Michael Kitces 4% rule podcast on Madfientist

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gilgamesh
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by gilgamesh » Mon Sep 04, 2017 9:08 am

JustinR wrote:
Mon Sep 04, 2017 9:06 am
gilgamesh wrote:
Mon Sep 04, 2017 8:48 am
JustinR wrote:
Mon Sep 04, 2017 8:23 am



Thanks for the reply. I guess I don't understand what portion is taken from the stable income versus the VPW.

The wiki says your "base income" should come from the stable portion, which is the TIPS/CD ladder or an annuity. But it doesn't say what "base" means...is that the total of your required spending?

So if my annual expenses are 40k and I'll retire at 35, is the strategy to buy $1,400,000 worth of TIPS to hold me over until I'm 70? I won't even have a portfolio leftover for the VPW part haha.
$1.4M if TIPS return is 0%. You need to use #Cruncher'S spreadsheet to see how much you will need. But, it will be a large sum.

Did you calculate to see how much you need with 4% rule?

There is a reason not too many retire at age 35. Even if we assume you can predict your expenses including healthcare for that long, it'll be interesting to see how the numbers will work.

Are you expecting SS? If so how much (the SS reports you get assumes you will have the current wages for the remaining years up to year 35, so you can't use that).

I am asking these to see how 4% compares to safe floor for this extreme situation.
At $40k annual expenses, you'd need $1,000,000 to retire at the 4% safe withdrawal rate. At the very conservative withdrawal rate of 3.5% you'd need $1,142,857. Still doable. Age doesn't matter as it's suppose to last in perpetuity...once you reach the number you can retire.

This seems much simpler and obtainable than the VPW strategy (apparently), although I understand that VPW is supposed to be 100% failproof.
That's what I thought you would say. 4% is clearly not a good idea as it's intended for 30 years. But, you could go with 3.5% and see how it works out. Firecalc says you have a 99% chance of success to age 90...may even end up with $21M :D

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by longinvest » Mon Sep 04, 2017 9:45 am

Gilgamesh,
gilgamesh wrote:
Mon Sep 04, 2017 9:00 am
Longinvest
Is there any issues in using rolling TIPS ladder. I know one cannot predict exact returns, but if one assumes zero return and use TIPS solely for inflation protection.
Note to readers: We are discussing two distinct types of ladders, rolling and non-rolling.

I'll assume that we are trying to build a riskless inflation-indexed income for a predetermined number of years, as part of a larger retirement plan. Unfortunately, trying to achieve this using a rolling ladder carries risks. In other words, TIPS used that way are risky.

We don't know if the yield-to-maturity of the TIPS we'll need to buy for a rolling ladder, in the future, will be positive. In fact, we already have a history of negative 5-year TIPS yields:

Source: FRED
Image

We don't even know if the U.S. Treasury will continue to issue TIPS with the maturities we'll need for the rolling ladder.

Of course, an investor willing to assume some risk can take his chances. But, he is not limited to TIPS, in that case. He could also take chances using other types of financial securities such as nominal bonds, CDs, or even stocks. Some of these have rewarded investors handsomely, sometimes (not always) in the past, for having assumed their risks.

The thing is that, usually, when we seek to build a riskless non-rolling income TIPS ladder, it is because we reduced our need for this type of income to its bare minimum and we plan to use a portfolio of risky assets to provide supplemental income (using VPW, for example). It isn't recommended to take any risk* with the base income, usually.

The beauty of #Cruncher's tool** is that it minimizes the cost of a non-rolling income TIPS ladder by combining, each year, the principal of the maturing TIPS with the coupons paid by all the TIPS of the ladder to provide the stable annual income. It's an awesome tool!

* In a reasonable sense. There is no such thing as zero risk. The government could decide to confiscate all wealth. Or a natural disaster could destroy the fabrics of society, making money valueless. There's a limitless number of such scenarios. I'm setting them aside because we can't protect ourselves from them using financial securities.
** The link to the tool is at the end of the following post: Re: How should I build a TIPS income ladder?.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by VictoriaF » Mon Sep 04, 2017 12:03 pm

Johnnie wrote:
Sun Sep 03, 2017 9:31 pm
I am also intrigued by Zeke Emmanuel's 2014 Atlantic Monthly piece, Why I Hope to Die at 75, wherein he announces and explains:

'At 75 and beyond, I will need a good reason to even visit the doctor and take any medical test or treatment, no matter how routine and painless. And that good reason is not “It will prolong your life.” I will stop getting any regular preventive tests, screenings, or interventions. I will accept only palliative—not curative—treatments if I am suffering pain or other disability.'

Suicide is not part of the plan, because it leaves scars on survivors.

He makes very strong case, I highly recommend the piece. Every person I have shared this with agrees with the argument except for one detail: Age 75 is too young. If I do follow this course my "number" will be 85. (The same family history suggests that's a good idea even when we do make it past 90.)
I've read this article when it was first published three years ago, and now I re-read it. This statement is quite illuminating:
in October 2014, Ezekiel Emanuel wrote:For instance, using data from the National Health Interview Survey, Eileen Crimmins, a researcher at the University of Southern California, and a colleague assessed physical functioning in adults, analyzing whether people could walk a quarter of a mile; climb 10 stairs; stand or sit for two hours; and stand up, bend, or kneel without using special equipment. The results show that as people age, there is a progressive erosion of physical functioning. More important, Crimmins found that between 1998 and 2006, the loss of functional mobility in the elderly increased. In 1998, about 28 percent of American men 80 and older had a functional limitation; by 2006, that figure was nearly 42 percent.
In the past few days, there was a lot of discussion in the media about the perils of the sedentary lifestyle. Apparently, some people sit over 13 hours/day and lose their ability to walk.

To me this does NOT imply that the quality of life is indiscriminately dropping. Quite the opposite is true: the earlier you retire and the earlier you switch from a sedentary office job to an active retirement lifestyle the longer you will preserve your physical functions.

Victoria
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by pkcrafter » Mon Sep 04, 2017 1:53 pm

What's going on here?

LPMs have a 20% failure rate
The problem with LMP is that it underestimates the costs substantially. It does this by constructing unrealistic scenarios and not actually matching liabilities.
https://medium.com/@justusjp/liability- ... b7300dcbdd


Paul
Last edited by pkcrafter on Mon Sep 04, 2017 3:45 pm, edited 1 time in total.
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by stlutz » Mon Sep 04, 2017 2:30 pm

LPMs have a 20% failure rate

The problem with LMP is that it underestimates the costs substantially. It does this by constructing unrealistic scenarios and not actually matching liabilities.
What did people do when they relied on traditional pension plans for income in retirement?

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by longinvest » Mon Sep 04, 2017 2:59 pm

Paul,
pkcrafter wrote:
Mon Sep 04, 2017 1:53 pm
What's going on here?

LPMs have a 20% failure rate

The problem with LMP is that it underestimates the costs substantially. It does this by constructing unrealistic scenarios and not actually matching liabilities.

https://medium.com/@justusjp/liability- ... b7300dcbdd
I can't speak for others, but I can definitely speak for myself. I haven't suggested a "liability-matching portfolio". I have suggested to build a workable retirement plan combining stable income with variable portfolio withdrawals, while also keeping an eye on longevity issues:
longinvest wrote:
Sun Sep 03, 2017 9:10 am
One approach to build a workable retirement plan is to split it in two parts: (i) lifelong non-portfolio stable inflation-indexed income and (ii) variable portfolio withdrawals. To address longevity issues, part of the remaining portfolio can be converted into lifelong non-portfolio stable inflation-indexed income around age 80, when the payout of an inflation-indexed Single Premium Immediate Annuity (SPIA) becomes competitive with variable portfolio withdrawal percentages.

Such a plan can use our Wiki's Variable Percentage Withdrawal (VPW) method, a withdrawal method which adapts to the retiree's retirement horizon, asset allocation, and portfolio returns during retirement. It combines the best ideas of the constant-dollar, constant-percentage, and 1/N withdrawal methods to allow the retiree to spend most of the portfolio using return-adjusted withdrawals. By adapting withdrawals to market returns, VPW will never prematurely deplete the portfolio.

