How did you calculate your safe withdrawal rate? If you're comfortable sharing, let us know your WR, age at retirement, and whether you'll have supplemental income (like a pension or side hustle). Let us know in the comments below!
Great podcast! Had a lot of fun talking with you! By the way, at 31:35: When we recorded this my money was still on a 50-bps hike but it became a 75 bps hike after all. So much for my forecasting abilities, haha!
Thanks, Karsten! We really enjoyed it too. It's great to see the conversation resonating well with people. And no one's crystal ball is totally clear, right? Thanks again for all your contributions to the community.
Wow, that's so kind of you! Thanks so much. If you'd be willing to rate the show it would be a huge help to us. Each episode gets thousands of downloads but we have only received 12 written reviews at Apple Podcasts. podcasts.apple.com/us/podcast/two-sides-of-fi/id1560745986
Thanks Fritz! Again, I think that we're 99%, maybe even 100% on the same page with the bucket strategy. Two smart guys agreeing on the basics on personal finance! :)
Karsten's calculator makes me glad I'm in the messy middle-- I know it's something I *should* figure out and utilize, but it looks overcomplicated and something I labeled as "don't worry about it right now-- just grind." thank you for another great discussion.
You're welcome! In all honesty, while there's a lot of output from the calculator, you don't need to enter much: total portfolio, asset allocation, retirement duration, and additional income (social security, pension, etc). You can start with his assumptions about returns by asset class and inflation rate like we did, or modify them as you see fit.
@@TwoSidesOfFI I will definitely look at it again. I am 27 and don't want to go down the rabbit hole of social security. But I can definitely put in my rental property cash flow instead.... hmm. Maybe I was originally intimated by all the numbers and transparency of the tool. 😅
Karsten is fantastic, love the funny , practical examples 19:45 - Thank you for bringing him to the pod. I look forward to playing with his spreadsheet and methodology :)
Through this episode, I found Karsten’s amazing website. His posts about his option strategies are a true eye-opener to me. Just ordered a few books on options to really dive into this fascinating topic further. Thanks guys!
I think Step One of retirement is a spreadsheet, one row per year, from this year until when you hit say age 95, estimating all your expected future costs, increasing those costs by the 50 year average inflation rate of 4.1%. Then adding a column of income off your portfolio, assuming the 50 year average appreciation (for me, nearly totally in the QQQs, that number is 13.2%, but for the S&P 500 I'd use the 95 year average of 12.3%). Then add a column for the Tax Man. It's more complicated that this, but I do think an Expenses First mentality is superior because it starts with "what do I want to do/spend in my life?". Which of course is the toughest question in the exercise.
Thanks for sharing! We don't disagree one bit about the essential nature of projecting estimated expenses over time. We actually talked about this relating to Fritz Gilbert' (The Retirement Manifesto) blog post about ensuring you have enough to retire. Neither approach is better in our opinion. They're just approaching the problem from each side of the equation. But you're absolutely right that it's challenging to project future expenses when you're much younger, yet it is essential to do this work and continue to refine it as time goes on. And if your FI number goes up as a result of that, so be it! If you've not seen the episode referenced, check it out here: ua-cam.com/video/fuzo1UiM6yE/v-deo.html
I'm surprised more people in the FIRE group don't invest in income producing real estate. Stocks and net worth are great, but cash flow is the single most important metric to determine FI.
It's reasonably popular in the community. As we've talked about in earlier episodes, neither of us want to be landlords. And while agencies have some appeal, we've seen others have pretty bad experiences. No question it works well for others though.
Good point. I dabble a little bit but outsource the "dirty" work, by investing through private equity funds. I like the results so far. I can't see myself shifting all my assets there, though. Currently at 10% of my portfolio, but likely moving to 20-20% over time.
When I’ve looked into real estate, it’s always seemed like people are counting on two factors to make money: 1: High leverage using debt. 2: Speculating on future property value increases. Both of these greatly increase risk. Without these factors, the returns on real estate seem very low. I do eventually want to diversify into real estate some, but I have yet to see math that makes sense to me.
@@BrianAnother I put 25% down. Not sure if you think thats high leverage. I only buy property that cash flows on day 1. I never factor in or plan for any appreciation. That's irrelevant to me anyway. I just want the cash flow. I won't do less than 8% cash on cash and usually I want more. Given that the cash flow is highly protected from taxes due to depreciation my real returns are substantially higher than what the 4% rule would provide me with and safer as well. I suppose rents could fall, but I never charge the max so I've never experienced it. That said, I wouldn't ever go 100% RE and I stick to SFH's. I also haven't bought anything for a few years for obvious reasons, but deals will come again.
Real estate is a great way to diversify one’s portfolio and have cash flowing assets. I’m nearly FI (2024 target, could be husband-FI today 🤣) and am using real estate to secure what I call Phase 1 retirement (age 42 to 55) the have pensions and 401ks that support Phase 2 retirement (age 55+). A great option to get all the benefits of real estate without being a landlords is through syndications. Full disclosure, I’m an active multifamily syndicator. I started off passively investing and acquiring Single-family and small-commercial-multifamily for the cash flow. Now I buy value-add 100+ unit apartment complexes (with partners, equity partners, and private investors like any of us) with a business plan to renovate interiors, exteriors, and implement operational efficiencies. No betting it all on market appreciation. Investors share in all the upside and tax benefits. It’s a great option for those who like the asset class and cash flow, but don’t want to be a landlord. Happy to share more if anyones interested, am firm member of the FIRE community and love to talk money and real estate. LinkedIn is the best place to reach me if you want chat this strategy more.
I just keep adding to the portfolio at this stage. Although even with the market downturn I would be ok right now with a 4% SWR. But I find the downturn in the market right now too much of a temptation to not take advantage of and keep the portfolio growing. Aiming for a lower SWR if I can stick it out longer and postpone ER.
@@TwoSidesOfFI yes I reached FI, but keep working. Actually afraid to RE because doesn’t look good at my age in my country. Think I will be working till 50 and keep adding to the stack in the meanwhile. A couple more years.
Why can't we teach these things to kids in high school to help set them up for success? I grew up very frugal, learned how to do my own taxes young, saved much of what I made, but it would have been brilliant to have a semester or more of education teaching about financial independence, effect of debt, savings, withdrawal strategies, social security, etc. Instead we have tiktok dance-offs and nonsense challenges. Great discussion, and great job putting this together!
It's an excellent point. Some states + municipalities seem to have added requirements to teach personal finance, based on feedback we've received. We need more to follow suit! That said, entertainment is pretty important too :)
Ive seen them all and this is best podacst yet! My wife and I will be utilizing the variable WR based on the CAEY that Karsten proposes. Our big decision will be do we leave medicine in nine years at age 53 when I think we will have enough to retire early or wait until 57 to qualify for the federal government health insurance subsidy for the rest of our lives (not to mention the immediate pension)
Thanks, Jonathan! That’s very kind of you to say. There are quite a few wrinkles to consider and each of our situations is unique! Best wishes to you in working out your own path.
FIRE is not too far away for us, but, like many smarter folks have said, accumulation is way easier than decumulation. And, finding a SWR that ensures we're not eating cat food in 25 years seems like the holy grail. A strategy I am looking into (at 30,000') is to a) assess our minimum expenses, b) calculate our secure income to cover those expenses until death (for both of us), and c) spend the rest! Bringing it closer to ground level, minimum expenses means living okay, but not large. Regular food from Safeway. Typical utilities. A basic roof over our heads. 1-2 basic cars and all the attendant expenses. And basic health care. Those expenses are all adjusted for inflation and assume a typical life expectancy for both of us. Secure income = pension (I'm lucky enough to have one), Social Security benefits, and any other consistent passive income (e.g., rental income, annuities). There are a handful of other considerations - emergency expenses (roof, new car, appliances), LTCI, money for the kids, and a just-in-case buffer. The remainder of our portfolio is for fun - restaurants, travel, hobbies, and any other tempting way to spend money. While setting up secure income is a conservative approach, it provides peace of mind - no need to assess the SWR at 3.3%, 4%, 5% or whatever the pundits are saying tomorrow, our future expenses are covered. No cat food needed. And I know how large I can live today without worrying about basic expenses tomorrow. This post is already too long, but I look forward to hearing how others poke holes in a different approach to the SWR.
