Financially independent and then market crashes?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
silverskates
Posts: 182
Joined: Thu May 12, 2016 11:19 am

Financially independent and then market crashes?

Post by silverskates » Tue Jun 06, 2017 1:42 pm

I'm just curious about this topic when I see people retiring in their 30's and 40's without a pension and they aren't old enough to take social security. So, if someone has reached financial independence and has 25x's plus their annual spending needs but then the market crashes and wipes out 25%+ of what they have. What do they do? They are possibly no longer financially independent depending on what they need to live on. I'm assuming they'd go back to work of some sort. Some of the people in the blogs I follow keep quite a high stock allocation (in my view) for someone retiring so early. A crash could totally change things for them. And, then if they walked away from a career that is difficult to return to because of advances in the field, etc.

This, and health care costs, are the two reasons I'd be very nervous retiring in my 30's, 40's or even early 50's without having someone working or that has a pension.

What are your thoughts?

sport
Posts: 6951
Joined: Tue Feb 27, 2007 3:26 pm
Location: Cleveland, OH

Re: Financially independent and then market crashes?

Post by sport » Tue Jun 06, 2017 1:53 pm

In that situation, 25X is not enough. An early retiree needs extra to allow for market drops while keeping a somewhat aggressive allocation.

jebmke
Posts: 8037
Joined: Thu Apr 05, 2007 2:44 pm

Re: Financially independent and then market crashes?

Post by jebmke » Tue Jun 06, 2017 1:53 pm

25x plus is open ended at the top -- for example, it includes 500X which is probably safe. In general, the earlier you go out, the more you'd want to have.
When you discover that you are riding a dead horse, the best strategy is to dismount.

DomDangelina
Posts: 180
Joined: Thu Jun 01, 2017 8:50 pm
Location: California refugee

Re: Financially independent and then market crashes?

Post by DomDangelina » Tue Jun 06, 2017 1:58 pm

Being subject to such vicissitudes makes one financially dependent rather than independent.
"Often the remedy causes the disease. It is by no means the least of life's rules: to let things alone." | Baltasar Gracián, S.J., The Art of Worldly Wisdom, Maxim 121

AlohaJoe
Posts: 3461
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Financially independent and then market crashes?

Post by AlohaJoe » Tue Jun 06, 2017 2:02 pm

The 25x number already takes into account a safety margin for market crashes. The market crash has no bearing on the situation. 25x isn't based on "and everything goes perfect". It is based on "and then the Great Depression starts TOMORROW".

Whether 25x is the right number for someone who is 30 or 40 is a different question.

Whether someone wants to take X amount of risk or 1.5X amount of risk is yet another question.

alex_686
Posts: 3617
Joined: Mon Feb 09, 2015 2:39 pm

Re: Financially independent and then market crashes?

Post by alex_686 » Tue Jun 06, 2017 2:08 pm

When I hear "25x" I have always made the assumption that we are talking about a couple retiring at 60. Than one is anticipating a normal life span of another 20 to 30 years. I am assuming that principle will be used to fund retirement. Failure is if you run out of money before you die. If you have extra that is a bonus to your children & charity.

The trick here is that the dispersion of returns in a 20 to 30 year period. The chance of a market crash or two is probably but that is o.k. You are committed to the spending of principle. The chance of 2 or 3 bone crunching crashes that happen in the first 10 years is very low.

Retire at 40 and now you need to figure in dispersion of returns for 40 to 50 years. The chance of a bad of market crunches in the first 20 years that destroys your plan increases. So you need something more than 25x. On the flip side the chance you will hit it out of the ball park also increases.

As for a high AA in stocks, meh. If not stocks than bonds, right? However long term bonds are offering low returns. For a period of greater than 10 years I am concerned that inflation will eat my returns. Stocks offer better inflation protection. In short, the current market does not offer much in terms of risk adjusted returns. You have to pick your battles.

User avatar
onthecusp
Posts: 412
Joined: Mon Aug 29, 2016 3:25 pm

Re: Financially independent and then market crashes?

Post by onthecusp » Tue Jun 06, 2017 2:09 pm

The original research that "25x" is based on assumes taking 4% (=1/25) of the initial portfolio. Then taking that same dollar amount, increased by inflation, in each subsequent year. Based on historical market moves down then up such a "safe withdrawal rate" allows the portfolio to survive about 30 years even in the worst (historical) case.

Will the next downturn (right after I retire), and the subsequent 25 years, be worse than any historical sequence of returns?

Maybe, but for planning purposes I don't know anything better unless you count 26x, 27x, 35x, 50x etc. :D

bigred77
Posts: 1994
Joined: Sat Jun 11, 2011 4:53 pm

Re: Financially independent and then market crashes?

Post by bigred77 » Tue Jun 06, 2017 2:10 pm

If I retired before age 50 and my portfolio dropped 25% from it's peak balance that would mean a repeat of 2008 or worse. I would have something along the lines of a 60/40 portfolio so global equities would have dropped by almost half. I would certainly be aware of the doom and gloom talk that is surely all around me. Depending on when I retired (maybe I retired 7 years ago and my portfolio ran up to the point that even a 25% drop this year doesn't even phase me) I'd have various levels of concern:

If I retired recently and my initial withdrawal rate was 4.0% - 3.75% I would watch things more closely. I would not adjust my withdrawals for inflation for a couple of years. Probably try to decrease spending 10% - 15%. I hope I have the courage to rebalance back into equities, as my plan states I should do.

If I retired recently and my initial withdrawal rate was between 3.0% - 3.75% I would take no action but would watch things closely. I would rebalance back into equities as my plan states I should.

If I retired recently and my initial withdrawal rate was sub 3.0% I would have no worries and no problems following my plan. I would of course watch the events unfolding but wouldn't feel all that concerned about my personal welfare.

Atgard
Posts: 362
Joined: Wed Apr 09, 2014 2:02 pm

Re: Financially independent and then market crashes?

