Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

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willthrill81
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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by willthrill81 » Sun Sep 08, 2019 3:54 pm

EnjoyIt wrote:
Sun Sep 08, 2019 3:52 pm
I think a SWR is almost like a religion. People will argue themselves blue in the face of why their choice is right and there is no convincing them otherwise. No one will know the truth until the very end.
This is sadly true. And as we've seen in this thread, even knowing what the SWR was for a specific period or many periods would not change some people's views at all. They will always argue that the SWR could have been much lower than it really was and that the only prudent strategy is to assume worse returns and a worse sequence of returns than has ever happened before.
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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by milktoast » Sun Sep 08, 2019 7:33 pm

willthrill81 wrote:
Sun Sep 08, 2019 3:54 pm
They will always argue that the SWR could have been much lower than it really was and that the only prudent strategy is to assume worse returns and a worse sequence of returns than has ever happened before.
I think that’s fine.

But only if they change their AA to be consistent with this assumption.

Hard to imagine realizing negative real returns over 30 to 50 years due to being forced to sell stocks at a loss - even when stocks are returning 2% real over that period.

Dude. Hedge that portfolio with enough TIPS to ride out the dips. 50/50 stocks and TIPS. Only sell stocks at a real gain.

Now to realize negative real returns with stocks performing at 2% real, it’s got to be a very odd sequence. 15 years (or 25 years) of net zero real return. Followed by a period where you are forced to sell stock at a real loss. Followed by an amazing rally that comes too late to recover.

All without noticing that spending might need a tweak.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by HomerJ » Sun Sep 08, 2019 9:19 pm

willthrill81 wrote:
Sun Sep 08, 2019 12:14 am
Saying that the SWR for a 50 year retirement is 2% means that it will take anywhere from 8-15 additional years of saving for a typical investor to get there vs. the 3.5% SWR that Bengen and now Kitces suggest. That's a lot of additional guaranteed time 'lost' in order to prepare for something significantly worse than the worst of what's happened before.
It's far worse than 8-15 additional years... because remember, we're assuming that returns are going to be FAR lower than the worst periods in history...

Near zero returns. Because you only need 1% real returns for 4% to work over 30 years. And these people are assuming worse than that... Negative returns, even.

So to double your money is going to have to come almost all from new savings... So we're talking 20+ years, and that's if your savings rate is in the 40%-50% range.

They don't get to assume returns are going to be super low (negative?) so they need 50x expenses without also realizing that, with super low (negative?) returns, they are going to have to save for an extra 20-30 years to grow their portfolio to 50x expenses.
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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by willthrill81 » Sun Sep 08, 2019 9:29 pm

HomerJ wrote:
Sun Sep 08, 2019 9:19 pm
willthrill81 wrote:
Sun Sep 08, 2019 12:14 am
Saying that the SWR for a 50 year retirement is 2% means that it will take anywhere from 8-15 additional years of saving for a typical investor to get there vs. the 3.5% SWR that Bengen and now Kitces suggest. That's a lot of additional guaranteed time 'lost' in order to prepare for something significantly worse than the worst of what's happened before.
It's far worse than 8-15 additional years... because remember, we're assuming that returns are going to be FAR lower than the worst periods in history...

Near zero returns. Because you only need 1% real returns for 4% to work over 30 years.

So to double your money is going to have to come almost all from new savings... So we're talking 20+ years, and that's if your savings rate is in the 40%-50% range.

They don't get to assume returns are going to be super low so they need 50x expenses without also realizing that, with super low returns, they are going to have to save for an extra 20-25 years to grow their portfolio to 50x expenses.
True. I was giving them the benefit of achieving something resembling actual historic returns, not basically zero returns.

So those claiming 2% withdrawals are needed for 50 year retirements are also claiming that early retirement is essentially unattainable unless your savings rate is at least 80% or you win the lottery. Sounds like Suze Orman.
“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: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by HomerJ » Sun Sep 08, 2019 9:31 pm

countmein wrote:
Sat Sep 07, 2019 10:52 pm
Homer J,

Can't disagree with the "life choices" part of your post but the part about the model being junk-- I get that you don't like the results, but can you explain, in quantitative terms, why it is mis-estimating SWR for 50 year horizons? What should the true estimate be and by what adjustment of the MC method?

For the one data point test in question (1972 - present), the actual returns hit the 60-something percentile of the model's prediction. This does not indicate anything close to an error by the model.
Many inaccurate Monte-Carlo simulations assume every year's return is an independent event from surrounding years.

This is a poor assumption, and leads to a poor model that does not accurately model reality.
The J stands for Jay

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by jmk » Sun Sep 08, 2019 11:01 pm

countmein wrote:
Thu Sep 05, 2019 3:11 pm
Unless I'm using it wrong, according to the Monte Carlo tool on PV, the FIRE SWR is more like 1.8%, not 3 - 3.5 %.

Assumptions:
- 50 year horizon
- 60/40 portfolio with 2.5% real expected return*
- 9% volatility
- non-variable withdrawals
- no forced worst case scenario sequence of returns

90% success happens at 2% withdrawal, 95% happens at 1.8% withdrawal.

https://tinyurl.com/y48s8xba

*On lastest podcast Rick F and Larry S agree on a 4.5% nominal expected return forecast for 60/40. Subtract 2% assumed inflation.
1) The 2.5% expected real return for a 60/40 is a geometric avg/CAGR (i.e. it includes volatility drag)-- so in a monte carlo you'd want to use a higher expected return representing the average: for instance, using a 2.9% average return in your monte carlo gives about a 2.5% CAGR at the 50th percentile. The 5% percentile SWR goes up to around 2%, 10% at 2.31%. PV

2) The very low 2.5% expected return would be for the next 10-20 years; but most would assume a higher average return in the 30-40 years after that. The 150y mean for 60/40 is 5.2% real CAGR.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by stlutz » Sun Sep 08, 2019 11:48 pm

HomerJ wrote:
Sun Sep 08, 2019 9:31 pm
countmein wrote:
Sat Sep 07, 2019 10:52 pm
Homer J,

Can't disagree with the "life choices" part of your post but the part about the model being junk-- I get that you don't like the results, but can you explain, in quantitative terms, why it is mis-estimating SWR for 50 year horizons? What should the true estimate be and by what adjustment of the MC method?

For the one data point test in question (1972 - present), the actual returns hit the 60-something percentile of the model's prediction. This does not indicate anything close to an error by the model.
Many inaccurate Monte-Carlo simulations assume every year's return is an independent event from surrounding years.

This is a poor assumption, and leads to a poor model that does not accurately model reality.
So are you saying that if tell you the return of the S&P 500 from any random year in history (without telling you which year) that you can tell me the return of the following year such that you'd be more accurate than just taking the average of all all years?

I guess I find it quite surprising that people will make the absolute claims we've seen in this thread based on having 2 data points from one country (i.e. there are basically two independent 50 years periods in the US).

The Monte Carlo simulations lead to a consideration that history didn't have to unfold the way it did. Alternate histories might have led to very different results. Retiring at age 45 and thinking you can withdraw 3 or 3.5% per year is something that will "probably" work--claiming it will work with 95% certainly is claiming a foresight of the future that nobody I know has.

Retiring at 45 is simply risky in a way that retiring at 65 is not. When you're 65 most of what you spend is actually principal that has already been saved. When you do it at 45, you're generally more dependent on returns. You're putting your future into other people's hands.

As I've noted earlier in (I think) this thread, hardly anybody retires at 45 for real. So in that sense this thread is irrelevant. This discussion for me has mainly been an interesting exercise in thinking about equity risk and the degree to which equities are risky over the super-long term or not. That is really what this debate comes down to. The Monte Carlo models allow for the notion that equities might in the worst cases have returns below bonds over 50 years. Others are saying that is in no way possible (outside of a nuclear holocaust).

But we should all be honest what we are debating here is not he particulars of a statistical simulation. Is is that question of whether equities are more risky than bonds or are a free lunch when looking at long holding periods.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by willthrill81 » Mon Sep 09, 2019 12:07 am

stlutz wrote:
Sun Sep 08, 2019 11:48 pm
HomerJ wrote:
Sun Sep 08, 2019 9:31 pm
countmein wrote:
Sat Sep 07, 2019 10:52 pm
Homer J,

Can't disagree with the "life choices" part of your post but the part about the model being junk-- I get that you don't like the results, but can you explain, in quantitative terms, why it is mis-estimating SWR for 50 year horizons? What should the true estimate be and by what adjustment of the MC method?

