Fire

Thrugelmir

bostonerimus wrote: »

Yes that's one way of looking at it, but it isn't necessarily a "zero sum game".

Profit can be be distributed so many ways. There's nothing magical. In the past decade or so an increased % has been passed to shareholders and executive management.

bugslett

Thrugelmir wrote: »

More red tape and regulation than ever if you start a business these days. Employing people comes with all sorts of burdens.

I'd run a one man band business, but I'd not going down the route of employing people again.

jamesd

Audaxer wrote: »

If you are relying wholly on investments, probably the worst thing that can happen is you retire early, and just after retiring there is a bad equity crash that takes several years to recover.

Guyton said in an interview with Kitces that several years of high inflation near the start were what worried him the most. Unlike a market drop that usually recovers quite quickly there is unlikely to be matching deflation so the higher drawing rate would last until death.

Incidentally, "gold plated" DB scheme members could suffer more from a few years of high inflation than those using drawdown. No increases for those retired were needed for accruals before 1997, from then a cap of 5% can be used and from 2005 a cap of 2.5%. The PPF usually cuts to legal minimums and I assume uses those caps. By contrast, 4% rule uses full inflation and Guyton-Klinger does until its limits are tripped. State pension and deferral aren't capped.

Kitces wrote about a low return decade being more of an issue than an early big drop.

Anonymous101 wrote: »

There’s numerous steps I’d plan on taking prior to retiring which would mitigate that risk.
- Eliminating any large reoccurring expenses such as mortgages and car payments
- Holding several years expenses in cash

Interesting that those two attempts at mitigation do the opposite and increase risk by reducing invested capital. Except if you do it by not buying the car and by downsizing the home instead of overpaying a mortgage.

itwasntme001 wrote: »

isn't the risk of wages rising significantly going to be a problem for the FIRE community? They have FIRE'd so they will not benefit from rising wages. ... Thoughts?

Since long term wage inflation is about 1% above RPI we've had a taste of this through the state pension and rising pensioner relative poverty, income less than 60% of median. The state pension used to increase with earnings but in the early Thatcher years this link was broken so lifestyles started a gradual decline vs those still working. The triple lock is intended to gradually reverse this decline.

The younger you are when you retire, the greater the effect of using inflation instead of earnings in your planning is.

It's tempting to use minor examples but consider:
1. 30% of homes had central heating in 1970, 59% in 1980, 90% in 2000 and 95% in 2018. That's reduced cold-related early deaths, not just improved comfort, and also changed how homes are used.
2. In 1971 only 42% of households had a telephone.
3. The extra cost of home internet access, first dialup, then more modern options, vs pre-internet days.

Audaxer

jamesd wrote: »

Interesting that those two attempts at mitigation do the opposite and increase risk by reducing invested capital. Except if you do it by not buying the car and by downsizing the home instead of overpaying a mortgage.

I think that depends on the investor's attitude to risk, as I think most cautious retirees might find greater peace of mind by paying off a mortgage and any loans first, and keeping a cash buffer.

Spreadsheetman

bugslett wrote: »

I'd run a one man band business, but I'd not going down the route of enjoying people again.

LOL! Deliberate mis-spelling?

Having run a business myself I agree, employees are a massive pain and I'd never employ anyone again apart from freelancers.

Anonymous101

jamesd wrote: »

Interesting that those two attempts at mitigation do the opposite and increase risk by reducing invested capital. Except if you do it by not buying the car and by downsizing the home instead of overpaying a mortgage.

That's an interesting study. I understand the concept and certainly agree with having a low cash and bond allocation during accumulation. I don't overpay my mortgage believing that investing will likely yield much greater returns. However I don't necessarily agree that paying off a mortgage, or any debt which creates a fixed expenditure, prior to retirement increases risk. Although I'm happy to be proven wrong, I still believe it reduces it.


In the event of an immediate crash following retirement the debt free retiree would perhaps be able to reduce an initial 4% withdrawal rate to a 2% withdrawal rate for a number of years. Something the indebted retiree could not do. This could make all the difference in those few failure scenarios.


In my opinion no studies that I have seen accurately model the real life scenario's which would occur in the event of a huge equity value fall during drawdown. Most studies, including the one you cited, focus on failure rates of portfolios given a range of asset allocations vs withdrawal rates. But almost all fail to model any changes in withdrawal amounts which would occur in this event, in reality its much more dynamic. If you have any studies which model this I'd be really keen to read them.