Post by Atgard » Tue Jun 06, 2017 2:11 pm

Probably when most of us financially-conservative types here on Bogleheads mentions being "financially independent" and what that number is, we are accounting for market crashes/sequence of return risk, greater number of years in retirement when retiring early, unknown health care costs (although this is hard to estimate since it can vary tremendously), etc. That's why many of us don't think conventional wisdom of a 4% safe withdrawal rate (25x annual spending) works for early retirement... that number may be fine for someone retiring at 65 with SS and Medicare. But for someone retiring at 35 with neither, many of us espouse a 3% rate (33x) or even more conservative.

Being TRULY financially independent means having enough money that you'd be OK even in the face of a market crash, because you have enough in bonds to live on, or enough of a buffer to withstand even a big market correction. I mean, if you had 100x annual spending at 50/50 (with 50x annual spending in bonds), you'd probably be safe from any market crash short of Armageddon.

On the other hand, it may make more sense to get to the 90% or 95% or 99% confidence level and retire, knowing you can cut back on spending or work part-time in that 1% of bad-luck cases. That's a personal decision based on many factors like your health, how much you like/hate your job, if you have ways to cut spending, how easy it would be to go back to work, etc.

User avatar
Meg77
Posts: 2312
Joined: Fri May 22, 2009 1:09 pm
Location: Dallas, TX
Contact:

Re: Financially independent and then market crashes?

Post by Meg77 » Tue Jun 06, 2017 2:14 pm

A lot of early retirees save more than 25x as a cushion (or keep 2 years expenses in cash in case of that situation). Others keep earning income whether from encore careers (including blog income for some of the folks you're probably reading about) or from other relatively active sources such as real estate cash flow that is fairly reliable. Some work part time in lower paying jobs to keep their portfolio withdrawals to a minimum in the early years; I ran into a retired attorney who does shifts manning the ski lifts in Deer Valley part time in order to meet people, make a bit extra and get free lift passes.

However some people are content to take the risk that they may have to return to work - or cut their lifestyles - in order to call it quits sooner rather than later. Most Bogleheads and perhaps most people are more likely to fall into the "one more year" syndrome of wanting to make sure every possible outcome is over-saved for and that they'll be able to leave a large inheritance for heirs even assuming a 3% SWR and high inflation and low market returns and paying for their grandkids' college educations. But that can keep you working for many years longer than you technically need to. I can understand both impulses, depending on how satisfied (or not) one is with her career.
"An investment in knowledge pays the best interest." - Benjamin Franklin

BW1985
Posts: 1745
Joined: Tue Mar 23, 2010 6:12 pm

Re: Financially independent and then market crashes?

Post by BW1985 » Tue Jun 06, 2017 2:15 pm

SWR of 4% (25x) is based on 30 year drawdown. People FI in their 30's and 40's need a lower SWR / more like 33x.
"Squirrels figured out how to save eons ago. They buried acorns. Some, they dug up, for food. Others, they let to sprout, in new oak trees. We could learn from squirrels." -john94549

KlangFool
Posts: 9190
Joined: Sat Oct 11, 2008 12:35 pm

Re: Financially independent and then market crashes?

Post by KlangFool » Tue Jun 06, 2017 2:57 pm

silverskates wrote:
I'm just curious about this topic when I see people retiring in their 30's and 40's without a pension and they aren't old enough to take social security. So, if someone has reached financial independence and has 25x's plus their annual spending needs but then the market crashes and wipes out 25%+ of what they have. What do they do? They are possibly no longer financially independent depending on what they need to live on.
silverskates,

Let me answer your question with an example. Let's assume that someone is FI with 2 million portfolios of 60/40. His annual expense is 50K. Aka 40X. Out of that 2 million portfolios, there 100K of cash act as his emergency fund.

So, let's say the market crash and drops 50%, he is down to 1.4 million. What happened next? The answer is nothing. The usual dividend/interest income of the 2 million portfolios is at least 2%. Aka, 40K. So, even if the stock drops 50%, he still collects 40K per year. he has 100K of the emergency fund to address the (50K - 40K) = 10K. Aka, he could last about 10 years without doing anything to his portfolios. So, what is the problem here?

Let's assume that instead of 40K per year of dividend/interest, it is 28K, So, he could last about 5 years without selling anything.

So, the answer is it depends on the annual expense. And, the size of the portfolio versus the annual expense. If it is big enough, it won't matter in most cases.

KlangFool

radiowave
Posts: 1713
Joined: Thu Apr 30, 2015 5:01 pm

Re: Financially independent and then market crashes?

Post by radiowave » Tue Jun 06, 2017 3:17 pm

I've been doing some modeling on my retirement spreadsheet. Factored in tax-deferred (and tax implications on withdrawal), taxable and Roth IRA funds, SS, small pension and expenses. Then calculated return on investments (4%) and inflation for each year to 100 for both of us. What surprised me was the noticeable change in late retirement available funds at modest increase in inflation to 3-4%, essentially we run out of money in our late 80's/early 90's depending on return vs. inflation. This assumes constant expenses, albeit it is hard to model based on current expenses.

There's been a lot of discussion regarding safe withdrawal rates in retirement, has anyone looked at effects of inflation on retirement funds linked to expenses?
Bogleheads Wiki: https://www.bogleheads.org/wiki/Main_Page

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: Financially independent and then market crashes?

Post by dbr » Tue Jun 06, 2017 3:18 pm

As pointed out those 25x rules or whatever modification of it for longer retirements, are determination of the worst case scenario one might have seen in last hundred years or so. The outcome for all the other cases ranges from comfortable to dying with a fabulous amount of wealth left in the bank. The answer, therefore, is that one does nothing. Perhaps a more sophisticated answer is that one implements a variable withdrawal scheme that adjusts to the course if the portfolio, whether by a computation or by seat of the pants. An alternative is to annuitize some of the assets.

It is evident there is a paradox here which is partly explained by the possibility that you can spend at a higher rate of the after crash portfolio than you can of the precrash portfolio. The other part of the explanation is that "getting your number" is not sufficient information to decide if it is "safe" to retire or not. It is a fact that the largest factor in how close to disaster your retirement will run is your luck of history, unknown before your retirement is over. The next largest conditional factor is how much you withdraw. The best thing is to allow a contingency in your spending and cut back if things go badly. In summary 25x or 4% is not a plan for an actual retirement but a general observation about all retirements on average that give a person a ball park for what to aim for or what is broadly feasible.