Say, you have a $100,000 budget. $30,000 are non-negotiable essentials. The rest is fluff and optional. Over a 50-year horizon, looking at the 0% real return in I Bonds, you'd need 50x$30,000=$1,500,000. And then roll the dice and use a 5% "flexible" SWR to cover the rest, i.e., 20x$70,000=$1,400,000. A total portfolio of $2.9m to generate $100k in annual income. That's a 3.45% blended SWR. Not very different from the 3.5% totally safe WR over 50 years, I'd recommend. No need to poke holes because we're on the same page. ;)
We agree - ignore the pundits saying what WR is “correct”. Check out the SWR toolbox with the details of your individual situation, and ensure your plan can support the expenses you’ve done a good job to characterize. As Karsten wrote, there’s no need for hole poking at all! Best wishes to you.
My modeling isn’t necessarily driven by the withdrawal rate but by my estimated financial need each year. The withdrawal rate is a byproduct or outcome of that. I carefully monitor my spending each month while in pre-retirement and then increase that for inflation each year in retirement. I model my estimated asset balances using different assumptions, such as early or late social security, optimistic or pessimistic market returns, large one-time expenses, and different tax rates. The withdrawal rate each year will vary based on those assumptions. For example, if I wait until 70 to draw social security, my withdrawal rates will be greater than 4% until I turn 70, and will then decrease at that point. That said, my average withdrawal rate over my retirement years (God willing) is 3.5% - 4%. I’ll retire at the end of 2023 (again, God willing) at 59, and no side hustle or supplemental income other than social security.
Agree with this (at least based on my assumptions as well). In the end, isn't it just a decision based on whether you believe the 4% rule is accurate and then putting a risk tolerance on top of it (which drives you to a higher or lower SWR)? I don't pretend to know more than some of the great minds out there in this FIRE space. I believe the trinity study is accurate and I am still more risk averse so I am targeting a 3.25-3.5% SWR.
@@jeumd While risk tolerance is important to keep in mind, his approach is much more analytical. In his posts you'll see that Karsten has mathematically modeled SWR based on historical performance with the important overlay of various contexts and individualized factors. If you're interested in digging in as we'd recommend, his articles on the topic are linked in the show notes: www.twosidesoffi.com/swr
Great talk. I’ve used this tool among others and found it very helpful. One question I wish I could ask him is thoughts on using dividends/cap gains as part of the withdrawal/replenish plan. Not as the whole strategy but say replenish cash each year only from dividends and cap gains thrown off from after tax accounts index funds and mutual funds. I’ve been considering making changes here on my strategy as I’ve read different opinions on this. I still have some legacy mutual funds that throw quite a bit of gains each year. I struggle with the decision to just keep these or divest into more tax efficient etfs.
Thanks! Much appreciated. He may check out the comments for this episode as he's responded here before. If not, you might tweet at him and see if he responds, or comment on a relevant blog post on his site.
i consider dividends and capital gains in my calculations. All returns are factoring in the dividend and interest income. From a tax optimization point of view it's certainly optimal to consume the dividends and interest. Because of efficient markets I don't think there's any other difference between cap gains in dividends that we can utilize.
Enjoying the channel thoroughly. Haven't listened to it as a podcast, but will definitely head over to apple to leave a review. Eric, based on putting your numbers into Big ERN's spreadsheet, are you confident in your 2024 date again? I'm on the FI fence. My plan doesn't fit the conventional 4% rule (more like 8% due to a pension), but Big ERN's spreadsheet says I'm good to go.
This was brilliant thanks I love the questions …..like you are reading my mind as I ‘was’ also 2 years out until the market tanked I will sleep a bit better tonight and so glad I didn’t retire in Jan!
Glad you liked it, Merry! Let the numbers *and* your individual risk tolerance guide you and we suspect you'll make decisions that are right for you. Best wishes to you in all things.
Hi still love this episode - I’ve re listened to it so many times - it’s 8 months now since this episode aired- would love a 12 month review with Karsten to see what his take is on Eric’s retirement date is - Eric’s face of relief when Karsten said he thinks 2024 would still be ok still makes me chuckle 😂
Great episode! I feel like the discussion at 18:00 should highlighted and in neon. Why withdraw more than you need because the model says you can? I like the flexibility a conservative model gives you.
Jason here - Thanks, Mike! Absolutely. The way I look at it is pretty simple: I'd rather withdraw lower for a few reasons: 1) it helps me sleep well knowing that even whatever today's "previously never seen conditions", I'm likely going to be OK - particularly during the most critical earlier Sequence Risk years, and 2) makes me feel confident that if/when I want to withdraw more - up to my SWR or even more for positive or negative reasons, I'll be fine.
Found you via Big Ern’s latest post. Fantastic podcast you have. I love your interaction and that you explore in a real way these questions. Unfortunately hysa is about 1 percent. 1st thought on bond ladder- a pain to set up? Recently after reading more from wade pfau etc + recent research on behavioral spending in retirement-I am exploring annuities. I noticed on your fee advisor episode it had spia… really? I thought. I only was looking at lifetime dia at 60s onwards. It spurned me to look-so thanks for sharing! Maybe an alternative to cd/hysa/mm as the rates are more attractive? I can get a real rate of 3.49. For me that is a one year deferred start on 100k with a 5 year payout (a calculator to help figure that return). With traditional inflation on my mind it is Food for thought :) Thanks guys!
Thanks very much! We’ve both elected to invest in bond funds vs. setting up bond ladders. They’re not too complex but definitely a bit more manual. there’s some good guidance online. Best wishes to you and welcome aboard! We are glad to have you.
Jason here- I consider scenarios ranging from 0% to 100% SS funding. Most often I use a 50% funded while also being confident that my base case plan assumes SS ceases to exist or at least doesn’t pay me anything.
Excellent interview. Really enjoy how you go from high level to a nuts and bolts example (Eric's scenario near the end). It helps to add some real life context that others can relate to! What I wonder now is how you will take Karaten's feedback on your scenario Eric and apply it to your 2024 date...? Do you feel more secure in keeping the time frame or do you have the 'rent a consultant' , "3.3% won't work" comment in your head..?
Thanks @zekeboz ! Eric replying here...my wife and I have discussed walking back the bond allocation a bit given we're still 24 months away and the plan is to follow Karsten's recommendation to do so incrementally. RE: the "3.3% withdrawal rate" question...I'm more confident in the results generated by Karsten's SWR toolbox/spreadsheet as it uses our real numbers contextualized to the current conditions. We can see the failsafe conditional probabilities and add a buffer to those that suits us perfectly. This level of granular detail is reassuring to both my wife and myself. All that said, we're hopeful the '24 date will still work, but we remain flexible!
I lOVE Karsten’s perspective, always… For one he is German, and love this guy and his analytical abilities, but in the end it’s just a take on a mathematical run on assumptions based on his CAPE analysis or maybe not…Funny it’s very German thinking and overthinking and over analyzing it and maybe in the end it doesn’t matter bc it is about what you feel comfortable with…Life is not a Cape formula but about how you balance needs with wants and resources…Most important is common sense and what the market tells you and how flexible you are on your spending needs or wants…His inverse cape rule with intercept (whatever this is) is just another way to feel comfortable about withdrawing assets from their portfolio…Please read Big ERN’s blog to see where he is coming from, but in the end it is what you are comfortable with…In the end I believe that the more flexible you are, the better off you will be in retirement….For Jason and Eric, I would love to know how future SS cash flows matter to your strategy!
