FIRE is DEAD

Hi RIP readers,

I’m here with you today to celebrate the death of FIRE, that weird idea that one can reach Financial Independence and then Retire Early.

FIRE, may you rest in peace…

“RIP, WTF? Are you nuts? FIRE is very well alive! So many people are seeking FI and many – really, many – are retiring every day in their 30s or 40s! Early retirement is not dead! Financial Independence is not dead! Even YOU are (kind of) early retired! What are you talking about?”

Let’s unveil the truth my dear, young, passionate self.

“Wait! Am I your…self?”

Maybe. I don’t know. Maybe you’re my real voice. I don’t know. But let’s stay focused, we’ve a lot to uncover.

“Let me guess. You’re complaining because you’re not able to FIRE. Yeah, got you! You can’t stop thinking about income, worrying about money, finding structure and meaning without a job. You thought you were a warrior, but you discovered you’re just a worrier!”

Ouch, ok, it hurts and it’s a bit exaggerated, but no, it’s not what I wanted to talk about.

But also yes, f*ck you my friend!

“Am I still yourself?”

Are you nuts? Get out, NOW! No wait. Just listen. Let’s get back on topic.

Let me tell you a secret: it’s all wishful thinking!

“What?”

The things, everything, FIRE.

“What do you mean? FIRE? Nope, there are definitions, formulas… what about the 4% rule?”

Exactly! That’s what I want to talk about today 🙂

Let’s talk about Financial Independence.

Do you know how it is defined?

“Ok, this is getting serious. Let’s ask Wikipedia:“

Financial independence is the status of having enough income to pay one’s living expenses for the rest of one’s life without having to be employed or dependent on others. Income earned without having to work a job is commonly referred to as passive income

Well done. And do you know where this “income” comes from?

“Yeah… there are several strategies. Like owning rental properties, buy and hold assets like stocks and bonds, living off dividends or other ‘fixed income’ profits, owning businesses and more”

Correct.

And it’s all a lie 🙂

It’s all wishful thinking!

Look at the world right now: renters are not paying rent, stocks plummeted, dividends will get cut.

Everything works on “historical data”. Everything works “up to a certain point”.

“Yeah, RIP, we all know that! Nothing is guaranteed. It’s a probabilistic game. You can raise your odds thanks to safety margins but you FIRE bloggers have already figured it out… but wait, isn’t this entire blog about FI? What happened to you??”

Nothing in particular but, as you should know by now, I’m always mining the foundations of what I think I know. Yes, it’s not always a healthy thing to do, but it’s how I’m wired. Live with that.

This blog WAS about my journey to FI, and my dream of early retirement. But as Alan Watts says, Life is not a Journey. Life is a dance, and I’m dancing. The music has changed now!

“Yeah, it’s changed for you, but not for us. You’re ‘100% FI’ according to your progress bar, and already ‘retired’. Do you want to get us depressed?”

That’s the point! I’m not 100% FI and I’m not retired.

And I’m thinking deeply about these two concepts: do they exist at all?

But I want to focus on something more practical today. Let’s only focus on Financial Independence. Actually, let’s restrict it even further: FI via withdrawing money from a portfolio of long term investments, usually stocks and bonds. Similar analysis could be done about other strategies.

“RIP, it’s literally one of the building blocks of this blog. It’s your philosophy since… since when? 2014? Are you questioning that?”

I think since 2012 (when I purchased ERE book), maybe even earlier 🙂

I’m not here to fall into the Fallacy of Gray though, I am here to embrace the complexity of the situation. FI, on the other hand, is a simplification. It’s the map, not the territory. Thinking it’s a real thing is a naive and dangerous belief. You realize that if you raise your head just a bit.

I’ve been planning to write few posts about the dark aspects of FIRE, and this is (maybe) my first post on the Dark FIRE category. They’re meant to raise awareness of what are the dangers and the lies behind such a powerful tool that promises freedom, intentionality, and self actualization.

Let’s start by criticizing my own approach: obtain FI status (passive income that cover expenses) via investing in a low cost, diversified portfolio of index funds during accumulation phase, and withdrawing from it during the “retirement” phase in a sustainable way for the rest of my life.