I agree its a suboptimal investment strategy for any other event however once you're FI the goal is to remain FI not to have the largest portfolio or most optimised strategy.

bugslett

Spreadsheetman wrote: »

LOL! Deliberate mis-spelling?

Having run a business myself I agree, employees are a massive pain and I'd never employ anyone again apart from freelancers.

Ooops, fixed it now. I blame auto correct:o

jamesd

Anonymous101 wrote: »

In the event of an immediate crash following retirement the debt free retiree would perhaps be able to reduce an initial 4% withdrawal rate to a 2% withdrawal rate for a number of years. Something the indebted retiree could not do. This could make all the difference in those few failure scenarios.

It should help in those scenarios because the portfolio natural income will be much of income and if there's not cash the extra would come from bonds if equities are down. More invested means more natural income and bonds so a bigger buffer.

As Jon Guyton and Michael Kitces put it:

"Jon: ... People talk about, you know, how much money do you have in cash? How many years’ worth or whatever, I think that’s silly. I frankly don’t see any difference between having a bunch of money in the money market and having…you know, as long as some of your fixed income is allocated to a high-quality bond holding with around a duration of one, I think, you know, there’s no difference.

Michael: It’s an interesting framing that, like, you have this fairly rigorously constructed bucket approach but not the bucket that most people have with a bucket approach, which is the short-term cash bucket for, you know, one, two, three years’ worth of spending.

Jon: Right. And there’s now research that was published last year which says that if you take the way that bucket approach is usually implemented, it really leads to a lot less wealth at the end versus just a simple balanced portfolio that’s rebalanced every year.

Michael: Yeah, we’ve covered this on the blog a few times as well. You know, it sounds great in theory, but from a practical perspective, when people are spending 4% or 5% a year, if you hold 3 years of spending in cash, you have a 15% cash allocation. And if you hold 15% in cash for life, you just end out with less money because that’s a lot of cash to hold for life for a multi-decade timeframe.

Jon: Well, it is, and it really hurts if it’s only the remaining 85% that you allocate 60/40. And furthermore, you know, the way most likely that portfolio has got somewhere in the neighborhood of a 2% overall yield between the interest that the bonds are paying and the dividends the stocks are throwing off. So you’ve got 2%, you know, coming in every year, so 3 years for 5% does not require 15%, it only requires 9, even if that’s what you wanted to do."

Anonymous101 wrote: »

In my opinion no studies that I have seen accurately model the real life scenario's which would occur in the event of a huge equity value fall during drawdown. Most studies, including the one you cited, focus on failure rates of portfolios given a range of asset allocations vs withdrawal rates. But almost all fail to model any changes in withdrawal amounts which would occur in this event, in reality its much more dynamic. If you have any studies which model this I'd be really keen to read them.

I agree its a suboptimal investment strategy for any other event however once you're FI the goal is to remain FI not to have the largest portfolio or most optimised strategy.

Of course the studies will normally be maintaining spending. Not doing so with many drawdown rules means that the plan has failed and the person has suffered an undesired income drop. That's a FIRE failure as well.

The work looking at retiree behaviour during short term drops has largely been about how to counter people's tendency to want to spend less when they should be carrying on as normal instead of self-inflicting a failure. Guyton agaiin, same podcast:

"Michael: So how has this worked out as we’ve gone through this recent bout of market volatility?

Jon: Well, it’s almost been a non-event in the sense that because markets got so high, withdrawal rates got lower. They got down, you know, close to 5%, 4.8%, 4.9%. And so if you do the math, if the portfolio value declines by 10% then the withdrawal rate increases by 10%. So, you know, someone whose withdrawal rate was 5% is now 5.5%. And that’s higher. You know, it’s definitely within the range of what’s okay.

Michael: That’s the point, right? They’re still within the bands. They’re still within the safety zone. That’s the whole point of drawing them with, you know, 20% parameters. Like, you can ignore…to me, like, it essentially tells you, 'You know, things between the bands are noise, things that move you across the bands are signals that require adjustments. So here’s where the threshold is. And as long as you don’t cross this line, you really don’t have to worry about it or call me.'"

That "call me" bit is what clients tend to do and the adviser then gets to remind them that the SWR has already taken the drop into account so they should just carry on.

Sea_Shell

Those two love their "you know"s, don't they!;)

Sea_Shell

So are they basically saying go all in and invest 60/40, rather than hold cash specifically for a downturn? As the SWR has that "built in"?