Another point of view is that 25x or 4% rule is a statistic applicable to the range of all possible retirements. If you know something about your particular retirement, you should compute the statistic conditional on what is known. That is tough to do as insufficient data exists to compute such things. In fact it is debatable sufficient data exists even to compute a 4% rule unconditionally.

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: Financially independent and then market crashes?

Post by dbr » Tue Jun 06, 2017 3:20 pm

radiowave wrote:I've been doing some modeling on my retirement spreadsheet. Factored in tax-deferred (and tax implications on withdrawal), taxable and Roth IRA funds, SS, small pension and expenses. Then calculated return on investments (4%) and inflation for each year to 100 for both of us. What surprised me was the noticeable change in late retirement available funds at modest increase in inflation to 3-4%, essentially we run out of money in our late 80's/early 90's depending on return vs. inflation. This assumes constant expenses, albeit it is hard to model based on current expenses.

There's been a lot of discussion regarding safe withdrawal rates in retirement, has anyone looked at effects of inflation on retirement funds linked to expenses?
All of the retirement models include inflation, often simply working in real dollars. Models also include variability of return. A constant return model doesn't work very well. Try starting at firecalc.com and then look up some of the other models. FireCalc uses actual investment returns and actual inflation out a hundred year plus sample.

avalpert
Posts: 6313
Joined: Sat Mar 22, 2008 4:58 pm

Re: Financially independent and then market crashes?

Post by avalpert » Tue Jun 06, 2017 3:43 pm

The real answer is they adapt to the circumstances - they lower expenses, increase income form other channels or see if they can ride it out.

The rest are contrived stories - anyone who retires (or starts a working career, or drive down the block) thinking that they can come up with a precise plan of how everything will play out is fooling themselves.

User avatar
bligh
Posts: 779
Joined: Wed Jul 27, 2016 9:13 pm

Re: Financially independent and then market crashes?

Post by bligh » Tue Jun 06, 2017 3:49 pm

She plans conservatively, she plans to get to a 3 to 3.5% withdrawal rate. She can purchase an annuity or setup a rolling bond ladder to provide a base income floor if she wishes. If things don't go as planned, she can cut back on expenses, she can take up a little side hustle that interests her and generates a bit of cash, or she can choose to come back out of retirement for a little bit. She rolls with the punches.

Just like with everything in life, there are no guarantees.

ryman554
Posts: 1024
Joined: Sun Jan 12, 2014 9:44 pm

Re: Financially independent and then market crashes?

Post by ryman554 » Tue Jun 06, 2017 5:01 pm

BW1985 wrote:SWR of 4% (25x) is based on 30 year drawdown. People FI in their 30's and 40's need a lower SWR / more like 33x.
What data do you have to base this statement on?

The 4% SWR comes from Trinity study for an 80/20 (ish, depending on how you judge "failure") allocation, year 2000 looks like may be exception to that rule. Maybe.

It also turns out that 30 years looks a heck of a lot like 40 years which extrapolates to "infinity" years. Data via FIREcalc.

If you replicate a trinity-like study, you get something close to 3.5% for a 60/40 portfolio, which at ~29x is well under 33x.
viewtopic.php?f=10&t=167066bog#p2512799

There's a big difference in nest egg needed for a 4% vs. 3.5% vs. 3.0% withdrawal rate. There is no question in my mind 3% is bullet-proof. I assert it's also overkill, particularly if you are not taking a MMM approach and have slack in your budget in retirement.

aum
Posts: 42
Joined: Wed Jan 30, 2013 2:27 pm

Re: Financially independent and then market crashes?

Post by aum » Tue Jun 06, 2017 5:15 pm

Retired recently on 12/1/2016 at age 52. My plan was to amass enough that 3%WR would cover all my essential expenses and a mini vacation of one week anywhere in USA. And I would withdraw 1% on top of that if the year was good for travel and other stuff. Not planning to take inflation on my withdrawal for first five years and reevaluate things after five years. 2% WR comes from yearly DIV/CG and I withdraw additional 1-2% in Dec for the coming year making sure that entire coming year is covered in advance.

IMO, no one should retire based on 4% if there is no room to cutback for sequence of bad returns.

bigred77
Posts: 1994
Joined: Sat Jun 11, 2011 4:53 pm

Re: Financially independent and then market crashes?

Post by bigred77 » Tue Jun 06, 2017 5:33 pm

ryman554 wrote:
BW1985 wrote:SWR of 4% (25x) is based on 30 year drawdown. People FI in their 30's and 40's need a lower SWR / more like 33x.
What data do you have to base this statement on?

The 4% SWR comes from Trinity study for an 80/20 (ish, depending on how you judge "failure") allocation, year 2000 looks like may be exception to that rule. Maybe.

It also turns out that 30 years looks a heck of a lot like 40 years which extrapolates to "infinity" years. Data via FIREcalc.

If you replicate a trinity-like study, you get something close to 3.5% for a 60/40 portfolio, which at ~29x is well under 33x.
viewtopic.php?f=10&t=167066bog#p2512799

There's a big difference in nest egg needed for a 4% vs. 3.5% vs. 3.0% withdrawal rate. There is no question in my mind 3% is bullet-proof. I assert it's also overkill, particularly if you are not taking a MMM approach and have slack in your budget in retirement.
I am with you ryman554.

When you go below a 4% initial withdrawal rate, the tough decision that your most likely to face is not "how will I react if I get 2 decades in and my portfolio looks like it might not survive". It's "At what point do I decide the portfolio has grown so much it's OK for me to increase my withdrawals by more than the inflation rate".

jebmke
Posts: 8037
Joined: Thu Apr 05, 2007 2:44 pm

Re: Financially independent and then market crashes?

