s plenty of time to recover from any massive losses.
2. Spend Rate is King
After all of this work, one thing is fairly clear: your spending rate has a fairly big impact on your chances of success. The ability to drop from a 4% to a 3% spend rate in trying times can significantly increase your ability to hang on through the lean years.
3. Living Below The Line Is Normal
I think of ‘the line’ as the level of your asset pool upon quitting your job. Everyone wants to see totals rise above that line by at least 3-4% every year, which will in turn sustain your spending without lowering your principal. But it doesn’t always work out that way. Slightly fewer than half the years in the history of the market will result in a drop in your 75/25 portfolio.
If there’s a bad sequence of returns after retirement, you may therefore be living below that line.
So seriously, with the Schiller P/E (CAPE) sitting around
26 (27 now, numbers updated 03.01.2015) does anyone think we’re right before another steep market climb? I’m more inclined to think we’re at the end of one. That being said, I like to indulge in fantasy sometimes. Reading articles that tell me that maybe CAPE is no longer as relevant as it used to be make me feel temporarily optimistic about the situation.
But back to reality: It’s very common, if not completely expected, for portfolios to have significant drops during retirement.
For fun, let’s take another look at that cFIREsim chart from the simulation post.
Here’s another shot, which zooms in on the lines that track lower to the bottom.
What I’m keying in on here is the ‘dip rate’. cFIREsim results list the dip rates in table form as below.
8 of 113(7%)
You can see that in an astonishing 60% of cycles, the asset sheet drops 10% or more below the starting total. In other words, if you are retiring with a million dollars right now, you should go in expecting periods where your totals are lower than 900K; cFIREsim shows us that this outcome is significantly more likely than not. And further, over 40% of the cycles will have periods where your assets are down over 20%.
The reason I’m so interested in these points is that I am trying to visualize how I will feel about this once I’m not pulling regular income. Now that I understand that these are normal, expected trend lines I am sure that I’ll handle it in stride.
Bottom line: Many of the cFIREsim ‘success’ cycles include some, for lack of a scientific term, absolutely crappy periods. I think that having an awareness of what might be in store for you can help you deal with some of the lousy sequence-of-return scenarios.
Bad Analogy Time
I’m going to go with an imperfect sports analogy to explain what’s happening here. You are a team locked in a best-of-seven playoff series with an opponent. And you’ve won the first three games. Your odds of winning the rest of the series are somewhere around 95%, assuming that both you and your opponent have similar levels of skill.
And 95% is a staggering percentage. You are an overwhelming favorite to close it out. After all, you only have to win one out of the next four to take care of business.
But this 95% percentage only show you the odds at that exact point in time. If you lose the next game, you are then up 3-1. The odds change. Instead of being a 95% favorite, you are now somewhere around 83%. Lose again? You’re up 3-2, and only have a 75% chance of winning. You can’t go back and say “well, the odds said 95% when I was 3-0, so we’re still absolutely going to do this.” The scenario where the series is won in game 7 counts exactly as much as the scenario of a sweep when calculating that nifty 95% 3-0 odds line.
This is because of the way odds work. Every game that is played is an outcome. Outcomes fill out entire scenario lines. The outcome that will kill you when you are up 3-0 is four consecutive wins by the opposition. Every time you lose, it is somewhat more likely that you are traversing down a path which will result in, ultimately, the failure scenario.
Once you’re at 3-3 on the series, that last game is a flip — nevermind that you beat their heads into the ground during the first three games. The past doesn’t matter.
Despite your starting odds of 95%+, you’ll simply never know which path you’re on until the result is staring you in the face. This is analogous to the market sequence of returns problem. If you register three losses in a row to kick off RE, you’ll be extremely concerned you’re on that rare path to failure. And even if you’re not, you’ll be more nervous than that red-suited extra in a Star Trek episode.
So it’s important to check in every year, work through the numbers, and have the flexibility to make course changes or apply patches if the need arises.
4. Setting Your Oh-Shit-Percentage (OSP)
Way back when I started the series, in the Strategy post, I thought it would be a good idea to re-execute cFIREsim every year in January. (This is when I do my annual financial reckoning prior to tax season.)
