Withdrawal Strategies for Early Retirees

thank you all for joining us to talk about withdrawal strategies in early retirement I plan on not monopolizing this conversation not at all I'm gonna open it up for questions very very quickly Kelly has the microphone and and so if you have a question that you want to ask just let us know hands to hands whatever you want to do and she'll get you the mic and we can we can make this very participatory but before I do that I want to introduce this amazing panel that you are all here to see Jonathan Mendoza to my right I don't always know my right from my left but I'm working on that he started to spot choose Fi in 2017 with his co-host Brad Barrett in one year they had two million downloads and their community launched 130 and Counting chapters across the country he is the only member of this panel who is not retiring in the immediate future or retired yet Tanya Hester writes the financial independence blog our next life she co-hosts the podcast the fairer sense and she's got a book coming out next year from Pichette she is early retired in Lake Tahoe California which is where we should all be early retired vice PA carsten jet ski who many of you know as big ern is the no longer anonymous blogger behind early retirement now he's 44 years old and he is retired using his time to travel and see the world with his wife and his daughter and leaf deli the position on fire which happens to be the name of his blog achieved financial independence within a decade of completing his residency in anesthesiology he is about a year away from leaving his job all right before we get to the technicalities of withdrawal and four percent or three and a half percent or however we're gonna debate this let's talk about what early retirement means in actuality and let me start with you I mean I think this is really the only value I can add to this conversation everything I know about which are all strategies I learned from the people at this panel and it's truly remarkable and you need somebody to go down into the weeds into the details and dig this house it's incredibly important information and you be honestly it's more difficult it's more difficult than what I've done up to this point but I think it is incredibly important to talk about reframing or redefining the word retirement you cannot apply what people think of as a traditional requirement for someone 65 years and older to someone that is has pulled this off in their 30s has pulled this off in their late twenties which I know individuals that have done that have pulled this off in their early 40s it is just a radically different frame and in my mind I think we just need to be a very work because I know people that have walked away from work with nine hundred thousand seven hundred thousand 2.4 million what you know just an incredible sum of money but you some people could argue about that's not enough it's not gonna make it you have 60 years and I promise you they're not worried about it they're not worried about it because their worst case scenario is someone else's every day they can just go back to work and because they've done this on the backbones of frugality and financial independence they inevitably have flexibility built in to the this entire worldview that they've built so I mean that's kind of I can I can will absolutely through the point of this episode kind of or through this panel try to highlight some examples of what this actually looks like but that's my operating perspective I'm like I'm not concerned about it and I think that that is in and of itself useful I think that's really interesting because as we saw watching the trailer for the amazing viii that's coming out soon people do word I mean the the the people who are making the movie were clearly worried Tania as we've gone through this have there been worries um I would not say there have been worries for us thus far but I think we are really taking a long-term view so those of you who read my blog you know that I was like bristling in a little bit of what my friend Jonathan said just because we're talking about really long time horizons with early retirement potentially being early retired for 50 60 years we don't know that Medicare will still be here for us for those of us who are in our 30s or 40s we don't know that Social Security will still be there in its current form so there are just so many unknowns that I think I tend to advocate for a more cautious approach but that said the funny thing about the word retirement your original question is it doesn't even mean what we think of a retirement for a lot of traditional retirees a huge number of people over 65 are still working they predict that in the next decade almost a third of people 65 to 75 will still be working in some way so the idea of retirement only meaning sitting on a beach and sipping an umbrella drink for anyone is crazy that just doesn't apply at all I think it's more to me really just the freedom to do whatever you want with your time and if that looks like work as it does in my case I'm that's fine and you have what I like to think of as the freedom to fail so I had the incredible privilege this year to write a book that comes out next year but if it sells zero copies I'll be okay because I don't need it to do well and that is really an amazing thing and so it's it's to me silly to define retirement based on whether what you're doing with your time looks like work or not and it's more just about getting to do whatever fires you up every day and having the financial freedom to do that Carstens that's a definition that you go by yeah so I mean obviously I'm not into umbrella drinks anyway so yeah I mean right now I'm retired I'm traveling full-time with my family and tried to I couldn't do this forever some people do that for years I tried to do that for seven months yeah but eventually I want to I want to settle down have a house in the suburbs send my kid to school volunteer in school work my daughter to school every morning so these are all things that this is the opportunity cost if you have the full-time job and