Post by jebmke » Tue Jun 06, 2017 5:40 pm

bigred77 wrote:When you go below a 4% initial withdrawal rate, the tough decision that your most likely to face is not "how will I react if I get 2 decades in and my portfolio looks like it might not survive". It's "At what point do I decide the portfolio has grown so much it's OK for me to increase my withdrawals by more than the inflation rate".
The shorter term is the tougher situation. I retired in December, 2007. Even with a low WR it was a tough decision to re-balance back to the target. These were big numbers. I was doing some consulting for about three years so it was easier for me than maybe if we had been totally dependent on withdrawal from the portfolio. Even then ...
When you discover that you are riding a dead horse, the best strategy is to dismount.

bigred77
Posts: 1994
Joined: Sat Jun 11, 2011 4:53 pm

Re: Financially independent and then market crashes?

Post by bigred77 » Tue Jun 06, 2017 5:44 pm

jebmke wrote:
bigred77 wrote:When you go below a 4% initial withdrawal rate, the tough decision that your most likely to face is not "how will I react if I get 2 decades in and my portfolio looks like it might not survive". It's "At what point do I decide the portfolio has grown so much it's OK for me to increase my withdrawals by more than the inflation rate".
The shorter term is the tougher situation. I retired in December, 2007. Even with a low WR it was a tough decision to re-balance back to the target. These were big numbers. I was doing some consulting for about three years so it was easier for me than maybe if we had been totally dependent on withdrawal from the portfolio. Even then ...
I think your situation is a perfect real world example of the question posed in the OP.

I'm sure in the thick of it over 2008 and 2009 and 2010 there was a lot of hand wringing and concern. I know it's easy to say now, with hindsight and with the emotion removed ( which I am not trying to downplay by any means), but I suspect your portfolio balance is higher now than when you retired? Would I be correct?

User avatar
Kevin M
Posts: 9793
Joined: Mon Jun 29, 2009 3:24 pm
Contact:

Re: Financially independent and then market crashes?

Post by Kevin M » Tue Jun 06, 2017 5:56 pm

You can last 25 years at a 4% real withdrawal rate with even a 0% real return. With the 30-year TIPS yield at a little less than 1%, and the 5-year at 0%, you can do better than 0% real with a 30-year TIPS ladder, but at a 4% withdrawal rate that still only gets you to about 27 years at say a 0.5% real return.

Reducing your withdrawal rate to 3% (33X) gets you to about 37 years at 0.5% real, and with a WR of 2% (50X) you get to about 58 years (but of course you can only build a TIPS ladder out to 30 years).

So you can retire in your 30s or 40s without taking much risk at all if you can keep your spending to 2% or less, and not have to worry about stock market declines.

Of course my impression is that the vast majority of forum participants consider it a virtual certainty that you will earn much more than 0.5% real in stocks over a time period of 30 years or more (although we do have some forum members building 30-year TIPS ladders and buying 30-year TIPS at every auction). If you agree with them, then holding enough in safe fixed income to get you through a 10-20 year stock market downturn could be your strategy, but you're going to want more than 25X of residual living expenses for a 50-60 year retirement with no earned income.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

User avatar
whodidntante
Posts: 3584
Joined: Thu Jan 21, 2016 11:11 pm

Re: Financially independent and then market crashes?

Post by whodidntante » Tue Jun 06, 2017 6:08 pm

That's why you don't put all your money in the good ol' American stock market. You also need emerging market stocks. :P :happy

TallBoy29er
Posts: 398
Joined: Thu Jul 18, 2013 9:06 pm

Re: Financially independent and then market crashes?

Post by TallBoy29er » Tue Jun 06, 2017 6:23 pm

I would suggest you read the Early Retirement Now blog on safe withdrawal rates. They discuss a number of factors that go into this decision. It is a 15 part series. I think you will find it enlightening.

https://earlyretirementnow.com/2016/12/ ... t-1-intro/

Edited to add: You should focus on the two sections dedicated to sequence of return risk.

silverskates
Posts: 182
Joined: Thu May 12, 2016 11:19 am

Re: Financially independent and then market crashes?

Post by silverskates » Tue Jun 06, 2017 7:43 pm

Thanks everyone for all the feedback. This answers my questions...and all the examples help!

Random Poster
Posts: 1638
Joined: Wed Feb 03, 2010 10:17 am

Re: Financially independent and then market crashes?

Post by Random Poster » Tue Jun 06, 2017 8:23 pm

How about this:

Set your annual expenses to equal 2.5% (or less) of your total investment portfolio balance, based on what the balance would be if the value of the equity portion of the portfolio is half of what it is now.

I think that if you can do this (and thus keep your expenses relatively low to the overall, unadjusted portfolio balance), you will be fine for many years (perhaps forever?) if the market crashes and fails to recover within a decade or so.

User avatar
JonnyDVM
Posts: 1592
Joined: Wed Feb 12, 2014 6:51 pm
Location: Atlanta, GA

Re: Financially independent and then market crashes?

Post by JonnyDVM » Tue Jun 06, 2017 8:59 pm

Random Poster wrote:How about this:

Set your annual expenses to equal 2.5% (or less) of your total investment portfolio balance, based on what the balance would be if the value of the equity portion of the portfolio is half of what it is now.
Sooooo never retire then? I know everyone likes these things to fit in a precise little formula but that not possible. If the market crashes six months out, the young retiree can cut back spending a little. They could pick up a part time job maybe. They have options. The 4% rule is derived from testing across a range of return sequences. The plan isn't to end up with exactly $0 at year 30. In fact, the end portfolio often finishes higher than the initial balance given most sequences of returns. The early FIRE isn't for me. I like to spend money and I get bored after a few days off work. For the frugal minded I think it's very doable and the math checks out.
Sometimes the questions are complicated and the answers are simple. -Dr. Seuss

bigred77
Posts: 1994
Joined: Sat Jun 11, 2011 4:53 pm

Re: Financially independent and then market crashes?

Post by bigred77 » Tue Jun 06, 2017 9:17 pm

Random Poster wrote:How about this:

Set your annual expenses to equal 2.5% (or less) of your total investment portfolio balance, based on what the balance would be if the value of the equity portion of the portfolio is half of what it is now.