For the one data point test in question (1972 - present), the actual returns hit the 60-something percentile of the model's prediction. This does not indicate anything close to an error by the model.
Many inaccurate Monte-Carlo simulations assume every year's return is an independent event from surrounding years.

This is a poor assumption, and leads to a poor model that does not accurately model reality.
So are you saying that if tell you the return of the S&P 500 from any random year in history (without telling you which year) that you can tell me the return of the following year such that you'd be more accurate than just taking the average of all all years?
Tharp discussed how the assumption of independent returns causes problems in Monte Carlo analyses in the post I've already linked to.
Mathematically, Monte Carlo analysis assumes that each year’s returns are entirely independent of the prior year(s). In other words, whether the prior year was flat, saw a slight increase, or a raging bull market, Monte Carlo analysis assumes that the odds of a bear market decline the following year are exactly the same. And the odds of a subsequent decline in the following years also remains exactly the same, regardless of whether it would be the first or eighth consecutive year of a decline!

Yet, a look at real-world market data reveals that this isn’t really the case. Instead, market returns seem to exhibit at least two different trends. In the short-run, returns seem to exhibit “positive serial correlation” (i.e., momentum – whereby short-term positive returns are more likely to be followed by positive returns, and vice-versa), and, in the long-run, returns seem to exhibit “negative serial correlation” (i.e., mean reversion – whereby longer-term periods of low performance are followed by periods of higher performance, and vice-versa).

Because Monte Carlo projections are long-term projections spanning multiple years (or decades), it is the “negative serial correlation” (i.e., mean reversion) which may cause the “tails” of Monte Carlo projections to actually be more volatile and extreme than anything in the historical record. In other words, because most Monte Carlo analyses don’t account for mean reversion, this specific aspect of Monte Carlo projections will actually tend to overstate tail risk (not understate it!).
https://www.kitces.com/blog/monte-carlo ... l-returns/
“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: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by EnjoyIt » Mon Sep 09, 2019 9:23 am

stlutz wrote:
Sun Sep 08, 2019 11:48 pm
HomerJ wrote:
Sun Sep 08, 2019 9:31 pm
countmein wrote:
Sat Sep 07, 2019 10:52 pm
Homer J,

Can't disagree with the "life choices" part of your post but the part about the model being junk-- I get that you don't like the results, but can you explain, in quantitative terms, why it is mis-estimating SWR for 50 year horizons? What should the true estimate be and by what adjustment of the MC method?

For the one data point test in question (1972 - present), the actual returns hit the 60-something percentile of the model's prediction. This does not indicate anything close to an error by the model.
Many inaccurate Monte-Carlo simulations assume every year's return is an independent event from surrounding years.

This is a poor assumption, and leads to a poor model that does not accurately model reality.
So are you saying that if tell you the return of the S&P 500 from any random year in history (without telling you which year) that you can tell me the return of the following year such that you'd be more accurate than just taking the average of all all years?
Experts are expecting lower returns today because valuations are high. The inverse would therefore be true. If returns are lower for a few years, valuations will be low and therefor expected returns would increase. You can't have it both ways. If you believe what happened yesterday affects expected returns negatively then you need to also accept that what happens tomorrow will affect returns in the future.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by ryman554 » Mon Sep 09, 2019 9:34 am

countmein wrote:
Thu Sep 05, 2019 4:44 pm
willthrill81 wrote:
Thu Sep 05, 2019 4:39 pm
countmein wrote:
Thu Sep 05, 2019 4:35 pm
willthrill81 wrote:
Thu Sep 05, 2019 4:19 pm

https://www.etf.com/sections/index-inve ... nopaging=1

Well, you were right. My respect for Rick has gone down another notch.

I don't see how you were getting 2.5% real returns expected from a 60/40 portfolio. Rick is forecasting 1.9% real for 10 year Treasuries and 5% real for U.S. large-cap and higher returns for all other equity asset classes. That would work out to at least a 3.76% expected real return for a 60/40 AA, which is a lot better than 2.5%.
I was using their stated 4.5% from the podcast and subtracted 2% for inflation. Could use Rick's old 30 year forecast but you've got to set the bond side to 0 real. Stocks are 5% so that's 3% real for the portfolio. The PV model at 3% real expected return gives you an SWR of 2.0.
So you really believe that bonds will have a 0% real return for the next 50 years?
Yes, absolutely, that's the most reasonable forecast. Also I edited the above to include the 'worst years first' parameter, which really brings the SWR down even further (1.4% or less). Personally I'm willing to gamble a little bit on that one and will keep it near the 2.0 range but IMO SWRs in the 3+ range for very long horizons are just reckless.
If bonds are 0% real @2% inflation, then bond yields are 2% nominal. Kind of where are kinda sorta today.

But these low bond rates are pushing equity multipliers up as folks chase yield, so it's hard to see that we would have such low returns going forward too, unless and until the bonds start providing more than 0-1% real. But these things are impossible to predict, so I would treat the preceeding statement with as much care as those from Rick, et. al, which is: not worth much.

I guess we'll see how this all plays out in the next correction and see if it's really worse than anything we've seen before. Historical data is not on your side as your predict "reckless" 3% SWR going forward. I'm sure we would both be happy if you are wrong (since we'll be richer!), and we'll both be unhappy if the herd and I are -- as we drop into great depression, round II.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by stlutz » Mon Sep 09, 2019 6:46 pm

EnjoyIt wrote:
Mon Sep 09, 2019 9:23 am
stlutz wrote:
Sun Sep 08, 2019 11:48 pm

So are you saying that if tell you the return of the S&P 500 from any random year in history (without telling you which year) that you can tell me the return of the following year such that you'd be more accurate than just taking the average of all all years?
Experts are expecting lower returns today because valuations are high. The inverse would therefore be true. If returns are lower for a few years, valuations will be low and therefor expected returns would increase. You can't have it both ways. If you believe what happened yesterday affects expected returns negatively then you need to also accept that what happens tomorrow will affect returns in the future.
Just to be clear--I'm not trying to have it both ways. I don't think valuation ratios provide a good indication of future returns. They do indicate risks--that is, lower valuations indicate that the market sees greater risk. That means that there is a potential of both higher and lower returns than high valuations would suggest.

The real driver of long-term returns is earnings growth. When growth runs higher than expected, you get the direct benefit from that (and the opposite if the reverse happens). When the market expects higher future growth, valuations will go up; when it expects lower growth they go down.

The returns offered by competing investments also factors in. Equities would have to offer a great sale if real interest rates were, say, 4%.

It does happen that the market becomes irrational on the high and low side at times. But not always. And there is where valuation can be helpful. The market was a bubble in 1999. Looking at where we were in 2007, I couldn't say that it was "overpriced" then. Instead, events happened that drove the value down. The market was not unduly undervalued in March 2009--that was a risky time to buy stocks as there were a whole wide range of things that could have happened then.

So, bottom line is that I'm not a fan of using P/E or CAPE to project future returns as those returns are mostly driven by growth or lack there of as opposed to valuations.

So, I don't think that "today's valuations" suggests that the SWR that one uses in their planning should change.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by jmk » Mon Sep 09, 2019 6:49 pm

countmein wrote:
Thu Sep 05, 2019 3:11 pm
Unless I'm using it wrong, according to the Monte Carlo tool on PV, the FIRE SWR is more like 1.8%, not 3 - 3.5 %.

Assumptions:
- 50 year horizon
- 60/40 portfolio with 2.5% real expected return*
- 9% volatility
- non-variable withdrawals
- no forced worst case scenario sequence of returns

90% success happens at 2% withdrawal, 95% happens at 1.8% withdrawal.

https://tinyurl.com/y48s8xba

*On lastest podcast Rick F and Larry S agree on a 4.5% nominal expected return forecast for 60/40. Subtract 2% assumed inflation.
1) The 2.5% expected real return for a 60/40 is a geometric avg/CAGR (i.e. it includes volatility drag)-- so in a monte carlo you'd want to use not geometric mean but the arithmetic average: for instance, using a 2.9% average return in your monte carlo gives about a 2.5% CAGR at the 50th percentile. The 5% percentile SWR goes up to around 2%, 10% at 2.31%. PV

2) The very low 2.5% expected return would be for the next 10-20 years based on today's high valuations; but most would assume a higher average return in the 30-40 years after that due to reversion to mean. The 150y mean for 60/40 is 5.2% real CAGR.
[/quote]

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by smitcat » Tue Sep 10, 2019 8:16 am

HomerJ wrote:
Sun Sep 08, 2019 9:19 pm
willthrill81 wrote:
Sun Sep 08, 2019 12:14 am
Saying that the SWR for a 50 year retirement is 2% means that it will take anywhere from 8-15 additional years of saving for a typical investor to get there vs. the 3.5% SWR that Bengen and now Kitces suggest. That's a lot of additional guaranteed time 'lost' in order to prepare for something significantly worse than the worst of what's happened before.
It's far worse than 8-15 additional years... because remember, we're assuming that returns are going to be FAR lower than the worst periods in history...