So, here's an example of a workable plan for retirement:
  1. Delay Social Security (SS) until age 70 to maximize this lifelong non-portfolio inflation-indexed income.
  2. Fill the gap in Social Security payments between retirement and age 70 using a non-rolling TIPS ladder. It is important to exclude this non-rolling ladder from the portfolio used for variable withdrawals; this non-rolling ladder is part of the lifelong non-portfolio stable inflation-indexed income. Forum member #Cruncher has developed an awesome tool for this; the link is at the end of the following post:
    Re: How should I build a TIPS income ladder?.
  3. Those without a defined benefit pension can buy a small inflation-indexed SPIA at retirement as a supplement to the above SS & gap-ladder income.
  4. At the beginning of every retirement year, lookup the appropriate percentage according to (i) the age of the retiree (or spouse, the lowest of the two) and (ii) the asset allocation of the portfolio* in the VPW table. Multiply this percentage by the current portfolio balance. Withdraw the resulting amount from the portfolio while rebalancing it.
  5. Around age 80, assuming one is still alive, use enough of the remaining portfolio to buy an inflation-indexed SPIA which will provide sufficient lifelong non-portfolio stable inflation-indexed income, when combined with existing non-portfolio income, in case of survival beyond age 100**. The idea is that even if the portfolio gets down to zero, total income should be sufficient to live well. Luckily, inflation-indexed SPIAs are cost-efficient at age 80.
  6. Continue depleting the remaining portfolio using VPW, but cap the withdrawal percentage at 20% (at age 95 and beyond).
* It is important to apply VPW on a balanced portfolio, one with a sufficient ratio of bonds (nominal and inflation-indexed) to reduce the volatility of both the portfolio and withdrawals.
** VPW plans for a last withdrawal at age 99.
I've explicitly stated that one of the objectives of such a plan is to balance guaranteed income and liquidity:
longinvest wrote:
Sun Sep 03, 2017 9:10 am
This is a simple, but extremely robust plan. It tries to balance the amount of stable non-portfolio income with the amount of liquidity kept under the retiree's control in the portfolio. It is anxiety repellent, as a workable plan should be.
Is there anything that you find out-of-line, from a Bogleheads point of view, in this suggested plan? How would you improve it?

I could have suggested to use of a CD ladder or an even simpler high-interest savings account, in point 2, as has been suggested in Delay Social Security to age 70 and Spend more money at 62, except that on this particular thread, some members have been discussing retirement in their 30s and 40s, which would expose the gap money to an excessive amount of inflation risk.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by Poipu » Mon Sep 04, 2017 3:37 pm

It appears that the author overlooked the risky portfolio (RP) in Bernstein's WSJ article. The "retiree" has $1million in an Ira and chooses not to purchase the annuity for $625k. Instead $750k is allocated to the LMP to cover expenses to delay SS until 70. There is still $250k remaining to cover future discretionary/legacy in the RP.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by CyclingDuo » Mon Sep 04, 2017 5:21 pm

longinvest wrote:
Mon Sep 04, 2017 2:59 pm
I could have suggested to use of a CD ladder or an even simpler high-interest savings account, in point 2, as has been suggested in Delay Social Security to age 70 and Spend more money at 62, except that on this particular thread, some members have been discussing retirement in their 30s and 40s, which would expose the gap money to an excessive amount of inflation risk.
That thread was really one of the best threads I've read here. Just when things get good, Lady Geek drops in and closes it. Oy! :oops:

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by gilgamesh » Mon Sep 04, 2017 5:26 pm

pkcrafter wrote:
Mon Sep 04, 2017 1:53 pm
What's going on here?

LPMs have a 20% failure rate
The problem with LMP is that it underestimates the costs substantially. It does this by constructing unrealistic scenarios and not actually matching liabilities.
https://medium.com/@justusjp/liability- ... b7300dcbdd


Paul
Paul, thank you so much for the article...extremely helpful. I am glad you are pointing these out so anyone considering this can fully appreciate what they are really doing.

I am planning to employ a floor and side portfolio, so I need to evaluate all of the risks discussed in the article and be true to myself. So, let me take each criticism and provide what I am planning to do with it. I've thought about each and everyone already.

General problems in estimating costs well into the future. First underestimating expenses, like healthcare etc. My plan is this. My side portfolio exposed to the market will in fact be 80% stocks, and withdrawn at 3.5%. At 3.5% I expect it to grow and pay for contingencies later in retirement. If it doesn't work out, I, at least have the TIPS to fall back on, rather than the whole portfolio failing the 3.5% SWR.

Problems in Overestimating costs like food and Overall reduction in spending in the middle: Expense curve looks like a smile with expenses going down in the middle. My TIPS ladder does go down at age 70. At the start of retirement travel expenses will be much higher, so I have a lot more allocated in TIPS for travel from retirement to age 70. So, as you can see, my TIPS along with expected hyper growth of side portfolio later on, provides me an income that also looks like a smile - TIPS provide more for the first decade, flat for a while and then higher amount to be withdrawn from the side portfolio.

CPI government estimate being different from personal expenses. This is a problem. But, I think managing inflation as defined by the government, even if it doesn't match mine, is better than not trying to manage inflation at all.

Life expectancy problem is not a problem for me. After age 70, SS covers a lot of the floor. On top of that the floor doesn't need to be as high after age 70, as it was from retirement to 70, for reasons mentioned above. Plus at age 80 my floor will be an SPIA. After age 80 it is not prudent to build individual TIPS ladders like this author suggests, rather one should utilize the mortality credit and utilize SPIA. So, longevity risk is mitigated. Expenses for this is not prohibitive for me. Without an SPIA it will be, as the author mentions. I can still retire before turning 60.

I find it strange how he acknowledges hiw most of the concerns he raised can be mitigated by the side portfolio. Yet! He ignores it. Relying on your side portfolio for parts of your income is not the same thing as relying on portfolio exposed to market risks for my entire income. His 20% failure is only if someone doesn't do things the way I've explained above. My flooring goes till age 100 and the 20% is flat wrong.

Can you find any faults with the above explanations?, did I not address any issues raised in the article? Only by finding faults with my logic, will I learn...So, please feel free to criticize my plan. I am here to learn, not to change somebody else's mind.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by pkcrafter » Mon Sep 04, 2017 7:10 pm

Gilgamesh, it sounds like you have taken the time and done the research to end up with a very resilient strategy. I remember when I retired, I said it felt like walking a tightrope with no net below. However, the feeling did not last long, and confidence grew.

Longinvest also has a good, flexible plan, and I think we all need to be adaptable to flex somewhat when needed. Common sense works well as long as we don't get behavioral issues in the way.

Victoria has also done a lot of research, and you can trust her conclusions and recommendations.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by Goodman60 » Mon Sep 04, 2017 8:45 pm

gilgamesh wrote:
Mon Sep 04, 2017 5:26 pm
pkcrafter wrote:
Mon Sep 04, 2017 1:53 pm
What's going on here?

LPMs have a 20% failure rate
The problem with LMP is that it underestimates the costs substantially. It does this by constructing unrealistic scenarios and not actually matching liabilities.
https://medium.com/@justusjp/liability- ... b7300dcbdd


Paul
Paul, thank you so much for the article...extremely helpful. I am glad you are pointing these out so anyone considering this can fully appreciate what they are really doing.

I am planning to employ a floor and side portfolio, so I need to evaluate all of the risks discussed in the article and be true to myself. So, let me take each criticism and provide what I am planning to do with it. I've thought about each and everyone already.

General problems in estimating costs well into the future. First underestimating expenses, like healthcare etc. My plan is this. My side portfolio exposed to the market will in fact be 80% stocks, and withdrawn at 3.5%. At 3.5% I expect it to grow and pay for contingencies later in retirement. If it doesn't work out, I, at least have the TIPS to fall back on, rather than the whole portfolio failing the 3.5% SWR.

Problems in Overestimating costs like food and Overall reduction in spending in the middle: Expense curve looks like a smile with expenses going down in the middle. My TIPS ladder does go down at age 70. At the start of retirement travel expenses will be much higher, so I have a lot more allocated in TIPS for travel from retirement to age 70. So, as you can see, my TIPS along with expected hyper growth of side portfolio later on, provides me an income that also looks like a smile - TIPS provide more for the first decade, flat for a while and then higher amount to be withdrawn from the side portfolio.

CPI government estimate being different from personal expenses. This is a problem. But, I think managing inflation as defined by the government, even if it doesn't match mine, is better than not trying to manage inflation at all.

Life expectancy problem is not a problem for me. After age 70, SS covers a lot of the floor. On top of that the floor doesn't need to be as high after age 70, as it was from retirement to 70, for reasons mentioned above. Plus at age 80 my floor will be an SPIA. After age 80 it is not prudent to build individual TIPS ladders like this author suggests, rather one should utilize the mortality credit and utilize SPIA. So, longevity risk is mitigated. Expenses for this is not prohibitive for me. Without an SPIA it will be, as the author mentions. I can still retire before turning 60.