There are many unknowns here: how long will I live? What’s my desired spending level? What to invest on? Which percentage of my portfolio is “sustainable”?

We all agree that “how long will you live?” is a question we want to answer as optimistically as we can (as humans, not as retirement planners!), so we try to set up a system that works “forever”. Problem solved! Yay! Except that history doesn’t progress in a linear way, and we’re all survivors of a sequence of many Black Swan events.

Our brain wants to extrapolate from the past. We fail to admit that we live in a unique time that’s not guaranteed to last for long. Literally, the concept of “retirement” (along with every pension system) didn’t exist before ~100 years ago, and we’ve been thru an unprecedented time of worldwide peace since the end of WWII, a technology disruption era, a demographic explosion, a decimation of absolute poverty, and the birth of a global internetwork where to share knowledge and opportunities.

That lead to an unprecedented exponential growth in productivity and individual wealth.

Do you think it’s honest to extrapolate next 70 years from previous ones?

Today, the world is experiencing a Gray Swan “so light as to be very nearly white” (cit.) and the stock market lost 35% in 5 weeks. So many things we gave for granted are now under discussion. Wasn’t it obvious? It always is in hindsight. I don’t complain about our collective incapacity of anticipating such events, I complain about our blindness in thinking that those kind of events won’t keep coming all the time!

Back to FIRE.

We all fell in love with the shockingly simple math. I think it’s the most popular Mr Money Mustache post of all time, and it dates back to 2012. It taught us that the only thing that matters is our Saving Rate. I was intuitively convinced at first sight. I designed my spreadsheets to track my saving rate, and I joined bloggers competitions on “who has it bigger”!

We all calculated our F*ck You (FU) Money using the 4% Rule, and dodged all complains thanks to the special power granted to us by Safety Margins. Problem solved! Forevah!

What about desired spending level? How much are you going to need for the rest of your life? Young and inexperienced, without a family to care for, and in very good health, we all fell in love with Minimalism and Frugality. Jacob Lund Fisker showed us the way. We all said he’s a bit extreme, so let’s add a 10-20% to that and check this item out! Problem solved! Forevah!

Let’s put everything on autopilot. Of course I’m perfectly aware, today, of what my 70 years old self would need in the future! It’s just linear interpolation, the future is smooth. And of course nothing will change once I start a family and have kids! And yeah, just adjusting my expenses with inflation is all I will ever need: I will want to buy the exact same basket of things for the next 50 years!

It’s all a lie.

It’s a too complex phenomenon, involving too many moving parts, to be planned for.

“RIP… I’ve been following you since the beginning. You seemed so certain about your plan. Now you tell me it’s all useless. What’s the point of even saving some money then? 🙁 ”

This is exactly how not to respond to a problem whose solution you thought it was Black/White and now you discovered it’s made of millions of shades of gray.

Yours is the indifferent uncertainty response, the Nihilist approach. Let’s instead embrace complexity and uncertainty, and see how we can live with that.

When people thought the earth was flat, they were wrong. When people thought the earth was spherical, they were wrong. But if you think that thinking the earth is spherical is just as wrong as thinking the earth is flat, then your view is wronger than both of them put together.

– Isaac Asimov, “The Relativity of Wrong”:

Let’s focus on the 4% Rule today.

For those who don’t know (is there anyone following my blog who doesn’t know the 4% rule?), the 4% rule is the colloquial name given to a 1994 study by William Bengen. It simply states that – according to historical data (not much data, to be honest) – a 50% US stocks / 50% US (government) bonds portfolio would have not been depleted for at least 30 years if you withdrew 4% of its initial value on year 1, and the same amount adjusted for inflation (CPI) for the following 29 years.

A variation of this study was confirmed by three economists from Trinity University in 1998 (the so called Trinity Study).

Aaaah, the roaring 90s!

The world is a bit different now:

• During this 21st century we already had 2(3?) major recessions, and 3 major market crashes (dotcom bubble 2000-2002, great financial crisis 2008-2009, coronavirus 2020-202?).
• Yields for fixed income investments (bonds) are at all time low.
• Shiller CAPE ratio for US stocks is at historically very high values, second only to dotcom bubble era.