I think that if you can do this (and thus keep your expenses relatively low to the overall, unadjusted portfolio balance), you will be fine for many years (perhaps forever?) if the market crashes and fails to recover within a decade or so.
That would mean an early retire with a perfectly reasonable 60/40 portfolio would be using a 1.75% initial withdrawal rate.

If I'm married and have 2 kids, I need over $1.4M in financial assets just to live at the federal poverty line.

User avatar
Bogle_Feet
Posts: 826
Joined: Tue Jan 14, 2014 6:56 pm

Re: Financially independent and then market crashes?

Post by Bogle_Feet » Tue Jun 06, 2017 10:34 pm

silverskates wrote:then the market crashes and wipes out 25%+ of what they have. What do they do?
Ever heard of bonds? If you can't stomach a 25% crash then you diversify into bonds.
Through diversification and a spending strategy (of probably 3.3%) history says that you probably will not run out of money.

grok87
Posts: 8122
Joined: Tue Feb 27, 2007 9:00 pm

Re: Financially independent and then market crashes?

Post by grok87 » Wed Jun 07, 2017 6:17 am

TallBoy29er wrote:I would suggest you read the Early Retirement Now blog on safe withdrawal rates. They discuss a number of factors that go into this decision. It is a 15 part series. I think you will find it enlightening.

https://earlyretirementnow.com/2016/12/ ... t-1-intro/

Edited to add: You should focus on the two sections dedicated to sequence of return risk.
Thanks for the link
Keep calm and Boglehead on. KCBO.

NiceUnparticularMan
Posts: 1740
Joined: Sat Mar 11, 2017 7:51 am

Re: Financially independent and then market crashes?

Post by NiceUnparticularMan » Wed Jun 07, 2017 7:39 am

More nuanced withdrawal studies don't just look at things like simple success/failure rates based on reaching zero before the target time. Instead they might look at things like percentage of target income achieved and real value of portfolio at death as percentage of initial real value. For perpetual portfolios--which you might as well use once you are out past 30-40 years or so--you need the real value to keep converging back to 100% if you want to maintain consistent income targets. If you can accept variance in your percentage of target income achieved in any given longish period then you can set higher (but softer) targets, as long as you keep in mind that goal of needing to get back to 100% (this can lead to things like income-smoothing funds and earnings reinvestment rules). But generally speaking if you look through studies like this one:

https://www.immediateannuities.com/pdfs ... radigm.pdf

You can see where something like 3% comes from. For example, it is implied by Figure 2, and really by Figure 4 too--provided you use a lot of stocks, at least.

Random Poster
Posts: 1638
Joined: Wed Feb 03, 2010 10:17 am

Re: Financially independent and then market crashes?

Post by Random Poster » Wed Jun 07, 2017 8:02 am

JonnyDVM wrote:Sooooo never retire then? I know everyone likes these things to fit in a precise little formula but that not possible. If the market crashes six months out, the young retiree can cut back spending a little. They could pick up a part time job maybe. They have options. The 4% rule is derived from testing across a range of return sequences. The plan isn't to end up with exactly $0 at year 30. In fact, the end portfolio often finishes higher than the initial balance given most sequences of returns. The early FIRE isn't for me. I like to spend money and I get bored after a few days off work. For the frugal minded I think it's very doable and the math checks out.
No, not at all.

What I'm suggesting is that a person who has, hypothetically, an investment portfolio currently valued at $2.75M that is split 50/50 and who only withdraws $50K or less a year from it should not need to be concerned about being financially independent and retiring (early), only for the market to then crash---because if the equity portion of their portfolio (being $1.375M) was halved (so that it now equaled $687,500), their withdrawal rate would still be below 2.5% of the lower, adjusted balance (being $2,062,500).

I tend to believe that the market goes down a lot easier than it goes up, and so I think that this calculation provides a relative measure of safety for any retiree. Plus, isn't it "better" to have more money and not need it than to have just barely enough money and need more of it?
bigred77 wrote:That would mean an early retire with a perfectly reasonable 60/40 portfolio would be using a 1.75% initial withdrawal rate.

If I'm married and have 2 kids, I need over $1.4M in financial assets just to live at the federal poverty line.
Okay, but, well, so what? Maybe people shouldn't be retiring early if all they have is $1.4M?

ryman554
Posts: 1024
Joined: Sun Jan 12, 2014 9:44 pm

Re: Financially independent and then market crashes?

Post by ryman554 » Wed Jun 07, 2017 8:31 am

Random Poster wrote: I tend to believe that the market goes down a lot easier than it goes up, and so I think that this calculation provides a relative measure of safety for any retiree. Plus, isn't it "better" to have more money and not need it than to have just barely enough money and need more of it?
I'm trying to parse this statement. If you really feel that the market goes down easier than it goes up, how do you correlate that with the historical fact that stocks average a ~6-7% (real) over the long term, well beyond any statistical measure of declining over any extended time.

Don't confuse short term volatility (which you have to have the guts to ride out) from longer term trends. (I would posit the last year may be the exception to prove your rule -- I have never experienced a bull market where seemingly nobody wanted to participate in, but nothing is seemingly able to knock this market down)

As to your last statement, yes, all other things being equal, it is better to have more money than not. But there is opportunity cost to accumulating said money. To rephrase somebody elses profound wisdom, "money buys you time, but it takes time to get money" Given our expiration date is not generally knowable, you're aiming for the sweet spot. The objections others have raised is that your figures seem too conservative to the point folks will take too long to get the money required... to the point where the money they have becomes rendered useless since they have no more time to enjoy it.

bigred77
Posts: 1994
Joined: Sat Jun 11, 2011 4:53 pm

Re: Financially independent and then market crashes?