I find it strange how he acknowledges hiw most of the concerns he raised can be mitigated by the side portfolio. Yet! He ignores it. Relying on your side portfolio for parts of your income is not the same thing as relying on portfolio exposed to market risks for my entire income. His 20% failure is only if someone doesn't do things the way I've explained above. My flooring goes till age 100 and the 20% is flat wrong.

Can you find any faults with the above explanations?, did I not address any issues raised in the article? Only by finding faults with my logic, will I learn...So, please feel free to criticize my plan. I am here to learn, not to change somebody else's mind.
Isn't the whole concept of a "side portfolio", like "buckets", just a way of fooling yourself into taking a lower SWR (because you're not recognizing a portion of your total portfolio value)?

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by ryman554 » Tue Sep 05, 2017 5:47 am

gilgamesh wrote:
Mon Sep 04, 2017 9:06 am
ryman554 wrote:
Mon Sep 04, 2017 8:50 am
As someone who *would* keep it simple and use something like a 3.5% perpetual SWR to define a yearly income stream (of which I may or may not spend), I believe the answer to your question is "yes".

The calculations become nearly impossible to simply run when taking into account SS income "appearing" 20+ years into your future. One simple way of accounting for that is to create a side TIPS account of the value (in real dollars, that SS.gov conveniently estimates for you via anyPIA software) of the yearly SS income with yearly (or so) rungs to get there. It turns out that the TIPS ladder supplement required for me is on the order of the 3.5% WR. So again, it becomes the classic question of how much I want to pay for ironclad security.

SPIA is for much later, since it is expensive for an early retiree, and then, only if you need it to sleep at night and cover your essential expenses.
Ok! So if the TIPS cost is equivalent to 3.5% SWR, and you are planning for a 3.5% withdrawal anyways, you are just substituting achieving ironclad security for the possibility of having lots of money when you are much older to spend or leave behind, right?

As long as the 3.5% withdrawal continues, you are not enjoying anymore money than a TIPS ladder, but with less security...correct?
I suppose that is one way to think about it.

Given a TIPS ladder goes to zero at the end, and the 3.5% SWR almost assuredly does not, I would argue that the 3.5% SWR has *more* security, not less, for large unplanned expenses that are prohibitive to insure against. Long term care comes to mind here. Yes, you can budget that against your "variable spending" portion, but in these situations, the income floor is no longer sufficient to support retirement. And these things, as discussed earlier in this excellent thread, are impossible to budget precisely for. I'm forced to conclude that I have amass an even larger pile of money to account for the unknown unknowns.

I also apparently apply significantly more value to a legacy than you do. I would like nothing more than give a gift of early retirement to my kids at my passing, as my parents will likely gift to me, just as my parents were gifted that (+a bit of brotherly angst) some years ago.

The way I will likely approach it is to recreate an income stream out of ~28.5x expenses, net of taxes. I then get to pretend I have a job which gives me a paycheck every year and I get to go budgeting. I'll spend ~33-50% of it on "essentials" and "minimal lifestyle goodness". I'll spend (or save) the rest on even more fun stuff or on gifts or budgeting for new cars. I agree to some degree that I am over-saving, but given my age, I'm gonna have to do that anyhow. I'll look again in 4-5 years when I've hit my first milestone and *could* walk away if the work life just got too bad at a 4% SWR. Good thing I like what I'm doing.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by pkcrafter » Tue Sep 05, 2017 9:33 am

Goodman60 wrote:
Mon Sep 04, 2017 8:45 pm


Isn't the whole concept of a "side portfolio", like "buckets", just a way of fooling yourself into taking a lower SWR (because you're not recognizing a portion of your total portfolio value)?
It may be. I have never understood the bucket strategy, but I know that many people do use it because it helps them organize and feel comfortable.


Paul
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by willthrill81 » Tue Sep 05, 2017 10:07 am

pkcrafter wrote:
Tue Sep 05, 2017 9:33 am
Goodman60 wrote:
Mon Sep 04, 2017 8:45 pm


Isn't the whole concept of a "side portfolio", like "buckets", just a way of fooling yourself into taking a lower SWR (because you're not recognizing a portion of your total portfolio value)?
It may be. I have never understood the bucket strategy, but I know that many people do use it because it helps them organize and feel comfortable.


Paul
The bucket strategy builds on the mental accounting that humans have a strong tendency to perform when assessing the present and the future. Having a 'necessary expenses' bucket that uses a low WR and another 'discretionary' bucket that uses a higher WR is not necessarily a way of "fooling yourself" any more than using part of your portfolio to buy TIPS or an annuity and investing the remainder. It many circumstances, it's simply covering your bases.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by gilgamesh » Tue Sep 05, 2017 10:34 am

Goodman60 wrote:
Mon Sep 04, 2017 8:45 pm
Isn't the whole concept of a "side portfolio", like "buckets", just a way of fooling yourself into taking a lower SWR (because you're not recognizing a portion of your total portfolio value)?
Well! it just doesn't matter...the same as bucket strategy. The entire portfolio visualized as one is the same as separating them into buckets...one is not worse than the other, nor better than the other.

So, TIPS and side portfolio visualized as one or as buckets is the same...visualized together it will look like this....parts of you portfolio is individual TIPS, parts in stocks and parts in other bonds. When it comes to floor, it helps to visualize separately, that's all...but, I also look at it as an overall portfolio...that's why I said, initially my overall portfolio will be about 35% bonds at retirement gradually going up to 50 or 60 as each TIPS matures.

P.S: the problems with buckets in the traditional sense, is when some considers it to be superior...having non-volatile bucket for immediate spending etc. and saying that's a better strategy....nothing superior about it vs overall portfolio having the same mix of asset "types".

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by gilgamesh » Tue Sep 05, 2017 11:42 am

ryman554 wrote:
Tue Sep 05, 2017 5:47 am
gilgamesh wrote:
Mon Sep 04, 2017 9:06 am
ryman554 wrote:
Mon Sep 04, 2017 8:50 am
As someone who *would* keep it simple and use something like a 3.5% perpetual SWR to define a yearly income stream (of which I may or may not spend), I believe the answer to your question is "yes".

The calculations become nearly impossible to simply run when taking into account SS income "appearing" 20+ years into your future. One simple way of accounting for that is to create a side TIPS account of the value (in real dollars, that SS.gov conveniently estimates for you via anyPIA software) of the yearly SS income with yearly (or so) rungs to get there. It turns out that the TIPS ladder supplement required for me is on the order of the 3.5% WR. So again, it becomes the classic question of how much I want to pay for ironclad security.

SPIA is for much later, since it is expensive for an early retiree, and then, only if you need it to sleep at night and cover your essential expenses.
Ok! So if the TIPS cost is equivalent to 3.5% SWR, and you are planning for a 3.5% withdrawal anyways, you are just substituting achieving ironclad security for the possibility of having lots of money when you are much older to spend or leave behind, right?

As long as the 3.5% withdrawal continues, you are not enjoying anymore money than a TIPS ladder, but with less security...correct?
I suppose that is one way to think about it.

Given a TIPS ladder goes to zero at the end, and the 3.5% SWR almost assuredly does not, I would argue that the 3.5% SWR has *more* security, not less, for large unplanned expenses that are prohibitive to insure against. Long term care comes to mind here. Yes, you can budget that against your "variable spending" portion, but in these situations, the income floor is no longer sufficient to support retirement. And these things, as discussed earlier in this excellent thread, are impossible to budget precisely for. I'm forced to conclude that I have amass an even larger pile of money to account for the unknown unknowns.

I also apparently apply significantly more value to a legacy than you do. I would like nothing more than give a gift of early retirement to my kids at my passing, as my parents will likely gift to me, just as my parents were gifted that (+a bit of brotherly angst) some years ago.

The way I will likely approach it is to recreate an income stream out of ~28.5x expenses, net of taxes. I then get to pretend I have a job which gives me a paycheck every year and I get to go budgeting. I'll spend ~33-50% of it on "essentials" and "minimal lifestyle goodness". I'll spend (or save) the rest on even more fun stuff or on gifts or budgeting for new cars. I agree to some degree that I am over-saving, but given my age, I'm gonna have to do that anyhow. I'll look again in 4-5 years when I've hit my first milestone and *could* walk away if the work life just got too bad at a 4% SWR. Good thing I like what I'm doing.
The SWR will most likely provide much more for unplanned LTC costs etc. in later life, that's for sure. Any cost above what's already planned for, IOW contingencies. With the floor only the smaller side portfolio has that potential for me. However, TIPS floor does allow you to spend more for the first ten years without worrying about sequence risk, if the first ten years of your retirement experiences turmoil. That's the difference.