that was always on my mind I had actually a pretty good job so I never wanted to escape from corporate America they treated me very well I earned good money and was a very fulfilling job and it wasn't finance but I can't hate finance too much because that's what I'm doing every day on the block but you see that opportunity cost and so you see all the other things you can do with your time now and as I said here and in other places not a single day that I that I missed my job so far which is scary scary to admit that I have nobody back from home [Laughter] letha's you think about the next year and I know you're paying wheat we had a conversation ahead of this panel I know you're paying very very close attention to the numbers before you actually officially retire tell us a little bit about where you are right now sure I discovered financial independence a few years ago now and and when I read about it and looked at the actual shockingly simple math I realized that that shockingly simple math said that I was financially independent right then and there so I've taken a few years to let that soak in and decide if I'm ready to leave a lucrative and somewhat rewarding but also stressful career as II ologist and we're there now so I'm finishing out the next year or so I actually helped find my replacement or he found me through just a very very neat coincidence this young physician is a resident in the training program that I trained in here in Florida and Gainesville Florida and is from the small town in northern Minnesota where I'm currently practicing so he's going to come take a job that I'm going to create by leaving and it's going to work out really well regarding the numbers yeah we'd rather overshoot than undershoot because I wasn't sure I was ready to leave quite when I discovered that a number that we had and then answer your question about what is retirement you know I talked about I'll be retiring for medicine I don't think I'll call myself a retired person when I started my blog two and a half years ago I said I'm gonna post yeah probably three or four times a month until I run out of things to say and not post four times a week and so I'm not going to be retired I'm not going to feel retired but I will be a morph more fun less stressful job no doubt about it so you refer to it as the shockingly simple math of early retirement it's not shockingly simple to everybody so take us just take us through that and then we're gonna dig into the withdrawal numbers and I'll ask our students start there but take us through take us through the shockingly simple math that you need to retire sure and I was going to have Carsten just start right off because he's written a 27 post series there are some some ins and some outs but if you want to try to make it simple you you can very likely see your money last 30 years or more if you have saved up 25 times your anticipated expenses in retirement includes taxes and anything else any kind of expenditure he'll talk more about the withdrawal rate so 4% works up to 25 times just 100 divided by 4 is 25 if you want to be especially safe you might go to 3 and a half percent or 3 percent and then you need 28 times or 33 and 1/3 times your anticipated annual spending so you know real quick math if you are like a fat fire-type person I tend to be a little closer to spending more let's say you're gonna spend $100,000 a year we're not quite there but that's an easy number to multiply so you want to point 5 million to 3.3 million in retirement assets to cover that level of spending and that should last 30 years or more most likely and definitely unless you have a particularly bad sequence of returns poor returns as you approach or enter into retirement and I think that's probably enough I guess I should point out there are other ways to cover your expenses besides just having a pile of money that gives you returns via this stocks and bonds you can also have passive or semi passive income from rental properties or other types of assets angel investing etc and approach them from a cash flow standpoint so your hundred thousand dollars a year eight thousand and some dollars a month well if you have rental properties that cash flow nine thousand month year you should be good as long as things don't change and I've talked and just in light of the fact that we started by talking about the shockingly simple math of this you know I'm assuming there's a lot of friendly faces people that are inside the five community but I wanted to point something out that may not have been quite as obvious you noticed him talking about your expenses and the fie community we're obsessed with what are our actual expenses and this is also to Tanya's point as well so maybe we can come back to that later but it's really important to think even in the calculations you are showing yesterday if they were highlighting your income well if you're saving 50% of your income by definition you're not you don't need to replace your entire income you need to replace how much your life cost on an annual basis it is all about the expenses and when we see constantly his numbers pipe you need to replace your income you need to replace your income you to do that to get to that point if you're applying the same math to your income you could be working for decades longer than you need to when the simple reality by knowing the math it's about your expenses you can be working in a decade I mean seriously five six seven years longer for a really marginal benefit so it usually it has to start with knowing how much your life always cost and I think all of us get there but maybe we're coming from different places you have to know how much your life cost well and that's not always knowable right so I promise we will get to withdrawal in in just a minute but health character long term care yep kids who take six years to get through college rather than four it's not you know the amount that a new roof right the amount that you're gonna spend is not always knowable and Tanya you talked about contingencies so let's let's get into that and then we're getting to the percentages