The FIRE community adopted a variety of different strategies in response to the above conditions. Strategies that span from denial to avoidance, from acceptance to rebuttal:

• “4%? Why that low? The stock market WILL return 12% on average each year! I plan to withdraw 8%! Hail to you, prophet Dave Ramsey!” (any update on this, my friends?)
• “Haha told you! FI thru investing is silly! That’s why I own 185 rental units on Airbnb, all leveraged with 99% mortgage on them! Cashflow is king! Hail to you, prophet Robert Kiyosaki!” (any update on this, my friends?)
• “Why care about stocks growth? I only buy high dividend stocks with guaranteed 4% or higher dividends, that are also growing their dividends each year! High dividends! Dividend Aristocrats! Hail to you, prophet DividendMantra!” (any update on this, my friends?)
• “Yeah, well, ok, let’s tell the truth: nobody lives off the 4% rule. Let’s call it “4% rule of thumb“. It’s important to not take it too literally. That’s why I quit my job according to the 4% rule but I’m running 4 business and I have these 75 side hustles… because you never know… I don’t trust the 4% rule. Btw, do you want to click on my affiliate links?” (get out, you and your Herbalife-like lifestyle!)
• “Yeah, 4% rule is dead. And I don’t plan to stay retired for just 30 years, let’s double down: 60 years! My friend Big ERN told me that if I’m willing to go 75+% stocks I can assume a 3.25% SWR. I know, it sucks a bit, but that’s what we have now.“

Last response is the most rational, even though Big ERN series also suffer from extrapolation fallacy, and it’s not hidden by the author: it’s just a retrospective analysis of the last 150 years. An amazing one though.

Is the future of the stock and bond markets (or any other investable asset) going to be comparable to the last 150 years? Or are we going to experience a change in kind?

Time will tell… but I don’t want to be told I was wrong 20 years from now!

Up until early 2017 I’ve read quite a lot about the SWR, its implications for people outside US, impact of taxes and other fees, and much more. After few installments of Big ERN SWR series (end of 2016) I decided to accept a 3.5% SWR instead of a 4%, on top of all the other safety margins.

That was “long time ago”, more than three years ago, half a year after I launched this blog. Never really reviewed my strategy since then. I kept reading each new post Big ERN pushed, but only assimilated the concepts intuitively, never got my hands dirty again with spreadsheets. The thought of “being it all a lie” started forming over time and it’s lingering on my mind since maybe a couple of years.

Let’s talk about FI Money (a.k.a. FI Money, FU Money, whatever) now.

According to a “fixed spending regime”, the amount of money (invested) you need to call yourself FI is:

FI Money = Spending / SWR

(e.g. if you spend 50k per year, and you plan for a 3% SWR, you need to invest 50k / 0.03 = 1.666M)

I personally have no idea how to draw a comprehensive FIRE plan for our situation given that we don’t know where we’re going to live (IT? CH? Other?), how many mouths to feed (will we have another child?), what will be our spending level in 5, 10, or 20 years from now… I have no clue!

This heavy fog prevented me to focus on the “easier” part of the equation (the SWR) for a while. I postponed my SWR revision indefinitely, waiting for other moving parts to slow down.

Part of my brain didn’t want to “recalculate ideal SWR” at all, change FI Money target, setting a cold number as a goal.

People who are getting close – or already sitting on the other side of FI – keep saying that you should not sacrifice your happiness in the pursuit of a numeric goal, that money and confidence are interchangeable, that you decide where to place yourself in the Money Spectrum.

Maybe the money game should be played seriously, but not that seriously. Of course the basics of personal finance must be learned anyway if you want to achieve some sort of financial success and stability: earn more, spend less, and invest wisely. Tools like budgeting, expense tracking, salary negotiation, getting so good they can’t ignore you, avoiding crappy and expensive investments, and avoiding lifestyle inflation will always be the building blocks of financial intelligence, with or without financial independence.

But…

Don’t earn more if it’s coming at the expense of your physical or mental health.

Don’t save more if you’re perceiving deprivation.