True about legacy....now, that gift of early retirement to the child however can be tricky...you've got to do that during your lifetime...assuming average life span for parent means the child will not have early retirement if done after the parent's death, unless you had the child when you were much older...correct?

Pretending to have a job that matches pay to inflation is another aspect of TIPS flooring...a job from where you can never be fired. With 4% you could face a pay cut.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by gilgamesh » Tue Sep 05, 2017 2:37 pm

Transcripts for the podcast is available now...I got a free PDF emailed to me.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by stlutz » Tue Sep 05, 2017 8:22 pm

P.S: the problems with buckets in the traditional sense, is when some considers it to be superior...having non-volatile bucket for immediate spending etc. and saying that's a better strategy....nothing superior about it vs overall portfolio having the same mix of asset "types".
True that in the end you will end up with some mix of stocks and bonds. I think the bucket approach provides a real rationale behind your asset allocation as opposed to simply saying, "I like 60/40."

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by willthrill81 » Tue Sep 05, 2017 9:43 pm

stlutz wrote:
Tue Sep 05, 2017 8:22 pm
P.S: the problems with buckets in the traditional sense, is when some considers it to be superior...having non-volatile bucket for immediate spending etc. and saying that's a better strategy....nothing superior about it vs overall portfolio having the same mix of asset "types".
True that in the end you will end up with some mix of stocks and bonds. I think the bucket approach provides a real rationale behind your asset allocation as opposed to simply saying, "I like 60/40."
I agree. It makes more sense to me to think of having a decade of spending in bonds with the rest in stocks, for instance, than an arbitrary AA. The fact that you can simplify a bucketed approach to an AA does not mean that the two are completely equivalent.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by gilgamesh » Wed Sep 06, 2017 6:20 am

willthrill81 wrote:
Tue Sep 05, 2017 9:43 pm
stlutz wrote:
Tue Sep 05, 2017 8:22 pm
P.S: the problems with buckets in the traditional sense, is when some considers it to be superior...having non-volatile bucket for immediate spending etc. and saying that's a better strategy....nothing superior about it vs overall portfolio having the same mix of asset "types".
True that in the end you will end up with some mix of stocks and bonds. I think the bucket approach provides a real rationale behind your asset allocation as opposed to simply saying, "I like 60/40."
I agree. It makes more sense to me to think of having a decade of spending in bonds with the rest in stocks, for instance, than an arbitrary AA. The fact that you can simplify a bucketed approach to an AA does not mean that the two are completely equivalent.
Why do you say that?...it's been a while since I read about this. Like any concept in investing and retirement, I apply to my situation and then forget about it. I know when I studied this, it did not make any difference to think in bucket vs overall for me, even if I were to follow SWR ...but you say they are not completely equivalent - curious in what way do they differ, other than mental accounting (I am not saying it's not...I know it made no difference for me...just curious why it makes a difference for you?) Thanks!

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by willthrill81 » Wed Sep 06, 2017 10:03 am

gilgamesh wrote:
Wed Sep 06, 2017 6:20 am
willthrill81 wrote:
Tue Sep 05, 2017 9:43 pm
stlutz wrote:
Tue Sep 05, 2017 8:22 pm
P.S: the problems with buckets in the traditional sense, is when some considers it to be superior...having non-volatile bucket for immediate spending etc. and saying that's a better strategy....nothing superior about it vs overall portfolio having the same mix of asset "types".
True that in the end you will end up with some mix of stocks and bonds. I think the bucket approach provides a real rationale behind your asset allocation as opposed to simply saying, "I like 60/40."
I agree. It makes more sense to me to think of having a decade of spending in bonds with the rest in stocks, for instance, than an arbitrary AA. The fact that you can simplify a bucketed approach to an AA does not mean that the two are completely equivalent.
Why do you say that?...it's been a while since I read about this. Like any concept in investing and retirement, I apply to my situation and then forget about it. I know when I studied this, it did not make any difference to think in bucket vs overall for me, even if I were to follow SWR ...but you say they are not completely equivalent - curious in what way do they differ, other than mental accounting (I am not saying it's not...I know it made no difference for me...just curious why it makes a difference for you?) Thanks!
If a specific bucketed approach could be simplified to a 50/50 AA, for instance, then the end product of those two lines of thinking is the same, temporarily at least. But the processes used to derive the 'buckets' are generally very different from those used to derive an AA, and I think that the process may be at least as important as the product. With buckets, people are usually thinking about how much money they want to have for the short-term, the medium-term, and the long-term. With an AA, people are usually most focused on their risk tolerance.

I think it's easier for some people to SWAN and also take on adequate risk when they think of their portfolio as "I've got X years of spending safely tucked away, so I don't really care what gyrations my longer-term investments experience." Interestingly, I've heard many people who used the AA approach say that they actually viewed their portfolio this way.

As people age, for instance, they may reevaluate their buckets. For instance, it may not make as much as sense to have a full decade of spending in fixed income for an 85 year old considering that would easily cover than their remaining life expectancy (roughly six years).

Planning for spending needs and matching these with appropriate investments makes more sense to me than someone saying "I want my AA to be X/Y because of my risk tolerance."
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by Leesbro63 » Wed Sep 06, 2017 10:08 am

willthrill81 wrote:
Wed Sep 06, 2017 10:03 am
As people age, for instance, they may reevaluate their buckets. For instance, it may not make as much as sense to have a full decade of spending in fixed income for an 85 year old considering that would easily cover than their remaining life expectancy (roughly six years).
Oh really. Then what should an 85 year old do? Go to 3-4 years of fixed income and all equity with the rest. And if it's 2007, wouldn't that be a quick way to lose a lifetime of saving and investing? If that person dies in 2008, their heirs are gonna probably divide the crashed stocks and sell at the bottom...not gonna wait for it to come back. If it is 1929, the heirs will have to wait until the 1950s for it to come back.
Last edited by Leesbro63 on Wed Sep 06, 2017 10:13 am, edited 2 times in total.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by Leesbro63 » Wed Sep 06, 2017 10:11 am

stlutz wrote:
Tue Sep 05, 2017 8:22 pm
P.S: the problems with buckets in the traditional sense, is when some considers it to be superior...having non-volatile bucket for immediate spending etc. and saying that's a better strategy....nothing superior about it vs overall portfolio having the same mix of asset "types".
True that in the end you will end up with some mix of stocks and bonds. I think the bucket approach provides a real rationale behind your asset allocation as opposed to simply saying, "I like 60/40."
I looked long and hard at the "bucket" thing a few years back. In the end it's just mental computation and asset allocation. The more intellectually honest thing to do would be to go back to an SWR approach. And admit that your short and intermediate term "buckets" is either or essentially fixed income. The "safety net" that "bucketeers" want is your fixed income. The intellectually honest way to approach it is to be 60/40 or 50/50 or 40/60 or even 30/70 and know that if all your equity went to near zero, like 1929, your fixed income is your safety net. I believe there were one or more threads here on this and, in the end, the general consensus was that, indeed, "buckets" is just SWR in mental disguise.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by avalpert » Wed Sep 06, 2017 10:13 am

willthrill81 wrote:
Wed Sep 06, 2017 10:03 am
gilgamesh wrote:
Wed Sep 06, 2017 6:20 am
willthrill81 wrote:
Tue Sep 05, 2017 9:43 pm
stlutz wrote:
Tue Sep 05, 2017 8:22 pm
P.S: the problems with buckets in the traditional sense, is when some considers it to be superior...having non-volatile bucket for immediate spending etc. and saying that's a better strategy....nothing superior about it vs overall portfolio having the same mix of asset "types".
True that in the end you will end up with some mix of stocks and bonds. I think the bucket approach provides a real rationale behind your asset allocation as opposed to simply saying, "I like 60/40."
I agree. It makes more sense to me to think of having a decade of spending in bonds with the rest in stocks, for instance, than an arbitrary AA. The fact that you can simplify a bucketed approach to an AA does not mean that the two are completely equivalent.
Why do you say that?...it's been a while since I read about this. Like any concept in investing and retirement, I apply to my situation and then forget about it. I know when I studied this, it did not make any difference to think in bucket vs overall for me, even if I were to follow SWR ...but you say they are not completely equivalent - curious in what way do they differ, other than mental accounting (I am not saying it's not...I know it made no difference for me...just curious why it makes a difference for you?) Thanks!
If a specific bucketed approach could be simplified to a 50/50 AA, for instance, then the end product of those two lines of thinking is the same, temporarily at least. But the processes used to derive the 'buckets' are generally very different from those used to derive an AA, and I think that the process may be at least as important as the product. With buckets, people are usually thinking about how much money they want to have for the short-term, the medium-term, and the long-term. With an AA, people are usually most focused on their risk tolerance.

