The fear of retirement, black swan, and math to dissuade the fear.

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EnjoyIt
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The fear of retirement, black swan, and math to dissuade the fear.

Post by EnjoyIt » Wed Nov 08, 2017 9:05 pm

Over the years I have seen many many discussion about how 4% withdrawal rate is too much and people should go down to 2-3% to be safe. Outside of the people who retire on a very tight budget such as the Mr. Money Mustache crowd who want to live on $25k-$30k/yr I want to show how 4% is really not that scary or dangerous. The demographics appear to be more wealthy on this forum so I will show an example retirement for a family who wants to retire early at 50 years old with $2 million living on $80k per year with a 50/50 portfolio and no debt. We need to also assume that at 70 years old this couple will get some form of social security. I will use $20k for one spouse and 1/2 that for the other spouse adding up to $30k/yr. We will also add in $20k in healthcare costs till they are 65 where we drop it down to $10k once the couple gets Medicare. Since this couple is debt free they can very likely live a very basic existence on $30k/yr which would include property tax, home maintenance, utilities, car insurance, gas, and groceries. The rest, $30k is used for discretionary spending such as eating out, travel, toys and what nots. I think you all may agree this is a reasonable boglehead scenario and a comfortable early retirement. Some may want more and some may need/want less but the below scenario is reasonable.

If we run this scenario in cfiresim we get the following results.
Image

This is pretty impressive considering this included some really serious bad events like The Great Depression, the inflation years of the 70s and The Great Recession. What else is interesting is that on average this couple will die with over $5 million telling me they can probably spend a bit more in retirement as they get older and their wealth increases or they start collecting social security.

But wait, many fearful bogleheads will say that the future will not be like the past and we need to consider much lower returns. So what will happen to this couple if the stock portion of their portfolio collapses by 50% followed by 8 years of 2% real returns followed by a 2 year recovery period of 20% returns followed by historical returns? Lets be honest, this is a pretty catastrophic event and the odds of this happening are very low, but fearful bogleheads say it may happen so lets see what it may look like. First and foremost we must realize that this couple is human, and humans will naturally become more frugal when times are tough. How frugal depends on the couple. I think this couple could easily cut out $5k from their discretionary spending as well as find ways to make a little money here and there. I know just doing sign on bonuses for credit cards, checking accounts, and brokerage accounts this couple could easily make an extra $10k/yr with a $1 million+ nest egg. Or they can drive for Uber part time or any other source of available income. So lets look at the math after 10 years of living like this and then using historical returns again.

We start with $2 million in a 50/50 portfolio with a 50% equities decline which puts us at $1.5 million. We use real returns.

50/50 2% bonus end of year
portfolio expenses returns churning total
year 0 2,000,000 1,500,000
year 1 1,500,000 75,000 30,000 10,000 1,465,000
year 2 1,465,000 75,000 29,300 10,000 1,429,300
.
.
.
year 9 1,199,596 75,000 239,919 10,000 1,374,515
year 10 1,374,515 75,000 274,903 10,000 1,584,418

After 10 years they are still below their original $2 million

This couple has learned to bonus churn or make a little side income and will continue to do that till they reach social security age. Also, since markets are doing great again they are more comfortable spending back to their 80k/yr.

If we run the numbers again in cfiresim it turns out this couple will have a 100% chance of not running out of money for the next 40 years with an average final amount of $3,268,766. The reason why this works is because this couple will eventually get social security as well as medicare. Some may say these won't exist but that is very unlikely. It is even more unlikely to have the above scenario play out as well as losing both social security and medicare.

I realize this is just a straw man example. I realize not everyone wants to earn money via brokerage house shopping and going threw a dozen credit cards a year. But just as easily this couple could cut their spending further, take in part time work, or any other means of generating or not spending an additional $10k/yr. Although not ideal for these retirees, we must realize that this is probably a worst case scenario and reality will likely not be so bad. For those who don't think they want to cut back spending or make an income, they can save an additional $150k and buy TIPS pulling out $15k/yr. In essence they would have save $2,150,000 making their withdrawal rate actually 3.72% which is still far better then the fear mongering I see here talking about needing 33-50x savings (2-3% SWR.)

Please share your thoughts and comments

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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by prudent » Wed Nov 08, 2017 9:13 pm

Topic moved to Investing - Theory, News & General.

rai
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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by rai » Wed Nov 08, 2017 9:30 pm

I can't see how you figure it's possible to make $10K/year by doing credit card sign-on bonuses and checking/brokerage accounts that number sounds ludicrously high, like an order of magnitude higher than possible.

Anyway my feeling is that it's far easier for me to make 6-figures currently at a high paying job with tax shelter plans and HSA plans while I'm working so I'd be more inclined to save an extra $500K from working an extra few years rather think about having to drive an Uber and look for new checking account deals every few months when I'm retired and find out that I didn't save enough.

So my point is if you are figuring things so close that there can be a bad sequence of return would force me back to work, I'd rather save more to make that a non-fear. IOW if you need $2M at 4% I'd rather see $2.5M and figure the 3% if there was a need to lower the spending because of a bad sequence of return.

IMO any plan that has the phrase "you can be an Uber driver to make extra money" is not my type of plan.

I'm looking for a plan that has the phrase like even if there is a bad sequence of event's you won't have to be an Uber driver.

However, I will grant you that 97% is quite good results :sharebeer
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patrick013
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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by patrick013 » Wed Nov 08, 2017 9:57 pm

Well realistically your approach seems well thought out. Common
crashes last a year but secular downtrends could last 5-10 even
20 years. I always remember growth is not infinite, it may stop.

There will always be a core economy but decade after decade of
growth may not be possible. We have little plastic phones, delivery
service from Amazon, expensive cars and cheap foreign shirts.
So bad news may begin and continue. Worst case scenario.

So large cap performance is very important and we'll just have to wait
and see. The 50-50 portfolio is a good bet, inflation that appears as
growth is still growth, and indexing should still provide investment gains.
Best case scenario.

Lower portfolio return estimates are probably best in your program. Everybody
hates to guess.
age in bonds, buy-and-hold, 10 year business cycle

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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by JBTX » Wed Nov 08, 2017 10:12 pm

How would that model work if you were a citizen of Japan investing in the Japanese Stock market?

I would argue that while the odds are high that 4.0% will be safe, as of right now, given where market levels are, the chance of success is significantly lower than 97%.

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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by AlohaJoe » Wed Nov 08, 2017 10:31 pm

EnjoyIt wrote: โ†‘
Wed Nov 08, 2017 9:05 pm
Or they can drive for Uber part time or any other source of available income.
I agree with the general thrust of your argument -- that in the real world people can adapt to the 4% rule failing by trying to get part time work or cutting their standard of living. After all, when we look at actually retirees from 1966 or 1969 (the "worst time to retire" back when people didn't even know about the 4% rule) it isn't as if the newspapers in the 1980s were full of stories about the hundreds of thousands elderly people dying in the streets. Today, 30 years into the Japanese crash, we don't see millions of elderly Japanese in absolute poverty.

That said, I think you are far too cavalier with "a retiree could earn extra money". Let's take a closer look at that 1966 retiree when the 4% rule fails (or comes close to failing, depending on which exact set of parameters you use for backtesting)....this is what their portfolio balance looks like over time....

Image

I would argue the most retirees aren't going to consider their portfolio in serious trouble until well after a decade into retirement. At that point you are 76 or 77 years old. You haven't had a job in a 10 years.

While there are lots of elderly working, I think it is implausible to suggest that it would be "easy" for someone who has been out of the workforce for so long and is at a pretty advanced age to return. Especially when we keep in mind that most of the time there is portfolio stress it is because there is a recession....