And I set a percentage: I will perhaps go back to work if cFIREsim is reporting lower than a 70% success rate. I’m going to call this my Oh-Shit-Percentage, or OSP. If I’m at or below this percentage, I will consider the following corrective actions:
a) Searching for Employment
b) Minimal (AKA “Floor”) Spending indefinitely.
c) Applying one of the patches outlined in the Strategy post.
The 70% cFIREsim figure will be breached when my non-cash asset pool is sitting at a CPI-adjusted 360K or lower — a drop of 40% 245K from the original 605K retirement amount. (This particular figure assumes 30 years left in retirement.) (Math note: Percentage odds may actually be better than the reported 70% — see this MMM thread for more details.)
A few notes on executing cFIREsim down the road:
1) Make sure you change the number of retirement years to adjust for the fact that you’re older now. Remember: The default is 30. This should improve your odds.
2) If you are closer to SS eligibility, you may want to consider or reconsider including it in your plan. For example, if you were 46 when you retired but you’re now 56 when you hit your OSP threshold of <%70, it may be that you’re now more comfortable “counting” on some amount of money from the government. Use one of the online social security calculators to determine your eligibility amount and plug the numbers in.
70% OSP, cFIREsim 75/25, 3% WR, 30 year retirement, inflation-adjusted spending.
You will hit your 70% OSP after a 40% drop in your asset sheet, assuming no significant changes to the # years in retirement.
70% OSP, cFIREsim 75/25, 4% WR, 30 year retirement, inflation-adjusted spending.
You will hit your 70% OSP after a 20% drop in your original asset sheet, again assuming no significant changes to the # years in retirement.
Of course, only you can judge your own risk tolerance and pick an OSP.
Or don’t pick one at all. A lot of people are comfortable winging it here.. I’m pretty sure most people will intuitively make course adjustments after a 20-30% drop in their overall asset sheet by cutting expenses, i.e. implementing their floor spending plans.
And remember: Predicting the future based on the past is not a guarantee of anything at all. There are no completely risk-free paths through this.
Spending Sheet adjustments
Throughout this series, I’ve been going on an awful lot about this hypothetical 18K spend rate. I think it’s worthwhile to take a moment to a) list out my current annual budget and then b) list out the new RE annual budget. This is important because our spending patterns will change somewhat in retirement.
|PITI||1143||200||Paid off house after downsize = no mortgage, cheaper taxes, cheaper insurance.|
|Other Housing-Related Expenses||100||175||HOA Fees in the new residence. This includes landscaping, sewer, water, some amenities (pool, tennis courts)|
|Auto/Insurance/Gas/Tax/Registration/Other Fees||220||220||Although I expect to be taking road trips here and there, I don’t think the miles driven will be over and above what I’ll be saving by not having to commute every day. (I currently drive 9-10 miles each way to and from work for a total of perhaps 200 miles a week. )|
|Cable/ISP/Phone||75||75||May be possible to make cuts down the road.|
|Monthly Charity||82||82||Works out to 1k/yr.|
|Monthly New-Used Car Expense 5K anually Amortized Over 10 years||41||41||This may end up being even cheaper depending on the specific car I get and how many miles I’m driving. I’m currently averaging 8.5K miles/yr. At this rate of driving, vehicles last a long, long time.|
|Entertainment||50||50||The occasional concert or event, roadrace, video game, etc. If I need a new device, the money will come out of this budget.|
|Heat||150||75||Moving away from oil to natural gas. Also smaller house. Some guessing here.|
|Health Care||0||30||Thank you ACA.|
|Medical||20||20||This item will go unused most months.|
|Restaurant/Cafe||60||100||Slight uptick in RE|
|Vitamin A(lcohol)||20||0||Zero. I’ve made a decision to stop drinking entirely. I’ve finally figured out that I don’t like it.|
|Additional Local and Fed Taxes||82||Rolling 20K/yr from Traditional to Roth = 1K taxes annually.|
|Home Misc||50||30||Smaller house = less to do.|
- As I’ve mentioned in previous posts, it will cost 10K less per year to live once Project: Downsize the House has been completed.
- You’ll notice I’m only at a 16.5K annual spend rate here. I plan to close the gap to 18K by increasing travel. Maybe a EU trip or a flight somewhere else in the states to visit a friend. Or both, if I manage to travel hack with sufficient skill. On the other hand, in years when I don’t travel, there will be some spending slack in the system.