Near zero returns. Because you only need 1% real returns for 4% to work over 30 years. And these people are assuming worse than that... Negative returns, even.

So to double your money is going to have to come almost all from new savings... So we're talking 20+ years, and that's if your savings rate is in the 40%-50% range.

They don't get to assume returns are going to be super low (negative?) so they need 50x expenses without also realizing that, with super low (negative?) returns, they are going to have to save for an extra 20-30 years to grow their portfolio to 50x expenses.

While I generally agree with all that you say this one is not necessarily accurate....
"So we're talking 20+ years, and that's if your savings rate is in the 40%-50% range."

Your savings rate would need to be a higher multiple of your future expenses and not necessarily tied to the current savings rate based on your income.
This is especially true if you are speaking about gross income %'s.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by Rob1 » Tue Sep 10, 2019 9:43 am

HomerJ wrote:
Sun Sep 08, 2019 9:19 pm
willthrill81 wrote:
Sun Sep 08, 2019 12:14 am
Saying that the SWR for a 50 year retirement is 2% means that it will take anywhere from 8-15 additional years of saving for a typical investor to get there vs. the 3.5% SWR that Bengen and now Kitces suggest. That's a lot of additional guaranteed time 'lost' in order to prepare for something significantly worse than the worst of what's happened before.
It's far worse than 8-15 additional years... because remember, we're assuming that returns are going to be FAR lower than the worst periods in history...

Near zero returns. Because you only need 1% real returns for 4% to work over 30 years. And these people are assuming worse than that... Negative returns, even.

So to double your money is going to have to come almost all from new savings... So we're talking 20+ years, and that's if your savings rate is in the 40%-50% range.

They don't get to assume returns are going to be super low (negative?) so they need 50x expenses without also realizing that, with super low (negative?) returns, they are going to have to save for an extra 20-30 years to grow their portfolio to 50x expenses.
Technically it wouldn’t take an extra 20-30 years - for each extra year the desired 50 year retirement will be reduced by one year. :wink:

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by willthrill81 » Tue Sep 10, 2019 10:29 am

Rob1 wrote:
Tue Sep 10, 2019 9:43 am
HomerJ wrote:
Sun Sep 08, 2019 9:19 pm
willthrill81 wrote:
Sun Sep 08, 2019 12:14 am
Saying that the SWR for a 50 year retirement is 2% means that it will take anywhere from 8-15 additional years of saving for a typical investor to get there vs. the 3.5% SWR that Bengen and now Kitces suggest. That's a lot of additional guaranteed time 'lost' in order to prepare for something significantly worse than the worst of what's happened before.
It's far worse than 8-15 additional years... because remember, we're assuming that returns are going to be FAR lower than the worst periods in history...

Near zero returns. Because you only need 1% real returns for 4% to work over 30 years. And these people are assuming worse than that... Negative returns, even.

So to double your money is going to have to come almost all from new savings... So we're talking 20+ years, and that's if your savings rate is in the 40%-50% range.

They don't get to assume returns are going to be super low (negative?) so they need 50x expenses without also realizing that, with super low (negative?) returns, they are going to have to save for an extra 20-30 years to grow their portfolio to 50x expenses.
Technically it wouldn’t take an extra 20-30 years - for each extra year the desired 50 year retirement will be reduced by one year. :wink:
I've said before that the entire savings and retirement can be avoided entirely with one very simple move: work until you die.
“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: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by pepys » Tue Sep 10, 2019 11:16 am

HomerJ wrote:
Sun Sep 08, 2019 9:19 pm
willthrill81 wrote:
Sun Sep 08, 2019 12:14 am
Saying that the SWR for a 50 year retirement is 2% means that it will take anywhere from 8-15 additional years of saving for a typical investor to get there vs. the 3.5% SWR that Bengen and now Kitces suggest. That's a lot of additional guaranteed time 'lost' in order to prepare for something significantly worse than the worst of what's happened before.
It's far worse than 8-15 additional years... because remember, we're assuming that returns are going to be FAR lower than the worst periods in history...

Near zero returns. Because you only need 1% real returns for 4% to work over 30 years. And these people are assuming worse than that... Negative returns, even.

So to double your money is going to have to come almost all from new savings... So we're talking 20+ years, and that's if your savings rate is in the 40%-50% range.

They don't get to assume returns are going to be super low (negative?) so they need 50x expenses without also realizing that, with super low (negative?) returns, they are going to have to save for an extra 20-30 years to grow their portfolio to 50x expenses.
I don't think many people are assuming super low returns, rather saying there is a significant possibility of it happening. And, even absent the 50x expenses assumption (despite working 20-30 extra years!), I think there are issues with your logic here. From my understanding, they're saying that returns in the near future could be lower than we've seen in the past, but not necessarily the far future. So, of the two scenarios:

If returns are normal or better than normal in the near future, then they aren't going to have to save for an extra 20-30 years. You seem to concur.

If returns are poorer than the past in the near future (worst case), as you assume, then:
- Valuations will likely improve after a much shorter number of years, so they might expect 4% to work again, greatly shortening the working period from what you assume.
- Working for longer was the right thing to do; they still will likely overwork, but anyone who depended on close to 4% will have run out of money.

In other words, you're assuming the worst-case scenario to point out the negatives of the strategy (20-30 extra years!), probably greatly overstating the negatives of following it in that case (assuming a very long retirement and no improvement in outlook), and ignoring that the negatives in this case are probably relatively positive. And, yeah, nobody is denying that using the 4% strategy in a regular market would be superior to this strategy in a terrible market, but that doesn't tell us anything useful.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by HomerJ » Tue Sep 10, 2019 12:06 pm

pepys wrote:
Tue Sep 10, 2019 11:16 am
And, yeah, nobody is denying that using the 4% strategy in a regular market would be superior to this strategy in a terrible market, but that doesn't tell us anything useful.
Just to be clear, since you are a new poster...

4% worked in the past in terrible markets. 4% is designed for terrible markets.

6% works in a regular market. But we don't want to count on a regular market going forward, which is why we use 4%.

When someone says "Hey the market looks to return less than usual going forward", we can say "Oh, good thing I was planning around that already".
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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by HomerJ » Tue Sep 10, 2019 12:12 pm

pepys wrote:
Tue Sep 10, 2019 11:16 am
From my understanding, they're saying that returns in the near future could be lower than we've seen in the past, but not necessarily the far future.
Also, they're NOT saying that... For some reason they are saying returns could be low forever going forward.

I agree that returns absolutely could be low for the next 10-15 years, but then valuations will be lower, expected returns will be higher, and the cycle will reverse, and we will probably get a bull market following the bear market, following the pattern of the past 150 years.

And 4% in the past handled that. Retiring right before a bad 10-15 years, 4% still worked.

When people say 3% or 2%, they are explicitly saying "Returns may never be good again". And that's possible. But I'd rather deal with that small possibility by cutting discretionary expenses in retirement, or buying a SPIA at some point, NOT by working an extra 10 years to make sure that I can still take vacation cruises even if returns are 0% for 40 years.

(Are cruise companies going to still offer cruises if there are zero profits to be made?)
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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by pepys » Tue Sep 10, 2019 1:18 pm

HomerJ wrote:
Tue Sep 10, 2019 12:06 pm
pepys wrote:
Tue Sep 10, 2019 11:16 am
And, yeah, nobody is denying that using the 4% strategy in a regular market would be superior to this strategy in a terrible market, but that doesn't tell us anything useful.
Just to be clear, since you are a new poster...

4% worked in the past in terrible markets. 4% is designed for terrible markets.

6% works in a regular market. But we don't want to count on a regular market going forward, which is why we use 4%.