Again, going back to that 1966-retiree...they are 77 years old, they haven't worked in a decade, and unemployment is 8%. All of which assumes they haven't developed any health issues by age 77 that limit the kind of employment they can undertake.

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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by flyingaway » Wed Nov 08, 2017 10:33 pm

If I got fired by my employer and I have satisfied the 4% rule, at 53, I would not look for another job. I will make the 4% rule work.
However, if I still have my human capital and my job, although not fun anymore, is not killing me, why not work for a few more years? Maybe the 4% rule did not count the money for my son's wedding. It certainly didn't count the cost of that pill that would reduce my age by 20 years in the future.
Last edited by flyingaway on Wed Nov 08, 2017 10:34 pm, edited 1 time in total.

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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by Steve723 » Wed Nov 08, 2017 10:35 pm

rai wrote: โ†‘
Wed Nov 08, 2017 9:30 pm
I can't see how you figure it's possible to make $10K/year by doing credit card sign-on bonuses and checking/brokerage accounts that number sounds ludicrously high, like an order of magnitude higher than possible.

Anyway my feeling is that it's far easier for me to make 6-figures currently at a high paying job with tax shelter plans and HSA plans while I'm working so I'd be more inclined to save an extra $500K from working an extra few years rather think about having to drive an Uber and look for new checking account deals every few months when I'm retired and find out that I didn't save enough.

So my point is if you are figuring things so close that there can be a bad sequence of return would force me back to work, I'd rather save more to make that a non-fear. IOW if you need $2M at 4% I'd rather see $2.5M and figure the 3% if there was a need to lower the spending because of a bad sequence of return.

IMO any plan that has the phrase "you can be an Uber driver to make extra money" is not my type of plan.

I'm looking for a plan that has the phrase like even if there is a bad sequence of event's you won't have to be an Uber driver.

However, I will grant you that 97% is quite good results :sharebeer
The "drive an Uber" scenario was only to be utilized in a worst-case kind of situation that he described. Perhaps some folks are willing to take that 2-3% chance of a worst case scenario vs. working a few extra years to eliminate that risk.

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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by Sandtrap » Wed Nov 08, 2017 11:16 pm

Hope for the best and if not, "make do". :shock:
vs
Hope for the best and prepare for the worst. :D

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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by randomguy » Wed Nov 08, 2017 11:20 pm

EnjoyIt wrote: โ†‘
Wed Nov 08, 2017 9:05 pm
Over the years I have seen many many discussion about how 4% withdrawal rate is too much and people should go down to 2-3% to be safe. Outside of the people who retire on a very tight budget such as the Mr. Money Mustache crowd who want to live on $25k-$30k/yr I want to show how 4% is really not that scary or dangerous.
Please share your thoughts and comments
It doesn't matter what you set your SWR at in terms of dealing with blackswan events. When the US gets nuked, the US devalues the dollar by 1000000%, the communists take over and sieze all private assets, civil war breaks out between red/blue states and so on (i.e. black swan events are not something that anyone can predict like market cycles), it doesn't matter much if you SWR is 4% or 1%. The world has changed and you will have to adapt to the new world order. Like the fact in 5 years, you can no longer drive an Uber cause they automated their whole fleet:)

But lets look at your "Catastrophic case" 50% loss, 2% gains for 8 year, and then 10%? That isn't really that bad. Look up japan were we are off by ~33% 28 years later.

Being able to cut spending (i.e. the difference between 3% and 4% is huge) is nice but it doesn't eliminate all unknowns. You could get hit with some crazy expense (i.e. you need to spend 100k retrofitting your house to accomodate your disability) that depletes your account. In the end you have to decide how much to worry about these edge cases. At some point you just have to accept you can't control everything and that you are not changing your risk profile much by saving more money.

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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by randomguy » Wed Nov 08, 2017 11:27 pm

rai wrote: โ†‘
Wed Nov 08, 2017 9:30 pm
I can't see how you figure it's possible to make $10K/year by doing credit card sign-on bonuses and checking/brokerage accounts that number sounds ludicrously high, like an order of magnitude higher than possible.

You can et 2500/million right now. That gets you 5k if you have 2 million in assets. Most places require to you leave the money in for 6-12 months. So you can get pretty close to 10k.

Now if you can do this for more than a couple of years is a different question. I have a feeling you might run out of places to switch to after a couple of years.

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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by EnjoyIt » Wed Nov 08, 2017 11:56 pm

randomguy wrote: โ†‘
Wed Nov 08, 2017 11:27 pm
rai wrote: โ†‘
Wed Nov 08, 2017 9:30 pm
I can't see how you figure it's possible to make $10K/year by doing credit card sign-on bonuses and checking/brokerage accounts that number sounds ludicrously high, like an order of magnitude higher than possible.

You can et 2500/million right now. That gets you 5k if you have 2 million in assets. Most places require to you leave the money in for 6-12 months. So you can get pretty close to 10k.

Now if you can do this for more than a couple of years is a different question. I have a feeling you might run out of places to switch to after a couple of years.
There are also plenty of credit card bonuses as well as other such opportunities. $10k/yr will require effort but not impossible. There are people doing well above that. BTW, there is a retiree in my neighborhood who drives for Uber/Lyft he says he does it sporadically/randomly. Basically when someone in the area needs a ride he may grab them. He drove me to the airport twice now. Seams like a nice little way to get out of the house and make a few extra bucks. If he does 3 rides a week at $40/ride and he makes $20 after expenses and taxes that is an extra $60 a week or $3120 a year. There is another retiree in my area who used to dog sit. We have neighbors who utilized his services. In retirement my grandmother used to set up excursions for other retirees. She was compensated and got to go for free. I saw a blog post about one retiree reselling yard sale stuff on eBay and making a small profit there.

My point is that even in a horrible event such as outlined above there are always ways to make little money and make it work.
Last edited by EnjoyIt on Thu Nov 09, 2017 12:12 am, edited 1 time in total.

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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by EnjoyIt » Thu Nov 09, 2017 12:09 am

flyingaway wrote: โ†‘
Wed Nov 08, 2017 10:33 pm
If I got fired by my employer and I have satisfied the 4% rule, at 53, I would not look for another job. I will make the 4% rule work.
However, if I still have my human capital and my job, although not fun anymore, is not killing me, why not work for a few more years? Maybe the 4% rule did not count the money for my son's wedding. It certainly didn't count the cost of that pill that would reduce my age by 20 years in the future.
Are you sure it isn't killing you? Would you not be healthier if you were more active outside of work, ate healthier because you had the time to prepare it, maybe exercised more. Also, maybe you wasting your day at work is really not worth an overpriced one day party for your son to show off his bride? Sometimes things we think are important are really not worth the time and the health working for it. This party may or may not be an example.
rai wrote: โ†‘
Wed Nov 08, 2017 9:30 pm
So my point is if you are figuring things so close that there can be a bad sequence of return would force me back to work, I'd rather save more to make that a non-fear. IOW if you need $2M at 4% I'd rather see $2.5M and figure the 3% if there was a need to lower the spending because of a bad sequence of return.

IMO any plan that has the phrase "you can be an Uber driver to make extra money" is not my type of plan.

I'm looking for a plan that has the phrase like even if there is a bad sequence of event's you won't have to be an Uber driver.

However, I will grant you that 97% is quite good results :sharebeer
2 comments:
1) in my example above saving the extra $150k and putting it into TIPs would have avoided this couple from "driving Uber" an extra $500k would have given them the ability to grow their spending over the decades which may not be a bad thing in retirement though historically 4% allowed for that as well.

2) You will never have a plan that gives you 100% certainty. You may have to be greeter in Walmart no matter how much money you save. We can not plan or predict 100% of what life throws at us. Having a plan to make a few extra bucks if you really have to is a worst case scenario. I know and am positive even if there is no worst case scenario I will likely find ways to make money. Not because I need it, but because doing something that other people value will likely end up turning a profit.