- In a pinch I can get below 15K easily (cut cable, cut most restaurant and entertainment spending other than Netflix/Library, cut travel, reduce charitable giving by 50%, zero home projects — these changes would drop me 2.5K instantly, from 16.5K to 14.5K. Past there and cuts start to really hurt. Hopefully this will be avoided.
- As a general note, if my asset totals do rise significantly over time, I may consider upping a) travel and b) charitable giving here and there. Honestly I can’t imagine doing much else with my money. I’m a believer in the concept of enough and I’ve had a sufficient number of years on Earth to both understand and internalize what it is that makes me happy. Spending money generally ain’t it. The only very notable exception I grant is if humans manage to invent real working lightsabers. If that happens, I’ll happily hand over the entirety of my stash in return for a single humming beam of colored awesome. If any reader wants to make this trade, please contact me. (Please!)
I’d by lying if I said I had zero worries about this plan. Specifically I think about the economy’s underlying ability to continue to grow exponentially indefinitely, given physical realities. (Is it even possible? There must be theoretical limitations on material global growth. )
I also worry about climate change and energy myself, not because these are unsolvable problems, but because there appears to be an utter lack of will to actually do much about it. Trust me, I’ve been following CC since ’89 with great interest, and PPM of CO2 continues to march steadily and disastrously upward. (If you read the entirety of the contents of the link I just provided, you won’t sleep tonight.)
Still, why should we allow climate change have all of the fun? There are any number of other market-crushing end-of-the-world die-off events that will, if they occur, make thinking about RE seem absurd. Let’s have a taste!
- Agricultural crisis. Billions dead from hunger. Those folks won’t be consuming or working any more. I’m going to guess that’s not going to be good for overall market health.
- Nanotechnologies. In an attempt to solve climate change, scientists create nanobots that break down molecules directly into energy, eliminating mankind’s need for fossil fuels. The issue? These adorable little guys can’t differentiate between organic and non-organic molecules and end up systematically converting all matter into pure E. Bye-bye, known universe.
- There could be a global pandemic. The good folks at the WHO always seem to think there’s a pretty good chance of one occurring at any given moment.
- Nukes. Do I need to elaborate here?
- Maybe instead of global warming, we’ll get a big meteor to hit good ‘ol planet Earth which will drop us into the next Ice Age. Love that plot twist!
- The singularity may happen. Listen, I saw Terminator, and it didn’t look like Skynet was funding pensions for the puny humans.
No one will think 26x valuations are reasonable for any company on the planet if there’s a major population-crushing event. Even assuming you and your loved ones live through whatever happens, your shares of MegaCorp and GovernmentBond are going to be worth about as much as pets.com. You’ll be much more worried about how to get food out of the ground than the value of Aflac, Coca-Cola, or Mattel.
On a day to day basis, though, I push these pessimistic thoughts out of my head and hum “We Shall Overcome.” In this area, you’ve simply got to be an optimist. It’s not like you have any control over what’s going to happen anyway.
After all, the alternative is to be a Doomsday Prepper. You don’t want to be like those weird people on that A&E show, right?
Fear and uncertainty are staples of life. Saving more money won’t suddenly make the world a more stable place to live in. You can’t achieve complete peace and serenity through simply growing your stash. Happiness is not a warm ball of cash.
After a point, the questions shift. You stop asking “Do I have enough money to retire?”
And you start asking the more important stuff instead:
Do I want to work forever just to feel safe? Is being safe, regardless of the cost, the goal of life? Am I actually happier with more money, or is that feeling just an illusion? What do I really want to do with my allotment of time on this planet? When I was in my teens, did I fantasize about doing what I’m doing now? When did I switch over from having real dreams to instead being primarily concerned about my pile of assets growing? How can I switch back? Am I contributing enough to my family? To my community? What are my values and ideals? Do they involve being in a cubicle or office all day? Being part of a corporate entity?
And so on. At some point, either you want to keep working or you don’t. The plan appears to be sound, and there are multiple fail-safes built into the system. A lot can go wrong and things will still turn out OK.
Hell, even if you have to go back to work — the nightmare scenario — you’ll still have gotten years(!!) away from the office. I have a hard time believing that anyone will regret having that time away, even if ultimately they have to go back to some form of drudgery for a while in order to plug a newly opened financial gap.