I think it's easier for some people to SWAN and also take on adequate risk when they think of their portfolio as "I've got X years of spending safely tucked away, so I don't really care what gyrations my longer-term investments experience." Interestingly, I've heard many people who used the AA approach say that they actually viewed their portfolio this way.

As people age, for instance, they may reevaluate their buckets. For instance, it may not make as much as sense to have a full decade of spending in fixed income for an 85 year old considering that would easily cover than their remaining life expectancy (roughly six years).

Planning for spending needs and matching these with appropriate investments makes more sense to me than someone saying "I want my AA to be X/Y because of my risk tolerance."
Yes, as with all forms of mental accounting, it can have you approach the same numbers differently and each approach may work better for a given individual. For some, they feel better when they can say they are 100% in stocks above a safe floor while other feel better with the same numbers when they can say they are 80% stocks.

The real problem comes when communicating broadly and someone using a bucket approach touting how they are 100% stocks and everyone else should be to, forgetting to mention the mental accounting they are doing to make their 'portfolio' appear to be all in risky assets...

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by willthrill81 » Wed Sep 06, 2017 10:17 am

Leesbro63 wrote:
Wed Sep 06, 2017 10:08 am
willthrill81 wrote:
Wed Sep 06, 2017 10:03 am
As people age, for instance, they may reevaluate their buckets. For instance, it may not make as much as sense to have a full decade of spending in fixed income for an 85 year old considering that would easily cover than their remaining life expectancy (roughly six years).
Oh really. Then what should an 85 year old do? Go to 3-4 years of fixed income and all equity. And if it's 2007, wouldn't that be a quick way to lose a lifetime of saving and investing? If that person dies in 2008, their heirs are gonna probably divide the crashed stocks and sell at the bottom.
I said "may." Some might say "I probably don't have a long while yet to live, so I'm just going to all bonds for the rest of life and forget about all that volatility" while others may say "I want to leave as much to my kids as possible, so I'm going to keep six years in bonds and leave the rest in equities."

What their heirs do with the money is on them.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by Leesbro63 » Wed Sep 06, 2017 10:22 am

avalpert wrote:
Wed Sep 06, 2017 10:13 am

The real problem comes when communicating broadly and someone using a bucket approach touting how they are 100% stocks and everyone else should be to, forgetting to mention the mental accounting they are doing to make their 'portfolio' appear to be all in risky assets...
Exactly. Or someone with a lucrative pension who has "all equity". Not really.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by willthrill81 » Wed Sep 06, 2017 10:24 am

avalpert wrote:
Wed Sep 06, 2017 10:13 am
Yes, as with all forms of mental accounting, it can have you approach the same numbers differently and each approach may work better for a given individual. For some, they feel better when they can say they are 100% in stocks above a safe floor while other feel better with the same numbers when they can say they are 80% stocks.

The real problem comes when communicating broadly and someone using a bucket approach touting how they are 100% stocks and everyone else should be to, forgetting to mention the mental accounting they are doing to make their 'portfolio' appear to be all in risky assets...
Regardless of the approach used, people need to take into account the whole picture of their situation and should also communicate the relevant factors at work to others when discussing their choices.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by Leesbro63 » Wed Sep 06, 2017 10:25 am

willthrill81 wrote:
Wed Sep 06, 2017 10:17 am
Leesbro63 wrote:
Wed Sep 06, 2017 10:08 am
willthrill81 wrote:
Wed Sep 06, 2017 10:03 am
As people age, for instance, they may reevaluate their buckets. For instance, it may not make as much as sense to have a full decade of spending in fixed income for an 85 year old considering that would easily cover than their remaining life expectancy (roughly six years).
Oh really. Then what should an 85 year old do? Go to 3-4 years of fixed income and all equity. And if it's 2007, wouldn't that be a quick way to lose a lifetime of saving and investing? If that person dies in 2008, their heirs are gonna probably divide the crashed stocks and sell at the bottom.
I said "may." Some might say "I probably don't have a long while yet to live, so I'm just going to all bonds for the rest of life and forget about all that volatility" while others may say "I want to leave as much to my kids as possible, so I'm going to keep six years in bonds and leave the rest in equities."

What their heirs do with the money is on them.
The idea of an 85 year old being heavy equity to leave more for the kids is flawed. Unless everyone is in on the family estate plan. The catch is if grandpa dies in a 2008 situation. Having to pay estate costs, and divide a deflated portfolio is a "stressed" situation. For someone "merely" upper middle class but not truly wealthy, this is flawed and can cause more grief than it's supposed to soothe. Also much of the equity risk might end up just being taken to enrich the nursing home.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by willthrill81 » Wed Sep 06, 2017 10:30 am

Leesbro63 wrote:
Wed Sep 06, 2017 10:25 am
willthrill81 wrote:
Wed Sep 06, 2017 10:17 am
Leesbro63 wrote:
Wed Sep 06, 2017 10:08 am
willthrill81 wrote:
Wed Sep 06, 2017 10:03 am
As people age, for instance, they may reevaluate their buckets. For instance, it may not make as much as sense to have a full decade of spending in fixed income for an 85 year old considering that would easily cover than their remaining life expectancy (roughly six years).
Oh really. Then what should an 85 year old do? Go to 3-4 years of fixed income and all equity. And if it's 2007, wouldn't that be a quick way to lose a lifetime of saving and investing? If that person dies in 2008, their heirs are gonna probably divide the crashed stocks and sell at the bottom.
I said "may." Some might say "I probably don't have a long while yet to live, so I'm just going to all bonds for the rest of life and forget about all that volatility" while others may say "I want to leave as much to my kids as possible, so I'm going to keep six years in bonds and leave the rest in equities."

What their heirs do with the money is on them.
The idea of an 85 year old being heavy equity to leave more for the kids is flawed. Unless everyone is in on the family estate plan. The catch is if grandpa dies in a 2008 situation. Having to pay estate costs, and divide a deflated portfolio is a "stressed" situation. For someone "merely" upper middle class but not truly wealthy, this is flawed and can cause more grief than it's supposed to soothe. Also much of the equity risk might end up just being taken to enrich the nursing home.
What if the 85 year old lives to a 100 and then dies today? Apart from long-term care issues, which are tangential to the discussion here, the heirs would certainly have more than if the retiree was all fixed income for 15 years.

Nothing is guaranteed, and all roads carry risk.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by Leesbro63 » Wed Sep 06, 2017 11:12 am

willthrill81 wrote:
Wed Sep 06, 2017 10:30 am

What if the 85 year old lives to a 100 and then dies today? Apart from long-term care issues, which are tangential to the discussion here, the heirs would certainly have more than if the retiree was all fixed income for 15 years.

Nothing is guaranteed, and all roads carry risk.
That's my point. Something more balanced (60/40 to 40/60) seems the most appropriate rather than portfolios that bet on dates of death.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by willthrill81 » Wed Sep 06, 2017 11:19 am

Leesbro63 wrote:
Wed Sep 06, 2017 11:12 am
willthrill81 wrote:
Wed Sep 06, 2017 10:30 am

What if the 85 year old lives to a 100 and then dies today? Apart from long-term care issues, which are tangential to the discussion here, the heirs would certainly have more than if the retiree was all fixed income for 15 years.

Nothing is guaranteed, and all roads carry risk.
That's my point. Something more balanced (60/40 to 40/60) seems the most appropriate rather than portfolios that bet on dates of death.
Why not 70/30? Why not 30/70?

That's a big problem with just jumping to an AA: usually, the decision is quite arbitrary and built on little more than risk tolerance.

It's not much of a 'bet' that an 85 year old doesn't have 15 years left.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by gilgamesh » Wed Sep 06, 2017 11:37 am

I agree bucket strategy helps to hone down the AA better...true for me.