I promise yeah and I'll actually tie this to withdrawal rate because I think it applies the the thing that is so important to recognize is a lot of the talk about withdrawal rate to me is a little bit too academic because it assumes that you're gonna spend the exact same thing every year and that's crazy JD Roth has a wonderful post about this or he actually goes through how much he's spent every year and the fluctuation is in Norman and so the idea that you're going to you know people like to use the math very commonly of saying okay we're going to spend forty thousand a year we're gonna save a million and great but the number of years when you'll actually spend forty thousand if that's your target is is probably zero you know you look at a blogger like Justin who writes rid of good he tracks his spending they struggle each year to spend what they have allocated but his kids are still young he and his wife are still young and healthy they haven't gotten to their expensive years yet so that to me is why it's so critical to have contingencies built in and honestly to over save a little bit I think Carsten and I and if you two are more in the 3.5 kind of range like a little bit more conservative on withdrawal rates and what that does is it gives you a little bit of wiggle room for those years that are more expensive you know for example right now the cost of health care if you're buying it on the exchange is going up approximately three times the rate of inflation and the 4% rule is based on all of your expenses tracking with the Consumer Price Index which is roughly at inflation not with things that are much much higher than that so that to me is a big reason to add a little bit of a cushion you know something like adding 10% to your total if you don't have assets or like in our case we have a house that's a little bigger than we need that we own free and clear we could sell we could downsize we could rent we could live in an RV full-time we have options by having that but things like that I think are really critical because the the truth of the matter is the idea of just going back to work it sounds really good but when you're most likely to run out of money and need to go back to work is either when the economy is doing really poorly and a lot of people need to go back to work and you've also now got a big resume gap or when you're 70 80 years old and then how feasible is that I'm so those are really important reasons to me to build in some safety valves and what that looks like is gonna be totally dependent on your plan but just thinking that truce you know okay what happens if I turn 75 and all of a sudden we realize that we only have half as much money to spend as we thought a lot of folks like to say this line that you're going to spend less in retirement but they forget to ask whether that's actually a chicken or an egg question most people spend less in retirement because they have less money than they wish they had not because it's cheaper to live in retirement inherently okay let's do numbers and then get your questions ready because we are gonna open this up so one of the key insights that I got from my research was that I mean obviously I agree I agree with mister money mustache that saving for retirement is simple it's shockingly simple so it actually suggesting we changes his title the shockingly simple math of saving for retirement not retirement because I noticed that you can't extrapolate the simplicity of accumulating assets to D cumulating assets so what I mean by that for example when you start saving and you have zero dollars you you shouldn't be too concerned about is the stock market expensive or not actually one of the biggest favors I ever got from from the stock market guards was that I started saving right around the peaks once in 2000 when I got my first job and once in 2008 when I got my second job which was much higher paying than my first job and you would think always horrible time to start saving or it's a horrible time to increase your savings because that was right around the market peak well no it was not that horrible because through the market trough I use dot dollar cost averaging I got I got really good returns through that so that sequence of return risk working in my favor whereas if you start retirement you should be a lot more concerned about where you are in the stock market today we have had nine and a half years the longest bull market run in history equity seemed a little bit expensive by whatever measure you take bonds seem expensive rad yields are relatively low yields are going up which puts pressure on bond prices so these are all things that are on my mind that were on my mind when I was thinking about retirement there are in my mind when I'm retiring now so the macro condition of the macro the economics and the financial conditions should be something that have to influence your your withdraw right and not just at the beginning right this has to be an ongoing process is a setting of withdrawal rate this is more than just sitting at once right you want to you want to follow what's going on in the market and then adjust potentially if we have a if we have a bear market one year down the road or five years down the road that that has to change so withdrawal rate strategies more than just setting one single withdrawal rate set it and forget it and let it go it has to be something that responds to conditions and then on top of that they have to be also idiosyncratic factors that influence how much I want to withdraw right mi mi 28 or a my 44 when I when I pulled the plug right am I am I married with a younger spouse or an older spouse do I have kids that I want to take care of do I expect a corporate pension which is a little bit more underwhelming than say a government pension just a few years down the road so I've seen a lot of cases where people even in today's expensive market valuations I said yeah sure not just 4% go for 4.5% of 5% because you have very generous pensions that are gonna kick in in the future you have to bridge really only maybe 10 or 20 years with your higher