I think that’s really the right attitude to have when going at this RE thing.
But this is also why I love learning DIY skills, particularly food and garden related.
No alcohol? Good for you!
GC, thanks for stopping by.
Listen, completely agree — there’s an enormous difference between practical self-reliance and doomer paranoia. Example: I’m not much of a gardener but my closest guy friend is really interested in growing edibles, and I’m always begging him to share the results of production. The side benefit of that skill is that he could scale it up for whatever reason pretty easily – very cool. Another example could be machine skill: if you can fix cars, your bicycle, a boiler, well, this is going to save you money, time, while further cutting cords between yourself and businesses.
On the other hand, once you’re building bunkers in the backyard and storing 10+ years of food away, I think a line has been crossed between realistic safety/sufficiency/efficiency goals and crazytown.
I checked out the Urban Homesteaders — seems like a great group of people with practical goals. Seems like there’s quite a bit of overlap between their objectives and the frugality/FIRE lifestyle.
My favorite urban homesteader is a fellow MMMer – Erica from NWEdible. Seriously inspiring.
You can be reasonably self-sufficient without being a prepper or nut job. The urban homesteaders are quite interesting in that regard.
Wow, this summary really says it all. You even touched upon one thing that had been bothering me (with CAPE, cFire Sim, and your sports analogy) and that’s that Monte Carlo analysis is useful when all of the outcomes are equally likely, but if the cards are stacked against you (high CAPE, low bond yield, low inflation), then having a 95% historical success masks the fact that your circumstances look more like the 5% failure group… A smart person realizes this, and is prepared for it (and secretly hoping to buy a lightsaber when he’s 80!)
Hi EV, nice to see you stop by.
Yes, you’ve noted my chief concern, which is that when the markets are overvalued (as the US market currently is, by most objective measures) this condition distorts the results of the history-based simulators. You can’t time the market, but you can see when it’s puffed up — and this condition makes it somewhat more likely that it’ll fail (or, at the very least, “correct”) in the near future.
Since retirement success with a 75/25 stock/bond spit is heavily dependent on sequence of returns in the first 10 years, it’s very important to be aware of these circumstances. This is why I continually repeated (perhaps too much?) that it’s important to be ready for market drops and leaner times. You don’t see too many 6 year periods where the market rises 150% or more — in this case from 700 to 1900 on the S&P from trough to peak 08 through 2014. I can’t predict the future any better than anyone else can, but predicting the future is different from gauging risk, and retiring with a “I just barely hit my 4% FIRE number” total when the market is overvalued is a risk with a capital R. I think I’ll still be OK because I’m closer to a 3% withrawal, but I’m bracing myself for less than ideal returns over the next 10 years.
Good article. I am posting this comment after nearly 2 years. Even after 2 years, the markets haven’t cratered but slowly moved up but risks to downside remain as strong as back then. Bottom line is we can’t time the market, and even your statistic of few periods of 150% rise should be put into context because this period has come right off of massive 50%+ decline in equity market. You don’t see too much of that either over the past 60 years. In fact, even during the Great Recession, where SPY asset value dropped over 50%, S&P 500 companies cut collectively only 24% of their dividends so dividends hold up much better than asset values during the drawdown periods. This is why I use a diversified DGI portfolio of dividend paying companies, which means I am in 100% stocks. My stress test is to be able to live on 75% of my current dividend income. If I can do that, then the market variable impact on retirement income is largely eliminated. This way, we don’t need to worry about safe withdrawal rates.
Thanks for this series of posts, they were really interesting! 🙂
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Just a quick note to say: thanks. I accidentally stumbled on this article, but oddly enough, it was exactly what I needed to read. Call it poor planning, but while I have worked and thought about RE for a long time… I cannot say I have ever put any real thought into the logistics of what happens *AFTER* FIRE.
I think I need a few hours with a spreadsheet to work through your examples using my own numbers…
Thank you very much for this series of posts. I think that you have a very realistic approach to FIRE and it is helping me to think deeply about my options.
The drawdown series is a must read for anyone interested in FIRE. Thanks for putting it together, you’ve added a lot of value here (doh! Excuse the corp drone speak, after 15 years I’m getting close to indoctrinated!)