Jason here - Thanks for sharing. We don't think he's overthinking nor overanalyzing, but you're certainly in your right to believe that. You're absolutely right that common sense is essential, and flexibility can help. That said, since you've read his blog, you know that Karsten feels really strongly that flexibility isn't a panacea - see Parts 24 and 25 (among others) for more on that. Part 24 linked here: earlyretirementnow.com/2018/05/09/the-ultimate-guide-to-safe-withdrawal-rates-part-24-flexibility-myths-vs-reality/ For me, I've modeled my portfolio from zero SS through 1X of projected. As he commented on the show, I assume it doesn't come through at all, despite me believing that's unlikely. So I probably think 0.5X current projections is probably reasonable for my age bracket, which is albeit conservative. That said, my current withdrawal rate shows a near-100% predicted success rate absent any SS at all.
@@TwoSidesOfFI Thanks Jason! I absolutely believe Karsten has a very solid and mathematical approach to SWR's. For me personally its too detailed oriented and requires a real foundational understanding of what he is doing based on his Cape formula. I am still not sure what the intercept factor is based on and seems to me an arbitrary number. Either way his methodology is a fun Math exercise, but i personally would not follow it. My is SWR is below 3% lower than he would recommend anyway, even in the current bear market so have not much to fear. As far as SS i also factor in about 0.5X Are you viewing the SS benefit as a fixed bond or hedge for your portfolio, and if so what age would you start drawing ie earlier to protect your portfolio or later to maximize $'s but potentially loose more to higher taxes (Prov Income test) and potentially future means testing for SS? BTW I love the fact that you are inviting cool guests to your show. Both Fritz and Karsten are for sure the guests to have! How about Michael Kitces who seems really knowledgeable on SWR's or JL Collins with his simple approach to investing...Love your show guys, cant wait for the next one, Thanks!
@@andyd102 Jason here - Fully agree that the detail level can be overwhelming for many - there are a number of posts that I've re-read to ensure I understood them well. It's also true that in the tool, he provides SWR both with and without accounting for CAPE ratios - it's an option to consider but not required. And I'm with you, with a
A CAPE-adjusted strategy might be interesting to you. We touch on it in several episodes. More on that soon. ‘Til then: ua-cam.com/video/CClhsaBbTm0/v-deo.html ua-cam.com/video/rapSolx37gY/v-deo.html
The idea of setting a higher SWR at the bottom of a bear market seems counter-intuitive to me, I'd have thought you'd want to limit spending and allow for stocks to recoup value and then adopt a higher SWR during bull runs? Can someone explain this please?
Had the same question. Found this answer on reddit, see if it makes more sense. The SWR in this case is relative to the current portfolio value, not on the initial portfolio value. A bigger SWR from a much smaller portfolio could actually be less in absolute terms than the initial SWR. "Ok that's a good point. I think how BigERN's CAPE-based-SWR is meant is to recalculate the SWR every month or year. Also he's using the formula: SWR=a+b*(1/CAPE) (with a=1.75%, b=0.5) Now for the above examples you'd get: Oct, 1 2007; Portfolio Value (100% VTSAX, 30.24 (Adj. Close) 5 ): $1,000,000; CAPE: 27.32 6; SWR: 3.58% --> Income Stream: $35,800/year ($2,983/Month) Mar, 1 2009; Portfolio Value (100% VTSAX, 13.71 (Adj. Close) 5 ): $453,373; CAPE: 13.32 6; SWR: 5.50% --> Income Stream: $24,935/year ($2,077/Month) Which means there's would've been a temporary 30% drop in your income stream. Not great, but better than the 55% drop in portfolio value. Also this drop would only be temporary and probably a lot less, if you are still in accumulation phase."
Great show, gentlemen, very insightful... You give us a lot to think about... So two quick questions I haven't asked you before... For someone 50 years old, would it be prudent to consider early retirement in Thailand or Philippines because of the extremely affordable lifestyle, 75 % cheaper than the U.S., therefore allowing for a much more conservative WR ... Eric or Jason... Considering Social Security income, When you are calculating the safe WR in retirement, do you REALLY plan on the money lasting for 30 years or more ? Do you include supplemental Social Security income in your WR strategy and calculations ? If you don't mind me being nosy.
Jason here - Thanks, glad you liked it. Many choose to relocate for a variety of reasons, often internationally. Indeed, the cost of living (including healthcare) is very commonly one of the reasons why - your money simply goes farther. So this is certainly a valid choice if you've found somewhere you truly enjoy that you can see yourself living, and which has visa/etc programs that are amenable. As for SS, I have done modeling from 0-100% of my currently forecasted benefit. Most often I just use 50% and have it lasting the duration of my lifetime one I claim (likely at 70). On a related point, for any longevity modeling, I always elect the "worst case" (ha!) of living a very long time, say >95. That way I'm that much more confident about not running out of money. Should my health prospects change, I'd almost certainly change that forecast and increase my WR.
Extremely insightful and most astute notion I have heard this year about the traffic at rush hour and when you retire. Albeit that rush hour is more easy to predict :) Also curious about your guys thoughts on the 4% rule and the fact that everyone is saying it won't work anymore because of a few off years? Isn't the rule or guideline a multi multi year strategy?
Thanks, Ray. We agree that he gave a great example. We've always felt the 4% rule was a great starting point and particularly early on, it's an easy mechanism to estimate portfolio needs. That said, we've also been consistent that particularly for early retirees with potentially 40+ year time horizons, it's likely insufficient barring other income streams.
@@TwoSidesOfFI I agree, my sense though and ERN mentions is depending on your circumstances , most easily age but other things like clear Social Security make it too low. I am charging in on 60, still really like my job, want to slow down but feel I can easily go at 5-6% till 67 or 70 when social kicks in. You could say not a really early retirement but if I jump off at 59 or 60 comfortably that is early I feel.
I’m not one of those “relentless dividend people” but what I heard was a fundamental misunderstanding of the dividend strategy. It’s not about high dividend yield individual stocks, it’s about a dividend *portfolio* that is thoughtfully designed with value/growth ETFs (not individual stocks) to throw out at least 2% yield in retirement so you don’t have to sell as much to generate income esp when the market is down. There are very sound, low risk dividend strategies out there. The take in this video was a bit narrow. Otherwise, great discussions!
@@michaelswami Like you, I’m designing my portfolio with little regard to the 4% rule or obsessing over Monte Carlo analysis. My portfolio will be designed to generate some dividend income, supplemented with sale of assets if needed. If it’s a down market, I will have 1.5-2 years worth of cash to draw from instead. People who are averse to dividend strategy don’t just understand it well.
Again, there's look-ahead bias. My example of the stable dividend payers, BAC, C, etc. in 2007 still applies. Unless you have the market timing ability to determine the sectors or even individual stocks that avoid ruin during the next downturn, you will only do as well as the index. Think about all the active stock pickers, the hedge funds, the prop trading desks, the high-frequency traders, the algo traders that read company reports and releases in milliseconds and weeks before you do... Do you think that you are smarter and faster than all of them and you can beat the index? I doubt it. And by the way, I have offered it to dividend investors (and other people who claim that they can beat the market): send me your monthly returns for the last 10 years. I can run a standard Fama-French 3-factor regression (market beta, value factor, size factor) and we can determine if you have any alpha. And if your alpha is statistically significant. So far, not a single dividend investor has accepted the challenge.
Glad you enjoyed the discussion! We can’t really add to Karsten’s great and well informed answer. Here’s another good resource for you. Like Karsten, Ben is also a CFA. This is their expertise. While Ben is largely using single stocks as a reference point, to your statement about funds, the tenets presented here still apply. There is no free lunch.. ua-cam.com/video/f5j9v9dfinQ/v-deo.html
@@jeske100 Again, I don’t intend to invest in individual dividend stocks for FIRE. Also, I’ve never met a dividend investor whose objective was to outperform the market. In fact, the way I’d design mine, it may even likely lag a bit in good times but will fall less in bad times because of some defensive dividend paying ETFs in there. But remember there is a growth exposure there too. I also understand the mechanism of dividends which is that it’s basically subtracted from the NAV once paid out. In the accumulation phase, this income paid back to you buys more shares with your DRIP on, and compounds as long as the share value appreciates. This is where high yield chasers fail because share value erodes significantly hence a 10% yield can still mean a net loss. In FIRE, who cares that dividends is not a free lunch? Take the income, argument it with selling some stock if needed, and you have all you need. I know we are not going to see eye to eye but I still have no reason to reconsider my dividend approach. But like I said, great discussions on the channel as always. Thanks Eric/Jason.