withdraws and then you can scale down your withdraws so you kind of have a two-phase problem or sometimes a three-phase problem depending on when you take your Social Security benefits so as I said before on the blog and in podcast it's it's not just the 4% that's a little bit offensive the word rule is actually the more offensive than 4% because I've seen many people that well you should be in the low 3% and I've seen some people that should be at 6% so the it's really only a rule of thumb and then when you when you consider how much money we're talking about Russia 2.8 percent versus 6% on a million dollar portfolio is anywhere between 28 and 60,000 dollars that is such a wide range 4% is not gonna do it is it's like saying well we should all have a rule of thumb of half of wearing size 10 shoe that's probably a pretty good estimate and a good place to start no but I don't call it the size 10 shoes and I don't want to call it the 9 size 9 shoes either right so it has to be something that is that is individually said and individually determined both at the start and then also ongoing overtime this is not this is not a one-time set it and forget it kind of thing this has to be this has to be done maybe not every month maybe not every quarter but every year you have to sit down what is my portfolio where are my expenses and how did markets perform should I make a change and and how much of a change do I have to make must have questions I do what size shoe do you wear a size 14 and then over to you wait one second here comes the mic I was wondering your thoughts on cash cushions and also the idea of bouncing a larger couch cushion with more in bonds and just your thoughts around all that I like that a lot I was do you know me because one of some of my earlier posts were very critical about emergency funds right and well how can big ern say that a cash cushion is not such a bad idea if he's so critical about the emergency fund so I like the cash cushion because it's almost like a glide path you you hedge a little bit the risk of an early equity market drawdown and so you've cushion that that prospect of of a market downturn right around the corner so it would help you understand circumstance it wouldn't help you so much if we had say a repeat of the 1970s and 80s where basically you had a 1718 year period that was just really underwhelming then with some really bad equity crashes in between but they happen so late in the process you start retirement at age 65 so in in the year 1965 and the total bottom the rock-bottom was 1982 you don't have a cash cushion that lasts for 17 years so in general I like them I think it's good for peace of mind I have a two in multiple forms I have a little bit of a cash cushion right now and then I still have a little bit of deferred compensation that I get from my job that I just left in June so if I add that that that's also counted as a cash cushion in my accounting model yeah I have that I like it don't go overboard and you will not be able to to hedge against every single market crash that we did we could face so so right now I could finance half of our expenses until the year 2021 so yeah I'll say we we have at this point actually almost about three and a half years worth of expenses in cash which is probably a bit more than most folks but we answer your question about bonds we count that in a total allocation of things that are not stock so everything that's cash then we do not have in bonds and bond yields are so abysmal right now and especially if you're trying to do like the tax stuff and you're going with tax-free bonds you actually overpay then and the bad yields for those so for most people who are retired tax-free bonds are a bad deal especially if you're not having a super high income but the thing I would say about cash cushion for those of you who are curious is I think that should be the last thing you build up because to the point you know cash obviously you have a huge opportunity risk with you're losing out on stock growth so do the cash cushion as your very last to-do list item before you leave your income because otherwise you're going to miss out on and my recollection from a blog post you wrote about the cash cushion was that you actually over the long run you have less money because of that cash question because the opportunity cost in those up markets which are most years it's more of a psychological benefit and being able to write out those down years but compared to not having a cash cushion over a 20 or 30 year period probably end up with more money without one so again so my cash question it just came about because I have this deferred compensation no choice and it is exactly the same plan that Tonya has well is a do it the very last thing don't build it up over 10 years tell us who you are I'm Roger Waller I'm uh I am a financial writer blogger and financial advisor and the question I have and I see you know mostly dealing with people that are older than the panelists how do you account for the continued well it's a two-part question how do you account for inflation in general and then specifically you know the medical inflation I'm sure you've all seen the study that fidelity does every year with the increasing costs of retiree medical expenses that they do every day I think it's 280,000 for a couple age 65 how does that factor into your planning again far down the road for you folks but age wise but how does that come into account and that doesn't include long-term care and they right that does not include long-term care which brings it up over 400,000 gene maybe yeah if you take the gap and you use that money to buy insurance right right good point thank you one thing I do want to say on long-term care is something that I think is not talked about often enough in early retirement because I think there's a lot of roommates romanticization so that'll wreck anything about a kind of alternative ways of living like tiny home living or RV living or permanent travel something worth knowing and of course this could all change but Medicare has essentially no coverage for long-term