When someone says "Hey the market looks to return less than usual going forward", we can say "Oh, good thing I was planning around that already".
Right. By "regular", I meant "something like what the US has seen in the past", and by "terrible", I meant "worse than what the US has seen in the past".
When people say 3% or 2%, they are explicitly saying "Returns may never be good again".
Why is that explicit in saying 3%? Plenty of countries have had SWRs around there, and have had better returns since then. I don't think it's all that unlikely that the US could face something like what happened in Japan. The US has had incredible market returns, and even the worst periods weren't *that* bad for a long-term investor, since the recoveries were so great (taking a look at real GDP per capita, for example, the recovery after the Great Depression ended up being so strong that it was like it didn't even happen; long term growth rates were steady). I think the global SWR has been closer to 3.5%, which is probably where I will aim for, but I don't think 3% is unreasonable (2% does feel so though).
But I'd rather deal with that small possibility by cutting discretionary expenses in retirement, or buying a SPIA at some point, NOT by working an extra 10 years to make sure that I can still take vacation cruises even if returns are 0% for 40 years.
I agree with that, but I'm not sure many people worried about lower returns feel much differently. A lot of this seems to be over semantics. If I start out by withdrawing 4%, but pull back to 3% because returns are so bad, then I need to have started with enough to survive on ~3%. So I too would be working an extra 10 years (or whatever). Has anyone said they are working extra years so they can get cruises and other luxuries on 2-3%? I certainly wouldn't go that far.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by MikeG62 » Tue Sep 10, 2019 6:11 pm

pepys wrote:
Tue Sep 10, 2019 11:16 am

I don't think many people are assuming super low returns, rather saying there is a significant possibility of it happening...From my understanding, they're saying that returns in the near future could be lower than we've seen in the past, but not necessarily the far future.
Anyone who believes they need to set their SWR at 2.0% (there appear to be a few of them in this and other currently active threads) is assuming the possibility of super low returns very, very far into the future.

If they thought, as you say, that returns might be bad in the near future but then improve, there would be no need to set their SWR so low in the first place.

Setting ones SWR is a big deal as it impacts how long one works. Just saying I need a 2.0% SWR is very different from actually working long enough to get there. I think those who suggest needing a SWR of 2.0% won't end up working long enough to get there. If they do, I think they will eventually determine they did not need to.
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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by willthrill81 » Tue Sep 10, 2019 6:25 pm

MikeG62 wrote:
Tue Sep 10, 2019 6:11 pm
Setting ones SWR is a big deal as it impacts how long one works. Just saying I need a 2.0% SWR is very different from actually working long enough to get there. I think those who suggest needing a SWR of 2.0% won't end up working long enough to get there. If they do, I think they will eventually determine they did not need to.
Keep in mind that virtually no one is actually using a fixed real dollar withdrawal approach (i.e. SWR), and for good reason. What sane person would withdraw 3.5-4% of their portfolio in year 1 of retirement and then withdraw that same dollar amount, adjusted annually for inflation, in every subsequent year, for multiple decades, with complete disregard for their portfolio's performance?

In reality, everyone makes adjustments to their withdrawals. So starting one's withdrawals at 3-3.5% if retiring early should not be mean that the retiree will never increase their withdrawals if their portfolio does well (which it very likely will if the future resembles the past much at all), nor will it mean that they would not decrease their withdrawals if their portfolio did very poorly (which is historically very unlikely to be necessary).

I agree that very, very few people will ever get to the point that 2% withdrawals will cover all of their desired spending. We personally plan on our essential spending being covered by 2% withdrawals, but we plan to withdraw at least another 2% for discretionary spending (i.e. at least 4% total) that we could rein in if we really needed to.
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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by HomerJ » Tue Sep 10, 2019 7:21 pm

willthrill81 wrote:
Tue Sep 10, 2019 6:25 pm
I agree that very, very few people will ever get to the point that 2% withdrawals will cover all of their desired spending.
Part of the reason that this is such a hot topic on Bogleheads is because quite a few people HERE have very high incomes, yet are smart enough to keep their expenses moderate.

Most of the people here who talk about 2% WILL get there, because it's going to be easy for them. They will hit 25x expenses at 40-45, and working another 5-10 years is no big hardship (might as well get the kids through college anyway, right?)

Anyone who hits 25x expenses at an older age like 55-65 is going to look at the trade-offs much more closely.
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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by konic » Tue Sep 10, 2019 9:35 pm

countmein wrote:
Sat Sep 07, 2019 7:15 pm
konic wrote:
Sat Sep 07, 2019 6:21 pm

The MC modeling makes very little sense. As an alternative look at a simple 3-fund 60:40 Portfolio with a Mean real return of 5.7 and a higher volatility of 10.7 at the below link:
https://portfoliocharts.com/portfolio/t ... portfolio/

This has a PWR of 3.5%!!!

If 2% SWR is meant as a serious suggestion, when you eventually do manage to pile up that much, just put the entire portfolio in the longest term TIPS, and stop worrying about financial management or portfolio composition.
PV's model gives approx the same result if you input recent returns and a 30 year horizon. 50 years is the issue.
Looks like you did not get the point of me listing the PWR. PWR leaves you with atleast as much portfolio as you started with in real terms, regardless of the time period.

So, again, if 2% SWR is a serious recommendation, then there is no need to bother with complex investment strategies which increase your risk. Therefore, no need to keep debating this endlessly.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by willthrill81 » Tue Sep 10, 2019 9:48 pm

konic wrote:
Tue Sep 10, 2019 9:35 pm
countmein wrote:
Sat Sep 07, 2019 7:15 pm
konic wrote:
Sat Sep 07, 2019 6:21 pm

The MC modeling makes very little sense. As an alternative look at a simple 3-fund 60:40 Portfolio with a Mean real return of 5.7 and a higher volatility of 10.7 at the below link:
https://portfoliocharts.com/portfolio/t ... portfolio/

This has a PWR of 3.5%!!!

If 2% SWR is meant as a serious suggestion, when you eventually do manage to pile up that much, just put the entire portfolio in the longest term TIPS, and stop worrying about financial management or portfolio composition.
PV's model gives approx the same result if you input recent returns and a 30 year horizon. 50 years is the issue.
Looks like you did not get the point of me listing the PWR. PWR leaves you with atleast as much portfolio as you started with in real terms, regardless of the time period.
Anyone planning on a retirement longer than about 40 years should, IMHO, target initial withdrawals at no more than the historic perpetual withdrawal rate, which has arguably been about 3% for most balanced portfolios. This is the case no matter whether they are targeting 45 years, 70 years, etc.
“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: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by konic » Tue Sep 10, 2019 9:58 pm

willthrill81 wrote:
Tue Sep 10, 2019 9:48 pm
konic wrote:
Tue Sep 10, 2019 9:35 pm
countmein wrote:
Sat Sep 07, 2019 7:15 pm
konic wrote:
Sat Sep 07, 2019 6:21 pm

The MC modeling makes very little sense. As an alternative look at a simple 3-fund 60:40 Portfolio with a Mean real return of 5.7 and a higher volatility of 10.7 at the below link:
https://portfoliocharts.com/portfolio/t ... portfolio/

This has a PWR of 3.5%!!!

If 2% SWR is meant as a serious suggestion, when you eventually do manage to pile up that much, just put the entire portfolio in the longest term TIPS, and stop worrying about financial management or portfolio composition.
PV's model gives approx the same result if you input recent returns and a 30 year horizon. 50 years is the issue.
Looks like you did not get the point of me listing the PWR. PWR leaves you with atleast as much portfolio as you started with in real terms, regardless of the time period.
Anyone planning on a retirement longer than about 40 years should, IMHO, target initial withdrawals at no more than the historic perpetual withdrawal rate, which has arguably been about 3% for most balanced portfolios. This is the case no matter whether they are targeting 45 years, 70 years, etc.
3% is a reasonable PWR for a conservative well balanced portfolio. For a moderate balanced portfolio (60:40, global stocks:US intermediate-term debt), 3.5% is the likely PWR.

