Incremental retirement?

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eurobogle
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Incremental retirement?

Postby eurobogle » Wed Jan 11, 2017 7:00 am

Question: If I have accumulated 50% of my retirement savings (based on SWR model) then is it safe to "50% retire" immediately?

I mean: Could I immediately start to draw half of my living costs from my retirement portfolio (supposing this were accessible) and then continue working to (a) pay the other half of my living costs and (b) save the other half of my retirement portfolio?

Furthermore: Would it still be safe to fully retire once my assets reached the SWR target for full retirement, even if this growth were partly due not to new deposits but rather to the portfolio appreciating faster than the SWR rate?

The intention here is to reduce the minimum amount of income that I have to earn each year, because this will give me relaxed peace of mind during my working career, while still taking advantage of any excess earnings or appreciation on the road towards full retirement. Inspired by the observation that work is more pleasant when it is optional, and that Firecalc shows that retirement portfolios often appreciate beyond the SWR requirements fairly quickly (but there is no time machine to go back in time and work less.)

qwertyjazz
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Re: Incremental retirement?

Postby qwertyjazz » Wed Jan 11, 2017 8:07 am

The key concept here is flexibility. Any model might be right or wrong to a degree. By continuing to work you can reassess. You are choosing a model of spending some, living some and saving some. You can see how it works out over the next decade or so. As long as you do not make any decisions that you cannot take back, it seems like an interesting plan.
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Ari
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Re: Incremental retirement?

Postby Ari » Wed Jan 11, 2017 8:13 am

Based on you username, I'm guessing you live in Europe? Does that mean you don't actually NEED your savings in order to retire, if you worked all the way to retirement age? If you're going to need those savings to be able to retire, you can't automatically assume it's safe to 50% retire at 50% final assets. It depends on how long you have left to save and how fast you're saving.

Working 50% will mean your savings rate will likely go down, which will mean it will take a longer time for you to aquire the other half. That's the part of the equation you should be looking at.

If, on the other hand, you're set for a retirement whether or not you manage to get to 100% or not (like I am, due to state retirement schemes), then there should be fewer problems, though remember that working less will likely mean that you'll get less in retirement from the state, too, since your salary has been lower. But since you already have 50% of your expenses covered, you should be fine.

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k66
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Re: Incremental retirement?

Postby k66 » Wed Jan 11, 2017 9:23 am

eurobogle wrote:Question: If I have accumulated 50% of my retirement savings (based on SWR model) then is it safe to "50% retire" immediately?

I mean: Could I immediately start to draw half of my living costs from my retirement portfolio (supposing this were accessible) and then continue working to (a) pay the other half of my living costs and (b) save the other half of my retirement portfolio?

Furthermore: Would it still be safe to fully retire once my assets reached the SWR target for full retirement, even if this growth were partly due not to new deposits but rather to the portfolio appreciating faster than the SWR rate?

The intention here is to reduce the minimum amount of income that I have to earn each year, because this will give me relaxed peace of mind during my working career, while still taking advantage of any excess earnings or appreciation on the road towards full retirement. Inspired by the observation that work is more pleasant when it is optional, and that Firecalc shows that retirement portfolios often appreciate beyond the SWR requirements fairly quickly (but there is no time machine to go back in time and work less.)


Can you start drawing down your savings in an early retirement -- even if you only partly draw a given SWR? That would be unlikely. First, you didn't tell us what SWR you had in mind (one otherwise presumes 4%). But even the 4% value is not always safe, it has been demonstrated to be generally safe, for certain asset allocations, in US markets, for a specific duration.

It may be the case that you intend to need the funds for longer than the typical duration (30 yrs) but you didnt tell us what you intend. We are also not certain where your funds will be invested. Other than investments based in US, Canada, and Australia, the 4% rate could be challenging.

And finally, the unique nature of this proposal will be very subjective to the "sequence of returns" risk--i.e. what happens if an unusually poor series of returns compound into highly unfavourable results in your portfolio, especially early on during the retirement period.

There are lots of unknowns here, the answers won't be simple.
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eurobogle
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Re: Incremental retirement?

Postby eurobogle » Wed Jan 11, 2017 12:28 pm

qwertyjazz wrote:The key concept here is flexibility. [...] As long as you do not make any decisions that you cannot take back, it seems like an interesting plan.


I like this way of thinking. However, I do see this plan as an irrevocable decision to spend a decade (say) with a more variable lower-bound on income and saving. I would imagine working less and/or on ventures with less certain returns.