Post by bigred77 » Wed Jun 07, 2017 8:48 am

Random Poster wrote:
JonnyDVM wrote:Sooooo never retire then? I know everyone likes these things to fit in a precise little formula but that not possible. If the market crashes six months out, the young retiree can cut back spending a little. They could pick up a part time job maybe. They have options. The 4% rule is derived from testing across a range of return sequences. The plan isn't to end up with exactly $0 at year 30. In fact, the end portfolio often finishes higher than the initial balance given most sequences of returns. The early FIRE isn't for me. I like to spend money and I get bored after a few days off work. For the frugal minded I think it's very doable and the math checks out.
No, not at all.

What I'm suggesting is that a person who has, hypothetically, an investment portfolio currently valued at $2.75M that is split 50/50 and who only withdraws $50K or less a year from it should not need to be concerned about being financially independent and retiring (early), only for the market to then crash---because if the equity portion of their portfolio (being $1.375M) was halved (so that it now equaled $687,500), their withdrawal rate would still be below 2.5% of the lower, adjusted balance (being $2,062,500).

I tend to believe that the market goes down a lot easier than it goes up, and so I think that this calculation provides a relative measure of safety for any retiree. Plus, isn't it "better" to have more money and not need it than to have just barely enough money and need more of it?
The problem is what does a "relative measure of safety mean"? Why would one think it's necessary to increase that level safety. At what point are you "safe enough"?

A 3% withdrawal rate is safer than a 4% rate. 2% is safer than 3%. 1% is safer than 2%. Heck negative withdrawal rates (when we make active contributions to our investment portfolio) are obviously safer than any withdrawal rate. How do we determine what number is safe enough?

Once you get to 3% you are safe even if the markets perform as bad as we've ever seen in history. If the day you retire the great depression replays out starting the next day, still more than safe. Why would you insist on cutting your spending by over 40% from a number that has survived the worst market returns we have ever seen? The increase in odds of portfolio survivability over a 60+ year term (assuming a 60/40 portfolio) between a 3% withdrawal rate and a 1.75% withdrawal rate is 0. They are both 100%. You are sacrificing 40% of your income for nothing in return in terms of safety. You gain a lot in legacy considerations, but safety is unaffected.

Random Poster wrote:
bigred77 wrote:That would mean an early retire with a perfectly reasonable 60/40 portfolio would be using a 1.75% initial withdrawal rate.

If I'm married and have 2 kids, I need over $1.4M in financial assets just to live at the federal poverty line.
Okay, but, well, so what? Maybe people shouldn't be retiring early if all they have is $1.4M?
I just think the thought of someone with well over a million dollars living at the federal poverty line is depressing. That is just a really discouraging picture in my mind. Many people have expenses higher than what $1.4M can support, and those people should not retire early with that size portfolio, but that's a number that should provide security to a family, not one that represents poverty if one is no longer able to work.

Random Poster
Posts: 1638
Joined: Wed Feb 03, 2010 10:17 am

Re: Financially independent and then market crashes?

Post by Random Poster » Wed Jun 07, 2017 10:50 am

ryman554 wrote:I'm trying to parse this statement. If you really feel that the market goes down easier than it goes up, how do you correlate that with the historical fact that stocks average a ~6-7% (real) over the long term, well beyond any statistical measure of declining over any extended time.
I don't.

However, the "long term," when that term is applied to the stock market, may not be the same as, or correlate to, the "long term," when that term is applied to my lifespan or anticipated withdrawal period.

Additionally, there is the whole "reversion to the mean" thing, and if, as you state, stocks return around 6 to 7 percent over the "long term" (whatever that term may mean), the recent run-up far exceeds that percentage increase, so there is bound to be some times of poor returns in the future. Furthermore, who is to say that the past 100 or so years is reflective at all of what the next several decades will be like? Maybe the "long term" average is much lower than what the past indicates, simply because we really haven't experienced, and thus not been able to calculate, the truly "long term" yet.

bigred77 wrote:The problem is what does a "relative measure of safety mean"? Why would one think it's necessary to increase that level safety. At what point are you "safe enough"?
Well, there is a reason why airplanes have redundant features. Why shouldn't one's portfolio?
bigred77 wrote:A 3% withdrawal rate is safer than a 4% rate. 2% is safer than 3%. 1% is safer than 2%. Heck negative withdrawal rates (when we make active contributions to our investment portfolio) are obviously safer than any withdrawal rate. How do we determine what number is safe enough?
I would think that it would be a number that would allow for one's standard of living to remain in effect, without having to cut any spending or obtain any paid employment, even if the stock market is worth half of what it is now. If the market continued to deteriorate, then perhaps some spending cuts would be required, but I tend to think that taking a "what is the worse case, and then make it worse" view can only help people weather any possibility. Others may disagree, and that's fine---it is their life, after all, and they are the ones who must live with the consequences of their decisions.
bigred77 wrote:Once you get to 3% you are safe even if the markets perform as bad as we've ever seen in history. If the day you retire the great depression replays out starting the next day, still more than safe. Why would you insist on cutting your spending by over 40% from a number that has survived the worst market returns we have ever seen? The increase in odds of portfolio survivability over a 60+ year term (assuming a 60/40 portfolio) between a 3% withdrawal rate and a 1.75% withdrawal rate is 0. They are both 100%. You are sacrificing 40% of your income for nothing in return in terms of safety. You gain a lot in legacy considerations, but safety is unaffected.
I don't see it as cutting or sacrificing one's spending, but rather as enhancing one's assets and abilities. And even if, as you assert, that one gains nothing in return in terms of safety, one certainly gains much in terms of optionality and flexibility---and perhaps that in itself equates to a more safe return.

Ultimately, of course, all that matters is what someone is comfortable with.

I think that it is relatively easy to type out some thoughts, run some numbers through various calculators, and look at data and assert some conclusion regarding the "safety" of some particular number.

Having the courage of one's convictions, however, and actually placing your entire economic future and well-being in the hands of those calculations for the rest of your life is something altogether different and, I think, is much more difficult to do.

Bigbonds
Posts: 94
Joined: Wed Jun 07, 2017 11:51 am

Re: Financially independent and then market crashes?