Don’t invest more (or more aggressively) if it’s coming at the expense of your mental health.

And maybe splurge a bit in that direction that you know will improve your life in a sensible way without destroying your finances! (Maybe I should replace my old 2012 desktop computer…)

Of course first try to push yourself a little bit into discomfort in each of the above fields. Once you’ve found your thresholds, try to go that extra mile more to test them. But don’t try harder if the sole goal is to reach FI.

The truth? You decide when you’re FI.

You decide when to change the music of your dance (hail to you, prophet Alan Watts), you decide when it’s time to make a change and live your ideal life now, instead of “one day”. More important than the amount of money you saved are the skills you demonstrated to save that amount, the virtuous habits you developed. And more importantly: why and what you plan to do with the second phase of your life! Better to quit your job with 100k and a lot of ideas and energies than with 2M but without a drive and burnt out! There’s no finish line. Or if there’s one, that line is blurred!

That’s my current mindset, which is not moving far away from my FIRE goals, but it’s always keeping an eye on the big picture.

Until last week.

Well, to be honest nothing changed radically since last week 🙂 but I took time to think deeply about the entire FI thing after having received a cold-shower wake-up call that found fertile terrain.

I’m talking about yet another amazing video by Ben Felix.

I watched the video twice, trying to not emotionally react soon, allowing my thoughts sit with me for a couple of days.

Ok, Ben is not a fan of Early Retirement and the 4% rule at all. I think his pessimistic view on the 4% rule is a bit exaggerated (his simulation produced a forward looking SWR between 2 and 2.5%, ouch) but he got many valid points.

Let’s unroll the video and add my (humble) analysis on top of his.

Fun fact: I found a r/fi thread started on the same day (or the day after) Ben published his video, and didn’t get what people were telling about in the comments. After a good 20 minutes reading (interesting) comments and replying to some of them, I realized the video linked in the thread was not the one Ben just published but an old one from Sept 2018, against the 4% rule anyway. It’s worth watching in my opinion, even if it’s almost a duplicate of the new one from May 2020. I was surprised to see a thread about his old video on the day he published a new video on the same topic.

Funnier fact: I realized it was not the same video after reading a comment who said “He posted a video yesterday about…” and I was going to reply “bro, this is exactly the video we’re discussing here, didn’t you realize that?” but before submitting the comment I wanted to verify I wasn’t dumb, so I clicked on the YT link to find that… the thread was about the old video 😀

Anyway, if you care about the 4% rule, which is essentially the “scientific” foundation of the entire FIRE thing, please take a look at the thread on r/fi I linked above (ok, here is it again)

Back to Ben

“Here I am, RIP, how’s going?”

No, not you Ben! See you next time, ciao!

First of all, congrats Ben for your 4th child! Wow, I have no idea how you can get anything done with 4 kids!

Actual content starts at 1:09.

Ben starts quoting Nobel prize winner William Sharpe (the guy behind the Sharpe ratio) who said that “Retirement Income is the nastiest, hardest problem in finance”, i.e. we’re facing a tough problem.

Ben introduces the 4% rule for Retirement Spending. He adds that reducing one of the most complex problem (retirement income) problem down to a simple rule of thumb is somewhat useful, i.e. we’re (over)simplifying a complex problem with a simple solution.

So far, I liked the differentiation between Retirement Income, which is the problem we’re trying to solve, and Retirement Spending, which is the problem the 4% rule addresses. This makes explicit that we’re not “generating any income” via the 4% rule, but only caring about covering our expenses.

That doesn’t mean Ben advocates other income-y tricks like high/growing dividend stocks! He’s been vocal so many other times that “total return” is what matters, not “income” if it comes at the expense of expected future returns.