Any thoughts on future stock market returns with the mass retirement of the boomers leading to outflows from equities to cash/bonds and also less consumption (as boomers lower spending in their golden years) possibly dampening future growth? Also concerned that the reduction of global trade will also negatively impact growth. I can’t find good arguments on why future returns will not be materially lower than they have been the last 30 years. Technological advancement will be a mitigant but likely only a partial one.
Hmm - I don’t think you should lump all dividend nuts together. What’s wrong with using solid dividend ETFs as generating cash to spend and not spending down the principle / selling stocks ( living with the dividend variability). It would be worth looking at the math here. This is basic value investing and has some sequence of return risk benefits. And inflation benefits. This is very different then a yield trap and picking dividend stocks with poor total returns. And if you look at the last 100 years value investing did very well. Also like the buckets strategy, there may be emotional benefit. If you can live on stock dividends at 2% ish (not everyone can) then you will never run out of money and your portfolio will likely grow. Can that help me sleep at night ? Yep. Sequence of return risk and inflation risk are the 2 biggest threats vs FIRE. Dividends can mitigate both. It’s not crazy. Love the show. Try modeling a VYM,VYMI,VTI,BND mix.
Hi great listen. That guy makes your head spin sometimes lol. Looking at retirement simulators is there one that I can easily incorporate a pension? I'm a firefighter in and would have a nice monthly pension once I plan to retire. Thanks in advance.
Hey guys I’ve been listening to your podcast since the beginning. Really dig it. You should change the somber/ominous music during the graphics. The minor notes set a really bleak mood and not what I think you’re after!
Glad you're enjoying the show! Reviews help spread the word (and, we only have a few): podcasts.apple.com/us/podcast/two-sides-of-fi/id1560745986 Thanks!
Why not sin a little away from FIRE orthodoxy ? Systematic trend following and tactical asset allocation (TAA) has worked well for 40-50 years and there are simple ways to implement nowadays (AllocateSmartly). You then have portfolios that adjust to market conditions and limit drawdowns so don't have to tie yourself into knots with all this stuff.
@@TwoSidesOfFI I liked the soft stuff but for investments he’s wholly reliant on mean the reversion and apparently buying the dip. It’s well known that mean reversion strategies have a negative skew distribution, fat left tail and thin right tail and so you are more likely to suffer bad losses .
I think that the general concept of withdrawal rates is irrelevant. Keep your index funds or value stocks forever and live of the dividends when you are FI. That way you are safe from crazy swings in the market. As long as companies make a profit they will surely pay a dividend. It might make your FI number a bit higher, but this way you'll never run out of money and you don't need to worry at all about the worth of your portfolio.
It's nice you're helping people but high quality companies that pay dividends sounds like people could sleep more easily at night. Your strategy, no offence, sounds exhausting and even worrying for some to make sure they withdraw an alright amount and it lasts them.
Have you checked out the calculator? There's actually very little information to plug in to determine your withdrawal rate. It's not something that requires ongoing maintenance. And importantly, dividends change over time, and are not always paid.
Really liked this guest, but saying “I don’t think we’re gonna have a repeat of the global financial crisis” is extremely dangerous. He should stick with “nobody knows,” which to his credit he said more than once.
Good to know that I'm not the most cautious person in the FIRE community! The dradwon in equity prices during the Volcker era wasn't as bad as during the Great Depression or the Great Recession. Hence my comment. There are some fundamental reasons behind it, i.e., corporate balance sheets look much better during inflation than deflation. That's all. There is certainly a possibility that 2022 goes off the rails, but I find that unlikely.
Thanks for the reply. It's unlikely inasmuch as drawdowns of that magnitude are uncommon, so we agree on that. I also appreciate your reasons for discounting the likelihood. That said, if I recall correctly, the S&P lost 50-60% between the early-70s and early-80s, which isn't the Great Depression/Recession, but not trivial. Moreover, we started 2022 at equity valuation levels rivaled only by 1929 and 1999. As you said in the podcast, valuations don't determine the near-term direction of the market, but I would suggest they do increase the chance of things going off the rails, even if that's not the most likely scenario. Again, I enjoyed the podcast and appreciate the work you do on your website. Perhaps we can come back to this next 4th of July and see if the level of caution has changed for either of us.
@@bob.popular The big drop you're thinking of was the 1972-1974 bear market with a 52% drop in real terms. But that was the oil embargo and not so much the Fed policy shock. A pretty swift recovery followed. From the 12/1972 peak to the 7/1982 bottom, the S&P 500 Total Return Index (incl dividends) was *up!* 40.9% in nominal terms. But down 38.6% in real terms. The decline in equities came mostly from inflation, not so much a drop in the index. From the 1981 peak to the 1982 bottom, really during the crazy rate hikes under Volcker, the S&P fell by only 15% nominal, 23% real. If we apply a 23% to 38.6% drop to the January 2022 peak, it's not really that much more bad news. But I don't think our current situation will get as bad under Volcker with a 22+% Fed Funds rate. So, again an inflationary period with the Fed stepping on the brakes, is not that damaging to the stock market. About the CAPE: Fair point. I like to do some adjustments to the Shiller CAPE to factor in lower corporate taxes and more earnings retention (and thus internal growth). Today's CAPE is not that crazy overvalued. 22 today vs. 18 in 1972.
You're right - my apologies. I was recalling the real return from the 70s. Regarding CAPE, do you adjust for the cyclicality of profit margins? I've found that to be very illuminating. Whatever the case, if we were investing today at something close to 1981 or even 1972 valuations, my level of caution would be much lower. Thanks again for the thoughtful discussion.
How did you calculate your safe withdrawal rate? If you're comfortable sharing, let us know your WR, age at retirement, and whether you'll have supplemental income (like a pension or side hustle). Let us know in the comments below!
Great podcast! Had a lot of fun talking with you!
By the way, at 31:35: When we recorded this my money was still on a 50-bps hike but it became a 75 bps hike after all. So much for my forecasting abilities, haha!
Thanks, Karsten! We really enjoyed it too. It's great to see the conversation resonating well with people. And no one's crystal ball is totally clear, right? Thanks again for all your contributions to the community.
Karsten, 50 basis points or 75, you are still a genius and thank you for sharing your wisdom.
Best FI channel on UA-cam right now.
Wow, that's so kind of you! Thanks so much. If you'd be willing to rate the show it would be a huge help to us. Each episode gets thousands of downloads but we have only received 12 written reviews at Apple Podcasts. podcasts.apple.com/us/podcast/two-sides-of-fi/id1560745986
You know you have a high caliber guest on the show when Jason trims his beard before the interview. Thanks for sharing your insights Karsten!
Ha! To be fair I got a haircut a few weeks before and it was unrelated :) -J
BIG ERN! Gee, I wish I could be as smart as that guy. He's become more diplomatic in his comments on the bucket strategy, too. Wink. Great discussion.
Thanks, Fritz! Glad you enjoyed it. We think both of y'all are rather smart guys!
Thanks Fritz! Again, I think that we're 99%, maybe even 100% on the same page with the bucket strategy. Two smart guys agreeing on the basics on personal finance! :)
This is one of the few thoughtful and intelligent discussions I’ve heard about asset allocation and retirement planning in general
Thanks, Richard! So glad you enjoyed it
Karsten's calculator makes me glad I'm in the messy middle-- I know it's something I *should* figure out and utilize, but it looks overcomplicated and something I labeled as "don't worry about it right now-- just grind."
thank you for another great discussion.