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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by randomguy » Thu Nov 09, 2017 12:20 am

EnjoyIt wrote: โ†‘
Wed Nov 08, 2017 11:56 pm
randomguy wrote: โ†‘
Wed Nov 08, 2017 11:27 pm
rai wrote: โ†‘
Wed Nov 08, 2017 9:30 pm
I can't see how you figure it's possible to make $10K/year by doing credit card sign-on bonuses and checking/brokerage accounts that number sounds ludicrously high, like an order of magnitude higher than possible.

You can et 2500/million right now. That gets you 5k if you have 2 million in assets. Most places require to you leave the money in for 6-12 months. So you can get pretty close to 10k.

Now if you can do this for more than a couple of years is a different question. I have a feeling you might run out of places to switch to after a couple of years.
There are also plenty of credit card bonuses as well as other such opportunities. $10k/yr will require effort but not impossible. There are people doing well above that. BTW, there is a retiree in my neighborhood who drives for Uber/Lyft he says he does it sporadically/randomly. Basically when someone in the area needs a ride he may grab them. He drove me to the airport twice now. Seams like a nice little way to get out of the house and make a few extra bucks. If he does 3 rides a week at $40/ride and he makes $20 after expenses and taxes that is an extra $60 a week or $3120 a month. There is another retiree in my area who used to dog sit. We have neighbors who utilized his services. In retirement my grandmother used to set up excursions for other retirees. She was compensated and got to go for free. I saw a blog post about one retiree reselling yard sale stuff on eBay and making a small profit there.

My point is that even in a horrible event such as outlined above there are always ways to make little money and make it work.

Most of the credit cards have limits on how many you can open. Getting 3k the first year is easy but after that you will rapidly into various limits like the 5/24 that chase has. You also run the risk that these things could be cut at anytime. I am not sure this is something you can really plan on doing for a decade or two . Uber runs a similiar risk. If unemployment is at 15%, how many of those people will be doing Uber while looking for a job? The market could very well get flooded with drivers while demand drops. There will always be the risk of the job not being available when you need it (i.e. it is easy to get a job now. It was a lot harder in say 2009).

But yes at low spending levels it is easy to replace income. If you are living on 30k/year, get a McJob and making 10k really helps you out. If you are living on 150k, that added 10k doesn't help anywhere near as much. Same thing with SS.

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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by randomguy » Thu Nov 09, 2017 12:31 am

EnjoyIt wrote: โ†‘
Thu Nov 09, 2017 12:09 am
flyingaway wrote: โ†‘
Wed Nov 08, 2017 10:33 pm
If I got fired by my employer and I have satisfied the 4% rule, at 53, I would not look for another job. I will make the 4% rule work.
However, if I still have my human capital and my job, although not fun anymore, is not killing me, why not work for a few more years? Maybe the 4% rule did not count the money for my son's wedding. It certainly didn't count the cost of that pill that would reduce my age by 20 years in the future.
Are you sure it isn't killing you? Would you not be healthier if you were more active outside of work, ate healthier because you had the time to prepare it, maybe exercised more. Also, maybe you wasting your day at work is really not worth an overpriced one day party for your son to show off his bride? Sometimes things we think are important are really not worth the time and the health working for it. This party may or may not be an example.

People that want to exercise, eat healthy and so on do it. Blaming the job is just making excuses. You can live life while having a job. It is just a type of procrastinating to say that when I retire I will do xxx. Yes there are exceptions (say you are working 80+ hours/week) but not very many.

And I notice you picked the wedding and not the pill that improves your quality of life:) For an nonhypothetical case, what if working 1 year gives you enough money to avoid yardwork/house keeping for the next 40 years. Is spending 2k hours at work worth it to save 4k hours of labor over the next 40 years? Seems like a reasonable trade off to me. And I much prefer my job to scrubbing toilets:)

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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by JoMoney » Thu Nov 09, 2017 12:31 am

Black swan sounds to benign to fear, and by definition it won't show up in statistics. It's really a fire breathing dragon of chaos coming to decimate your nest egg with unknown unknowns... and then only if you survive does it start to look like a "black swan" in the rear view mirror.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by EnjoyIt » Thu Nov 09, 2017 12:44 am

randomguy wrote: โ†‘
Thu Nov 09, 2017 12:20 am
Most of the credit cards have limits on how many you can open. Getting 3k the first year is easy but after that you will rapidly into various limits like the 5/24 that chase has. You also run the risk that these things could be cut at anytime. I am not sure this is something you can really plan on doing for a decade or two . Uber runs a similiar risk. If unemployment is at 15%, how many of those people will be doing Uber while looking for a job? The market could very well get flooded with drivers while demand drops. There will always be the risk of the job not being available when you need it (i.e. it is easy to get a job now. It was a lot harder in say 2009).

But yes at low spending levels it is easy to replace income. If you are living on 30k/year, get a McJob and making 10k really helps you out. If you are living on 150k, that added 10k doesn't help anywhere near as much. Same thing with SS.
But someone retiring on 150k/yr has more room to cut frivolousness as compared to person retiring on $30k/yr. Maybe those years they don't fly first class on their next European vacation. Most round trip first class tickets seam to require a $4k-$6k premium. For a couple who flies twice a year that can be $20k/yr difference. Maybe do one less trip all together and your 4% in now 3%. Easy peasy. Actually I think 4% is much easier the more wealth you have since you probably have more discretionary expenses that you can choose not to spend during that years.
randomguy wrote: โ†‘
Thu Nov 09, 2017 12:31 am
People that want to exercise, eat healthy and so on do it. Blaming the job is just making excuses. You can live life while having a job. It is just a type of procrastinating to say that when I retire I will do xxx. Yes there are exceptions (say you are working 80+ hours/week) but not very many.

And I notice you picked the wedding and not the pill that improves your quality of life:) For an nonhypothetical case, what if working 1 year gives you enough money to avoid yardwork/house keeping for the next 40 years. Is spending 2k hours at work worth it to save 4k hours of labor over the next 40 years? Seems like a reasonable trade off to me. And I much prefer my job to scrubbing toilets:)
I picked on the wedding because I am very biased and think they are ridiculous waste of money (Sorry Flyingaway.) Just telling the venue it is a wedding doubles if not quadruples the cost. Next, I exercise, eat healthy and do so while currently working. When I have stretches of days off I exercise more, and eat even healthier. On days off I take the dogs out hiking something I can't do on a work day. Some days I just don't have the time to prepare a meal because of work and am forced to eat out. Some days works kicks my butt and I don't exercise. Lastly, If you are currently working and hiring someone else to do your housework then it is part of your budget and likely should save that extra cash to keep that expense in retirement. But, in a prolonged recession maybe you can do some yard work and save some money. Like you, yard services and maid services are part of my retirement budget, but I have no issues stopping that if I have to. I'm not above picking weeds and wiping urine off the toilet rim.
JoMoney wrote: โ†‘
Thu Nov 09, 2017 12:31 am
Black swan sounds to benign to fear, and by definition it won't show up in statistics. It's really a fire breathing dragon of chaos coming to decimate your nest egg with unknown unknowns... and then only if you survive does it start to look like a "black swan" in the rear view mirror.
Your scaring me :shock:

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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by Nate79 » Thu Nov 09, 2017 1:13 am

There are plenty of retirees who own their own home, live on SS and maybe have some money in CD's. You can adapt or Darwin is going to come along and slap you in the face. To me these extremely low SWR are absurd. 4% is perfectly fine and if, especially in the early years the market is really down you adapt, cut spending, maybe make a little money on the side and move on. But if someone wants to work an extra decade so they can have a 2% SWR good for them. But I'll be laughing and enjoying retirement while they are continuing to needlessly slave away at work.