Of course, we can torture the historical data a bit more and construct a portfolio that had yielded 4.5% as a PWR :mrgreen:

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by willthrill81 » Tue Sep 10, 2019 11:42 pm

konic wrote:
Tue Sep 10, 2019 9:58 pm
willthrill81 wrote:
Tue Sep 10, 2019 9:48 pm
konic wrote:
Tue Sep 10, 2019 9:35 pm
countmein wrote:
Sat Sep 07, 2019 7:15 pm
konic wrote:
Sat Sep 07, 2019 6:21 pm

The MC modeling makes very little sense. As an alternative look at a simple 3-fund 60:40 Portfolio with a Mean real return of 5.7 and a higher volatility of 10.7 at the below link:
https://portfoliocharts.com/portfolio/t ... portfolio/

This has a PWR of 3.5%!!!

If 2% SWR is meant as a serious suggestion, when you eventually do manage to pile up that much, just put the entire portfolio in the longest term TIPS, and stop worrying about financial management or portfolio composition.
PV's model gives approx the same result if you input recent returns and a 30 year horizon. 50 years is the issue.
Looks like you did not get the point of me listing the PWR. PWR leaves you with atleast as much portfolio as you started with in real terms, regardless of the time period.
Anyone planning on a retirement longer than about 40 years should, IMHO, target initial withdrawals at no more than the historic perpetual withdrawal rate, which has arguably been about 3% for most balanced portfolios. This is the case no matter whether they are targeting 45 years, 70 years, etc.
3% is a reasonable PWR for a conservative well balanced portfolio. For a moderate balanced portfolio (60:40, global stocks:US intermediate-term debt), 3.5% is the likely PWR.

Of course, we can torture the historical data a bit more and construct a portfolio that had yielded 4.5% as a PWR :mrgreen:
Since 1970 (data in Portfolio Charts), the PWR for a portfolio with 60% global stock (50% U.S. / 50% ex-U.S.) and 40% ITT was right around 3-3.2%.

To your second point, over the same period, the Golden Butterfly portfolio had a PWR of 5.3%.
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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by 986racer » Wed Sep 11, 2019 5:55 am

I’ve written a rudimentary MC simulator (no mean reversion though) and ran with two types of ways of simulating returns.

1. Take actual inflation and returns from previous years and then randomly pick data from real years. E.g., a return from year 1 might be the 1929 return and then the return from year 2 might come from 1944.
2. Use observed means and standard deviations to randomly generate a return from a normal distribution

What I quickly observed that if you want to have a 100% safe SWR, you needed to be somewhere in the 2% SWR rate. A 95% SWR was closer to 3-3.5% (it’s been a while so I forget the exact number).

I wanted to see what was happening in that 5% tail so I then set it up to print out the results and sequences of those 5% failures, and I quickly saw the problems of not incorporating mean reversion. It almost always started with a 1929, 1966, 2000, or 2008 type scenario and then quickly followed by another one of those scenarios, and then followed by another one. I.e, you had the worst periods in history all thrown together.

As a quick hack to get around those problems and not try to build a mean reversion model, I just decided to focus on a 95% SWR. I’m sure there are lots of issues with that too.

However, for those who want to be completely safe and think 2% SWR is what represents safety, I think you are deluding yourselves. If we really hit a 30-50 year period where 2% is the safe SWR, realize that we are talking about Great Depression followed by 70’s inflation, followed by further crashes in the stock market. If that happens, we are probably facing US bankruptcy and defaulting, and the US currency being thrown out. If that occurs, your money will no longer be useful. Instead, you should be investing in hard assets like the survivalists do. Don’t stockpile money - instead, start stockpiling 30-50 years of hard goods and start growing your own food. Also, you’ll need to protect your assets as there will likely be roving marauders. Yes, that is what a 2% SWR means

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by Random Poster » Wed Sep 11, 2019 8:31 am

HomerJ wrote:
Tue Sep 10, 2019 7:21 pm
Most of the people here who talk about 2% WILL get there, because it's going to be easy for them. They will hit 25x expenses at 40-45, and working another 5-10 years is no big hardship (might as well get the kids through college anyway, right?)
I've been doing a lot of thinking and calculating lately, and it seems to me that the real key is to just have moderate or low-ish expenses.

Annual expenses of $75,000 a year only requires $3M to have 40 times expenses, or $3.75M to have 50 times expenses. The difference between 50 and 40 times expenses is just $750,000, and saving that much more isn't really all that difficult, particularly for someone who, say, earns $250K+ a year and saves at least 50% of their income in a strong investment market.

But if your annual expenses increase just 25% to $93,750, then you now need $3.75M to have 40 times expenses, or $4,687,500 to have 50 times expenses. The difference now is $937,500, which might be a bit harder to reach and would probably take at least a year's worth more working and savings.

And if your annual expenses increase another 25% to now total $117,187, you are going to need $4,687,500 to get to 40 times expenses, or $5,859,350 to get to 50 times expenses---a difference of $1,171,850. Even in a strong market, that is going to take a bit more work and savings to reach.

So wouldn't it just be easier, and perhaps a whole lot less stressful, to just figure out how to live on less money and be content with living a reasonably solid middle-class life?

That way, you can work until 40-ish, save up $3M to $3.75M, put it all in a 50/50 portfolio, and just withdraw 2% to 2.5% a year and be done with it all?

For most higher-income professionals, going that route should not be particularly difficult. So why do most of them seem not to do it?

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by michaeljc70 » Wed Sep 11, 2019 9:25 am

HomerJ wrote:
Sun Sep 08, 2019 9:31 pm
countmein wrote:
Sat Sep 07, 2019 10:52 pm
Homer J,

Can't disagree with the "life choices" part of your post but the part about the model being junk-- I get that you don't like the results, but can you explain, in quantitative terms, why it is mis-estimating SWR for 50 year horizons? What should the true estimate be and by what adjustment of the MC method?

For the one data point test in question (1972 - present), the actual returns hit the 60-something percentile of the model's prediction. This does not indicate anything close to an error by the model.
Many inaccurate Monte-Carlo simulations assume every year's return is an independent event from surrounding years.

This is a poor assumption, and leads to a poor model that does not accurately model reality.
Some do do that. Some use actual sequences of real returns for the entire period (like 1970-1999 for a 30 year retirement would be one scenario). The problem with that is there aren't that many. If you have a 30 year retirement, then you typically have around 60-70 periods to test (assuming data from 1920s). In my software I use chunks of years. This is to simulate cycles in the economy. Typically I use 7-10 year chunks. There is no right answer but I agree using random years one at a time is not the best.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by MikeG62 » Wed Sep 11, 2019 9:26 am

Random Poster wrote:
Wed Sep 11, 2019 8:31 am

...So wouldn't it just be easier, and perhaps a whole lot less stressful, to just figure out how to live on less money and be content with living a reasonably solid middle-class life?

For most higher-income professionals, going that route should not be particularly difficult. So why do most of them seem not to do it?
For a few reasons.

First, not all people are happy living a solid middle-class lifestyle - especially if their career (income level) affords them the ability to do/spend/experience more. Last I heard, we only have one turn at life. Why put an artificial limiter on because it's "good enough"? DW and I want to live life to the fullest - live up the level of our means. That's what we have been trying to do since we retired in 2016.

Second, many/most high-income professionals don't want to take a step back in their lifestyles in retirement. I would think they would want to at least maintain the lifestyles to which they grown accustomed. True there are high income folks who save a ton, but I think they are in the minority of high income people. These boards skew toward people with a bias to save.
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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by smitcat » Wed Sep 11, 2019 9:36 am

MikeG62 wrote:
Wed Sep 11, 2019 9:26 am
Random Poster wrote:
Wed Sep 11, 2019 8:31 am

...So wouldn't it just be easier, and perhaps a whole lot less stressful, to just figure out how to live on less money and be content with living a reasonably solid middle-class life?

For most higher-income professionals, going that route should not be particularly difficult. So why do most of them seem not to do it?
For a few reasons.

First, not all people are happy living a solid middle-class lifestyle - especially if their career (income level) affords them the ability to do/spend/experience more. Last I heard, we only have one turn at life. Why put an artificial limiter on because it's "good enough"? DW and I want to live life to the fullest - live up the level of our means. That's what we have been trying to do since we retired in 2016.