care if you have to go into a nursing home they'll cover short stays and rehab centers after like you break your hip or something like that however they have fairly generous coverage as far as anything as generous and Medicare for in-home care and so it's a really good idea to set yourself up even if not in your early retirement stage but at least in your traditional retirement stage in a home where you can age in place that will do a lot to insulate you against future medical care costs so just one point in terms of inflation I do think it's really important to not just do something like follow the 25 X rule I put it in quotes you but to actually build your own model and build in low expected rates of returns so it was really important to us in building out our numbers that all of this work if we only get 2% real rich long-term which is way way below market averages you know over time you tend to make about 6% by 6.8% in the sp500 after inflation but we weren't comfortable projecting historical averages because again all the unknowns so I think aiming below averages and making sure that your plan still works is one really good way I'm sure you guys had things to em oh yeah so so that's exactly a concern that I have too and this is exactly the reason why I don't believe that we should have these simple models where you assume that your expenses stay constant over time and so I I would like to have a tool and I built that tool where I can add additional cash flow needs at certain ages and there could be there could be I could add the gross increase in medical expenses over time that that I assume of course some people would say well you know my mandatory expenses for medical will go up over time but there might also be a little bit of crew discretionary spending where I spent a little bit less maybe I spend less on travel but still the net effect I bet you is going to be is going to be in spending increase and again you want to have a way to build this into your calculations it has to be a customized individual calculation because some people say look I have a family history of illnesses we're at old age others have not so again this has to be something that is that is customized and now the good news is I've done some case studies for for at least one person that that brought forward this concern and it didn't actually make that much of a difference because here's a 44 year old or 45 year old who expects to have astronomically higher expenses at age 80 but age 80 is so far away that so normally people run out of money in early retirement or if you have the bad return shocks right away so imagine you set aside just 50,000 or $100,000 do some mental accounts so you set it aside while this is my this is my medical spending increase for the future and you let that simmer for 3540 years it's gonna be a humongous amount of money and it might it might help you to guess with that so so the good news is that I'm concerned about that too it actually may not make as much of a difference on your on your withdrawal right so that's the good news and I think a lot of us don't really factor in Social Security into our you know at least if you're using a percent and so for my wife and I that would be I think an extra forty seven thousand a year and today's dollars that I'll have come age seventy if we wait that long and so that's a big chunk of money and also if you do have a bit of a higher spending budget or like in my case I'm planning our retirement based on the expenses as a family of four alright eventually that will be a family of two there'll be grandkids will still you know buy gifts for our kids and probably take them on vacation with us like we do now my kids are at Disneyworld as we speak we're on their way so we're basing our our future spending on current spending which is probably its supporting twice as many people as we'll need to do later on so you know you plan for you know sort of worst-case scenario with with returns and you plan for kind of biggest budget expenditures with spending and then that creates again a lot of wiggle room for increased healthcare expenses and again the social security piece coming in later which can really help and then long-term care it probably right now it doesn't cost more than what we were spending in a year so you know unless both my wife and I end up in nursing homes for 10 years or more it it shouldn't really matter we're a self-insured sent planning on two percent returns makes me wonder if there's any place in the math for an annuity any situation in which you take a chunk of cash and annuitize or if that's doesn't is that's not part of the movement I think one of the things I'll try to talk more into the Mike one of the things that I do think is worth thinking about is thinking of your early retirement and your traditional retirement as different things and that's what we've planned for financially from the beginning so we sort of saved we mark and I had the benefit of I should really say mark mark was amazing at saving in his 401k from like age 22 I think he was maxing out by 26 cuz he's just awesome like that whereas at 26 I was still $40,000 in credit card debt but it's something where if you can get a head start or you have good traditional retirement tax advantaged savings right now and then you can focus on saving for the near term the early retirement then you have flexibility so I think the answer is we're going to look at things like annuities once we get into our 50s and consider them at that time I've talked to several salespeople for them who've told me that they are typically not a very good deal and that there are only specific kinds that really makes sense but I don't think we should all just have a blanket rule of ruling them out I think it's something to explore but it's not something that I think people should be purchasing in their 30s for example yeah I feel like you won't I don't have a rule of ruling them out but it's almost ruling them out because in some way they are the worst of all worlds they obviously hedge your expenses and your longevity but and by the way we are here