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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by Hyperborea » Thu Nov 09, 2017 1:33 am

randomguy wrote: โ†‘
Wed Nov 08, 2017 11:20 pm
But lets look at your "Catastrophic case" 50% loss, 2% gains for 8 year, and then 10%? That isn't really that bad. Look up japan were we are off by ~33% 28 years later.
If that oft-referenced Japanese investor had bought a world market portfolio they would be doing fine. If they had followed the vociferous recommendation given on Bogleheads that a fully home market equity portfolio is a good choice then they would definitely be in trouble. What makes it easier on this Japanese investor is the fact that inflation in Japan over those 28 years has been about 12% in total so that prices have changed little.

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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by visualguy » Thu Nov 09, 2017 4:06 am

Hyperborea wrote: โ†‘
Thu Nov 09, 2017 1:33 am
randomguy wrote: โ†‘
Wed Nov 08, 2017 11:20 pm
But lets look at your "Catastrophic case" 50% loss, 2% gains for 8 year, and then 10%? That isn't really that bad. Look up japan were we are off by ~33% 28 years later.
If that oft-referenced Japanese investor had bought a world market portfolio they would be doing fine. If they had followed the vociferous recommendation given on Bogleheads that a fully home market equity portfolio is a good choice then they would definitely be in trouble. What makes it easier on this Japanese investor is the fact that inflation in Japan over those 28 years has been about 12% in total so that prices have changed little.
Isn't it possible for something similar to the Japanese scenario to happen to a world market portfolio? What's the basis for ruling that out?

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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by EnjoyIt » Thu Nov 09, 2017 4:17 am

visualguy wrote: โ†‘
Thu Nov 09, 2017 4:06 am
Hyperborea wrote: โ†‘
Thu Nov 09, 2017 1:33 am
randomguy wrote: โ†‘
Wed Nov 08, 2017 11:20 pm
But lets look at your "Catastrophic case" 50% loss, 2% gains for 8 year, and then 10%? That isn't really that bad. Look up japan were we are off by ~33% 28 years later.
If that oft-referenced Japanese investor had bought a world market portfolio they would be doing fine. If they had followed the vociferous recommendation given on Bogleheads that a fully home market equity portfolio is a good choice then they would definitely be in trouble. What makes it easier on this Japanese investor is the fact that inflation in Japan over those 28 years has been about 12% in total so that prices have changed little.
Isn't it possible for something similar to the Japanese scenario to happen to a world market portfolio? What's the basis for ruling that out?
Anything is possible. What about aliens destroy all our resources and we will all be broke? Is that possible? Sure it is, but very very very very unlikely. What about if the US dollar stops being the world currency plummets? Again, possible but very unlikely. That is the fear I am talking about. Saving reasonable resources to weather most storms seams like a smart and prudent idea. Saving enough resources to cover every possible contingency is nearly impossible. At some point you just have to accept some uncertainty and move on.

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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by 4nursebee » Thu Nov 09, 2017 4:40 am

The "math" I've done have said we could FIRE for a couple years now but the facts do not do much in way of minimizing the deep in the gut or mind emotional fear, especially with the unknowns of health insurance costs until age 65.
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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by NomadicExpat » Thu Nov 09, 2017 7:29 am

Hyperborea wrote: โ†‘
Thu Nov 09, 2017 1:33 am
If that oft-referenced Japanese investor had bought a world market portfolio they would be doing fine. If they had followed the vociferous recommendation given on Bogleheads that a fully home market equity portfolio is a good choice then they would definitely be in trouble. What makes it easier on this Japanese investor is the fact that inflation in Japan over those 28 years has been about 12% in total so that prices have changed little.
@EnjoyIt - Good post and perspective. Even when shown the data, it is understandable that people are still fearful/conservative when it comes to their future.

@Hyperborea - I was going to make a similar point. The big thing people forget when they bring up the Japan "Lost Decade(s)" example is DEFLATION. In a stock market collapse scenario there is a good chance your dollar is going to a lot further than it does now.

https://inflationdata.com/articles/hist ... 1971-2014/

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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by 4nursebee » Thu Nov 09, 2017 7:50 am

Drive for Uber idea is not valid IMO as it requires an appropriate newer car.
4nursebee

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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by tennisplyr » Thu Nov 09, 2017 8:18 am

IMHO for anyone with half a head on their shoulders, there's a greater likelihood of dying with a boatload on money than dying broke. Lose the fear and believe!
Those who move forward with a happy spirit will find that things always work out.

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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by rgs92 » Thu Nov 09, 2017 8:39 am

I feel this makes a case for having a robust floor or foundation of income via SPIAs or other vehicles that generate regular payments for life.
Even the inflation risk inherent in these seems worth it to me.

It's certainly better than thinking you could go back to work when you are old.
That would be an awful shock to one's system and may kill you. (Or it may just be impossible.)

It's far better to have an annuity to avoid this nightmare than trying to create a legacy. I'd much rather deal with the risk of dying early and essentially letting the bank end up with my money at the end in order to sleep well at night regardless of the markets.

But of course, you should still keep a healthy stash of stocks for growth and keeping up with inflation, but I feel I need a growth and income middle-of-the-road approach.
Last edited by rgs92 on Thu Nov 09, 2017 8:43 am, edited 1 time in total.

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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by carolinaman » Thu Nov 09, 2017 8:42 am

Health care for pre-Medicare seniors is a really big issue. I have a friend who is in early 60s and self employed. His joint healthcare policy is jumping from $700 to $2200 per month with deductible of $13k. If major medical issues occur (and some have chronic issues require lots of medical expenses), he is out $40k before insurance pays anything. His wife needs hip replacement and they are doing that this year before new plan kicks in.

This type of expense is not reflected in your planning, but is real for many people. There could be numerous other extraordinary expenses to occur. Many retirees choose to live in-place in their aging homes which may require expensive maintenance and repair. For example, since I retired 7 years ago, I have spent $13k to replace HVAC/ductwork, $10k tree work, $6k new french drain to re-mediate drainage/moisture issues, wood rot on foundation sill $3k and numerous other smaller repairs. My wife and I have incurred some significant dental expenses which are uninsured, with more likely to occur as we try to save our teeth. I am on my second set of hearing aids and they only last 5 to 7 years. These are common expenses for seniors but many do not plan for them.

These types of expenses are really non-recurring expenses. These are not extraordinary or black swan expenses, because over time these sorts of expenses occur for most people to one extent or another. I suspect your retirement plan did not sufficiently plan for these. I know that I did not adequately plan for the expenses I have incurred but fortunately we had the capacity to handle them. Someone who has made a best case expense plan may not have the same outcome.

One more thing. I cannot recall the exact percentage, but a surprisingly high percentage of people between 50 and 65 are unable to work. They either are forced to leave the work force prematurely or are unable to return to work due to health issues. Basing a plan on the ability to return to work if needed is very risky.

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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by lostdog » Thu Nov 09, 2017 8:54 am

Nate79 wrote: โ†‘
Thu Nov 09, 2017 1:13 am
There are plenty of retirees who own their own home, live on SS and maybe have some money in CD's. You can adapt or Darwin is going to come along and slap you in the face. To me these extremely low SWR are absurd. 4% is perfectly fine and if, especially in the early years the market is really down you adapt, cut spending, maybe make a little money on the side and move on. But if someone wants to work an extra decade so they can have a 2% SWR good for them. But I'll be laughing and enjoying retirement while they are continuing to needlessly slave away at work.
+1

My mother lives strictly off of SS and Medicare and pays rent. She has no retirement savings. Just a couple thousand in savings that is up and down. She works very part time. She is happy and goes on a vacation or two every year with her friends. She has some minor health problems. Reading so e of these doom and gloom comments sometimes makes me realize some bogleheads are out of touch with reality?
"Our life is frittered away by detail. Simplify, simplify." -Thoreau

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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by AlohaJoe » Thu Nov 09, 2017 9:14 am

visualguy wrote: โ†‘
Thu Nov 09, 2017 4:06 am
Isn't it possible for something similar to the Japanese scenario to happen to a world market portfolio? What's the basis for ruling that out?
No it isn't possible for that to happen right now. Remember that the Japanese crash didn't happen in a vacuum. Japan was in an asset bubble. The P/E was over 90. The global P/E today is in the 20s. It would have to double and then double again.