In fact, I go even further. I know I won't be spending my Roth till much later, taxable first, IRA in the middle...So, I like to visualize those as separate buckets based on investment horizon too and assign their own AA and then combine to get a final AA.

Also, even the type of assets in each. For instance I will be buying TIPS from IRA and Roth (if I have to). With most of my portfolio eventually being tied up with TIPS, I will need my taxable to be almost all stocks. I don't want to sell muni's in my taxable to bring the stock allocation higher. So, I start out with all stocks in taxable and keep it that way. Adjust my overall AA based on this...stock index funds are ideal in taxable anyways.

I want to minimize the need to sell taxable just to rebalance...I want to do it all inside retirement accounts....so bucket planning helps me achieve that too.

So, Bucket thinking does help in all sorts of ways...I realize now, StLutz was saying the same.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by Garco » Wed Sep 06, 2017 12:51 pm

I keep 2 buckets (though I don't use the term itself). One in my bank (cash or MMF), for cash I'm likely to need over next 6-12 months (rent, car payments, insurance, travel, etc.). A second one within my investment accounts (MM or FI), for "near cash" that I could withdraw over next 6-12 months for RMD's (required minimum distributions). In both cases, I am insulating my longer-term investments and my equities investments from needing to be tapped for near-term needs.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by AnalogKid22 » Thu Sep 07, 2017 9:31 am

Thanks so much for this podcast! I'm really enjoying it!

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by MEA » Thu Sep 07, 2017 12:11 pm

I finally got a chance to listen to it, and I enjoyed it too.

One question. Is it 4% of the amount you have the year you start the withdrawals, and you withdraw that amount every year regardless of the account balance. Or do you withdraw 4% of the balance of the portfolio as it goes up and down year to year?
It is speculators speculating on other speculators speculations. It is a tale told by an idiot, full of sound and fury signifying nothing.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by willthrill81 » Thu Sep 07, 2017 1:48 pm

MEA wrote:
Thu Sep 07, 2017 12:11 pm
I finally got a chance to listen to it, and I enjoyed it too.

One question. Is it 4% of the amount you have the year you start the withdrawals, and you withdraw that amount every year regardless of the account balance. Or do you withdraw 4% of the balance of the portfolio as it goes up and down year to year?
The former. You start withdrawing 4% of the original balance and then add inflation to that amount each subsequent year.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by hoops777 » Thu Sep 07, 2017 5:25 pm

If someone wants to "retire" at 35 I think you better have so much money that you do not have to think about any plans.
K.I.S.S........so easy to say so difficult to do.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by willthrill81 » Thu Sep 07, 2017 5:29 pm

hoops777 wrote:
Thu Sep 07, 2017 5:25 pm
If someone wants to "retire" at 35 I think you better have so much money that you do not have to think about any plans.
That's virtually impossible for a 35 year old unless they inherited a lot of money or had a ridiculously successful business. Early retirees often have to make the most plans.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by hoops777 » Thu Sep 07, 2017 6:04 pm

willthrill81 wrote:
Thu Sep 07, 2017 5:29 pm
hoops777 wrote:
Thu Sep 07, 2017 5:25 pm
If someone wants to "retire" at 35 I think you better have so much money that you do not have to think about any plans.
That's virtually impossible for a 35 year old unless they inherited a lot of money or had a ridiculously successful business. Early retirees often have to make the most plans.
My point was they better have a lot of money however they got it because so many things can go wrong over such a timespan.I do not consider 35 an early retiree but someone who chooses to not work,so as I said,better have professional athlete money.I just think there is a difference between say an athlete who is too old to compete at that level anymore and someone working in Silicon Valley,who just does not want to work anymore.Perfectly fine,no problem with it at all.Just better make sure you have a LOT more money than you need because you are making the choice to live 50 years give or take without working.Anyone care to predict the markets and world events for the next 50 years :DJust look at the events the last few weeks and that should make one real comfortable projecting a 50 year plus retirement.
K.I.S.S........so easy to say so difficult to do.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by willthrill81 » Thu Sep 07, 2017 6:50 pm

hoops777 wrote:
Thu Sep 07, 2017 6:04 pm
willthrill81 wrote:
Thu Sep 07, 2017 5:29 pm
hoops777 wrote:
Thu Sep 07, 2017 5:25 pm
If someone wants to "retire" at 35 I think you better have so much money that you do not have to think about any plans.
That's virtually impossible for a 35 year old unless they inherited a lot of money or had a ridiculously successful business. Early retirees often have to make the most plans.
My point was they better have a lot of money however they got it because so many things can go wrong over such a timespan.I do not consider 35 an early retiree but someone who chooses to not work,so as I said,better have professional athlete money.I just think there is a difference between say an athlete who is too old to compete at that level anymore and someone working in Silicon Valley,who just does not want to work anymore.Perfectly fine,no problem with it at all.Just better make sure you have a LOT more money than you need because you are making the choice to live 50 years give or take without working.Anyone care to predict the markets and world events for the next 50 years :DJust look at the events the last few weeks and that should make one real comfortable projecting a 50 year plus retirement.
I know of many who retired in their 30s. Most of them are using around a 4% withdrawal rate, but virtually all of them are prepared to cut their spending significantly when a market downturn occurs. Justin at Rootofgood.com retired at 33 (his wife retired shortly after him) with over $1M and no debt by having a high income and a very high savings rate for about a decade. He is currently planning on spending $40k annually (though he actually spends around $30k), and his very stock heavy portfolio has grown to nearly $1.9M, so his effective withdrawal rate right now is under 2%.

Others, like Mr. Money Mustache and Paula Pant, have diversified their retirement income with rental properties in addition to stock/bond portfolios.

While it's true that a 35 year old has a much longer time in retirement than a traditional retiree, they can also reenter the workforce to supplement their income if needed. Just $10-$20k a year can take a lot of stress off of a battered portfolio, though even that can be a bit difficult in a recession.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by #Cruncher » Fri Sep 08, 2017 10:45 am

gilgamesh wrote:
Mon Sep 04, 2017 8:48 am
There is a reason not too many retire at age 35. Even if we assume you can predict your expenses including healthcare for that long, it'll be interesting to see how the numbers will work.
The following table gives an idea how hard it would be for a worker to retire at age 35. Assuming he starts at age 25, in order to have enough money at age 35 to last until age 100, each period for ten years he'd need to save from 588% to 107% of his desired retirement spending -- depending on investment returns. At the other extreme if he doesn't retire until age 75, he'd need to save only between 29% and 2%.

Code: Select all

Row   Col A     Col B   Col C   Col D   Col E   Col F   Col G   Col H
  2  Start work    25
  3  Die          100
  4              2.0%    3.0%    4.0%    5.0%    6.0%    7.0%    8.0%  <- growth while working
  5  Retire      0.0%    1.0%    2.0%    3.0%    4.0%    5.0%    6.0%  <- growth while retired

Code: Select all

  6    35      587.7%  410.3%  296.3%  220.9%  169.4%  133.2%  107.1%
  7    40      343.3%  238.5%  170.3%  124.9%   93.8%   71.9%   56.2%
  8    45      223.9%  154.6%  109.1%   78.6%   57.7%   43.1%   32.7%
  9    50      154.3%  105.8%   73.7%   52.2%   37.4%   27.2%   20.0%
 10    55      109.6%   74.6%   51.3%   35.6%   24.9%   17.6%   12.5%
 11    60       79.0%   53.3%   36.1%   24.6%   16.8%   11.5%    7.9%
 12    65       57.2%   38.3%   25.5%   17.0%   11.3%    7.5%    5.0%
 13    70       41.2%   27.3%   17.9%   11.7%    7.6%    4.9%    3.2%
 14    75       29.1%   19.1%   12.4%    7.9%    5.0%    3.1%    2.0%
The table above assumes amounts and growth rates are in constant dollar terms and that upon retirement one shifts to a safer portfolio allocation with a return 2% points less. For anyone wishing to see the effect of different assumptions in cells B2:B5, here is the key formula in cell B6 -- which uses the Excel PMT and PV functions:

Code: Select all

B6: 587.7% = PMT(B$4 / 12, 12 * ($A6 - $B$2), 0, PV(B$5 / 12, 12 * ($B$3 - $A6), 1, 0, 0), 0)

hoops777
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Re: Michael Kitces 4% rule podcast on Madfientist