with a lot of representatives from companies that might be offering them I would like to see an annuity that is inflation adjusted and not just at some fixed rate that sets a 2% I want it to be set to the CPI or or some generally observable inflation index because you do the math and you say well imagine I get a I get an annuity and it pays me $500 months what is that $500 were worth in 40 years right if if we have 1.8 percent inflation vs. 2.2 versus 2.4 that you're gonna have huge risk of basically inflating a way that that annuity and again I mean especially for early retirees right we we need the long term power of equities to grow our to grow our portfolio to sustain expenses over 40 or 50 60 years whereas annuities by by definition is it's a bond investment if you look at bond yields right now they don't they don't really look that good that said it could change again right in 1997 it was the first time they came out with tips and some of the tips had real yields of 3% and more so a 3 percent real yield that looks attractive now and that could probably almost sustain say a three and a half percent withdrawal rate even over 60 years if I can guarantee 3 and a half percent real return or 3 percent real return I could say that while I'm part of my part of my portfolio I'm gonna put that into some kind of a tips based account or or a tips based annuity that is inflation adjusted it could become more attractive but again today's real yields are just so low that you don't get through 60 years if you want some kind of annuities a say you want you want the certainty of of a payment to deal with sequence of return was I would almost suggest you do something like like a CD ladder over the next 10 years I once suggested at the blog in front of mine they were concerned well over the next 10 years we're gonna have a market blow up and we want to have a little bit of our expenses hedges should we buy an annuity I said no I mean because the the back end of the annuity there's so much uncertainty about how inflation works out because it's nominal annuity why don't you just do a 10 year CD ladder and then hedge a little bit of that and then you keep your powder dry and you put the rest of the money in stocks and let them live for the long run I think just sort of the big picture to me takeaway from that is that it's just so important to keep paying attention it like as you said not doing a set it and forget it planned for those of you who've read your money or your life by Vicki Robin and Joe Dominguez the the first edition of it in the early 90s recommended investing 100% of your money in Treasury bonds because in the early 90s that made sense they were making like 78 percent and that was a great guaranteed return I mean I think we would all take that return guaranteed at any point in history now that investment approach makes zero sense because they make less than inflation so you're guaranteed to lose money when you invest in them so it's really I think just being flexible but I do think that Carson's argument that an annuity locks up your my money it's something that I wouldn't make that decision until much later on and looking at kind of where this what the offerings are you know I think one of the things that I actually enjoy about the 4% rule of thumb is despite its flaws it actually does account for inflation now you're pointing out that medical expenses and inflation and that in the medical industry that's far exceeding that and and that's why what I noticed though is with the vast majority of individuals their raises year over year don't keep up with inflation you got a 1% raise last year well thank you thank you I just got a pay decrease just the fact that the 4% rule of thumb despite its flaws actually accounts for inflation in it just by pursuing this fad this path you're already in a better place that's like truly remarkable for me and so what I came with after listening to urn and hearing him break it down and show all the flaws both now and when we interviewed him on a podcast was this is a phenomenal starting place I mean it actually like this is it just to be able to find a number even if it's a size 10 shoe and then say you know what I probably need to scale it down that gives you so much peace of mind because there's so many people that prey on this fact that you need way way more than you think you need and so that is one thing the other thing is going back to Tonya's point about separating it out between early retirement and traditional retirement this is what I think we just need to call the paradox of financial independence just the fact that you're pursuing by at such a relatively young age gives you so much power and it's unfair how money flows the people that don't need it I mean you see that across the board but think about what that means for your life when you go to your boss in your eyes that they need you more than you need them think about what that does Willy's working he's location-independent right now he was able to pull it up because they needed him more than he needed it works that way across the board and so when I talk to people in our community I get their stories I look for how they've leveraged that and inevitably I'm able to get to that point that they were able to get bandwidth long before they reach financial independence they were able to design a job that they were comfortable with or maybe their peers are miserable and looking for the exit but they they have that ostrich strategy cuz they don't know exactly what the next step is these people were able they're outliers but they're not outliers when you put them in a group you realize that there's a common thread and that common thread is a strong strong financial ground game so you started at 4% leave you're at 3% and and that's where you're comfortable can you talk about that but also we've been dancing around the fact that right now the markets have been just roaring ahead for so many years that it's frightening how do we handle the numbers on withdrawal at this particular time and the market cycle that's a great question and and and again I