You're welcome! In all honesty, while there's a lot of output from the calculator, you don't need to enter much: total portfolio, asset allocation, retirement duration, and additional income (social security, pension, etc). You can start with his assumptions about returns by asset class and inflation rate like we did, or modify them as you see fit.
@@TwoSidesOfFI I will definitely look at it again. I am 27 and don't want to go down the rabbit hole of social security. But I can definitely put in my rental property cash flow instead....
hmm. Maybe I was originally intimated by all the numbers and transparency of the tool. 😅
The best episode yet! Thanks to all three of you. I will listen to it several times.
Thanks so much! Very happy to learn you enjoyed it.
Karsten is fantastic, love the funny , practical examples 19:45 - Thank you for bringing him to the pod. I look forward to playing with his spreadsheet and methodology :)
Our pleasure! So glad you liked it.
Through this episode, I found Karsten’s amazing website. His posts about his option strategies are a true eye-opener to me. Just ordered a few books on options to really dive into this fascinating topic further. Thanks guys!
You’re welcome! Be careful with those options.
Unbelievable,what a genius! Such crisp and clear explanation of complex topics!! Thank you
🙏
I think Step One of retirement is a spreadsheet, one row per year, from this year until when you hit say age 95, estimating all your expected future costs, increasing those costs by the 50 year average inflation rate of 4.1%. Then adding a column of income off your portfolio, assuming the 50 year average appreciation (for me, nearly totally in the QQQs, that number is 13.2%, but for the S&P 500 I'd use the 95 year average of 12.3%). Then add a column for the Tax Man.
It's more complicated that this, but I do think an Expenses First mentality is superior because it starts with "what do I want to do/spend in my life?". Which of course is the toughest question in the exercise.
Thanks for sharing! We don't disagree one bit about the essential nature of projecting estimated expenses over time. We actually talked about this relating to Fritz Gilbert' (The Retirement Manifesto) blog post about ensuring you have enough to retire.
Neither approach is better in our opinion. They're just approaching the problem from each side of the equation. But you're absolutely right that it's challenging to project future expenses when you're much younger, yet it is essential to do this work and continue to refine it as time goes on. And if your FI number goes up as a result of that, so be it! If you've not seen the episode referenced, check it out here: ua-cam.com/video/fuzo1UiM6yE/v-deo.html
I'm surprised more people in the FIRE group don't invest in income producing real estate. Stocks and net worth are great, but cash flow is the single most important metric to determine FI.
It's reasonably popular in the community. As we've talked about in earlier episodes, neither of us want to be landlords. And while agencies have some appeal, we've seen others have pretty bad experiences. No question it works well for others though.
Good point. I dabble a little bit but outsource the "dirty" work, by investing through private equity funds. I like the results so far. I can't see myself shifting all my assets there, though. Currently at 10% of my portfolio, but likely moving to 20-20% over time.
When I’ve looked into real estate, it’s always seemed like people are counting on two factors to make money:
1: High leverage using debt.
2: Speculating on future property value increases.
Both of these greatly increase risk. Without these factors, the returns on real estate seem very low.
I do eventually want to diversify into real estate some, but I have yet to see math that makes sense to me.
@@BrianAnother
I put 25% down. Not sure if you think thats high leverage.
I only buy property that cash flows on day 1.
I never factor in or plan for any appreciation. That's irrelevant to me anyway. I just want the cash flow.
I won't do less than 8% cash on cash and usually I want more. Given that the cash flow is highly protected from taxes due to depreciation my real returns are substantially higher than what the 4% rule would provide me with and safer as well. I suppose rents could fall, but I never charge the max so I've never experienced it.
That said, I wouldn't ever go 100% RE and I stick to SFH's. I also haven't bought anything for a few years for obvious reasons, but deals will come again.
Real estate is a great way to diversify one’s portfolio and have cash flowing assets. I’m nearly FI (2024 target, could be husband-FI today 🤣) and am using real estate to secure what I call Phase 1 retirement (age 42 to 55) the have pensions and 401ks that support Phase 2 retirement (age 55+).
A great option to get all the benefits of real estate without being a landlords is through syndications. Full disclosure, I’m an active multifamily syndicator. I started off passively investing and acquiring Single-family and small-commercial-multifamily for the cash flow. Now I buy value-add 100+ unit apartment complexes (with partners, equity partners, and private investors like any of us) with a business plan to renovate interiors, exteriors, and implement operational efficiencies. No betting it all on market appreciation. Investors share in all the upside and tax benefits. It’s a great option for those who like the asset class and cash flow, but don’t want to be a landlord.
Happy to share more if anyones interested, am firm member of the FIRE community and love to talk money and real estate. LinkedIn is the best place to reach me if you want chat this strategy more.
I was able to stop working at age 22 using the HIRE principle: Huge Inheritance Retire Early !
Congrats, Ed!
I just keep adding to the portfolio at this stage. Although even with the market downturn I would be ok right now with a 4% SWR. But I find the downturn in the market right now too much of a temptation to not take advantage of and keep the portfolio growing. Aiming for a lower SWR if I can stick it out longer and postpone ER.
Are you post-FI but still working? If you have income and are able to contribute, this is certainly a good time to consider it.
@@TwoSidesOfFI yes I reached FI, but keep working. Actually afraid to RE because doesn’t look good at my age in my country. Think I will be working till 50 and keep adding to the stack in the meanwhile. A couple more years.
glad the FED listened to Karsten's advice and finally spiked interest rates a bit more :-o
:)
Why can't we teach these things to kids in high school to help set them up for success? I grew up very frugal, learned how to do my own taxes young, saved much of what I made, but it would have been brilliant to have a semester or more of education teaching about financial independence, effect of debt, savings, withdrawal strategies, social security, etc. Instead we have tiktok dance-offs and nonsense challenges.
Great discussion, and great job putting this together!
It's an excellent point. Some states + municipalities seem to have added requirements to teach personal finance, based on feedback we've received. We need more to follow suit! That said, entertainment is pretty important too :)
In New Jersey it is taught from sixth to eighth grade (but that went into effect in 2019)
Ive seen them all and this is best podacst yet! My wife and I will be utilizing the variable WR based on the CAEY that Karsten proposes. Our big decision will be do we leave medicine in nine years at age 53 when I think we will have enough to retire early or wait until 57 to qualify for the federal government health insurance subsidy for the rest of our lives (not to mention the immediate pension)
Thanks, Jonathan! That’s very kind of you to say. There are quite a few wrinkles to consider and each of our situations is unique! Best wishes to you in working out your own path.
Thank you for bringing Karsten on! Excellent discussion!
You're welcome, Carey. So glad you enjoyed it
FIRE is not too far away for us, but, like many smarter folks have said, accumulation is way easier than decumulation. And, finding a SWR that ensures we're not eating cat food in 25 years seems like the holy grail. A strategy I am looking into (at 30,000') is to a) assess our minimum expenses, b) calculate our secure income to cover those expenses until death (for both of us), and c) spend the rest! Bringing it closer to ground level, minimum expenses means living okay, but not large. Regular food from Safeway. Typical utilities. A basic roof over our heads. 1-2 basic cars and all the attendant expenses. And basic health care. Those expenses are all adjusted for inflation and assume a typical life expectancy for both of us. Secure income = pension (I'm lucky enough to have one), Social Security benefits, and any other consistent passive income (e.g., rental income, annuities). There are a handful of other considerations - emergency expenses (roof, new car, appliances), LTCI, money for the kids, and a just-in-case buffer. The remainder of our portfolio is for fun - restaurants, travel, hobbies, and any other tempting way to spend money.
While setting up secure income is a conservative approach, it provides peace of mind - no need to assess the SWR at 3.3%, 4%, 5% or whatever the pundits are saying tomorrow, our future expenses are covered. No cat food needed. And I know how large I can live today without worrying about basic expenses tomorrow.
This post is already too long, but I look forward to hearing how others poke holes in a different approach to the SWR.