Image

Japan's crash was at the end of a 35 year uninterrupted bull market that had been running since the 1950s without a single bear year. In the 7 years before the crash an equity investment would have quintupled; a $200,000 portfolio had turned into a $1,000,000 portfolio in a mere 7 years (that's less time that it has been since the GFC!). The global market portfolio hasn't even doubled in the past seven years.
From 1956 to 1986 land prices increased 5000% even though consumer prices only doubled in that time.
In the 1980s share prices increased 3x faster than corporate profits for Japanese corporations.
By 1990 the total Japanese property market was valued at over 2,000 trillion yen or roughly 4x the real estate value of the entire United States.
In 1989 the P/E ratio on the Nikkei was 60x trailing 12 month earnings.
The world market portfolio is nowhere remotely close to that. A Japanese scenario could not happen in the market today.

Could it happen in, say, five years? If asset prices blow up and a huge speculative bubble forms? Sure. But all of us who are invested today would come out ahead. A Japanese investor only had to get into the market 24 months before the bubble popped to never fell below their initial investment even if they were 100% equities. And someone who invested just 48 months before the crash in a common 60/40 portfolio would have seen positive returns over the past 31 years of 2.6%. Which isn't amazing by any means but -- especially with the lack of inflation in Japan over that period -- is very far from the catastrophic circumstances people assume. And would have been more than enough to sustain the 4% rule that so many people think is wildly optimistic.

People always forget about the massive runup in prices that lead to a crash. Being exposed to even a small part of that runup generally means you come out of the crash just fine.

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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by flyingaway » Thu Nov 09, 2017 9:16 am

lostdog wrote: โ†‘
Thu Nov 09, 2017 8:54 am
Nate79 wrote: โ†‘
Thu Nov 09, 2017 1:13 am
There are plenty of retirees who own their own home, live on SS and maybe have some money in CD's. You can adapt or Darwin is going to come along and slap you in the face. To me these extremely low SWR are absurd. 4% is perfectly fine and if, especially in the early years the market is really down you adapt, cut spending, maybe make a little money on the side and move on. But if someone wants to work an extra decade so they can have a 2% SWR good for them. But I'll be laughing and enjoying retirement while they are continuing to needlessly slave away at work.
+1

My mother lives strictly off of SS and Medicare and pays rent. She has no retirement savings. Just a couple thousand in savings that is up and down. She works very part time. She is happy and goes on a vacation or two every year with her friends. She has some minor health problems. Reading so e of these doom and gloom comments sometimes makes me realize some bogleheads are out of touch with reality?
The key point here is that your mother is still working part-time. That seems to me a worry about the 4% rule.

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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by flyingaway » Thu Nov 09, 2017 9:29 am

AlohaJoe wrote: โ†‘
Thu Nov 09, 2017 9:14 am
visualguy wrote: โ†‘
Thu Nov 09, 2017 4:06 am
Isn't it possible for something similar to the Japanese scenario to happen to a world market portfolio? What's the basis for ruling that out?
No it isn't possible for that to happen right now. Remember that the Japanese crash didn't happen in a vacuum. Japan was in an asset bubble. The P/E was over 90. The global P/E today is in the 20s. It would have to double and then double again.

Image

Japan's crash was at the end of a 35 year uninterrupted bull market that had been running since the 1950s without a single bear year. In the 7 years before the crash an equity investment would have quintupled; a $200,000 portfolio had turned into a $1,000,000 portfolio in a mere 7 years (that's less time that it has been since the GFC!). The global market portfolio hasn't even doubled in the past seven years.
From 1956 to 1986 land prices increased 5000% even though consumer prices only doubled in that time.
In the 1980s share prices increased 3x faster than corporate profits for Japanese corporations.
By 1990 the total Japanese property market was valued at over 2,000 trillion yen or roughly 4x the real estate value of the entire United States.
In 1989 the P/E ratio on the Nikkei was 60x trailing 12 month earnings.
The world market portfolio is nowhere remotely close to that. A Japanese scenario could not happen in the market today.

Could it happen in, say, five years? If asset prices blow up and a huge speculative bubble forms? Sure. But all of us who are invested today would come out ahead. A Japanese investor only had to get into the market 24 months before the bubble popped to never fell below their initial investment even if they were 100% equities. And someone who invested just 48 months before the crash in a common 60/40 portfolio would have seen positive returns over the past 31 years of 2.6%. Which isn't amazing by any means but -- especially with the lack of inflation in Japan over that period -- is very far from the catastrophic circumstances people assume. And would have been more than enough to sustain the 4% rule that so many people think is wildly optimistic.

People always forget about the massive runup in prices that lead to a crash. Being exposed to even a small part of that runup generally means you come out of the crash just fine.
I have been to Japan after the crash, and I saw their people are no less happier than the Americans. I posted here before that we worried about them more then themselves.

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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by wrongfunds » Thu Nov 09, 2017 9:42 am

EnjoyIt:-

Are you trying to convince BH about the folly of preparing for any type of black swan event? Or are you really trying to figure out if the decision that you want to make is prudent from your own perspective? I get the feeling that you are doing your best to prove to yourself that 4% rule is reasonable and the chance of you having to live under a bridge and eating dogfood when you are 95 years old is laughably small. But it can never be zero.

The people who talk about SPIA or treasury ladder never consider the non-zero probability of the insurance company going broke or the government defaulting or the revolution coming in next 50 years or scrapping of Medicare or US becoming colony of China or India! These are black swan events and nobody can categorically give you assurance that it could not happen.

For BHs, whatever the withdrawal rate is, it always needs to be ratcheted down because of the unknown black swan events.

In the end, *you* have to be one who has to be comfortable with *your* number and be able to adapt to ongoing world as it changes. Without that one can ever have enough because ultimately there is zero limit on spending.

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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by siamond » Thu Nov 09, 2017 10:01 am

EnjoyIt, some of your reasoning is a tad debatable, as other posters pointed out. But still, you are on the right track. The key here is really flexibility and adaptability. Which are the antithesis of this non-sensical 4% rule, and the "plan for the worst" mentality.
- You need a system by which you adjust your spending & withdrawals as the market goes up and down, and this has to apply for both short-term hiccups (for which reasonable people wouldn't want their spending budget to go up & down in a wild manner, but still should tighten or relax the belt) AS WELL AS apply for long-term trends (upward & downward), which is the hardest part.
- And sure, be flexible to foster some opportunities in a time of duress, some people may be able to find some small side income source, others may be better at some form of bartering (hence reducing spending), others will only resort to belt-tightening and this may include more dramatic actions like moving to a LCOL area or initiate a reverse mortgage, but still, we all have some asset, strength & talent that we can leverage.
- And a point often underestimated, simple knowledge. Educating yourself about past crisis and their outcomes, about the foolishness AND creativity of human beings, is a powerful tool to navigate emotional roller coasters, and avoid stupid mistakes.

We do not know the future, we can't predict black swans, but if we let fear rule our life, well, that is not much of a life. So better acknowledge the problem, and plan to be adaptive, flexible and well-informed. This will go much further than slaving away for one more year.