have talked about over saving and working for three or four years beyond the point where we had our baseline of financial independence and that is one of the worries you know one of the reasons we have more money that I expected to have at this time is that the markets have performed better than I would have expected them for them over the last decade I do want to touch like quickly on annuities really one of the best annuities you can you know quote unquote buy is delaying Social Security to age 70 if you're in good health and don't need the money at age 62 or 66 or 67 because you you get a big bigger return for the amount of money you're giving up by not taking it at your full retirement age or early and then also an annuity is really just betting the insurance company that you're going to live longer than their actuaries think you're going to live right so if you are a healthy you know person at age 70 and your family members have lived well into their 90's or beyond like a single premium immediate annuity SPIE might make really good sense you might actually win that bet because if you lived in ninety nine or something like that or beyond you're going to end up with more money than you would have probably just leaving invested on your own but I'm sure other people have comments on this frothy market or the thing I just said maybe I know I actually would like Kirsten to comment because you did the analysis right that showed that early retirees are more likely to have a bad sequence because the idea is most people who traditionally retire peg it to age or maybe health status but it's it's typically unrelated to market performance or economic cycles you retire at 65 63 whatever it is you get sick you know whereas early retirees tend to peg our retirement date to a number and because you think about it everybody's likely to hit that number around the same time we have these clusters so anyway I'm repeating your great work okay thank you thank you so there was an old blog post of mine you know so if people follow this simple math so if people follow this simple math mister money mustache you save until you reach a certain multiple of your expenses then when would they retire nobody retires at the market bottom right and so when you when you look at studies like the Trinity study and they calculate the average failure rates they would consider all of the different starting points even the ones that occurred at very poor market conditions when nobody like us would have retired unless it's a is an involuntary retirement and you lose your job and that's just when you pull the plug but more likely it would be that we would all be clustering right around the market peak so that would again so don't look too carefully at the Trinity study and so don't look too carefully at the Trinity study and look at these unconditional probabilities we have to do the probabilities conditional on a we had good market performance for the last ten years and we might all retire around the market peak and then even when you look at probabilities well you have a three percent failure rate what makes you think that the 97% that that would have been a success in the past that they all had a nice smooth ride they did right there were a lot of cohorts that when you do the math and you look at the historical simulations they would have made it over 30 40 50 years but it was one scary hell of a ride along the way and so I compare that to imagine we take an airline and we call it a Trinity air and in honor of the Trinity study and they have a kind of a spotty safety record and then 3% of the planes crash what makes you think that the other 97 you imagined you made it but this might have been a scary scary plane ride right with with smoke coming out of the of of the engines and the pilot shouting we're all gonna die and because in the end we're going to land safely because you might have started retirement maybe in 1972 and that was actually a good year where the 4% rule would have worked but 10 years into your retirement we were in 1982 and everybody thought we're gonna run out of money stocks are down stocks are dead so so keep that in mind somebody tells you this is the probability of of succeeding as some of the successes might have been some failures in disguise to really really good point Roger I know you have another question and then I'm gonna open it we'll go we'll go right to you after and if there were a couple more we can take them but we're gonna run out of the clock so go ahead it's as I said number three reasons people run out of money sequence risk sequence risk and sequence risk this is this is this is the number one reason right - cushion bond glidepath some people do it through a glide path they have a little bit higher bond allocation early on and then they phase that out yeah I'd also argue that if you are a homeowner or you aspire to be to me sequence risk is also an argument in favor of paying off your mortgage before you retire because it allows you then to live very very cheaply if you need to and to be able to cut your expenses to very close to zero whereas if you are being forced to make a mortgage payment you may be having to sell shares that will loss when you don't wish to so that's another way that you can build that in and I'd like to just like follow up on that just because it's it's such a softball that discretionary spending is a massive part of this talking about separating your expenses into structural expenses and discretionary spending my structural expenses are 20k a year my actual spinning could be far far exceed that but what does that mean for my personal risk if I know how much it costs to keep the lights on in a bad year and I can scale down by a factor of three I mean that that's incredible if a factor a four factor of five what is an earn I'd loved it because I know you've done this as well like how does that weigh and it's your math in terms of that person's withdrawal rate right so again it goes back to the flexibility discussion again I mean I want to be flexible - right nobody wants to admit they're inflexible right I go