Say, you have a $100,000 budget. $30,000 are non-negotiable essentials. The rest is fluff and optional. Over a 50-year horizon, looking at the 0% real return in I Bonds, you'd need 50x$30,000=$1,500,000. And then roll the dice and use a 5% "flexible" SWR to cover the rest, i.e., 20x$70,000=$1,400,000. A total portfolio of $2.9m to generate $100k in annual income.
That's a 3.45% blended SWR. Not very different from the 3.5% totally safe WR over 50 years, I'd recommend.
No need to poke holes because we're on the same page. ;)
We agree - ignore the pundits saying what WR is “correct”. Check out the SWR toolbox with the details of your individual situation, and ensure your plan can support the expenses you’ve done a good job to characterize. As Karsten wrote, there’s no need for hole poking at all! Best wishes to you.
Great collab with Karaten - bring him back again!
Thanks! We'd welcome the opportunity
My modeling isn’t necessarily driven by the withdrawal rate but by my estimated financial need each year. The withdrawal rate is a byproduct or outcome of that. I carefully monitor my spending each month while in pre-retirement and then increase that for inflation each year in retirement. I model my estimated asset balances using different assumptions, such as early or late social security, optimistic or pessimistic market returns, large one-time expenses, and different tax rates. The withdrawal rate each year will vary based on those assumptions. For example, if I wait until 70 to draw social security, my withdrawal rates will be greater than 4% until I turn 70, and will then decrease at that point.
That said, my average withdrawal rate over my retirement years (God willing) is 3.5% - 4%. I’ll retire at the end of 2023 (again, God willing) at 59, and no side hustle or supplemental income other than social security.
You should have a look at Karsten's spreadsheet/toolbox, it's a rethink of the standard approaches to SWR and spending.
Agree with this (at least based on my assumptions as well). In the end, isn't it just a decision based on whether you believe the 4% rule is accurate and then putting a risk tolerance on top of it (which drives you to a higher or lower SWR)? I don't pretend to know more than some of the great minds out there in this FIRE space. I believe the trinity study is accurate and I am still more risk averse so I am targeting a 3.25-3.5% SWR.
@@TwoSidesOfFI Thanks! I’m looking forward to playing with it. (Always glad to have one more tool to use!)
@@jeumd While risk tolerance is important to keep in mind, his approach is much more analytical. In his posts you'll see that Karsten has mathematically modeled SWR based on historical performance with the important overlay of various contexts and individualized factors. If you're interested in digging in as we'd recommend, his articles on the topic are linked in the show notes: www.twosidesoffi.com/swr
@@TwoSidesOfFI will do! Thanks again for the great content.
YES! I have been hoping someone would drop a WR spreadsheet in my lap.
Glad to deliver one, Knut! We hope you find it as useful as we have.
Great talk. I’ve used this tool among others and found it very helpful. One question I wish I could ask him is thoughts on using dividends/cap gains as part of the withdrawal/replenish plan. Not as the whole strategy but say replenish cash each year only from dividends and cap gains thrown off from after tax accounts index funds and mutual funds. I’ve been considering making changes here on my strategy as I’ve read different opinions on this. I still have some legacy mutual funds that throw quite a bit of gains each year. I struggle with the decision to just keep these or divest into more tax efficient etfs.
Thanks! Much appreciated. He may check out the comments for this episode as he's responded here before. If not, you might tweet at him and see if he responds, or comment on a relevant blog post on his site.
i consider dividends and capital gains in my calculations. All returns are factoring in the dividend and interest income.
From a tax optimization point of view it's certainly optimal to consume the dividends and interest. Because of efficient markets I don't think there's any other difference between cap gains in dividends that we can utilize.
@@jeske100 Hi. Are there any sequence of return risk or inflation risk advantages on value investing (or ETF dividend investing) ?
I really enjoyed that. I'm glad to be so far away from retiring that I don't have to think about this 😅😅
Thanks, so glad you enjoyed it! Best wishes to you
Enjoying the channel thoroughly. Haven't listened to it as a podcast, but will definitely head over to apple to leave a review. Eric, based on putting your numbers into Big ERN's spreadsheet, are you confident in your 2024 date again? I'm on the FI fence. My plan doesn't fit the conventional 4% rule (more like 8% due to a pension), but Big ERN's spreadsheet says I'm good to go.
Jason here - Thanks, Andrea! We truly appreciate every review that is written. Feedback is gold and it really helps out the show.
This was brilliant thanks I love the questions …..like you are reading my mind as I ‘was’ also 2 years out until the market tanked I will sleep a bit better tonight and so glad I didn’t retire in Jan!
Glad you liked it, Merry! Let the numbers *and* your individual risk tolerance guide you and we suspect you'll make decisions that are right for you. Best wishes to you in all things.
Hi still love this episode - I’ve re listened to it so many times - it’s 8 months now since this episode aired- would love a 12 month review with Karsten to see what his take is on Eric’s retirement date is - Eric’s face of relief when Karsten said he thinks 2024 would still be ok still makes me chuckle 😂
Great episode! I feel like the discussion at 18:00 should highlighted and in neon. Why withdraw more than you need because the model says you can? I like the flexibility a conservative model gives you.
Jason here - Thanks, Mike! Absolutely. The way I look at it is pretty simple: I'd rather withdraw lower for a few reasons: 1) it helps me sleep well knowing that even whatever today's "previously never seen conditions", I'm likely going to be OK - particularly during the most critical earlier Sequence Risk years, and 2) makes me feel confident that if/when I want to withdraw more - up to my SWR or even more for positive or negative reasons, I'll be fine.
Found you via Big Ern’s latest post. Fantastic podcast you have. I love your interaction and that you explore in a real way these questions. Unfortunately hysa is about 1 percent. 1st thought on bond ladder- a pain to set up? Recently after reading more from wade pfau etc + recent research on behavioral spending in retirement-I am exploring annuities. I noticed on your fee advisor episode it had spia… really? I thought. I only was looking at lifetime dia at 60s onwards. It spurned me to look-so thanks for sharing! Maybe an alternative to cd/hysa/mm as the rates are more attractive? I can get a real rate of 3.49. For me that is a one year deferred start on 100k with a 5 year payout (a calculator to help figure that return). With traditional inflation on my mind it is Food for thought :) Thanks guys!
Thanks very much! We’ve both elected to invest in bond funds vs. setting up bond ladders. They’re not too complex but definitely a bit more manual. there’s some good guidance online. Best wishes to you and welcome aboard! We are glad to have you.
Followup question… Did or do either of you include Social Security in your retirement planning
Jason here- I consider scenarios ranging from 0% to 100% SS funding. Most often I use a 50% funded while also being confident that my base case plan assumes SS ceases to exist or at least doesn’t pay me anything.
Excellent interview. Really enjoy how you go from high level to a nuts and bolts example (Eric's scenario near the end). It helps to add some real life context that others can relate to! What I wonder now is how you will take Karaten's feedback on your scenario Eric and apply it to your 2024 date...? Do you feel more secure in keeping the time frame or do you have the 'rent a consultant' , "3.3% won't work" comment in your head..?
Thanks @zekeboz ! Eric replying here...my wife and I have discussed walking back the bond allocation a bit given we're still 24 months away and the plan is to follow Karsten's recommendation to do so incrementally.
RE: the "3.3% withdrawal rate" question...I'm more confident in the results generated by Karsten's SWR toolbox/spreadsheet as it uses our real numbers contextualized to the current conditions. We can see the failsafe conditional probabilities and add a buffer to those that suits us perfectly. This level of granular detail is reassuring to both my wife and myself.
All that said, we're hopeful the '24 date will still work, but we remain flexible!
I lOVE Karsten’s perspective, always… For one he is German, and love this guy and his analytical abilities, but in the end it’s just a take on a mathematical run on assumptions based on his CAPE analysis or maybe not…Funny it’s very German thinking and overthinking and over analyzing it and maybe in the end it doesn’t matter bc it is about what you feel comfortable with…Life is not a Cape formula but about how you balance needs with wants and resources…Most important is common sense and what the market tells you and how flexible you are on your spending needs or wants…His inverse cape rule with intercept (whatever this is) is just another way to feel comfortable about withdrawing assets from their portfolio…Please read Big ERN’s blog to see where he is coming from, but in the end it is what you are comfortable with…In the end I believe that the more flexible you are, the better off you will be in retirement….For Jason and Eric, I would love to know how future SS cash flows matter to your strategy!