Second, many/most high-income professionals don't want to take a step back in their lifestyles in retirement. I would think they would want to at least maintain the lifestyles to which they grown accustomed. True there are high income folks who save a ton, but I think they are in the minority of high income people. These boards skew toward people with a bias to save.
"That way, you can work until 40-ish, save up $3M to $3.75M, put it all in a 50/50 portfolio, and just withdraw 2% to 2.5% a year and be done with it all?"
Work till 40'ish and save $3.5 million is not likely with high income unless you are speaking about really high income. Some reasons:
- school loans
- children
- home purchase
- taxes
These items will reduce the ability to save enough funds from mid 20's to 40 and beyond. The fewer of them that you want or desire the easier that path becomes.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by willthrill81 » Wed Sep 11, 2019 9:55 am

986racer wrote:
Wed Sep 11, 2019 5:55 am
I’ve written a rudimentary MC simulator (no mean reversion though) and ran with two types of ways of simulating returns.

1. Take actual inflation and returns from previous years and then randomly pick data from real years. E.g., a return from year 1 might be the 1929 return and then the return from year 2 might come from 1944.
2. Use observed means and standard deviations to randomly generate a return from a normal distribution

What I quickly observed that if you want to have a 100% safe SWR, you needed to be somewhere in the 2% SWR rate. A 95% SWR was closer to 3-3.5% (it’s been a while so I forget the exact number).

I wanted to see what was happening in that 5% tail so I then set it up to print out the results and sequences of those 5% failures, and I quickly saw the problems of not incorporating mean reversion. It almost always started with a 1929, 1966, 2000, or 2008 type scenario and then quickly followed by another one of those scenarios, and then followed by another one. I.e, you had the worst periods in history all thrown together.

As a quick hack to get around those problems and not try to build a mean reversion model, I just decided to focus on a 95% SWR. I’m sure there are lots of issues with that too.

However, for those who want to be completely safe and think 2% SWR is what represents safety, I think you are deluding yourselves. If we really hit a 30-50 year period where 2% is the safe SWR, realize that we are talking about Great Depression followed by 70’s inflation, followed by further crashes in the stock market. If that happens, we are probably facing US bankruptcy and defaulting, and the US currency being thrown out. If that occurs, your money will no longer be useful. Instead, you should be investing in hard assets like the survivalists do. Don’t stockpile money - instead, start stockpiling 30-50 years of hard goods and start growing your own food. Also, you’ll need to protect your assets as there will likely be roving marauders. Yes, that is what a 2% SWR means
Yes, you've correctly pinpointed the big problem with most of the Monte Carlo analyses being used. Everyone should realize that if you stacked all of the worst periods together in a long daisy chain that the 4% rule wouldn't work. But as you also point out, it's hard to imagine what would work in such a situation. 3% certainly wouldn't, and 2% would seem really shaky too.

Those serious contemplating withdrawing less than 3% from their portfolio in any given year may be well served with a SPIA and/or a TIPS ladder with enough to cover all essential spending when used in conjunction with non-portfolio sources of income like SS benefits.
“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: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by EnjoyIt » Wed Sep 11, 2019 11:19 am

Random Poster wrote:
Wed Sep 11, 2019 8:31 am
HomerJ wrote:
Tue Sep 10, 2019 7:21 pm
Most of the people here who talk about 2% WILL get there, because it's going to be easy for them. They will hit 25x expenses at 40-45, and working another 5-10 years is no big hardship (might as well get the kids through college anyway, right?)
I've been doing a lot of thinking and calculating lately, and it seems to me that the real key is to just have moderate or low-ish expenses.

Annual expenses of $75,000 a year only requires $3M to have 40 times expenses, or $3.75M to have 50 times expenses. The difference between 50 and 40 times expenses is just $750,000, and saving that much more isn't really all that difficult, particularly for someone who, say, earns $250K+ a year and saves at least 50% of their income in a strong investment market.

But if your annual expenses increase just 25% to $93,750, then you now need $3.75M to have 40 times expenses, or $4,687,500 to have 50 times expenses. The difference now is $937,500, which might be a bit harder to reach and would probably take at least a year's worth more working and savings.

And if your annual expenses increase another 25% to now total $117,187, you are going to need $4,687,500 to get to 40 times expenses, or $5,859,350 to get to 50 times expenses---a difference of $1,171,850. Even in a strong market, that is going to take a bit more work and savings to reach.

So wouldn't it just be easier, and perhaps a whole lot less stressful, to just figure out how to live on less money and be content with living a reasonably solid middle-class life?

That way, you can work until 40-ish, save up $3M to $3.75M, put it all in a 50/50 portfolio, and just withdraw 2% to 2.5% a year and be done with it all?

For most higher-income professionals, going that route should not be particularly difficult. So why do most of them seem not to do it?
I fully agree, but alter the plan just a little. Our basic comfortable life is 2% of our expenses. The other 2% is extra fun stuff which I would be ok with stopping if push came to shove. Same thing, but I get to spend 4% every year except during those times when markets stumble.

One's ability to manage expenses is key in any withdrawal strategy.

Also, 2% of $3M is $60k/yr. For most high income professionals, SS will cover the majority of that. If both spouses are high income earners SS will cover all if withdrawn at 70.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by MikeG62 » Wed Sep 11, 2019 12:25 pm

EnjoyIt wrote:
Wed Sep 11, 2019 11:19 am
Our basic comfortable life is 2% of our expenses. The other 2% is extra fun stuff which I would be ok with stopping if push came to shove. Same thing, but I get to spend 4% every year except during those times when markets stumble.

One's ability to manage expenses is key in any withdrawal strategy.
I agree with the need to be flexible, but I don't believe one needs to ratchet down expenses every time the market goes through a rough patch or has a bad year (not suggesting you are necessarily saying that EnjoyIt).

Although withdrawal strategies like VPW would make such an immediate adjustment, there are plenty of other strategies, such as Guyton & Klinger's guardrails (a modified version of which we are following) or Kitces' ratcheting, among others, that would only require adjustment in extreme scenario's (likely after a long run of very poor returns). After all, the 4.0% rule was developed to allow consistent withdrawals, increased annually for inflation, (thereby allowing the retiree to maintain their standard of living) over a 30-year period (the worst the US has ever seen). There will be good and bad times within that 30-year period, but no real need to deviate from the suggested withdrawal pattern simply because the market has stumbled.

Now if we encounter something we've never seen before, then by all means scale back discretionary until it becomes clearer that the situation is improving.
Last edited by MikeG62 on Wed Sep 11, 2019 1:40 pm, edited 1 time in total.
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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by visualguy » Wed Sep 11, 2019 12:53 pm

Random Poster wrote:
Wed Sep 11, 2019 8:31 am
So wouldn't it just be easier, and perhaps a whole lot less stressful, to just figure out how to live on less money and be content with living a reasonably solid middle-class life?

That way, you can work until 40-ish, save up $3M to $3.75M, put it all in a 50/50 portfolio, and just withdraw 2% to 2.5% a year and be done with it all?

For most higher-income professionals, going that route should not be particularly difficult. So why do most of them seem not to do it?
People with this kind of income most often live in HCOL or VHCOL areas, and don't want to move upon retirement.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by willthrill81 » Wed Sep 11, 2019 2:58 pm

MikeG62 wrote:
Wed Sep 11, 2019 12:25 pm
EnjoyIt wrote:
Wed Sep 11, 2019 11:19 am
Our basic comfortable life is 2% of our expenses. The other 2% is extra fun stuff which I would be ok with stopping if push came to shove. Same thing, but I get to spend 4% every year except during those times when markets stumble.

One's ability to manage expenses is key in any withdrawal strategy.
I agree with the need to be flexible, but I don't believe one needs to ratchet down expenses every time the market goes through a rough patch or has a bad year (not suggesting you are necessarily saying that EnjoyIt).

Although withdrawal strategies like VPW would make such an immediate adjustment, there are plenty of other strategies, such as Guyton & Klinger's guardrails (a modified version of which we are following) or Kitces' ratcheting, among others, that would only require adjustment in extreme scenario's (likely after a long run of very poor returns).
There are other ways to smooth withdrawals also. If using the time value of money formula to determine annual withdrawals, using 1/CAPE as an estimate for forward stock returns can do this. As an example, from 2008 to 2009, despite a 60/40 portfolio dropping in value by 20%, the withdrawals would only have declined by 2% because the estimated forward stock returns went up almost enough to offset the drop in portfolio balance. I provided the details for this in this thread.
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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by EnjoyIt » Wed Sep 11, 2019 2:58 pm

visualguy wrote:
Wed Sep 11, 2019 12:53 pm
Random Poster wrote:
Wed Sep 11, 2019 8:31 am
So wouldn't it just be easier, and perhaps a whole lot less stressful, to just figure out how to live on less money and be content with living a reasonably solid middle-class life?