to a job interview and say hey I'm totally inflexible so it's not gonna fly well there might be some jobs where that's that's asked for but but anyways so I'm flexible too and I definitely baked that in so it goes back to the discussion you you want to look at your withdraw right not not as a once-in-a-lifetime set in and forget it kind of deal but you want to look at what happens to market conditions and you want to have some cushion built in and but so the one warning that that I want to issue is that people think that well I have to be flexible only for as long as the market is down and unfortunately that's not true you might have to so I did some simulations well let me be flexible and let me look at what happened to the 1965 or 1966 cohort or the 1929 cohort they had to be flexible for a lot more than a few years that the market was down right so the 1965 cohort had to be flexible although not just until 1982 but until the market had recovered enough from the 1982 bottom so we're talking about 20 plus years you have to cut down your expenses and yeah I mean we could all do that but again this is not like you know I have for a year or two I'm not gonna go to Starbucks so this is there could be some serious spending cuts and especially for people in the fight community we've already maxed out all that we've you've already cut out all the all the fat in your spending and then you retire and you set your withdrawal rate too high and then you have to reduce it from there I mean a lot of us we are probably we have a budget higher than mister money mustache and well my my option is well if it doesn't work out then I can cut down to mr. money moustache and I'll still be as happy as mister money mustache is I wanna I want to take this question right here yes I was curious leaf touched on it a little bit but how you factor in changes in your family situation so kids moving out going from a family plant health plan to a single health plan is that a factor that you take into consideration or just worst-case scenarios yeah I guess my answer is same answer I've given a few times having having that cushion you know I have any extra most of the ones that you described and the ones that we would anticipate will be changes that will benefit our budget but there can obviously be changes that go the opposite way you know for example my kids are almost eight and now ten and so in five years they'll start to learn to drive and then they'll go on our car insurance maybe they'll crash a card you know what I mean so there are going to be additional expenses later on one thing I've looked at is we talked about financial independence as being maybe you know 25 or 30 times your analyst spending and I broke that down like Jonathan was talking about into Miami core expenses of about that for us it's about 40,000 a year versus discretionary you know fund money for Disneyworld and everything else of maybe a thirty thousand the air and I call that financial independence where we have our multiple of seventy thousand a year but I also looked at financial freedom which we use interchangeably but freedom to me means you're more free to do whatever and so I looked at it said well what if we doubled our discretionary expenses and instead of thirty thousand and in discretionary fund money we have 60,000 and amused the 100 thousand 40 plus 30 plus 30 as like the financial freedom number and we're kind of approaching being there now so whether discretionary expenses are more travel or you know more restaurants or more nicer cars it might be something more necessary that your children or your parents or anyone else needs I'll add to I think the the family change that I think a lot of folks tend to talk about in the fire discussion is children of course I think a lot of people when you're in your 20s 30s 40s that's what's right in front of you but the family situation changes that I think everyone also needs to think through is the potential for divorce and the potential for needing to provide care for sick relatives because those are very real things that maybe we just aren't top of mind in your 30s but we talk about all these tiny percentages you know less than 1% of the population retires before age 55 but a third of marriages end in divorce among Millennials and this is the least divorcing generation of all time so it's not a rare unicorn Black Swan event this is something that's potentially very common so I do think it's worth running your numbers and making sure before you give up income if you are in a partnership that you know what would happen and also I call it a pre-fire agreement sort of like a prenup but that you've actually talked through okay what happens if we have to divide our assets and would we still both be okay or would this cause some major hardship but talk about that and then also look at other options for providing care for relatives so for example I have a disabled relative and we knew that your friend that we could be helpful and so we've we found actually a creative way to build that into our plan by buying a rental property that we hadn't planned to buy but we've talked with that relative we said okay how can we try to make this mutually beneficial so it was a big outlay of cash that we hadn't planned to spend but in the long run it'll be a good investment and it'll help that person live sustainably so it works out in both ways there so there are ways you can do that that aren't just about working over a ton of cash one thing I will say though because real estate does tend to be talked about as a great option if you are working a high income job and you get a rental property a hundred percent of that money is taxed at your marginal rate so make sure you're factoring in income tax when you're actually looking at rental and we are going to leave it there because I know that you all have it's next session thank you thank you [Applause]

Channel: FinCon

Views: 29,654

Keywords: early retirement, FIRE movement, investments, personal finance, retirement, fincon, fincon18

Id: -M79Y45gSLg

Length: 51min 7sec (3067 seconds)

Published: Thu Dec 13 2018