Post by hoops777 » Fri Sep 08, 2017 11:30 am

willthrill81 wrote:
Thu Sep 07, 2017 6:50 pm
hoops777 wrote:
Thu Sep 07, 2017 6:04 pm
willthrill81 wrote:
Thu Sep 07, 2017 5:29 pm
hoops777 wrote:
Thu Sep 07, 2017 5:25 pm
If someone wants to "retire" at 35 I think you better have so much money that you do not have to think about any plans.
That's virtually impossible for a 35 year old unless they inherited a lot of money or had a ridiculously successful business. Early retirees often have to make the most plans.
My point was they better have a lot of money however they got it because so many things can go wrong over such a timespan.I do not consider 35 an early retiree but someone who chooses to not work,so as I said,better have professional athlete money.I just think there is a difference between say an athlete who is too old to compete at that level anymore and someone working in Silicon Valley,who just does not want to work anymore.Perfectly fine,no problem with it at all.Just better make sure you have a LOT more money than you need because you are making the choice to live 50 years give or take without working.Anyone care to predict the markets and world events for the next 50 years :DJust look at the events the last few weeks and that should make one real comfortable projecting a 50 year plus retirement.
I know of many who retired in their 30s. Most of them are using around a 4% withdrawal rate, but virtually all of them are prepared to cut their spending significantly when a market downturn occurs. Justin at Rootofgood.com retired at 33 (his wife retired shortly after him) with over $1M and no debt by having a high income and a very high savings rate for about a decade. He is currently planning on spending $40k annually (though he actually spends around $30k), and his very stock heavy portfolio has grown to nearly $1.9M, so his effective withdrawal rate right now is under 2%.

Others, like Mr. Money Mustache and Paula Pant, have diversified their retirement income with rental properties in addition to stock/bond portfolios.

While it's true that a 35 year old has a much longer time in retirement than a traditional retiree, they can also reenter the workforce to supplement their income if needed. Just $10-$20k a year can take a lot of stress off of a battered portfolio, though even that can be a bit difficult in a recession.
If I "retire " at 35 I definitely do not want to go back to work in my 50's or 60's because I need money.I am just voicing my opinion that just make sure you have enough money to 100 pct avoid that possibility.More power to you if you do not have to work,but I still say if you cut it too close depending on historical market returns,it could turn out very badly.Hey,everyone is different,looks at life in their own way and has their own spending needs.I would never retire at 35 if I needed a 7 or 8 pct return on stocks because the stock market returns are unknown,and I would not bet my future on it.
K.I.S.S........so easy to say so difficult to do.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by 2015 » Fri Sep 08, 2017 3:30 pm

longinvest wrote:
Mon Sep 04, 2017 2:59 pm
Paul,
pkcrafter wrote:
Mon Sep 04, 2017 1:53 pm
What's going on here?

LPMs have a 20% failure rate

The problem with LMP is that it underestimates the costs substantially. It does this by constructing unrealistic scenarios and not actually matching liabilities.

https://medium.com/@justusjp/liability- ... b7300dcbdd
I can't speak for others, but I can definitely speak for myself. I haven't suggested a "liability-matching portfolio". I have suggested to build a workable retirement plan combining stable income with variable portfolio withdrawals, while also keeping an eye on longevity issues:
longinvest wrote:
Sun Sep 03, 2017 9:10 am
One approach to build a workable retirement plan is to split it in two parts: (i) lifelong non-portfolio stable inflation-indexed income and (ii) variable portfolio withdrawals. To address longevity issues, part of the remaining portfolio can be converted into lifelong non-portfolio stable inflation-indexed income around age 80, when the payout of an inflation-indexed Single Premium Immediate Annuity (SPIA) becomes competitive with variable portfolio withdrawal percentages.

Such a plan can use our Wiki's Variable Percentage Withdrawal (VPW) method, a withdrawal method which adapts to the retiree's retirement horizon, asset allocation, and portfolio returns during retirement. It combines the best ideas of the constant-dollar, constant-percentage, and 1/N withdrawal methods to allow the retiree to spend most of the portfolio using return-adjusted withdrawals. By adapting withdrawals to market returns, VPW will never prematurely deplete the portfolio.

So, here's an example of a workable plan for retirement:
  1. Delay Social Security (SS) until age 70 to maximize this lifelong non-portfolio inflation-indexed income.
  2. Fill the gap in Social Security payments between retirement and age 70 using a non-rolling TIPS ladder. It is important to exclude this non-rolling ladder from the portfolio used for variable withdrawals; this non-rolling ladder is part of the lifelong non-portfolio stable inflation-indexed income. Forum member #Cruncher has developed an awesome tool for this; the link is at the end of the following post:
    Re: How should I build a TIPS income ladder?.
  3. Those without a defined benefit pension can buy a small inflation-indexed SPIA at retirement as a supplement to the above SS & gap-ladder income.
  4. At the beginning of every retirement year, lookup the appropriate percentage according to (i) the age of the retiree (or spouse, the lowest of the two) and (ii) the asset allocation of the portfolio* in the VPW table. Multiply this percentage by the current portfolio balance. Withdraw the resulting amount from the portfolio while rebalancing it.
  5. Around age 80, assuming one is still alive, use enough of the remaining portfolio to buy an inflation-indexed SPIA which will provide sufficient lifelong non-portfolio stable inflation-indexed income, when combined with existing non-portfolio income, in case of survival beyond age 100**. The idea is that even if the portfolio gets down to zero, total income should be sufficient to live well. Luckily, inflation-indexed SPIAs are cost-efficient at age 80.
  6. Continue depleting the remaining portfolio using VPW, but cap the withdrawal percentage at 20% (at age 95 and beyond).
* It is important to apply VPW on a balanced portfolio, one with a sufficient ratio of bonds (nominal and inflation-indexed) to reduce the volatility of both the portfolio and withdrawals.
** VPW plans for a last withdrawal at age 99.
I've explicitly stated that one of the objectives of such a plan is to balance guaranteed income and liquidity:
longinvest wrote:
Sun Sep 03, 2017 9:10 am
This is a simple, but extremely robust plan. It tries to balance the amount of stable non-portfolio income with the amount of liquidity kept under the retiree's control in the portfolio. It is anxiety repellent, as a workable plan should be.
Is there anything that you find out-of-line, from a Bogleheads point of view, in this suggested plan? How would you improve it?

I could have suggested to use of a CD ladder or an even simpler high-interest savings account, in point 2, as has been suggested in Delay Social Security to age 70 and Spend more money at 62, except that on this particular thread, some members have been discussing retirement in their 30s and 40s, which would expose the gap money to an excessive amount of inflation risk.
I have spent much of yesterday and last night reading all threads related to VPW, and have incorporated the strategy into my IPS as a result. I deeply appreciate your work, time and patience (particularly the great detail you went into in some of the threads). It has resulted in my creating a lifelong income stream, provided great peace of mind, while increasing spending through variable withdrawals from the risk portfolio. Many thanks for your contributions!

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by Leesbro63 » Fri Sep 08, 2017 5:15 pm

#Cruncher wrote:
Fri Sep 08, 2017 10:45 am
The following table gives an idea how hard it would be for a worker to retire at age 35. Assuming he starts at age 25, in order to have enough money at age 35 to last until age 100, each period for ten years he'd need to save from 588% to 107% of his desired retirement spending...

I would assume that those retiring at 35 had some sort of financial windfall event. Sold a business or received an inheritance. Or perhaps received an injury settlement. I can't imagine being able to "save" your way to retirement at age 35.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by willthrill81 » Fri Sep 08, 2017 5:46 pm

Leesbro63 wrote:
Fri Sep 08, 2017 5:15 pm
#Cruncher wrote:
Fri Sep 08, 2017 10:45 am
The following table gives an idea how hard it would be for a worker to retire at age 35. Assuming he starts at age 25, in order to have enough money at age 35 to last until age 100, each period for ten years he'd need to save from 588% to 107% of his desired retirement spending...

I would assume that those retiring at 35 had some sort of financial windfall event. Sold a business or received an inheritance. Or perhaps received an injury settlement. I can't imagine being able to "save" your way to retirement at age 35.
This guy did it by age 33 with three small kids and almost made it look easy. A high income coupled with a high savings rate are key to very early retirements.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by hoops777 » Fri Sep 08, 2017 6:12 pm

willthrill81 wrote:
Fri Sep 08, 2017 5:46 pm
Leesbro63 wrote:
Fri Sep 08, 2017 5:15 pm
#Cruncher wrote:
Fri Sep 08, 2017 10:45 am
The following table gives an idea how hard it would be for a worker to retire at age 35. Assuming he starts at age 25, in order to have enough money at age 35 to last until age 100, each period for ten years he'd need to save from 588% to 107% of his desired retirement spending...