That way, you can work until 40-ish, save up $3M to $3.75M, put it all in a 50/50 portfolio, and just withdraw 2% to 2.5% a year and be done with it all?

For most higher-income professionals, going that route should not be particularly difficult. So why do most of them seem not to do it?
People with this kind of income most often live in HCOL or VHCOL areas, and don't want to move upon retirement.
not true

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by Rob1 » Wed Sep 11, 2019 2:59 pm

Seems like a somewhat relevant perspective again here...
Rob1 wrote:
Fri Apr 06, 2018 1:19 am
One somewhat relevant perspective...

"But history teaches us that depriving ourselves to boost our 40-year success probability much beyond 80% is a fool’s errand, since all you are doing is increasing the probability of failure for political, economic, and military reasons relative to the failure of banal financial planning."

More context in Bernstein‘s article here:
The Retirement Calculator from Hell, Part III
http://www.efficientfrontier.com/ef/901/hell3.htm

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by EnjoyIt » Wed Sep 11, 2019 3:11 pm

MikeG62 wrote:
Wed Sep 11, 2019 12:25 pm
EnjoyIt wrote:
Wed Sep 11, 2019 11:19 am
Our basic comfortable life is 2% of our expenses. The other 2% is extra fun stuff which I would be ok with stopping if push came to shove. Same thing, but I get to spend 4% every year except during those times when markets stumble.

One's ability to manage expenses is key in any withdrawal strategy.
I agree with the need to be flexible, but I don't believe one needs to ratchet down expenses every time the market goes through a rough patch or has a bad year (not suggesting you are necessarily saying that EnjoyIt).

Although withdrawal strategies like VPW would make such an immediate adjustment, there are plenty of other strategies, such as Guyton & Klinger's guardrails (a modified version of which we are following) or Kitces' ratcheting, among others, that would only require adjustment in extreme scenario's (likely after a long run of very poor returns). After all, the 4.0% rule was developed to allow consistent withdrawals, increased annually for inflation, (thereby allowing the retiree to maintain their standard of living) over a 30-year period (the worst the US has ever seen). There will be good and bad times within that 30-year period, but no real need to deviate from the suggested withdrawal pattern simply because the market has stumbled.

Now if we encounter something we've never seen before, then by all means scale back discretionary until it becomes clearer that the situation is improving.
Although I in essence agree with a variable withdrawal type of strategy, I don't necessarily see the need for it for us. We can spend more today, we don't. We spend what we need to for living, and spend what we want to that makes us happy. I don't see how spending more will really change that. Ratcheting up spending during a good year does nothing for us because it won't happen. If we are fortunate enough for a positive sequence of returns that has an ever increasing portfolio, I think we would end up with a slow lifestyle creep.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by willthrill81 » Wed Sep 11, 2019 3:17 pm

Rob1 wrote:
Wed Sep 11, 2019 2:59 pm
Seems like a somewhat relevant perspective again here...
Rob1 wrote:
Fri Apr 06, 2018 1:19 am
One somewhat relevant perspective...

"But history teaches us that depriving ourselves to boost our 40-year success probability much beyond 80% is a fool’s errand, since all you are doing is increasing the probability of failure for political, economic, and military reasons relative to the failure of banal financial planning."

More context in Bernstein‘s article here:
The Retirement Calculator from Hell, Part III
http://www.efficientfrontier.com/ef/901/hell3.htm
In this situation, I agree with Bernstein. Trying to find ways to reduce the risk of 'failure' from 5% to 2%, for instance, is folly. Flexibility is likely to be far more effective.
“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: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by visualguy » Wed Sep 11, 2019 3:35 pm

willthrill81 wrote:
Wed Sep 11, 2019 3:17 pm
Rob1 wrote:
Wed Sep 11, 2019 2:59 pm
Seems like a somewhat relevant perspective again here...
Rob1 wrote:
Fri Apr 06, 2018 1:19 am
One somewhat relevant perspective...

"But history teaches us that depriving ourselves to boost our 40-year success probability much beyond 80% is a fool’s errand, since all you are doing is increasing the probability of failure for political, economic, and military reasons relative to the failure of banal financial planning."

More context in Bernstein‘s article here:
The Retirement Calculator from Hell, Part III
http://www.efficientfrontier.com/ef/901/hell3.htm
In this situation, I agree with Bernstein. Trying to find ways to reduce the risk of 'failure' from 5% to 2%, for instance, is folly. Flexibility is likely to be far more effective.
How is this flexibility achieved? Working longer and/or saving more to have discretionary money that you're willing to live without if needed. Kind of changes the 4% rule to a "4% with a buffer of discretionary reduction" rule...

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by willthrill81 » Wed Sep 11, 2019 3:54 pm

visualguy wrote:
Wed Sep 11, 2019 3:35 pm
willthrill81 wrote:
Wed Sep 11, 2019 3:17 pm
Rob1 wrote:
Wed Sep 11, 2019 2:59 pm
Seems like a somewhat relevant perspective again here...
Rob1 wrote:
Fri Apr 06, 2018 1:19 am
One somewhat relevant perspective...

"But history teaches us that depriving ourselves to boost our 40-year success probability much beyond 80% is a fool’s errand, since all you are doing is increasing the probability of failure for political, economic, and military reasons relative to the failure of banal financial planning."

More context in Bernstein‘s article here:
The Retirement Calculator from Hell, Part III
http://www.efficientfrontier.com/ef/901/hell3.htm
In this situation, I agree with Bernstein. Trying to find ways to reduce the risk of 'failure' from 5% to 2%, for instance, is folly. Flexibility is likely to be far more effective.
How is this flexibility achieved? Working longer and/or saving more to have discretionary money that you're willing to live without if needed. Kind of changes the 4% rule to a "4% with a buffer of discretionary reduction" rule...
What's wrong with '4% with a buffer of discretionary spending'? Most of us spend more than we would need to in order to live happy, satisfied lives. As HomerJ has said repeatedly, I'd be fine with reducing our number of vacations in retirement from four to two if we needed to.

If you want to be as assured as you can that you will never have to reduce your spending at all, then you should probably consider an inflation-adjusted single premium annuity (although I believe that only one company still offers one that's linked to CPI). That comes with its own set of caveats, but if you never want to delay a vacation or buying a new car, then that's what you're left with.

If you try to convert your portfolio into income on your own (i.e. via withdrawals), you can never be 100% sure that you will never run out of money and/or be forced to reduce your spending at some point.

You can't have your cake and eat it too.
“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: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by visualguy » Wed Sep 11, 2019 3:59 pm

willthrill81 wrote:
Wed Sep 11, 2019 3:54 pm
visualguy wrote:
Wed Sep 11, 2019 3:35 pm
willthrill81 wrote:
Wed Sep 11, 2019 3:17 pm
Rob1 wrote:
Wed Sep 11, 2019 2:59 pm
Seems like a somewhat relevant perspective again here...
Rob1 wrote:
Fri Apr 06, 2018 1:19 am
One somewhat relevant perspective...

"But history teaches us that depriving ourselves to boost our 40-year success probability much beyond 80% is a fool’s errand, since all you are doing is increasing the probability of failure for political, economic, and military reasons relative to the failure of banal financial planning."

More context in Bernstein‘s article here:
The Retirement Calculator from Hell, Part III
http://www.efficientfrontier.com/ef/901/hell3.htm
In this situation, I agree with Bernstein. Trying to find ways to reduce the risk of 'failure' from 5% to 2%, for instance, is folly. Flexibility is likely to be far more effective.
How is this flexibility achieved? Working longer and/or saving more to have discretionary money that you're willing to live without if needed. Kind of changes the 4% rule to a "4% with a buffer of discretionary reduction" rule...
What's wrong with '4% with a buffer of discretionary spending'? Most of us spend more than we would need to in order to live happy, satisfied lives. As HomerJ has said repeatedly, I'd be fine with reducing our number of vacations in retirement from four to two if we needed to.

If you want to be as assured as you can that you will never have to reduce your spending at all, then you should probably consider an inflation-adjusted single premium annuity (although I believe that only one company still offers one that's linked to CPI). That comes with its own set of caveats, but if you never want to delay a vacation or buying a new car, then that's what you're left with.

If you try to convert your portfolio into income on your own (i.e. via withdrawals), you can never be 100% sure that you will never run out of money and/or be forced to reduce your spending at some point.