2:13: Ben introduces the two main (and unique to this problem) financial risks of retirement:

• Sequence Risk: it’s not only the average returns during your retirement that matters, it also matters the order in which your portfolio returns are coming. Starting your retirement with bad returns (right before a market crash) can’t be covered by later better returns. Best articles on this subject: Big ERN SWR series part 14, Michael Kitces post on SRR, ONL post on how to address SRR, and again a recent article by Big ERN. Bonus: an amazing article (more math) by Fat Tailed and Happy (maybe the best on the topic).
• Longevity Risk: well, you don’t know how long you’re going to live. There’s the risk of you living for too long and needing more money than anticipated. Be safe, die early! Longevity risk is the nastiest problem, and can only be anticipated by planning for a loooong life (which means trying to never deplete your portfolio). Best article on the topic: again, Big ERN’s “you are a pension fund of One“. Bonus: this amazing calculator, with a visual representation of odds of ending up rich, broke or dead over time.

According to Ben, the 4% rule was designed to address sequence risk, with (secondary) focus on longevity risk as well.

3:19: Ben explains the genesis of the 4% Rule, from Bengen to Trinity study. I learnt few details I didn’t know, like the type of bonds considered, and minor differences in the definition of “success”.

So far, so good.

4:33: here comes the (many) problems:

• The 4% Rule only uses historical data. No guarantees on future performance.
• The 4% Rule only uses US data. Good luck if you want to apply it everywhere else in the world!
• Historical data contains few samples. Yes, 50-80 (or even 120) years are statistically insignificant.
• Data before WWII is of doubt usefulness.
• The 4% Rule doesn’t care about current high stock valuations and low bond yields. Shiller CAPE second only to dotcom bubble.
• The 4% Rule only considers a time horizon of 30 years. Good luck dear early retiree friends!
• The 4% Rule assumes constant inflation-adjusted spending. No space for flexibility, both up and down.
• The 4% Rule ignores Fees and Taxes. Good luck almost everywhere in Europe!
• The 4% Rule assumes your spending level won’t grow more than inflation. Again, take a look at this amazing post by Big ERN on how you should plan not just for COLA (cost of living adjustment), but you might want to plan for COLA+1% or COLA+2%. Boom! Screwed!

Ok, some of the above problems were added by me 🙂

4:51: Ben addresses the time frame.

This is a video about early retirement. A 40 yo early retiree (hey, hi Ben, you talking to me?) should plan to live a bit longer than 30 years. Over 40 years, the 4% rule has 87% success rate (50% stocks / 50% bonds portfolio), and longer time periods are of course even worse. No evidence has been provided to support the (quantitative) claim. I do accept the qualitative argument though.

Let’s increase the weight in stocks to improve the outcome!

5:32: Ben mentions the SWR guide by Big ERN (well done Karsten!)

The Safe Withdrawal Rate Series

According to ERN, as reported by Ben, if you want to extend time frame up to 50 or 60 years and retain a reasonable chance of success (based on historical data), you need higher stock exposure – at least 75% – and accept a SWR closer to 3.25% than to 3.50%.

Over longer horizons, bonds are bad!

– Big ERN, SWR Guide Part 2

Emphasis mine. Same below.

You have to live with very high volatility for 60 years in order to increase your chances of success! An aggressive portfolio can be stressful even if it does make sense.

– Ben Felix

Big ERN realistic (but also pessimistic, compared to the 4% enthusiasts) conclusions represent more or less my view on the subject. My “plans”, if I appeared to have any, was to go for a 3.5% SWR, account for expected taxes, and don’t actually “retire” to a life of leisure, but keep being productive and care (hopefully less) about income. That was my fuzzy plan, I think it still is.

Ok, Big ERN also deployed a couple of bombs on the “flexibility myth”, but my rapid eyes dismissed them as manageable. C’mon bro, stop killing our dreams!

So far, nothing new on the horizon. Nice to see Ben confirming what I knew, and see the picture forming in a more formal frame.

7:02: Ben addresses the fact that historical US stocks and bonds data might not be representative of expected future returns at this point in time (2020 and beyond), and almost useless outside of US.

A CFA charterholder and retirement expert named Wade Pfau wrote a book in 2017 titled How Much Can I Spend in Retirement?

Wade re-run the historical data analysis (1900-2015) at the basis of the 4% Rule on 20 developed countries, to discover that the chances of success were below 95% (Trinity Study threshold, Ben’s assumed definition of failure) in all of them except Canada. And US of course!