I would assume that those retiring at 35 had some sort of financial windfall event. Sold a business or received an inheritance. Or perhaps received an injury settlement. I can't imagine being able to "save" your way to retirement at age 35.
This guy did it by age 33 with three small kids and almost made it look easy. A high income coupled with a high savings rate are key to very early retirements.
He did it because they spend way less money than 99 pct of similar families and had a very good investment outcome.I question what happens if the market goes bad for a long time and their children become much more expensive.Without spending more than 5 minutes skimming his story,I would not say they are worry free financially for the rest of their life and they will be forced to continue that frugal life forever in all probability,but to each their own.They seem happy.There are other families with 3 kids in their 30's with the same income struggling to pay the mortgage in hcol areas.
K.I.S.S........so easy to say so difficult to do.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by willthrill81 » Fri Sep 08, 2017 6:26 pm

hoops777 wrote:
Fri Sep 08, 2017 6:12 pm
willthrill81 wrote:
Fri Sep 08, 2017 5:46 pm
Leesbro63 wrote:
Fri Sep 08, 2017 5:15 pm
#Cruncher wrote:
Fri Sep 08, 2017 10:45 am
The following table gives an idea how hard it would be for a worker to retire at age 35. Assuming he starts at age 25, in order to have enough money at age 35 to last until age 100, each period for ten years he'd need to save from 588% to 107% of his desired retirement spending...

I would assume that those retiring at 35 had some sort of financial windfall event. Sold a business or received an inheritance. Or perhaps received an injury settlement. I can't imagine being able to "save" your way to retirement at age 35.
This guy did it by age 33 with three small kids and almost made it look easy. A high income coupled with a high savings rate are key to very early retirements.
He did it because they spend way less money than 99 pct of similar families and had a very good investment outcome.I question what happens if the market goes bad for a long time and their children become much more expensive.Without spending more than 5 minutes skimming his story,I would not say they are worry free financially for the rest of their life and they will be forced to continue that frugal life forever in all probability,but to each their own.They seem happy.There are other families with 3 kids in their 30's with the same income struggling to pay the mortgage in hcol areas.
Their timing was fortuitous, to be sure. But a high saving rate trumps investment returns every time when it comes to minimizing the time to retire.

Considering that their current withdrawals are under 2% of their portfolio, I have no clue why you think they are on shaky financial ground.

Regarding HCOL areas, most of those folks are getting paid a lot more than those in LCOL areas. There's something to be said for living in a HCOL area long enough to save up your nest egg, then moving to a LCOL area. But if someone just can't get ahead in a HCOL area, moving seems like a reasonable option for many.

audentes Fortuna iuvat
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by hoops777 » Fri Sep 08, 2017 6:47 pm

willthrill81 wrote:
Fri Sep 08, 2017 6:26 pm
hoops777 wrote:
Fri Sep 08, 2017 6:12 pm
willthrill81 wrote:
Fri Sep 08, 2017 5:46 pm
Leesbro63 wrote:
Fri Sep 08, 2017 5:15 pm
#Cruncher wrote:
Fri Sep 08, 2017 10:45 am
The following table gives an idea how hard it would be for a worker to retire at age 35. Assuming he starts at age 25, in order to have enough money at age 35 to last until age 100, each period for ten years he'd need to save from 588% to 107% of his desired retirement spending...

I would assume that those retiring at 35 had some sort of financial windfall event. Sold a business or received an inheritance. Or perhaps received an injury settlement. I can't imagine being able to "save" your way to retirement at age 35.
This guy did it by age 33 with three small kids and almost made it look easy. A high income coupled with a high savings rate are key to very early retirements.
He did it because they spend way less money than 99 pct of similar families and had a very good investment outcome.I question what happens if the market goes bad for a long time and their children become much more expensive.Without spending more than 5 minutes skimming his story,I would not say they are worry free financially for the rest of their life and they will be forced to continue that frugal life forever in all probability,but to each their own.They seem happy.There are other families with 3 kids in their 30's with the same income struggling to pay the mortgage in hcol areas.
Their timing was fortuitous, to be sure. But a high saving rate trumps investment returns every time when it comes to minimizing the time to retire.

Considering that their current withdrawals are under 2% of their portfolio, I have no clue why you think they are on shaky financial ground.

Regarding HCOL areas, most of those folks are getting paid a lot more to. There's something to be said for living in a HCOL area long enough to save up your nest egg, then move to a LCOL area. But if someone just can't get ahead in a HCOL area, moving seems like a reasonable option for many.

audentes Fortuna iuvat
I guess maybe because he has a very heavy stock portfolio(your quote)which could take a nice plunge and it is hard to believe a family of 5 lives on 30,000 a year.Especially a family with young kids with potential for a lot of unexpected expenses,as well as expected ones.Pretty difficult to predict the stock market and the future expenses of 3 kids.I guess I am just a pessimist.They will probably be just fine.What could ever go wrong :)
Let me add I hope they do live happily ever after because he seems like a really good man.
K.I.S.S........so easy to say so difficult to do.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by gilgamesh » Fri Sep 08, 2017 6:54 pm

I wonder how much a family of 5 on welfare/social assistance, including Medicaid dental and health coverage get a year?

I know there is qualification requirements, circumstances etc. and obviously not a financial plan... for those unfortunate who are in that predicament, I wonder how much they get to survive a year?

I am not equating someone drawing a retirement income with their hard earned savings to those receiving government assistance either....

It's non-judgemental curiosity, that's all.

Could it possibly be less than $30k/year?
Last edited by gilgamesh on Fri Sep 08, 2017 6:57 pm, edited 2 times in total.

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Re: Michael Kitces 4% rule podcast on Madfientist

Post by willthrill81 » Fri Sep 08, 2017 6:55 pm

hoops777 wrote:
Fri Sep 08, 2017 6:47 pm
willthrill81 wrote:
Fri Sep 08, 2017 6:26 pm
hoops777 wrote:
Fri Sep 08, 2017 6:12 pm
willthrill81 wrote:
Fri Sep 08, 2017 5:46 pm
Leesbro63 wrote:
Fri Sep 08, 2017 5:15 pm



I would assume that those retiring at 35 had some sort of financial windfall event. Sold a business or received an inheritance. Or perhaps received an injury settlement. I can't imagine being able to "save" your way to retirement at age 35.
This guy did it by age 33 with three small kids and almost made it look easy. A high income coupled with a high savings rate are key to very early retirements.
He did it because they spend way less money than 99 pct of similar families and had a very good investment outcome.I question what happens if the market goes bad for a long time and their children become much more expensive.Without spending more than 5 minutes skimming his story,I would not say they are worry free financially for the rest of their life and they will be forced to continue that frugal life forever in all probability,but to each their own.They seem happy.There are other families with 3 kids in their 30's with the same income struggling to pay the mortgage in hcol areas.
Their timing was fortuitous, to be sure. But a high saving rate trumps investment returns every time when it comes to minimizing the time to retire.

Considering that their current withdrawals are under 2% of their portfolio, I have no clue why you think they are on shaky financial ground.

Regarding HCOL areas, most of those folks are getting paid a lot more to. There's something to be said for living in a HCOL area long enough to save up your nest egg, then move to a LCOL area. But if someone just can't get ahead in a HCOL area, moving seems like a reasonable option for many.

audentes Fortuna iuvat
I guess maybe because he has a very heavy stock portfolio(your quote)which could take a nice plunge and it is hard to believe a family of 5 lives on 30,000 a year.Especially a family with young kids with potential for a lot of unexpected expenses,as well as expected ones.Pretty difficult to predict the stock market and the future expenses of 3 kids.I guess I am just a pessimist.They will probably be just fine.What could ever go wrong :)
Let me add I hope they do live happily ever after because he seems like a really good man.
I follow his monthly reports on income and spending. They have budgeted around $40k for annual spending but typically come in quite a bit under that. They really show that this idea that kids are super-expensive is largely a myth. He argues that spending time with kids is far important than spending money on them.

He does seem to spend a fair amount of time looking for good deals on pretty much everything they spend money on. He even had their internet service disconnected for their recent trip to Europe.

They have no mortgage, their property taxes are low, and he does nearly all of the maintenance on the home. They spend very little on vehicles and don't drive much. They don't eat out much because they are clearly very good cooks.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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