Jason here - Thanks for sharing. We don't think he's overthinking nor overanalyzing, but you're certainly in your right to believe that. You're absolutely right that common sense is essential, and flexibility can help. That said, since you've read his blog, you know that Karsten feels really strongly that flexibility isn't a panacea - see Parts 24 and 25 (among others) for more on that. Part 24 linked here: earlyretirementnow.com/2018/05/09/the-ultimate-guide-to-safe-withdrawal-rates-part-24-flexibility-myths-vs-reality/
For me, I've modeled my portfolio from zero SS through 1X of projected. As he commented on the show, I assume it doesn't come through at all, despite me believing that's unlikely. So I probably think 0.5X current projections is probably reasonable for my age bracket, which is albeit conservative. That said, my current withdrawal rate shows a near-100% predicted success rate absent any SS at all.
@@TwoSidesOfFI Thanks Jason! I absolutely believe Karsten has a very solid and mathematical approach to SWR's. For me personally its too detailed oriented and requires a real foundational understanding of what he is doing based on his Cape formula. I am still not sure what the intercept factor is based on and seems to me an arbitrary number. Either way his methodology is a fun Math exercise, but i personally would not follow it. My is SWR is below 3% lower than he would recommend anyway, even in the current bear market so have not much to fear. As far as SS i also factor in about 0.5X Are you viewing the SS benefit as a fixed bond or hedge for your portfolio, and if so what age would you start drawing ie earlier to protect your portfolio or later to maximize $'s but potentially loose more to higher taxes (Prov Income test) and potentially future means testing for SS? BTW I love the fact that you are inviting cool guests to your show. Both Fritz and Karsten are for sure the guests to have! How about Michael Kitces who seems really knowledgeable on SWR's or JL Collins with his simple approach to investing...Love your show guys, cant wait for the next one, Thanks!
@@andyd102 Jason here - Fully agree that the detail level can be overwhelming for many - there are a number of posts that I've re-read to ensure I understood them well. It's also true that in the tool, he provides SWR both with and without accounting for CAPE ratios - it's an option to consider but not required. And I'm with you, with a
How would you know you are the bottom of the bear market and can withdraw more? And how do you determine how much more you can withdraw?
A CAPE-adjusted strategy might be interesting to you. We touch on it in several episodes. More on that soon. ‘Til then: ua-cam.com/video/CClhsaBbTm0/v-deo.html
ua-cam.com/video/rapSolx37gY/v-deo.html
Amazing conversation!
Thanks, Cyrus!
The idea of setting a higher SWR at the bottom of a bear market seems counter-intuitive to me, I'd have thought you'd want to limit spending and allow for stocks to recoup value and then adopt a higher SWR during bull runs? Can someone explain this please?
Had the same question. Found this answer on reddit, see if it makes more sense. The SWR in this case is relative to the current portfolio value, not on the initial portfolio value. A bigger SWR from a much smaller portfolio could actually be less in absolute terms than the initial SWR.
"Ok that's a good point. I think how BigERN's CAPE-based-SWR is meant is to recalculate the SWR every month or year. Also he's using the formula: SWR=a+b*(1/CAPE) (with a=1.75%, b=0.5) Now for the above examples you'd get:
Oct, 1 2007; Portfolio Value (100% VTSAX, 30.24 (Adj. Close) 5 ): $1,000,000; CAPE: 27.32 6; SWR: 3.58% --> Income Stream: $35,800/year ($2,983/Month)
Mar, 1 2009; Portfolio Value (100% VTSAX, 13.71 (Adj. Close) 5 ): $453,373; CAPE: 13.32 6; SWR: 5.50% --> Income Stream: $24,935/year ($2,077/Month)
Which means there's would've been a temporary 30% drop in your income stream. Not great, but better than the 55% drop in portfolio value. Also this drop would only be temporary and probably a lot less, if you are still in accumulation phase."
Great show, gentlemen, very insightful... You give us a lot to think about... So two quick questions I haven't asked you before... For someone 50 years old, would it be prudent to consider early retirement in Thailand or Philippines because of the extremely affordable lifestyle, 75 % cheaper than the U.S., therefore allowing for a much more conservative WR ... Eric or Jason... Considering Social Security income, When you are calculating the safe WR in retirement, do you REALLY plan on the money lasting for 30 years or more ? Do you include supplemental Social Security income in your WR strategy and calculations ? If you don't mind me being nosy.
Jason here - Thanks, glad you liked it. Many choose to relocate for a variety of reasons, often internationally. Indeed, the cost of living (including healthcare) is very commonly one of the reasons why - your money simply goes farther. So this is certainly a valid choice if you've found somewhere you truly enjoy that you can see yourself living, and which has visa/etc programs that are amenable.
As for SS, I have done modeling from 0-100% of my currently forecasted benefit. Most often I just use 50% and have it lasting the duration of my lifetime one I claim (likely at 70). On a related point, for any longevity modeling, I always elect the "worst case" (ha!) of living a very long time, say >95. That way I'm that much more confident about not running out of money. Should my health prospects change, I'd almost certainly change that forecast and increase my WR.
Extremely insightful and most astute notion I have heard this year about the traffic at rush hour and when you retire. Albeit that rush hour is more easy to predict :)
Also curious about your guys thoughts on the 4% rule and the fact that everyone is saying it won't work anymore because of a few off years?
Isn't the rule or guideline a multi multi year strategy?
Thanks, Ray. We agree that he gave a great example. We've always felt the 4% rule was a great starting point and particularly early on, it's an easy mechanism to estimate portfolio needs. That said, we've also been consistent that particularly for early retirees with potentially 40+ year time horizons, it's likely insufficient barring other income streams.
@@TwoSidesOfFI I agree, my sense though and ERN mentions is depending on your circumstances , most easily age but other things like clear Social Security make it too low. I am charging in on 60, still really like my job, want to slow down but feel I can easily go at 5-6% till 67 or 70 when social kicks in. You could say not a really early retirement but if I jump off at 59 or 60 comfortably that is early I feel.
When Karsten Jeske speaks, people listen.😀
Very true!
Jason: love the new ‘do. Looking fresh!
Thanks, Mike!
I’m not one of those “relentless dividend people” but what I heard was a fundamental misunderstanding of the dividend strategy. It’s not about high dividend yield individual stocks, it’s about a dividend *portfolio* that is thoughtfully designed with value/growth ETFs (not individual stocks) to throw out at least 2% yield in retirement so you don’t have to sell as much to generate income esp when the market is down. There are very sound, low risk dividend strategies out there. The take in this video was a bit narrow. Otherwise, great discussions!
@@michaelswami Like you, I’m designing my portfolio with little regard to the 4% rule or obsessing over Monte Carlo analysis. My portfolio will be designed to generate some dividend income, supplemented with sale of assets if needed. If it’s a down market, I will have 1.5-2 years worth of cash to draw from instead. People who are averse to dividend strategy don’t just understand it well.
@@michaelswamiSure, it’s all about tradeoffs.
Again, there's look-ahead bias. My example of the stable dividend payers, BAC, C, etc. in 2007 still applies. Unless you have the market timing ability to determine the sectors or even individual stocks that avoid ruin during the next downturn, you will only do as well as the index.
Think about all the active stock pickers, the hedge funds, the prop trading desks, the high-frequency traders, the algo traders that read company reports and releases in milliseconds and weeks before you do... Do you think that you are smarter and faster than all of them and you can beat the index? I doubt it.
And by the way, I have offered it to dividend investors (and other people who claim that they can beat the market): send me your monthly returns for the last 10 years. I can run a standard Fama-French 3-factor regression (market beta, value factor, size factor) and we can determine if you have any alpha. And if your alpha is statistically significant. So far, not a single dividend investor has accepted the challenge.