Using bonds and stocks data from the other 18 countries would have had success rate between 38% and 92%.

This is a bit depressing in my opinion.

“But RIP, who cares if Italian stocks wouldn’t sustain a 4% rule? Even if I live in Italy I can buy US stocks for cheap!”

I have two objections to this apparently innocuous concern:

• First: don’t you care about currency risk? Or any other risks of investing in another country? I can name a few: estate tax, unrecoverable dividends withholding tax, extra taxes on investments abroad (Italy taxes 0.2% per year investments abroad), and more.
• Second: 2 countries made it while the other 18 didn’t. Doesn’t this fact make you think that maybe those two outperformed “the global index” and won’t repeat themselves forever? Wouldn’t it be much safer if the 4% Rule worked everywhere? Would you bet that re-rolling the highest scoring dice would grant you another round of awesome scores?

Pfau analysis made me sad, a bit.

But there’s a comeback for the global stock market!

7:47: The Global Stock Market (yay, VT!) would have sustained a 3.5% SWR!

But if you think about it, that’s not that reassuring for a couple of reasons:

• We’re talking about a 100% stocks portfolio. Welcome volatility!
• We’re just talking about the 20 countries that made into the Pfau dataset. Welcome survivorship bias! For example, Argentina, Russia and China didn’t make it into the data (and they would have pulled down the 3.5% SWR for world – ACWI – stocks). Could this concern be solved by only referring to Developed World? Maybe, but again who guarantees you that the breadwinners for next 30-50 years aren’t in today’s developing countries?

Anyway, we’re still talking about historical data. What about Today and Tomorrow?

8:20: Today stocks evaluation are high and bond yields are low – even negative almost everywhere in the developed world. Stocks evaluation matters a lot in terms of expected future returns.

In a 2019 paper, professor Aswath Damodaran demonstrated that the Earning Yields (inverse of Shiller CAPE) is the best predictor of Equity Risk Premium (which is the expected excess return that investing in the stock market provides over a risk-free rate).

[Note: Professor Damodaran is one of the most prolific Youtuber ever! His channel published all his recorded lessons at NYU, and they’re now available to all of us. For free. What a time to be alive! Here are few videos about Equity Risk Premium]

Now, CAPE is dancing at around 30, which means Earning Yields is more or less 3.33% (1/30).

Add to that that risk-free rate is close to zero and voilà: welcome to the low returns future!

During the previous 120 years (while a 4% SWR was more or less sustainable over a 30 years period), geometric average US stocks real return has been 6.8%, which was the same as the average Earning Yields. Very high correlation. That’s also confirmed by this very good Mad Fientist podcast episode with Michael Kitces.

Today the Earning Yields is half of that!

Now this is very depressing 🙁

Applying any historical analysis to today starting point does not make sense.

– Ben Felix, while killing hordes of millennials aiming to retire in their late 20s.

Ok, Ben, what’s a Really Safe Withdrawal Rate for you?

10:04: Ben introduces – without adding more evidences or a link to his analysis – the methodology he used to estimate a SWR, i.e. using current starting point and running a Monte Carlo simulation (to compensate for the lack of available historical data).

Ben claims (not evidence provided though) that for a 60 years period, 100% stocks (world) portfolio, and aiming to no more than 5% failure rate the Really Safe Withdrawal Rate is 2.5%.

Ouch! Let’s update our spreadsheet!

“RIP… so I don’t need to accumulate 25 times my annual spending (including taxes), but… 40?”

YES.

And then you can be 95% sure to make it 🙂

“F*** you and your blog, I’m done with this shit! FIRE is DEAD”

No, wait, don’t fall into the fallacy of gray! There’s some light at the end of the tunnel, don’t drown into indifferent uncertainty!

10:38: What happens if you’re an early retiree that follows the new 2.5% Rule?

After 60 years of inflation adjusted 2.5% withdrawals, according to Ben simulation:

• 5% of retiree died broke.
• 10% of those who managed to not die broke, died with more or less same inflation adjusted amount they started with.
• 10% of them died with 30x the initial amount or more!
• The remainder 80% died with between 1x and 30x the initial amount.

