People blow off SS as a resource in retirement like it’s some “gravy”. It’s a short sided perspective. If you FIRE the affect of SS is muted since your wage history is muted and your ability to claim is distant. If you retire in a normal time frame as a high wage earner it’s economic impact on your retirement income is massive.
When you FIRE you throw away some human capital. You also throw away a huge chunk of SS. PoF discusses the diminishing marginal rate of return in his bend point article, but the overall return across 40 years of retirement is massive. It’s not gravy, it’s the main course. SS to a post age 70 retirement portfolio can mean virtual immunity to SORR for example because of how it reduces WR. I built a spreadsheet using my own numbers and my wife’s numbers to explore various scenarios with an eye toward optimization in retirement.
The spreadsheet comes with assumptions like inflation and it has a built in 25% haircut in 2032, which is consistent with how the law is written. You can mess around with claiming strategy like if you claim at 62 v 70 or if your wife claims at 62 and you claim at 70 and the sheet will project expected SS income out to age 100. You can add provision in case a spouse dies and see what a survivor benefit does to the scenario, or a post haircut survivor benefit scenario. If you have a TIRA you can track the effect of RMD on your total income, and you can calculate your tax burden and then the surviving spouses tax burden along the way. You can vary the year a spouse dies and see the effect of early death or late death. Understanding SS is an important bit of data in procuring a sustainable life.
This is a picture of the sheet. It plots my life and my wife’s life based on age. She’s 7 years younger. It takes into account the 2032 25% haircut (blue line), 2% inflation. the 15% tax break. Income need is how much you budget per year inflation adjusted. It adds RMD data from a 500K 6% TIRA portfolio into the mix so you have a total yearly income number and a total taxable income number. It subtracts income from need to come up with a shortfall which is the amount you have to extract from the portfolio ie WR. It does not account for income from the portfolio like dividends which can have tax consequence and throw you into a higher bracket.
As you can see if I live to 99 my SS and RMD at an age 70 payout, that will pay me and my wife 3.3M during the course of 29 years. My shortfall is 1.22M which is what I would need from savings to pay for our life. My total needed in retirement for 29 years would be 4.55M. With a wife and a long life, and optimized pre-retirement earnings period SS and a small 500K TIRA, can provide about 70% of retirement need. I would never call that gravy. It’s the beef!
Let’s say I kick off at age 83. I created a separate column that tracks inflation adjusted survivor benefits so you can track the benefit pre and post the 25% haircut
I can pick off any year of death and know how much SS will pay my wife thereafter.
My wife claims 50% of my SS since that’s the larger of the two possibilities. We can either claim separately or she can claim 50% of my income. Upon my death then she would claim the inflation adjusted and haircut adjusted survivor benefit of my FRA benefit.
Here is an example of my death at age 83
Notice the blue block reflects the change from joint income to survivor. Notice how much less SS pays out once I die, 3,3 v 2.7. Notice how the need did not change. Notice the extra WR required from the portfolio. Notice also the S S + RMD taxable income (SS Taxable). Recall once a spouse dies one deduction is lost and the tax bracket expands so the needed income expands even more and must be considered.
So there ya go, a quantitative way to think about gravy. If you understand this, this can be the difference in portfolio failure for the 4% WR, and 100% success. Plan wisely
My friend David Graham who’s opinion I greatly admire wrote a post called Fear Greed and FIRE. It poked a little fun at Star Wars while proposing a common investing point of view. I decided to counter with my own Hunter S Thompson-esque rebuttal proposing an alternative investing view point and a critique of common Bogglehead investing philosophy. Read David’s piece first as a set up to understand mine. Knowledge is best obtained against a backdrop of contrast. I didn’t want to litter David’s site with 3000 words of my own.
You write 2 articles about peri-retirement risk and the notion that 10 years before and 15 years after you should “risk off” i.e. take some risk off the table. Then you come out with the mantra “stand tall young man/woman while the market mows you down, there is nothing you can do!!”
You are quite right, market timing when the horse has left the barn is stupid and deadly. It does not mean at some level, all market timing is deadly. Buffet is the ultimate market timer even though he likes to folksey up his analysis with “stand tall young man and let the market mow you down” His interest is in buying your shares after the crash. Buffet RIGHT NOW is holding a ton of cash. Why is that? There is nothing he is interested in buying AT THESE PRICES aka market timing, so he’d rather sit on cash than buy high. He does not DCA he buys low. I own a lot of BRK.B because I believe in Buffet’s market timing ability despite the rhetoric. You have to analyze what he does not what he says.