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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by flyingaway » Thu Nov 09, 2017 10:16 am

EnjoyIt wrote: โ†‘
Wed Nov 08, 2017 9:05 pm

But wait, many fearful bogleheads will say that the future will not be like the past and we need to consider much lower returns. So what will happen to this couple if the stock portion of their portfolio collapses by 50% followed by 8 years of 2% real returns followed by a 2 year recovery period of 20% returns followed by historical returns? Lets be honest, this is a pretty catastrophic event and the odds of this happening are very low, but fearful bogleheads say it may happen so lets see what it may look like. First and foremost we must realize that this couple is human, and humans will naturally become more frugal when times are tough. How frugal depends on the couple. I think this couple could easily cut out $5k from their discretionary spending as well as find ways to make a little money here and there. I know just doing sign on bonuses for credit cards, checking accounts, and brokerage accounts this couple could easily make an extra $10k/yr with a $1 million+ nest egg. Or they can drive for Uber part time or any other source of available income. So lets look at the math after 10 years of living like this and then using historical returns again.

I have to laugh about some people's claim that one could "reliably" and "sustainably" doing sign on bonuses for credit cards, checking accounts, and brokerage accounts for $10K each year.

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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by WiscoTrout » Thu Nov 09, 2017 10:55 am

As has been said, some of the assumptions like credit card income may have been a bit off, but overall I think the logic of what OP has laid out is sound. If someone has enough self control, flexibility, and sense to have accumulated $2M, with a 50/50 asset allocation, and can live comfortably with a 4% withdrawal rate, they should be fine.

And even if we experience a Japanese-style financial disaster as some have suggested, OP should have the wherewithal to do better than others in avoiding the mass poverty, starvation, and societal collapse that Japan was forced to live through for over 20 years (sarcasm intended). :wink:

You'll be fine. Plan for the future, but enjoy the present. Life is not a safe withdrawal rate...

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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by flyingaway » Thu Nov 09, 2017 11:08 am

WiscoTrout wrote: โ†‘
Thu Nov 09, 2017 10:55 am
As has been said, some of the assumptions like credit card income may have been a bit off, but overall I think the logic of what OP has laid out is sound. If someone has enough self control, flexibility, and sense to have accumulated $2M, with a 50/50 asset allocation, and can live comfortably with a 4% withdrawal rate, they should be fine.

And even if we experience a Japanese-style financial disaster as some have suggested, OP should have the wherewithal to do better than others in avoiding the mass poverty, starvation, and societal collapse that Japan was forced to live through for over 20 years (sarcasm intended). :wink:

You'll be fine. Plan for the future, but enjoy the present. Life is not a safe withdrawal rate...
I find myself in the middle of both sides. The 4% rule is just a tool for planning purpose to tell people how much they may need to retire (academically). You would be surprised to know how many of my friends, who are quite financially well, do not know a number that they may need.

I would rather to talk more about retirement life in more leisure ways as I tried before. But the forum policy does not allow that (not actionable). I have complained that this forum has become elementary school education for new comers. We discuss rudimentary things again and again, like we teach the same elementary mathematics to (different) kids again and again, hopefully to educate different new comers, who did not know or do not have a good understanding about the 4% rule.

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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by ReadyToRetire » Thu Nov 09, 2017 11:19 am

4nursebee wrote: โ†‘
Thu Nov 09, 2017 4:40 am
The "math" I've done have said we could FIRE for a couple years now but the facts do not do much in way of minimizing the deep in the gut or mind emotional fear, especially with the unknowns of health insurance costs until age 65.
I would like to add my +1 to this comment.

I'm still on the youngish side - a bit under 50 - from the perspective of a normal retirement age (what is average retirement now 62 or 63?). I do not desire a MMM retirement of $25 to $30K a year although I very much enjoy his blog and the optimism and flexibility of him and his readers. And as much as I would like a $4 or $5 million net worth, that does not appear to be in the cards either - at least at the start of when I would like my retirement to begin.

So I am right there with where I presume 4nursebee might be. Yes, at a 3 1/2 to 4% withdrawal rate on what I have now, the retirement I desire is at hand. All that remains is that deep in the gut fear. And I do not consider health insurance costs to be a black swan event. Insurance is a real cost and a real fear especially for those years prior to 65. I think I can handle most items that would fly my way - burst water heaters, new cars, etc. But $10 - $15K a year for health insurance? And that's just the premium? Costs go up if I actually need it? That is hard to swallow and a really big hurdle for retirement around 50 years old.

I am addicted though to perspectives like these that say 4% is fine. Keep them coming. It keeps my hopes up there! :sharebeer :sharebeer

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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by ResearchMed » Thu Nov 09, 2017 11:25 am

WiscoTrout wrote: โ†‘
Thu Nov 09, 2017 10:55 am
As has been said, some of the assumptions like credit card income may have been a bit off, but overall I think the logic of what OP has laid out is sound. If someone has enough self control, flexibility, and sense to have accumulated $2M, with a 50/50 asset allocation, and can live comfortably with a 4% withdrawal rate, they should be fine.

And even if we experience a Japanese-style financial disaster as some have suggested, OP should have the wherewithal to do better than others in avoiding the mass poverty, starvation, and societal collapse that Japan was forced to live through for over 20 years (sarcasm intended). :wink:

You'll be fine. Plan for the future, but enjoy the present. Life is not a safe withdrawal rate...
"And even if we experience a Japanese-style financial disaster as some have suggested, OP should have the wherewithal to do better than others in avoiding the mass poverty, starvation, and societal collapse that Japan was forced to live through for over 20 years (sarcasm intended). :wink: "

Right... That's exactly why one country has a railroad system that doesn't run on time and has frequent derailments, and the other has had amazingly modern FAST trains for many decades (and no fatalities)...

... Oh, wait...!!

RM
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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by VictoriaF » Thu Nov 09, 2017 11:36 am

randomguy wrote: โ†‘
Wed Nov 08, 2017 11:20 pm
It doesn't matter what you set your SWR at in terms of dealing with blackswan events. When the US gets nuked, the US devalues the dollar by 1000000%, the communists take over and sieze all private assets, civil war breaks out between red/blue states and so on (i.e. black swan events are not something that anyone can predict like market cycles), it doesn't matter much if you SWR is 4% or 1%. The world has changed and you will have to adapt to the new world order. Like the fact in 5 years, you can no longer drive an Uber cause they automated their whole fleet:)
Excellent examples. I am frustrated on behalf of the Black Swans that people are trivializing them as garden-variety setbacks.

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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by Hyperborea » Thu Nov 09, 2017 11:44 am

VictoriaF wrote: โ†‘
Thu Nov 09, 2017 11:36 am
randomguy wrote: โ†‘
Wed Nov 08, 2017 11:20 pm
It doesn't matter what you set your SWR at in terms of dealing with blackswan events. When the US gets nuked, the US devalues the dollar by 1000000%, the communists take over and sieze all private assets, civil war breaks out between red/blue states and so on (i.e. black swan events are not something that anyone can predict like market cycles), it doesn't matter much if you SWR is 4% or 1%. The world has changed and you will have to adapt to the new world order. Like the fact in 5 years, you can no longer drive an Uber cause they automated their whole fleet:)
Excellent examples. I am frustrated on behalf of the Black Swans that people are trivializing them as garden-variety setbacks.

Victoria
If any of those kind of black swan events happen and assets aren't completely worthless then those with assets will be in a better position than those without. If assets are worthless then it won't matter either way except for the regret those of us who saved will have over not buying a Ferrari and drinking more champagne instead of saving.