“Wow… on average… wow!”

Yeah, on average it’s awesome, but still 5% of people didn’t make it. That’s the problem of being a pension fund of one.

Problem: to cover for as many unfortunate cases as possible, the average retiree adopting a 2.5% Rule (or even a 4% Rule) ends up being needlessly rich on their deathbed.

It’s like building a car to just maximize safety. You might add 10 layers of extra armor and end up with a 10 tons of metal that can’t go faster than 20 km/h.

In a few words: wanting to guarantee a fixed spending pattern with such exposure to risky and volatile assets might be inefficient in the first place.

10:55: it is inefficient indeed! In a 2018 paper by William Sharpe (the Nobel guy, not a millennial YOLO blogger) titled The 4% Rule, at what Price we find that:

And goodbye Uncle Bengen!

“But RIP, in a recent Reddit AMA Bengen said that the 4% rule is very solid! He’d actually raised the bar and told that ‘the “4% rule” is actually the “4.5% rule”‘”

Sorry bro, when Bengen meets Sharpe (and ERN, and Ben Felix, and year 2020 essentially) I know on which side I should stand. Even though I really really wished for a different reality.

And btw, Bengen said 4.5% for standard retirement, withdrawing from a tax advantage account. He also said 4% “should do it” if you plan to live forever. And he’s only looking at the past. But he’s our old dear uncle Bill and we all love him and give him gold on reddit anyway <3

11:23: Ben doubles down on Sharpe’s conclusion:

Retirees who use a fixed spending rule from a portfolio of risky assets to fund their inflation adjusted lifestyle needs are probably overpaying for the potential of investment gains they don’t need to meet their retirement goals.

– Ben Felix

Ben mentioned that a more efficient solution to that fixed spending problem would include options, leverage and annuities (really?) but didn’t provide any evidence on this topic.

Maybe it’s time to review the spending pattern.

11:51: Ben introduced an awesome Vanguard paper from 2017, titled A Rule for all Seasons, which is about dynamic withdrawing rules. Goodbye constant spending!

I knew a bit about the world of Variable Percentage Withdraw (VPW), but that opened a totally different can of worms that I still have to make my head around. Take a look at this ~1000 posts long thread on bogleheads forum, and a good summary in this bogleheads wiki entry!

As I said, I don’t have a strong opinions about VPW because I “grew up” with the 4% Rule, even though I knew it was a “rule of thumb”. I’m part of the optimistic crowd who say “if you have the skills to reach FI according to the 4% Rule, you’ll be safe forever. Not because of the math behind the 4% Rule, but because you’re a top performer and you’ll experience a life of abundance. Get rid of this scarcity mindset!“

I’m now fully on board with what Chris Hutchins said in his appearance on Mad Fientist podcast: “You Should “Retire” Before You Hit Your Number“. MMM in “Money and Confidence are interchangeable” and More To That in “Money is the Megaphone of Identity”. OLY (one less year) instead of OMY (one more year) Syndrome!

That’s exactly what I’ve done a couple of months ago!

In the final couple minutes of his perfect video Ben walks exactly this way.

Before that, few words on the Vanguard paper on dynamic withdrawing/spending rules: the optimal strategy shown in the paper says that you should adjust your spending over the year based on investing performance, with a ceiling of +5% and a floor of -2.5%. That’s on top of inflation adjustment. Ben doesn’t mention it but I found it in the original paper.

This is an outcome-based spending adjustment, i.e. adjust next year spending based on current portfolio value. On the other hand, adjusting next year spending based on CAPE (or EY) is an expectation-based spending adjustment.

I like both solutions, and I think we should put those two in FIRE literature and say goodbye to the 4% Rule like Relativity Theory did with Classical Physics!

And now, finally, some words on earning flexibility. We’re not retiring “for real”, aren’t we?

12:53: if you’re able to do something that you love, and generate any supplement on top of your 99% fail-safe withdrawals… you’re done!

That’s where the gray fallacy shows its power: we’ll never be 100% sure that our FIRE plans will work. Given this undeniable truth one can conclude that “FI doesn’t exist, because in case of a Zombie apocalypse your investments are not going to help you!”.