If you think about it and you go to work at 20 and retire at 30, according to your mantra you should start de-risking at 20 and stay de-risked till 45. So how do you make enough yield to cover 60 years of FIRE? How do you not run out of money? Are you using one of those double sided light sabers? Keep risk on, and Keep risk off?
The way money is made is you buy low and sell high. The thing you buy is risk. You buy IBM you are buying IBM’s risk, and you are hoping to reap IBM’s return but that return is not guaranteed by any stretch because what you own is risk. The reason Buffet is sitting on a pile of cash is he chooses to not invest in too much risk so he stays in less risky cash waiting for his entry into the risk pool, constantly analyzing risk opportunities. Essentially Buffet is waiting for recession. The chaf will go bankrupt, the strong will be beaten down, the naked will show themselves and he will buy low or GEICO will sell them a bathing suit. It’s that simple. When will buffet sell? Oh yes Buffet sells!! He sells a lot!! He sells HIGH!! That’s why Buffet is rich. BRK.B has outperformed the S&P 500 by 1.5 to 1. BRK.B is cheap to own Mine cost me $5 to buy it. BRK.B is well diversified they own 63 companies as well as a portfolio across many sectors. They are managed NOT passively and clearly outperform the market by a lot through judicious market timing yet the Boggleheads decry BUY PASSIVE, BUY CHEAP, YOU CAN’T TIME, STAND THERE AND TAKE YOUR LUMPS LIKE A MAN!! That advice is a load of crap IMHO. 2 times in my life I lost 1M in market value 2000 and 2008. I wish I had risked off before the crash. In 2000 some funds I owned (note “funds” not single stocks, supposedly diversified) essentially went to zero because the paper they contained was worthless, so don’t think standing tall can’t clean your clock. I made it back because in 2003 the week the Iraq war started I plowed a different 1M BACK into the market. I had the Buffet choice to make, be greedy when every one else is fearful. I asked my self this question”do you bet with America or against?” I bet with and bought low. 2000 was a different recession than 2008. 2000 was trading fairy tales. 2008 was trading unbelievable over leverage. 2008 was musical chairs. In some respects 2008 was worse, since in 2008 we could have and likely should have gone into depression but the FED and Hank Paulsen ginned up QE and moved 4T of bad paper off corporate balance sheets. It was either that or every bank, insurance company ad investment bank was going bankrupt and you can’t run a country without a financial sector. The ghost of Paulsen still haunts us because now it’s the fed’s job to bail us out aka we are living in the land of moral hazard. At some point the fed won’t work. The fed will pull the lever and it will break off in their hands. You can see it in Europe with 14T of negative bonds. Their lever already broke off. You can see it in Socialist Norway who went into default over free health care. Their lever already broke off. If you’re riding on a train and the lever breaks off and you can get off before you die GET OFF. (sell high scenario) If you’re riding on a train and the lever breaks off and you’re dead already, not much point in getting off, dead is dead (sell low scenario). No amount of levophed is going to do the trick.
The problem with FIRE is they are all worried about retiring early rather than worried about making sustainable money. Every year of retirement under the SS FRA, is adding leverage to your life. You are making a bet the economy will outperform, because you need out performance to survive, BUT your performance is linked to cheap passive funds which by definition can’t outperform. The economy out performance is your Millennial Falcon. No out performance you’re hosed. This MUST be the case since you own cheap passive funds that NEVER do better than the market by definition and you own them is some fixed AA and you own likely own TOO MUCH RISK and you pretend you are tough and can take a licking and keep on ticking. 50 years is a long damn time.
England once was the premier economy. That worked till the world wars, then the order changed and the US took over. Do not think the US is invincible. China is licking its chops If you own passive funds you also own the countries risk. It took 2 wars and a lot of dead people and huge deficits to settle the country risk pecking order in the last century. We are in the first phase of that war today.
I made a lot of money last decade. I study this extensively and personally I think the whole world is rolling over. There is too much debt. I’m concerned enough I sold some risk and invested in something less risky. I sold stock and bought gold and bonds. There is a second way to reduce risk and that is to diversify it away, using an efficient frontier plane. I’m in the process of applying that risk management process as well.
The efficient frontier calculates portfolio efficiency aka the most return for the least risk for a given set of non correlated assets. Correlated assets provide no to trivial diversity. Currently my asset classes are described by VTI BND BIL GLD and BTC. I own more sub choices than this but these describe in general my non correlated risk map. More than this the analysis becomes too complex to write about. Each of these are virtually uncorrelated with any other asset on the map, and exist in a specific asset allocation yielding the most predicted return for the least predicted risk.