Ari wrote:Based on you username, I'm guessing you live in Europe? Does that mean you don't actually NEED your savings in order to retire, if you worked all the way to retirement age? Does that mean you don't actually NEED your savings in order to retire, if you worked all the way to retirement age?


Good question. I have lived in several countries without fully understanding the pension schemes. Honestly I don't know how to value my past and future pension contributions. I am currently self-employed in Switzerland, and fully participating in the standard occupational pension schemes here, but I am not sure how much of my career will be spent this way.

k66 wrote:There are lots of unknowns here, the answers won't be simple.


Interesting points. Raises some questions. Q1: Do you have any references with more information about (un)safe withdrawal rates for Europeans? Q2: I understand that many SWR models exist, each with different assumptions and risks, but I wonder if this "incremental" approach has same risk / less risk / more risk than whatever SWR model it is based on (e.g. 2% or 3% or 4% etc)?

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PhysicianOnFIRE
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Re: Incremental retirement?

Postby PhysicianOnFIRE » Wed Jan 11, 2017 12:37 pm

Well, that depends. If you're spending 3/4 of your take-home pay annually, going half-time would cause you to run a deficit and deplete the savings you have built up.

If you're spending 1/4 of your take-home pay annually, you could easily afford to go half-time now. Your tax burden will likely decrease by far more than half if you cut your pay in half, but I'm not at all familiar with the Swiss tax system, so I can't be certain.

I have run the numbers on a physician working full-time versus half-time at various points of her career, and the time to achive FI. Assumptions are $300,000 full time salary, in the US, married with 2 children. Annual spending $80,000.

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k66
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Re: Incremental retirement?

Postby k66 » Wed Jan 11, 2017 1:20 pm

eurobogle wrote:...
k66 wrote:There are lots of unknowns here, the answers won't be simple.


Interesting points. Raises some questions. Q1: Do you have any references with more information about (un)safe withdrawal rates for Europeans? Q2: I understand that many SWR models exist, each with different assumptions and risks, but I wonder if this "incremental" approach has same risk / less risk / more risk than whatever SWR model it is based on (e.g. 2% or 3% or 4% etc)?


Dr. Wade Pfau has compiled some useful information in this respect (i.e. SWR values outside the US for other developed countries using their domestic markets, following the earlier Bengen, Trinity, etc works) here.

Another useful note (although I don't have a link), and often mentioned here in this forum, is that a Japanese investor could have done acceptably well if they were not wholly invested in only Japanese securities during the bleak timeframe from 1990 -- ??... I think the take-away for me, especially as a non-US investor, is that placing some eggs in other baskets has a lot of appeal.
LOSER of the Boglehead Contest 2015 | lang may yer lum reek

eurobogle
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Re: Incremental retirement?

Postby eurobogle » Wed Jan 11, 2017 3:54 pm

PhysicianOnFIRE wrote:Well, that depends. If you're spending 3/4 of your take-home pay annually, going half-time would cause you to run a deficit and deplete the savings you have built up.


My model says otherwise. I wonder what the difference is? Do you account for investment returns during the accumulation phase? Or have I simply made an error?

Here is my arithmetic based on the 3/4 spending assumption and using simple round numbers.

My take-home pay (salary) is $80K. I spend $60K and save $20K.
I start making safe withdrawals to cover half of my expenses. Now from my $80K salary I am spending $30K and saving $50K.
I start working half-time. Now my take-home salary drops to $40K from which I spend $30K and save $10K.

This assumes that I have separately found a SWR strategy that I am comfortable with and that I have sufficient assets to support a $30K/year withdrawal indefinitely. (This may be hard, or even impossible, but I see this as a separate issue.)

k66 wrote:Dr. Wade Pfau has compiled some useful information in this respect


Thank you for this excellent link.

I am leaning towards a strategy more like this: invest in a world-diversified portfolio and then choose a retirement domicile that I can afford. I wonder if somebody has already modelled this scenario? (Do Bogleheads have a stash of the relevant data in CSV somewhere for easy modelling?)

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PhysicianOnFIRE
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Re: Incremental retirement?

Postby PhysicianOnFIRE » Wed Jan 11, 2017 4:28 pm

eurobogle wrote:
PhysicianOnFIRE wrote:Well, that depends. If you're spending 3/4 of your take-home pay annually, going half-time would cause you to run a deficit and deplete the savings you have built up.


My model says otherwise. I wonder what the difference is? Do you account for investment returns during the accumulation phase? Or have I simply made an error?