You can't have your cake and eat it too.
Sure, but then you need to plan for four vacations a year or something similar (so you have meaningful slack to cut), which many of us don't.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by willthrill81 » Wed Sep 11, 2019 4:06 pm

visualguy wrote:
Wed Sep 11, 2019 3:59 pm
Sure, but then you need to plan for four vacations a year or something similar (so you have meaningful slack to cut), which many of us don't.
If you are truly unable to reduce your withdrawals significantly, then 4% might be too aggressive of a starting point (depending on other factors, such as your age and health). But that's certainly not the case with most BHs.

If you don't have 'meaningful slack', as you put it, in your spending, then you might want to consider an inflation-adjusted SPIA.
“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: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by Rob1 » Wed Sep 11, 2019 4:16 pm

Another relevant perspective. This one from from Vanguard CEO Tim Buckley:

"I would say with most Vanguard shareholders in retirement, they live below their means. You both have seen that time and time again. And when times get tough, they cut down their savings—which they should do—but they do that too much. And they worry in the good times and are not spending. And you know what, maybe they could be living a little bit better."

From Vanguard's "The Planner and the Geek: podcast. Podcast and transcript here:
https://investornews.vanguard/a-convers ... m-buckley/

Note: I believe he misspoke and meant "spending" and not "savings".

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by MikeG62 » Wed Sep 11, 2019 5:26 pm

willthrill81 wrote:
Wed Sep 11, 2019 3:54 pm

If you want to be as assured as you can that you will never have to reduce your spending at all, then you should probably consider an inflation-adjusted single premium annuity (although I believe that only one company still offers one that's linked to CPI). That comes with its own set of caveats, but if you never want to delay a vacation or buying a new car, then that's what you're left with.

If you try to convert your portfolio into income on your own (i.e. via withdrawals), you can never be 100% sure that you will never run out of money and/or be forced to reduce your spending at some point.

While SPIA's are highly likely to pay out, that does not mean you are assured of not running out of money or that they are absolutely and unequivocally "safer" than a broadly diversified investment portfolio (same goes for pension obligations).

It comes down to risk retention vs. risk transfer as Michael Kitces explains quite well in this blog post from 2015...

https://www.kitces.com/blog/even-safety ... retention/

A few key quotes,

"...just because the risk (and/or the value) of a bond, annuity, or defined benefit plan payment is not continuously adjusted up and down on a daily basis and “marked to market” doesn’t make it unequivocally “safe” either. The odds that everything works out OK using insurance companies and defined benefits may still be highly probable… but that’s still a probability that the insurance/annuity company won’t default. And in fact, given that there is at least some probability any random insurance company might have failed in the past century, while a 4% “safe” withdrawal rate has never failed in US history, the dividing lines of “probability” versus “safety” don’t appear to be mutually exclusive at all! Either can have a probability of failure..."

“...markets and the economy in the aggregate may not support [a given] spending level in the long run, but ultimately that remains a concern of both risk retention and risk transfer strategies, for the simple reason that again both are subject to the same capital markets and the same exogenous shocks and events. The low-interest-rate environment damaging retirees today is damaging insurance companies as well, and the kinds of Great Depression and World War events that have been destructive to safe withdrawal rates throughout history around the globe have been similarly damaging to insurance companies, corporations, and governments. In other words, while both strategies can be managed in a manner to make the risks very very low, the remaining risks that can’t be “perfectly” eliminated are actually highly correlated across both philosophies!"
Real Knowledge Comes Only From Experience

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by MikeG62 » Wed Sep 11, 2019 5:45 pm

visualguy wrote:
Wed Sep 11, 2019 3:59 pm

Sure, but then you need to plan for four vacations a year or something similar (so you have meaningful slack to cut), which many of us don't.
All spending plans (budgets) should have a reasonable amount of buffer for unexpected or unplanned or to-be-determined later items. Otherwise how do you afford maintenance items like the furnace or AC system crapping out, the roof needing to be replaced or some other fairly large expenditure?

FWIW, we had to have our entire septic field ripped out and replaced last month at a cost of nearly $25K. It was unplanned, but it had to be done. We were able to repurpose/utilize funds from our "Travel & Entertainment an other One-off Spend" budget category to cover the cost. Despite this large one-off item (and significant travel this year) I still think we will land on budget overall this year.

Without a sizable buffer in the budget, I don't know how one can manage expenses that can spike like this from time to time. I would add that it is ok to overspend your budget in some years and underspend it in others, as long as over the long run you manage to your budget (or planned spending level - as I know some people hate the word budget).
Real Knowledge Comes Only From Experience

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by visualguy » Wed Sep 11, 2019 5:52 pm

MikeG62 wrote:
Wed Sep 11, 2019 5:45 pm
visualguy wrote:
Wed Sep 11, 2019 3:59 pm

Sure, but then you need to plan for four vacations a year or something similar (so you have meaningful slack to cut), which many of us don't.
All spending plans (budgets) should have a reasonable amount of buffer for unexpected or unplanned or to-be-determined later items. Otherwise how do you afford maintenance items like the furnace or AC system crapping out, the roof needing to be replaced or some other fairly large expenditure?

FWIW, we had to have our entire septic field ripped out and replaced last month at a cost of nearly $25K. It was unplanned, but it had to be done. We were able to repurpose/utilize funds from our "Travel & Entertainment an other One-off Spend" budget category to cover the cost. Despite this large one-off item (and significant travel this year) I still think we will land on budget overall this year.

Without a sizable buffer in the budget, I don't know how one can manage expenses that can spike like this from time to time. I would add that it is ok to overspend your budget in some years and underspend it in others, as long as over the long run you manage to your budget (or planned spending level - as I know some people hate the word budget).
I have money allocated for items such as what you're describing, which I don't consider discretionary. That money needs to be there. It's in a reserve I don't touch until these things happen. I don't know the exact year, but I do know that I'll have to replace the A/C, furnace, roof, other appliances, do some renovations, cars, etc.

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Re: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by willthrill81 » Wed Sep 11, 2019 6:54 pm

MikeG62 wrote:
Wed Sep 11, 2019 5:26 pm
willthrill81 wrote:
Wed Sep 11, 2019 3:54 pm

If you want to be as assured as you can that you will never have to reduce your spending at all, then you should probably consider an inflation-adjusted single premium annuity (although I believe that only one company still offers one that's linked to CPI). That comes with its own set of caveats, but if you never want to delay a vacation or buying a new car, then that's what you're left with.

If you try to convert your portfolio into income on your own (i.e. via withdrawals), you can never be 100% sure that you will never run out of money and/or be forced to reduce your spending at some point.
While SPIA's are highly likely to pay out, that does not mean you are assured of not running out of money or that they are absolutely and unequivocally "safer" than a broadly diversified investment portfolio (same goes for pension obligations).
It seems to safe that a CPI-linked SPIA is safer than relying on your own portfolio (assuming you aren't making ridiculously small withdrawals), but you're right that it's not absolutely safe. Nothing is.
“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: Kitces: The Problem with FIREing at 4% and the Need for Flexible Spending Rules

Post by bhsince87 » Wed Sep 11, 2019 7:20 pm

willthrill81 wrote:
Wed Sep 11, 2019 6:54 pm
MikeG62 wrote:
Wed Sep 11, 2019 5:26 pm
willthrill81 wrote:
Wed Sep 11, 2019 3:54 pm

If you want to be as assured as you can that you will never have to reduce your spending at all, then you should probably consider an inflation-adjusted single premium annuity (although I believe that only one company still offers one that's linked to CPI). That comes with its own set of caveats, but if you never want to delay a vacation or buying a new car, then that's what you're left with.

If you try to convert your portfolio into income on your own (i.e. via withdrawals), you can never be 100% sure that you will never run out of money and/or be forced to reduce your spending at some point.
While SPIA's are highly likely to pay out, that does not mean you are assured of not running out of money or that they are absolutely and unequivocally "safer" than a broadly diversified investment portfolio (same goes for pension obligations).
It seems to safe that a CPI-linked SPIA is safer than relying on your own portfolio (assuming you aren't making ridiculously small withdrawals), but you're right that it's not absolutely safe. Nothing is.

And by the same token, "working longer" isn't a guaranteed path to success either.
"If ye love wealth better than liberty, the tranquility of servitude better than the animating contest of freedom, go home from us in peace." Samuel Adams

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