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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by VictoriaF » Thu Nov 09, 2017 11:53 am

Hyperborea wrote: โ†‘
Thu Nov 09, 2017 11:44 am
VictoriaF wrote: โ†‘
Thu Nov 09, 2017 11:36 am
randomguy wrote: โ†‘
Wed Nov 08, 2017 11:20 pm
It doesn't matter what you set your SWR at in terms of dealing with blackswan events. When the US gets nuked, the US devalues the dollar by 1000000%, the communists take over and sieze all private assets, civil war breaks out between red/blue states and so on (i.e. black swan events are not something that anyone can predict like market cycles), it doesn't matter much if you SWR is 4% or 1%. The world has changed and you will have to adapt to the new world order. Like the fact in 5 years, you can no longer drive an Uber cause they automated their whole fleet:)
Excellent examples. I am frustrated on behalf of the Black Swans that people are trivializing them as garden-variety setbacks.

Victoria
If any of those kind of black swan events happen and assets aren't completely worthless then those with assets will be in a better position than those without. If assets are worthless then it won't matter either way except for the regret those of us who saved will have over not buying a Ferrari and drinking more champagne instead of saving.
The thing about Black Swans is that we don't know what they will be; we only know what they have been, and even then we dismiss them as something explainable. randomguy's examples give a taste of Black Swans, not a full meal.

Future Black Swans can cause a full catastrophe or something survivable. There are no preparations for full catastrophes, but survivabilty has infinite varieties. In some cases, it helps to have more assets than less; in some cases, you need better health; in some cases, you can only survive if you know Chinese language and have friends in rural China. The willingness to drive Uber ranks low on the survival list.

Victoria
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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by technovelist » Thu Nov 09, 2017 12:12 pm

VictoriaF wrote: โ†‘
Thu Nov 09, 2017 11:53 am
Hyperborea wrote: โ†‘
Thu Nov 09, 2017 11:44 am
VictoriaF wrote: โ†‘
Thu Nov 09, 2017 11:36 am
randomguy wrote: โ†‘
Wed Nov 08, 2017 11:20 pm
It doesn't matter what you set your SWR at in terms of dealing with blackswan events. When the US gets nuked, the US devalues the dollar by 1000000%, the communists take over and sieze all private assets, civil war breaks out between red/blue states and so on (i.e. black swan events are not something that anyone can predict like market cycles), it doesn't matter much if you SWR is 4% or 1%. The world has changed and you will have to adapt to the new world order. Like the fact in 5 years, you can no longer drive an Uber cause they automated their whole fleet:)
Excellent examples. I am frustrated on behalf of the Black Swans that people are trivializing them as garden-variety setbacks.

Victoria
If any of those kind of black swan events happen and assets aren't completely worthless then those with assets will be in a better position than those without. If assets are worthless then it won't matter either way except for the regret those of us who saved will have over not buying a Ferrari and drinking more champagne instead of saving.
The thing about Black Swans is that we don't know what they will be; we only know what they have been, and even then we dismiss them as something explainable. randomguy's examples give a taste of Black Swans, not a full meal.

Future Black Swans can cause a full catastrophe or something survivable. There are no preparations for full catastrophes, but survivabilty has infinite varieties. In some cases, it helps to have more assets than less; in some cases, you need better health; in some cases, you can only survive if you know Chinese language and have friends in rural China. The willingness to drive Uber ranks low on the survival list.

Victoria
Anyone who has any concern for real black swans needs some gold in their portfolio, because that protects against significant events that have actually happened in history, where "normal" assets like stocks and bonds get trashed. Examples include high inflation and currency devaluation.

A moderate amount of gold also reduces portfolio variance without reducing overall returns drastically.

Of course you have to stay the course and not change your AA because gold goes up or down drastically, but that is something that bogleheads should be pretty good at by this point. :mrgreen:
In theory, theory and practice are identical. In practice, they often differ.

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VictoriaF
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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by VictoriaF » Thu Nov 09, 2017 12:16 pm

technovelist wrote: โ†‘
Thu Nov 09, 2017 12:12 pm
VictoriaF wrote: โ†‘
Thu Nov 09, 2017 11:53 am
Hyperborea wrote: โ†‘
Thu Nov 09, 2017 11:44 am
VictoriaF wrote: โ†‘
Thu Nov 09, 2017 11:36 am
randomguy wrote: โ†‘
Wed Nov 08, 2017 11:20 pm
It doesn't matter what you set your SWR at in terms of dealing with blackswan events. When the US gets nuked, the US devalues the dollar by 1000000%, the communists take over and sieze all private assets, civil war breaks out between red/blue states and so on (i.e. black swan events are not something that anyone can predict like market cycles), it doesn't matter much if you SWR is 4% or 1%. The world has changed and you will have to adapt to the new world order. Like the fact in 5 years, you can no longer drive an Uber cause they automated their whole fleet:)
Excellent examples. I am frustrated on behalf of the Black Swans that people are trivializing them as garden-variety setbacks.

Victoria
If any of those kind of black swan events happen and assets aren't completely worthless then those with assets will be in a better position than those without. If assets are worthless then it won't matter either way except for the regret those of us who saved will have over not buying a Ferrari and drinking more champagne instead of saving.
The thing about Black Swans is that we don't know what they will be; we only know what they have been, and even then we dismiss them as something explainable. randomguy's examples give a taste of Black Swans, not a full meal.

Future Black Swans can cause a full catastrophe or something survivable. There are no preparations for full catastrophes, but survivabilty has infinite varieties. In some cases, it helps to have more assets than less; in some cases, you need better health; in some cases, you can only survive if you know Chinese language and have friends in rural China. The willingness to drive Uber ranks low on the survival list.

Victoria
Anyone who has any concern for real black swans needs some gold in their portfolio, because that protects against significant events that have actually happened in history, where "normal" assets like stocks and bonds get trashed. Examples include high inflation and currency devaluation.

A moderate amount of gold also reduces portfolio variance without reducing overall returns drastically.

Of course you have to stay the course and not change your AA because gold goes up or down drastically, but that is something that bogleheads should be pretty good at by this point. :mrgreen:
I've taken care of that by acquiring a Gold Swan for $3, https://www.thingiverse.com/thing:731686

Victoria
WINNER of the 2015 Boglehead Contest. | Every joke has a bit of a joke. ... The rest is the truth. (Marat F)

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Hyperborea
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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by Hyperborea » Thu Nov 09, 2017 12:20 pm

VictoriaF wrote: โ†‘
Thu Nov 09, 2017 11:53 am
Hyperborea wrote: โ†‘
Thu Nov 09, 2017 11:44 am
VictoriaF wrote: โ†‘
Thu Nov 09, 2017 11:36 am
randomguy wrote: โ†‘
Wed Nov 08, 2017 11:20 pm
It doesn't matter what you set your SWR at in terms of dealing with blackswan events. When the US gets nuked, the US devalues the dollar by 1000000%, the communists take over and sieze all private assets, civil war breaks out between red/blue states and so on (i.e. black swan events are not something that anyone can predict like market cycles), it doesn't matter much if you SWR is 4% or 1%. The world has changed and you will have to adapt to the new world order. Like the fact in 5 years, you can no longer drive an Uber cause they automated their whole fleet:)
Excellent examples. I am frustrated on behalf of the Black Swans that people are trivializing them as garden-variety setbacks.

Victoria
If any of those kind of black swan events happen and assets aren't completely worthless then those with assets will be in a better position than those without. If assets are worthless then it won't matter either way except for the regret those of us who saved will have over not buying a Ferrari and drinking more champagne instead of saving.
The thing about Black Swans is that we don't know what they will be; we only know what they have been, and even then we dismiss them as something explainable. randomguy's examples give a taste of Black Swans, not a full meal.

Future Black Swans can cause a full catastrophe or something survivable. There are no preparations for full catastrophes, but survivabilty has infinite varieties. In some cases, it helps to have more assets than less; in some cases, you need better health; in some cases, you can only survive if you know Chinese language and have friends in rural China. The willingness to drive Uber ranks low on the survival list.

