You can’t control the future but you can control the likely shape of the future. In fact the whole 4 x25 rule is based on this, that somehow the future will look like the past. You only need a subset of the future to look like the past. You need the future to look like the past long enough for your plan to work until you become a carbon donor. Ever notice Curling? In Curling some joker throws a stone down a path of ice towards a bulls eye. Two other jokers have brooms and they slide along with the stone and sweep the way so the stone hits it’s mark. Victory has some component of luck but mostly application of doing what you can do to realize the result, aka risk control. The path of how this ballet plays out is not just accepting chance, but it’s encased in constantly changing the odds. I’m sure much drinking is involved as well perhaps changing the odds in another direction.

Poker is the same. In black jack the house has an 8% advantage. The advantage is due to the fact the house bets last so the player goes bust first. By correctly playing the player can reduce the houses odds to 0.2%, still a loser for the player but barely. The odds change because as cards are played, what’s left in the deck determines new odds with each hand and the fact the house has to live by betting rules. By understanding those changing odds and by judicious betting 0.2% negative goes positive and the player takes the advantage. If you get too good the house won’t play with you.

So retirement is not just abandoning yourself to chance but careful adherence to sweeping the path and correctly playing your cards and correctly betting, EVERY SINGLE THROW OR EVERY SINGLE HAND. The future plays out minute by minute not as an aggregate. Minute by minute is called accounting for sequence of return risk, aggregate is a future value calculator. People have trouble pulling the trigger because they are extremely risk averse. Their brains are wired that way. Your employer takes on the cost of your risk when he hires you. He pays for insurance, half your SS, makes sure all the government forms are filed on time, provides some retirement incentive etc. When you quit, all that risk cost comes back on you. If you have a plan that has dealt with the risk your pretty golden, if you have a plan that is based on some dumb assed formula you read on the internet.. ”At some point, we just have to decide that everything will be alright.” There is truth in that, but the truth is not inevitable and maybe not even probable.

I was playing with this the other day and I decided the formula should be a payout say 100K per year + a risk premium say 20K per year, for 120K per year and save x25 of that number. 3M instead of 2.5M. That would give you living expense plus risk premium expense. This is why people like 3 x33 because that just about equals living plus risk premium. You also have to include taxes based on yearly payouts and filing status etc. Sweep the ice!

6 Replies to “Granularity”

  1. I’ve gone to Vegas. I do not enjoy live shows nor do I gamble. But it is still loads of fun.

    Do NOT take financial plans off the internet. Furthermore, a plan is only the beginning. Thankfully you get it. It is the regular vigilance and culling that will be 80%+ of the work.

    If you just take someone else’s plan, you will surely be the guy standing there saying “what happened?!!” when life shifts.

    If you created the plan, you will understand instinctively when you need to change things.

    The benefit of blogging for me has been encouraging clearer decisions lately. There is a syngergy of reading what our colleagues are doing.

    I am glad that you have joined the dialogue. Your outlook is a relief from the “plans” made by our younger colleagues.

    I can attest to that. I thought it would have been sooo easy when I first graduated. But add in kids, spouse, aging parents, aging myself, career changes, business and investment setbacks, attitude changes…..well in essence REAL LIFE. It is and isn’t so simple after all.

    1. I agree plans need to be very granular, almost to a year by year plan. My plan has epochs. I’m in a Roth conversion epoch right now which will last 3 more years. I am living off cash so my only tax is Roth conversion. At 70 I will re-retire take SS and RMD any residual TIRA I have left. I’m Roth converting the risky assets and keeping bonds in a TIRA where the taxes they generate will be trivial. At 70 a new epoch will happen and I will re-evaluate my risks then. I will be 5 years closer to death so SORR will start to fade as a villain. If the market turns down I’m going to 40/60 AA as I can easily survive on 40/60 and the 60 part gives me bullets to buy stocks low and ride the wave back up. I moved from 70/30 to about 57/43 this year since I converted a bunch of stock to cash to live on and pay Roth taxes. As I spend that money my AA will automatically become more aggressive. This is another example of controlling variance. What you don’t want is to be stock heavy and retire into a recession. The solution is obvious change the AA and live in safety for a while till the coast is clear.

  2. I’ve really enjoyed your joining the blog world and appreciate your quantitative approach in examining retirement issues. I had to chuckle regarding retirees preferring 3X33. When approaching FI based on 4X25, my gut instinct was that I wasn’t protected from SORR. So I swept the ice and added a buffer. Once I got to 3X33 I finally felt like I had FU money.

    I like your thoughts on granularity. When making a plan it’s important to dig in to the details as much as you can and then periodically reassess. When reading your earlier Roth conversion post I found myself agreeing that that’s what I’m planning to do once I fully retire. I wanted to do some while working part-time, but I couldn’t stomach it while in the 33% marginal bracket. Lo and behold, Tax Cut, same income but now in the 24% bracket. Now it’s worth the effort to fill the rest of the 24% space with Roth conversions. Thanks for your efforts in addressing retirement concerns and I look forward to future posts.

    1. Your words are very kind. It’s simple but hidden. You can’t really control the future but you can control the variance to a large extent. Variance control is what Monte Carlo does. It gives a range of probable outcomes from very probable to three standard deviation from the mean likelihood. If you can go far into the lower tail and still survive you are very robust in your plan. As an example my technique was to retire on a specific budget lets say $120K/yr. These aren’t my numbers but an example. This budget included my risk premium and was about 75% of my W2. Studies show people do well at 75% on the average. After a couple months I decided to see what belt tightening felt like, so I took our spending down to about 70% of the 120K or 84K (with my wife’s permission). We cut out some partying and such but also retiring had it’s cash flow slimming effect we just didn’t need to spend as much. We didn’t really feel pinched at 70% of 75% (52%) but any lower would feel pinched like we were living subsistence. This was very liberating data. What it meant is I had a range between 7K/mo and 10K/mo to play with. If I wanted a trip to Europe and it was 6K I just saved up the excess 3K for 2 months and went to EU without busting the budget. Some months were expensive months like August is homeowners insurance for the year so that month we don’t travel we pay insurance. Some months are cheap months so we bank the 3K. My net expenses for last year came in 10% under budget and was well under 3% WR. This is an example of how you can control variance.

  3. 20% risk premium sounds about right in terms of what I am doing. I doubt my living expenses will even come close to this yearly but I am going with 125k/yr goal of withdrawal (I put my risk premium over the 90k/yr amount studies say have shown maximum happiness). I think in this range I can take a couple of extravagant vacations a year, if not more, and enjoy fine dining with no worries about what side of the menu an item is on.

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