Nicely done! I just stumbled upon your site and followed the drawdown string. Very well written and helpful. I am a 57 yr old who is 4 months away from cutting the corporate umbilical cord after 36 years. Being a highly analytical type (Chemical Engineer) I have done very similar scenario analysis ( repeatedly like Rain Man).
I never realized how emotionally difficult it would be to decide to retire. Even though the math tells me I am in great shape the Labrador portion of my brain is hard to squelch. I saw your posts on this topic and found them very insightful.
I will continue to follow your blog!
One of the biggest challenges for frugal accumulators is the inflection point to becoming ‘decumulators’ that is, withdrawing from assets. The mentality that we followed throughout our asset earning years doesn’t change suddenly when we become FI. We imagine every possible worse case scenario, and look at if we are protected. The adaptability we exhibited during the years when significant earned income came in doesn’t disappear when we retire to live off our assets. In fact, we may become more adaptable. This is not captured in the 4% rule studies because it assumes we will be automatons taking 4% plus guaranteed inflation adjustments every year. If you learned to live on $35k a year when your salary was $100k, then living on the same amount when your investments throw off $40k a year shouldn’t be difficult. You can surely cut down in bad market years. Sure, there are other uncertainties like health but then where do you draw the line? Having decent insurance and counting on Medicare when you become eligible is all a reasonable person can do. Perhaps you buy expensive LTC insurance as well but for those with sizable assets (that generate passive income like $40k+), you can spend down assets till they deplete should you find yourself in that unfortunate situation. Some planning is necessary but too much planning to cover all uncertainties of life leads to ‘analysis paralysis’.
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Shiller PE ratio at 32 today. What do you think livingafi?
32, yikes. Frankly, it’s a scary number for people who have a lot of money in US DOMs. History tells us this is not sustainable, there will be a correction. What we can’t predict is when or how exactly this will occur. Crash? Slow decline? This year? 2020? Maybe it’ll hit 40 and stay there for a few years — it’s certainly been higher before.
I believe there will be a return to something closer to historical norms… eventually. And if you’re planning on retiring RIGHT NOW in 100% stocks assuming 4% return (i.e. cutting it close) — well. I wouldn’t recommend that, given valuations, especially if you do not have a reliable Plan B for if market loses 50% of value.
I will add that my own plans are resilient enough to deal with correction/crash scenarios so I’m personally not worried for myself.
Yeah I’m with you on all of that. The big questions are when it will correct and how it will correct. Aside from that, how have you been enjoying retirement these past couple years? Everything you thought it would be or anything observations that deviate from what you expected? How have you and your SO been spending your time? I’ve enjoyed reading through your posts, thanks again.
RE is fantastic. Some shakeup to existing relationships, especially old friends who are still working — we don’t have as much in common anymore. I also find some people believe that my approach to life is “childish,” “lazy” etc. Quite a lot of judging by some. No judging at all by others. I spend most of my time reading and writing, and also devote blocks every day to exercise and family. I’m happy, not much more to say.
Hey man, just want to say love your writing style and blog, I share your geeky enthusiasm for reading and gaming and of course love of not working :). A bit about myself, also DINK couple 31/33 and lucky to currently make 230k a year combined, and current net worth of about 950k combined. I feel fairly confident my wife and I could live comfortably on a 3k passive income with a paid off house, so we are pretty much FI!
However our biggest hurdle currently is mentally, specifically figuring out what is enough, working to get to a lower withdrawal rate (3 instead of 4), and also the worst part is I also fear a big correction is coming given current CAPE/PE numbers. So it makes me not trust my current assets (largely in Real Estate). I like the idea of having a 75/25 split with stocks and bonds but I hate the idea of converting all our assets into the stock market at this point, so I take the wussy way out of keep working and padding the stash.
But back to my original reason of wanting to comment. I love how you visualized the fact that your assets will most likely dip in most scenarios by 10% after retiring, this was something I didn’t know I needed to read but felt very grateful after reading. It felt like uncovering a gold nugget in an abandoned field, thank you. So much of life is a battle of the mind and it’s crucial to have both a strong body and mind to be successful.
I read your global pandemic line in ‘other concerns’. 😀 You can read the future 😀😀😀
Good catch. And yet the market is still high.
Even going into the 2nd wave it is still high!?!?