Victoria
So, if they are completely unpredictable then there is nothing we can do to prepare for them in advance. They are going to be devastating to us whether we retire early or not, save or not, are fit or not (does that make us more delicious to the invaders from Kepler-186?), etc. Completely unpredictable and unknowable events can then be ignored in planning since we can do nothing.

By the way, I'm having a special on alien enslavement insurance. Everyone who signs up in the next 48 hours will get a free can of zombie repellant.

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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by VictoriaF » Thu Nov 09, 2017 12:27 pm

Hyperborea wrote: โ†‘
Thu Nov 09, 2017 12:20 pm
By the way, I'm having a special on alien enslavement insurance. Everyone who signs up in the next 48 hours will get a free can of zombie repellant.
I am looking for pheromones for attracting zombies and surviving the zombie apocalypse while having the most spectacular love affair. Hopefully, they will go on sale on Black Friday.

Victoria
WINNER of the 2015 Boglehead Contest. | Every joke has a bit of a joke. ... The rest is the truth. (Marat F)

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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by Hyperborea » Thu Nov 09, 2017 12:29 pm

technovelist wrote: โ†‘
Thu Nov 09, 2017 12:12 pm
Anyone who has any concern for real black swans needs some gold in their portfolio, because that protects against significant events that have actually happened in history, where "normal" assets like stocks and bonds get trashed. Examples include high inflation and currency devaluation.

A moderate amount of gold also reduces portfolio variance without reducing overall returns drastically.

Of course you have to stay the course and not change your AA because gold goes up or down drastically, but that is something that bogleheads should be pretty good at by this point. :mrgreen:
In any of these black swan type events being discussed - zombie hordes, collapse of the government, alien invasion, explosion of the volcano under Yellowstone - gold will only be useful if held directly and not as an ETF. That's going to mean keeping the metal at home. That means security and secrecy. There will be no easy rebalancing. It will be a drag on your portfolio.

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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by smitcat » Thu Nov 09, 2017 1:33 pm

Hyperborea wrote: โ†‘
Thu Nov 09, 2017 12:29 pm
technovelist wrote: โ†‘
Thu Nov 09, 2017 12:12 pm
Anyone who has any concern for real black swans needs some gold in their portfolio, because that protects against significant events that have actually happened in history, where "normal" assets like stocks and bonds get trashed. Examples include high inflation and currency devaluation.

A moderate amount of gold also reduces portfolio variance without reducing overall returns drastically.

Of course you have to stay the course and not change your AA because gold goes up or down drastically, but that is something that bogleheads should be pretty good at by this point. :mrgreen:
In any of these black swan type events being discussed - zombie hordes, collapse of the government, alien invasion, explosion of the volcano under Yellowstone - gold will only be useful if held directly and not as an ETF. That's going to mean keeping the metal at home. That means security and secrecy. There will be no easy rebalancing. It will be a drag on your portfolio.
The vast majority of folks really have no drive to prepare for such an event and that will never change. For the most part preparing for events such as those can generate much 'drag' and disruption and are not viewed as a good risk/reward.

EnjoyIt
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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by EnjoyIt » Thu Nov 09, 2017 2:25 pm

Hyperborea wrote: โ†‘
Thu Nov 09, 2017 12:20 pm
VictoriaF wrote: โ†‘
Thu Nov 09, 2017 11:53 am
Hyperborea wrote: โ†‘
Thu Nov 09, 2017 11:44 am
VictoriaF wrote: โ†‘
Thu Nov 09, 2017 11:36 am
randomguy wrote: โ†‘
Wed Nov 08, 2017 11:20 pm
It doesn't matter what you set your SWR at in terms of dealing with blackswan events. When the US gets nuked, the US devalues the dollar by 1000000%, the communists take over and sieze all private assets, civil war breaks out between red/blue states and so on (i.e. black swan events are not something that anyone can predict like market cycles), it doesn't matter much if you SWR is 4% or 1%. The world has changed and you will have to adapt to the new world order. Like the fact in 5 years, you can no longer drive an Uber cause they automated their whole fleet:)
Excellent examples. I am frustrated on behalf of the Black Swans that people are trivializing them as garden-variety setbacks.

Victoria
If any of those kind of black swan events happen and assets aren't completely worthless then those with assets will be in a better position than those without. If assets are worthless then it won't matter either way except for the regret those of us who saved will have over not buying a Ferrari and drinking more champagne instead of saving.
The thing about Black Swans is that we don't know what they will be; we only know what they have been, and even then we dismiss them as something explainable. randomguy's examples give a taste of Black Swans, not a full meal.

Future Black Swans can cause a full catastrophe or something survivable. There are no preparations for full catastrophes, but survivabilty has infinite varieties. In some cases, it helps to have more assets than less; in some cases, you need better health; in some cases, you can only survive if you know Chinese language and have friends in rural China. The willingness to drive Uber ranks low on the survival list.

Victoria
So, if they are completely unpredictable then there is nothing we can do to prepare for them in advance. They are going to be devastating to us whether we retire early or not, save or not, are fit or not (does that make us more delicious to the invaders from Kepler-186?), etc. Completely unpredictable and unknowable events can then be ignored in planning since we can do nothing.

By the way, I'm having a special on alien enslavement insurance. Everyone who signs up in the next 48 hours will get a free can of zombie repellant.
+1
I have no interest preparing for the rare un-preparable event. I would rather have a plan incase something like a prolonged recession occurs as opposed to collecting ammunition and gold nuggets for the potential apocalypse. An decade working amassing another million or two will not protect me from a real black swan.

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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by wrongfunds » Thu Nov 09, 2017 2:27 pm

Every time this type of topic is created, literally zero new information or strategy is put forth.

avalpert
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Re: The fear of retirement, black swan, and math to dissuade the fear.

Post by avalpert » Thu Nov 09, 2017 2:30 pm

VictoriaF wrote: โ†‘
Thu Nov 09, 2017 11:53 am
Hyperborea wrote: โ†‘
Thu Nov 09, 2017 11:44 am
VictoriaF wrote: โ†‘
Thu Nov 09, 2017 11:36 am
randomguy wrote: โ†‘
Wed Nov 08, 2017 11:20 pm
It doesn't matter what you set your SWR at in terms of dealing with blackswan events. When the US gets nuked, the US devalues the dollar by 1000000%, the communists take over and sieze all private assets, civil war breaks out between red/blue states and so on (i.e. black swan events are not something that anyone can predict like market cycles), it doesn't matter much if you SWR is 4% or 1%. The world has changed and you will have to adapt to the new world order. Like the fact in 5 years, you can no longer drive an Uber cause they automated their whole fleet:)
Excellent examples. I am frustrated on behalf of the Black Swans that people are trivializing them as garden-variety setbacks.

Victoria
If any of those kind of black swan events happen and assets aren't completely worthless then those with assets will be in a better position than those without. If assets are worthless then it won't matter either way except for the regret those of us who saved will have over not buying a Ferrari and drinking more champagne instead of saving.
The thing about Black Swans is that we don't know what they will be; we only know what they have been, and even then we dismiss them as something explainable. randomguy's examples give a taste of Black Swans, not a full meal.

Future Black Swans can cause a full catastrophe or something survivable. There are no preparations for full catastrophes, but survivabilty has infinite varieties. In some cases, it helps to have more assets than less; in some cases, you need better health; in some cases, you can only survive if you know Chinese language and have friends in rural China. The willingness to drive Uber ranks low on the survival list.

Victoria
Exactly, ultimately it becomes less about planning for specific type events and more about building general resiliency (or antifragility in Taleb's parlance) into your systems (financial and otherwise).

I too am saddened how the term 'black swan' has become meaningless in popular usage as it now either refers only to apocalyptic events or risky tail events - in both cases completely missing the point and usefulness of the concept.

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