Post by Bigbonds » Wed Jun 07, 2017 12:01 pm

To the OP, you are asking a question that has no scientific answer, it's completely subjective and deeply personal. Early retirement at its core is simply a risk, no different than riding a motorcycle or skydiving. You should ask this question on the MMM forums and you will get a completely different response, night and day different. You do understand there are risk in continuing to work too right? Look at what happened to Steve Jobs, that scares me way more than a 25% market correction. Again it's not black or white, it's personal.

Atgard
Posts: 362
Joined: Wed Apr 09, 2014 2:02 pm

Re: Financially independent and then market crashes?

Post by Atgard » Wed Jun 07, 2017 1:05 pm

Random Poster wrote:
bigred77 wrote:The problem is what does a "relative measure of safety mean"? Why would one think it's necessary to increase that level safety. At what point are you "safe enough"?
Well, there is a reason why airplanes have redundant features. Why shouldn't one's portfolio?
I think most of us are conservative here, but there is a real opportunity cost in working several more years to build up a portfolio more than what is truly "enough." There comes a point where it's more likely that you die while working (maybe BECAUSE of the extra work stress) than that you run out of money. So there are risks on both sides, and if you're being hyper-conservative in accumulating wealth you may never use, I think you're ignoring one of those risks.

As for your quote above, I'd say because if a plane crashes, you 100% die immediately with no chance to recover. This is not remotely true of a market crash with a 3% withdrawal rate (although they do both have the word "crash" in there :D ). So, while I agree redundancy is good, I'd say that's not a very accurate analogy. In fact it shows you are singularly focused on one set of risks, to the exclusion of other, just as real risks.

AlwaysBeClimbing
Posts: 143
Joined: Fri Mar 31, 2017 10:39 am

Re: Financially independent and then market crashes?

Post by AlwaysBeClimbing » Wed Jun 07, 2017 2:49 pm

Random Poster wrote:How about this:

Set your annual expenses to equal 2.5% (or less) of your total investment portfolio balance, based on what the balance would be if the value of the equity portion of the portfolio is half of what it is now.

I think that if you can do this (and thus keep your expenses relatively low to the overall, unadjusted portfolio balance), you will be fine for many years (perhaps forever?) if the market crashes and fails to recover within a decade or so.
Say that's a great idea, but it needs a catchy title. How about the Work Till You Drop, Portfolio Spending Plan.

wolf359
Posts: 1280
Joined: Sun Mar 15, 2015 8:47 am

Re: Financially independent and then market crashes?

Post by wolf359 » Wed Jun 07, 2017 3:33 pm

silverskates wrote:I'm just curious about this topic when I see people retiring in their 30's and 40's without a pension and they aren't old enough to take social security. So, if someone has reached financial independence and has 25x's plus their annual spending needs but then the market crashes and wipes out 25%+ of what they have. What do they do? They are possibly no longer financially independent depending on what they need to live on. I'm assuming they'd go back to work of some sort. Some of the people in the blogs I follow keep quite a high stock allocation (in my view) for someone retiring so early. A crash could totally change things for them. And, then if they walked away from a career that is difficult to return to because of advances in the field, etc.

This, and health care costs, are the two reasons I'd be very nervous retiring in my 30's, 40's or even early 50's without having someone working or that has a pension.

What are your thoughts?
1. If you have bonds, you live from your bond position, avoiding the need to sell equities while low. If you have an 80/20 AA, you automatically have 5 years of expenses in bonds (assuming a 4% SWR).
2. Reduce your expenses if the market crashes. The 4% SWR should be for a desired standard of living. It should allow cutbacks such that a minimally acceptable standard of living is supported at a much lower SWR. With cutbacks, my 5 years of expenses is actually quite a bit longer.
3. Actually, if I had recently retired, I'd be looking for a job or trying to start a business or do something to raise money to dump money into the market. Major crashes are an opportunity that don't come along frequently. I don't care about the Internet Retirement Police if I can buy lots of shares are bargain prices.
4. Prior to early retiring, I'd set up an income stream that doesn't have to do with the stock market. It doesn't have to be much, but enough to keep food on the table and the lights on. Currently it's a rental house. I'm exploring other ideas.
5. A backup plan is to sell my primary residence and use the proceeds to replenish my investments. I can then either rent or move into the rental house. Another backup plan is to sell the rental house as well.
6. If I had not recently retired, then there's probably not much to worry about. Sequence of returns will show up early in retirement. If the market booms during the first 10-15 years, you get beyond sequence of returns risk.
7. Delaying social security to 70 means I only have to get to 70, not forever.
8. I'm exploring QLAC annuities to be a backup to Social Security cutbacks.
9. I'm exploring converting the bond position to annuities to be that alternate income stream. I probably have to be over 50 to annuitize, so I'd also probably wait until I really had to, such as a market crash.

User avatar
knpstr
Posts: 2004
Joined: Thu Nov 20, 2014 8:57 pm
Location: Michigan

Re: Financially independent and then market crashes?

Post by knpstr » Wed Jun 07, 2017 3:47 pm

For a very long retirement it is better to shoot for 30x-35x than 25x, in my opinion.

Usually those that young with "only" 25x are thinking they will make "some" money on the side still doing projects.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

jebmke
Posts: 8037
Joined: Thu Apr 05, 2007 2:44 pm

Re: Financially independent and then market crashes?

Post by jebmke » Wed Jun 07, 2017 3:51 pm

knpstr wrote:For a very long retirement it is better to shoot for 30x-35x than 25x, in my opinion.

Usually those that young with "only" 25x are thinking they will make "some" money on the side still doing projects.
That can be risky. When the market really tanks, it probably goes hand in hand with a recession. Assuming you can re-enter the workforce and compete for the fewer jobs available might not be a good assumption.

Also, keep in mind when someone says 25X the general interpretation is 25 times residual expenses -- after accounting for other income sources.
When you discover that you are riding a dead horse, the best strategy is to dismount.

InvestoGuy
Posts: 165
Joined: Thu Feb 11, 2010 1:34 pm

Re: Financially independent and then market crashes?

Post by InvestoGuy » Wed Jun 07, 2017 4:06 pm

Sorry, a very basic question: 25X of what? Annual expenses? What all should this calculation include, as a rule of thumb.