Glad you enjoyed the discussion! We can’t really add to Karsten’s great and well informed answer. Here’s another good resource for you. Like Karsten, Ben is also a CFA. This is their expertise. While Ben is largely using single stocks as a reference point, to your statement about funds, the tenets presented here still apply. There is no free lunch..
ua-cam.com/video/f5j9v9dfinQ/v-deo.html
@@jeske100 Again, I don’t intend to invest in individual dividend stocks for FIRE. Also, I’ve never met a dividend investor whose objective was to outperform the market. In fact, the way I’d design mine, it may even likely lag a bit in good times but will fall less in bad times because of some defensive dividend paying ETFs in there. But remember there is a growth exposure there too. I also understand the mechanism of dividends which is that it’s basically subtracted from the NAV once paid out. In the accumulation phase, this income paid back to you buys more shares with your DRIP on, and compounds as long as the share value appreciates. This is where high yield chasers fail because share value erodes significantly hence a 10% yield can still mean a net loss. In FIRE, who cares that dividends is not a free lunch? Take the income, argument it with selling some stock if needed, and you have all you need. I know we are not going to see eye to eye but I still have no reason to reconsider my dividend approach. But like I said, great discussions on the channel as always. Thanks Eric/Jason.
Any thoughts on future stock market returns with the mass retirement of the boomers leading to outflows from equities to cash/bonds and also less consumption (as boomers lower spending in their golden years) possibly dampening future growth? Also concerned that the reduction of global trade will also negatively impact growth. I can’t find good arguments on why future returns will not be materially lower than they have been the last 30 years. Technological advancement will be a mitigant but likely only a partial one.
Our crystal ball is as murky as anyone else's. We're staying the course and following our strategies.
Hmm - I don’t think you should lump all dividend nuts together. What’s wrong with using solid dividend ETFs as generating cash to spend and not spending down the principle / selling stocks ( living with the dividend variability). It would be worth looking at the math here. This is basic value investing and has some sequence of return risk benefits. And inflation benefits. This is very different then a yield trap and picking dividend stocks with poor total returns. And if you look at the last 100 years value investing did very well.
Also like the buckets strategy, there may be emotional benefit. If you can live on stock dividends at 2% ish (not everyone can) then you will never run out of money and your portfolio will likely grow. Can that help me sleep at night ? Yep.
Sequence of return risk and inflation risk are the 2 biggest threats vs FIRE. Dividends can mitigate both. It’s not crazy.
Love the show.
Try modeling a VYM,VYMI,VTI,BND mix.
See Karsten’s response to another commenter on this point.
Hi great listen. That guy makes your head spin sometimes lol. Looking at retirement simulators is there one that I can easily incorporate a pension? I'm a firefighter in and would have a nice monthly pension once I plan to retire. Thanks in advance.
Hi, David- Try Karsten's SWR toolbox linked in the show notes. Use the 'cash flow assist' column to model your pension as income. Good luck!
How about no withdrawal rate. I don’t want to decrease my wealth. Take out a fixed annuity with a minimum payout
Hey guys I’ve been listening to your podcast since the beginning. Really dig it. You should change the somber/ominous music during the graphics. The minor notes set a really bleak mood and not what I think you’re after!
Glad you're enjoying the show! Reviews help spread the word (and, we only have a few): podcasts.apple.com/us/podcast/two-sides-of-fi/id1560745986
Thanks!
Why not sin a little away from FIRE orthodoxy ? Systematic trend following and tactical asset allocation (TAA) has worked well for 40-50 years and there are simple ways to implement nowadays (AllocateSmartly). You then have portfolios that adjust to market conditions and limit drawdowns so don't have to tie yourself into knots with all this stuff.
ua-cam.com/video/H0WVYePTheI/v-deo.html
@@TwoSidesOfFI I liked the soft stuff but for investments he’s wholly reliant on mean the reversion and apparently buying the dip. It’s well known that mean reversion strategies have a negative skew distribution, fat left tail and thin right tail and so you are more likely to suffer bad losses .
Your comments never revert to the mean, they always have a negative skew!
@@TwoSidesOfFI fair enough . I do appreciate your channel guys> permabear.
I think that the general concept of withdrawal rates is irrelevant. Keep your index funds or value stocks forever and live of the dividends when you are FI. That way you are safe from crazy swings in the market. As long as companies make a profit they will surely pay a dividend. It might make your FI number a bit higher, but this way you'll never run out of money and you don't need to worry at all about the worth of your portfolio.
Check out some of Karsten’s comments here. There are no sure things except death and taxes.
It's nice you're helping people but high quality companies that pay dividends sounds like people could sleep more easily at night. Your strategy, no offence, sounds exhausting and even worrying for some to make sure they withdraw an alright amount and it lasts them.
Have you checked out the calculator? There's actually very little information to plug in to determine your withdrawal rate. It's not something that requires ongoing maintenance. And importantly, dividends change over time, and are not always paid.
@@TwoSidesOfFI Thanks for the reply, I'll plan to take a look at it.
Really liked this guest, but saying “I don’t think we’re gonna have a repeat of the global financial crisis” is extremely dangerous. He should stick with “nobody knows,” which to his credit he said more than once.
So glad you liked it! We took the comment as an opinion, albeit a rather informed one. Totally true that none of us knows what lies ahead.
Good to know that I'm not the most cautious person in the FIRE community! The dradwon in equity prices during the Volcker era wasn't as bad as during the Great Depression or the Great Recession. Hence my comment. There are some fundamental reasons behind it, i.e., corporate balance sheets look much better during inflation than deflation. That's all. There is certainly a possibility that 2022 goes off the rails, but I find that unlikely.
Thanks for the reply. It's unlikely inasmuch as drawdowns of that magnitude are uncommon, so we agree on that. I also appreciate your reasons for discounting the likelihood. That said, if I recall correctly, the S&P lost 50-60% between the early-70s and early-80s, which isn't the Great Depression/Recession, but not trivial. Moreover, we started 2022 at equity valuation levels rivaled only by 1929 and 1999. As you said in the podcast, valuations don't determine the near-term direction of the market, but I would suggest they do increase the chance of things going off the rails, even if that's not the most likely scenario.
Again, I enjoyed the podcast and appreciate the work you do on your website. Perhaps we can come back to this next 4th of July and see if the level of caution has changed for either of us.
@@bob.popular The big drop you're thinking of was the 1972-1974 bear market with a 52% drop in real terms. But that was the oil embargo and not so much the Fed policy shock. A pretty swift recovery followed.
From the 12/1972 peak to the 7/1982 bottom, the S&P 500 Total Return Index (incl dividends) was *up!* 40.9% in nominal terms. But down 38.6% in real terms. The decline in equities came mostly from inflation, not so much a drop in the index.
From the 1981 peak to the 1982 bottom, really during the crazy rate hikes under Volcker, the S&P fell by only 15% nominal, 23% real.
If we apply a 23% to 38.6% drop to the January 2022 peak, it's not really that much more bad news. But I don't think our current situation will get as bad under Volcker with a 22+% Fed Funds rate.
So, again an inflationary period with the Fed stepping on the brakes, is not that damaging to the stock market.
About the CAPE: Fair point. I like to do some adjustments to the Shiller CAPE to factor in lower corporate taxes and more earnings retention (and thus internal growth). Today's CAPE is not that crazy overvalued. 22 today vs. 18 in 1972.
You're right - my apologies. I was recalling the real return from the 70s. Regarding CAPE, do you adjust for the cyclicality of profit margins? I've found that to be very illuminating. Whatever the case, if we were investing today at something close to 1981 or even 1972 valuations, my level of caution would be much lower.
Thanks again for the thoughtful discussion.
All this guy is doing is blabbering 😂. All this for what? 😂😂
We mock what we don't understand
@@TwoSidesOfFI Lol. Its easy to understand and the concept is not complicated at all. The way its being presented is making it look complicated!
He’s actually very interesting.