Here is my arithmetic based on the 3/4 spending assumption and using simple round numbers.

My take-home pay (salary) is $80K. I spend $60K and save $20K.
I start making safe withdrawals to cover half of my expenses. Now from my $80K salary I am spending $30K and saving $50K.
I start working half-time. Now my take-home salary drops to $40K from which I spend $30K and save $10K.

This assumes that I have separately found a SWR strategy that I am comfortable with and that I have sufficient assets to support a $30K/year withdrawal indefinitely. (This may be hard, or even impossible, but I see this as a separate issue.)


I see. I missed the part where you would start spending from the assets you have set aside for retirement. Your arithmetic makes sense.

Personally, if I was halfway to FI, I would try to earn at least enough to cover my annual spending, so that the accumulated nest egg could continue to benefit from compounding. But that's just me.

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Rodc
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Re: Incremental retirement?

Postby Rodc » Wed Jan 11, 2017 4:36 pm

eurobogle wrote:
PhysicianOnFIRE wrote:Well, that depends. If you're spending 3/4 of your take-home pay annually, going half-time would cause you to run a deficit and deplete the savings you have built up.


My model says otherwise. I wonder what the difference is? Do you account for investment returns during the accumulation phase? Or have I simply made an error?

Here is my arithmetic based on the 3/4 spending assumption and using simple round numbers.

My take-home pay (salary) is $80K. I spend $60K and save $20K.
I start making safe withdrawals to cover half of my expenses. Now from my $80K salary I am spending $30K and saving $50K.
I start working half-time. Now my take-home salary drops to $40K from which I spend $30K and save $10K.

This assumes that I have separately found a SWR strategy that I am comfortable with and that I have sufficient assets to support a $30K/year withdrawal indefinitely. (This may be hard, or even impossible, but I see this as a separate issue.)

k66 wrote:Dr. Wade Pfau has compiled some useful information in this respect


Thank you for this excellent link.

I am leaning towards a strategy more like this: invest in a world-diversified portfolio and then choose a retirement domicile that I can afford. I wonder if somebody has already modelled this scenario? (Do Bogleheads have a stash of the relevant data in CSV somewhere for easy modelling?)


I am confused. Why would you take out $30K to reduce spending from your salary and then save $50K? Or after dropping down you take out $30K and save $10K?

You drop to $40K in income, you spend $60K, you are running an income deficit of $20K (note taking out $30K and saving $10K is the same thing).

Running an income deficit of $20K means $20k per year less growth in your nestegg. Your portfolio may still grow just less quickly and thus it will take longer to get to full retirement.

No free lunch, if you half retire now it will take longer to reach full retirement. How much longer you will need to run some numbers.

This might or might not be a fine idea depending on what you would do with the time. Sometimes a full time job is just too much of a grind, but working half time is great. Or you have some hobbies or volunteer work you really want to do and so you are willing to push our retirement as the trade for doing those things now.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

eurobogle
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Re: Incremental retirement?

Postby eurobogle » Wed Jan 11, 2017 4:51 pm

Rodc wrote:This might or might not be a fine idea depending on what you would do with the time. Sometimes a full time job is just too much of a grind, but working half time is great. Or you have some hobbies or volunteer work you really want to do and so you are willing to push our retirement as the trade for doing those things now.


These are indeed the lines that I am thinking along. I enjoy work, and I am not in a hurry to retire, but I also value my own time and would enjoy the freedom to pursue interests with low returns (e.g. hobbies) or uncertain returns (e.g. entrepreneurship.) So I am not really thinking about reducing my income so much as introducing more variability and uncertainty, which for the sake of simplicity and conservatism I am modelling as a simple reduction.

Rodc
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Re: Incremental retirement?

Postby Rodc » Wed Jan 11, 2017 6:06 pm

eurobogle wrote:
Rodc wrote:This might or might not be a fine idea depending on what you would do with the time. Sometimes a full time job is just too much of a grind, but working half time is great. Or you have some hobbies or volunteer work you really want to do and so you are willing to push our retirement as the trade for doing those things now.


These are indeed the lines that I am thinking along. I enjoy work, and I am not in a hurry to retire, but I also value my own time and would enjoy the freedom to pursue interests with low returns (e.g. hobbies) or uncertain returns (e.g. entrepreneurship.) So I am not really thinking about reducing my income so much as introducing more variability and uncertainty, which for the sake of simplicity and conservatism I am modelling as a simple reduction.


Best of luck! This works very well for some people.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.


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