My embracing-uncertainty answer would be like: “Fine, but I’m happy I’ve took steps toward FI even if FI doesn’t exist! I may discover that it’s unsafe to assume my investments would cover 100% of my expenses, fine. But they might cover 90%, 80% or even 50%… which is much better than having quit the project because ‘everything is gray’. Thanks to the steps I’ve taken I can now switch down to a part time position, change job or field, take a lower paying job, face seasonal unemployment, take open ended sabbaticals, semi retire, work on passion plus passive income, fully fund my lifestyle change, become a Financially Independent Entrepreneur, and much more. Time will tell how FI I was, but what really matters is the system I put in place, not the final goal 🙂 ”

13:20: plus, work is important for humans!

We’re moving out of financials and more into a meaning/purpose territory, but I’m glad Ben made me discover Martin Seligman’s PERMA model of well being

Ben claims that “working at something that you love to do, even if it doesn’t make a ton of money, is a great way to get Engagement, Meaning, and Accomplishment“.

Checking 3 boxes out of 5 🙂

I have some complaints on this point, but it’s getting too long and don’t want to start non-financial arguments now (and btw, why not also positive emotion and relationship? I’m scoring 5 out of 5 via blogging for example). Anyway, here‘s a 25 minutes Martin Seligman video explaining his model in detail for those who are interested.

Thanks Ben, it’s a pleasure to have had you as a special involuntary guest on my blog 🙂

Conclusions

The 4% rule is dangerous, and should not be considered even as a “rule of thumb” if you plan to retire early, i.e. with 45, 50 or more years of “retirement” ahead of you.

Given current high market valuations (even considering the pandemic) and low interest rates, you should rely on a 2.5% – 3.5% SWR depending on your time horizon, willingness to take high stock exposure, and optimism/confidence.

It’s not all doomed though, you’re not retiring like your grandpa did. You should review your retirement planning and allow for flexibility in both spending and earning.

Adjusting portfolio withdrawals according to market performance or in anticipation of expected performances, and being able (and willing) to earn some money thru paid work or via monetizing a side gig will easily cover the gap.

Nobody wants to retire to a beach sipping mojitos.

And that’s more or less what I plan to do / what I’m doing.

And that’s really all for today!

Have fun!

 

P.S. I wrote a short appendix to this post few days later, with a nice surprise at the end 🙂

Enjoy!

 

Here some other amazing resources on SWR and 4% Rule:

• TOP – Early Retirement Now: “The Safe Withdrawal Rate Series” (link)
• Vanguard research: A rule for all seasons (link)
• Bogleheads wiki: Variable percentage withdrawal (link)
• Bogleheads wiki: Withdrawal Methods (link)
• Michael Kitces: “20 Years of Safe Withdrawal Rate Research” (link)
• Michael Kitces: “What the FIRE movement gets wrong” (link)
• Michael Kitces: “Is the Safe Withdrawal Rate Sometimes Too Safe?” (link)
• Michael Kitces: “What Returns Are Safe Withdrawal Rates REALLY Based Upon?” (link)
• Mad Fientist: podcast with Michael Kitces (link)
• Mad Fientist: “Safe Withdrawal Rate for Early Retirees” (link)
• Our Next Life: “The 4% Rule Is Not Your Friend” (link)
• Ten Factorial Rocks: A CAPE-based SWR (link) – I love this approach!
• Investment Moats: Variable Withdrawal Strategies for Financial Independence (link)
• u/msrj4 post on r/fi: “Why you should consider a 5-6% withdrawal rate” (link)
• u/msrj4 post on r/fi: “Choosing your personal withdrawal rate” (link)
• r/fi post about the Ben Felix video analyzed in this post, and the old one (link)
• Bogleheads wiki: Trinity Study 2009 update (link)
• Early Retirement Dude: “The 4% rule can ruin your retirement” (link)
• Early Retirement Now: “Ten Lessons From Ten Safe Withdrawal Rate Case Studies” (link)
• Philosophical Economics: “Fixing the Shiller CAPE” (link)
• The Poor Swiss: “Updated Trinity Study for 2020” (link)