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: Financially independent and then market crashes?

Post by dbr » Wed Jun 07, 2017 4:25 pm

InvestoGuy wrote:Sorry, a very basic question: 25X of what? Annual expenses? What all should this calculation include, as a rule of thumb.
The whole idea originates in some studies back in the early 90's that showed that the most money people could withdraw from typical portfolios and mostly not run out of money before some period of time, say 30 years, would be 4% of the initial value of the portfolio, subsequently increased by inflation every year. This translates to initially needing 25 times what one intends to withdraw and spend that first year assuming what one spends every year stays constant after inflation. If you have other sources of income, then what you actually spend could be more. So you start with annual expenses, including taxes to be paid, subtract SS and pensions and rents and gifts to get what you need to fund from investments. Multiply that by 25 given that 4% is the maximum "safe" rate of withdrawal. If you want to argue that people retiring in 2017 are only safe at a lower withdrawal rate or because they are looking at a much longer period than thirty years, then the % goes down and the multiple goes up.

There are many, many schemes that can be studied so far as how one schedules expenses. But a very important point is that these are studies to help retirees understand how these things tend to work on average. As we have seen, and for many other reasons, this stuff is not a plan in detail for how you retire. It probably helps manage retirement by giving one a "rhumb line" to know if one might be dangerously off course.

I am afraid that trying to narrow "safe" retirement down to some simple minded numbers and rigid plans is just not possible and quickly becomes a parody or caricature of actual management of life's variability.

tesuzuki2002
Posts: 364
Joined: Fri Dec 11, 2015 12:40 pm

Re: Financially independent and then market crashes?

Post by tesuzuki2002 » Wed Jun 07, 2017 4:29 pm

My plan would be to go back to making money again... I mean really if the market drops +25%... who wouldn't want free cash flow to put into that fire sale?

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: Financially independent and then market crashes?

Post by dbr » Wed Jun 07, 2017 4:31 pm

tesuzuki2002 wrote:My plan would be to go back to making money again... I mean really if the market drops +25%... who wouldn't want free cash flow to put into that fire sale?
Anyone who would then find that money dropping from 75 to 25 and never recovering. But, yes, your point has some appeal, maybe.

InvestoGuy
Posts: 165
Joined: Thu Feb 11, 2010 1:34 pm

Re: Financially independent and then market crashes?

Post by InvestoGuy » Wed Jun 07, 2017 4:42 pm

dbr wrote:
InvestoGuy wrote:Sorry, a very basic question: 25X of what? Annual expenses? What all should this calculation include, as a rule of thumb.
The whole idea originates in some studies back in the early 90's that showed that the most money people could withdraw from typical portfolios and mostly not run out of money before some period of time, say 30 years, would be 4% of the initial value of the portfolio, subsequently increased by inflation every year. This translates to initially needing 25 times what one intends to withdraw and spend that first year assuming what one spends every year stays constant after inflation. If you have other sources of income, then what you actually spend could be more. So you start with annual expenses, including taxes to be paid, subtract SS and pensions and rents and gifts to get what you need to fund from investments. Multiply that by 25 given that 4% is the maximum "safe" rate of withdrawal. If you want to argue that people retiring in 2017 are only safe at a lower withdrawal rate or because they are looking at a much longer period than thirty years, then the % goes down and the multiple goes up.

There are many, many schemes that can be studied so far as how one schedules expenses. But a very important point is that these are studies to help retirees understand how these things tend to work on average. As we have seen, and for many other reasons, this stuff is not a plan in detail for how you retire. It probably helps manage retirement by giving one a "rhumb line" to know if one might be dangerously off course.

I am afraid that trying to narrow "safe" retirement down to some simple minded numbers and rigid plans is just not possible and quickly becomes a parody or caricature of actual management of life's variability.
Thanks for explanation. Appreciate it.

User avatar
knpstr
Posts: 2004
Joined: Thu Nov 20, 2014 8:57 pm
Location: Michigan

Re: Financially independent and then market crashes?

Post by knpstr » Wed Jun 07, 2017 5:37 pm

jebmke wrote:
knpstr wrote:For a very long retirement it is better to shoot for 30x-35x than 25x, in my opinion.

Usually those that young with "only" 25x are thinking they will make "some" money on the side still doing projects.
That can be risky. When the market really tanks, it probably goes hand in hand with a recession. Assuming you can re-enter the workforce and compete for the fewer jobs available might not be a good assumption.

Also, keep in mind when someone says 25X the general interpretation is 25 times residual expenses -- after accounting for other income sources.
I would agree that it is not a good assumption. Hence, the 30-35x suggestion. However, usually the side jobs proposed by them are self-employment type activities, though I'm sure not always.
I usually read that they have a nest egg of 25x actual expenses, not accounting for side income. I suppose that would be a "caveat" to look for in some people's stories.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

User avatar
JonnyDVM
Posts: 1592
Joined: Wed Feb 12, 2014 6:51 pm
Location: Atlanta, GA

Re: Financially independent and then market crashes?

Post by JonnyDVM » Wed Jun 07, 2017 5:47 pm

If you insist on 30-35X expenses or a 2.5% SWD no one would be able to retire early.
Sometimes the questions are complicated and the answers are simple. -Dr. Seuss

TallBoy29er
Posts: 398
Joined: Thu Jul 18, 2013 9:06 pm

Re: Financially independent and then market crashes?

Post by TallBoy29er » Wed Jun 07, 2017 6:49 pm

grok87 wrote:
TallBoy29er wrote:I would suggest you read the Early Retirement Now blog on safe withdrawal rates. They discuss a number of factors that go into this decision. It is a 15 part series. I think you will find it enlightening.

https://earlyretirementnow.com/2016/12/ ... t-1-intro/

Edited to add: You should focus on the two sections dedicated to sequence of return risk.
Thanks for the link
One other good summary (shorter than ERN) on SRR is on Kitces blog:
https://www.kitces.com/blog/understandi ... d-decades/

Post Reply