There are other ways to manage risk except to stand there and take it like a man while your legs and arms get chopped off. If you’re a bogglehead you may get your head chopped off. That big old head is a tasty target.
I present this as point counter point comparison. It’s not about winning it’s about understanding.
Harry Browne was a man who lived mostly in the last century. He was an author, investment adviser, newspaper syndicator and Libertarian. He ran twice for president on the libertarian ticket in 1996 and 2000. He set up a portfolio for “all conditions” His portfolio consisted of 4 assets stocks bonds cash and gold in equal amounts.
If you Monte Carlo this you can withdraw 4% for 30 years with 97.55% success
If you have 3 bad years of SORR up front (the worst stress) you survive 94% of the time.
For reference a BH3 survives 3 yr bad SORR for 30 yr at 4% withdrawal 38% of the time.
So Harry Browne’s Portfolio is pretty damn safe. It does just what it says it will do. The Harry Browne does’t hit a home run, no 9M value at the 90% level, but it gives you reliable 4% come rain or shine. The HB looks like this on the EF plane.
It is not on the EF so lets adjust the AA and place it on the EF
Lets Monte Carlo that AA
With 3 years of bad SORR and 4% inflation adjusted withdrawal you survive 99.92% of the time and have half a mil left at 30 years in the worst case
5 YEARS BAD SORR:
This post is a radical demonstration of the power of diversity using the EF as a guide. If your goal is set it and forget it 4%/yr year in year out the EFPP is the ticket (efficient frontier permanent portfolio). The reason it works is a relatively high rate of return (7%) and a low SD (5%) . The BH3 (7%return 12% risk) fails 80% of the time at 5 yr bad SORR. The trick to the EFPP is don’t change anything. If the market is up one year do not be tempted to move some cash into stocks.
BTC badly distorts the EF
because of it’s out sized return and vol over the last 8 years but you can still do the calculation
This is my portfolio simplified around 58% VTI as the stock, 9% BND as the bond 7% EDV as the bond (total 16%), 16% as the cash in a high yield represented as BIL and 7% GLD. As you can see the portfolio sits on the EF. I can’t Monte Carlo this portfolio because the MC needs 10 years of data to run but I’m willing to give this a try. Disclaimer: I do not recommend this portfolio. If you do it don’t blame me. I think it’s constructed on sound Modern Portfolio Theory principles of maximal non correlated diversity. Do I expect 16% return? No. What I expect is smaller loss in a more robust portfolio, similar to the EFPP, if there is Armageddon. It amounts to that I’m substituting a source of high volatility and high return that is transparent and not open to market manipulation and completely non correlated to stocks for a portion of the vol and return normally allocated to stocks. The BTC bet is small only 3%. Notice the ratio of return to risk is like (not the same number but the same direction) as the risk and vol in the EFPP. with a greater than 1 Shape’s ratio. If you look at the BH3 risk is 12 return is 7. EFPP risk is 5 return is 7, less than 1 Sharpe’s In this portfolio risk is 10 return almost 17, so this portfolio and EFPP are “the same” Sharpe’s type vs BH3 which is different.
There has been a ton of analysis done on Harry Browne PP plus a lot of biased commentary. It’s worth studying but comparisons are often not logical but replete with bias discounting HB for whatever the author is hawking.
I own BTC and I’m adding to my position. I’m NOT ADVOCATING buying BTC. BTC is a mathematical construct and a social compact. I believe it behaves as a volatile store of wealth as well. People often say it’s not “backed by anything”. I don’t see that as true. I bought it with dollars so it’s backed by my dollars. People say but but it has no government. In fact it has a massive totally transparent government. The algorithm is its government
BTC is not a tulip. You can’t just plant a field of BTC cover it with manure and wait for the dough to roll in. It is not a bubble because it is not financed by credit. It’s price discovery is in the open market completely transparent. It is not open to window dressing like share buy back. It’s WYSISWYG what you see is what you get. It is not open to FED manipulation and control by banks. No one skims anything off the top except for the exchange fee. The IRS treats it as property like real estate and stock gains and charges cap gains. Unlike stocks and real estate there are no government incentives to distort pricing. It settles instantly. You push the button and the deal is done permanently and anonymously. The IRS is likely going to force some accounting like a 1099 be reported by the exchange, so what? You get a 1099 on your stock sales as well. The law is the law and the government deserves their cut of capital gains.
BTC is closed ended. It is designed so only 21,000,000 BTC will ever be created, so again it is not like tulips. It is more like gold, another store of value. You mine gold. You also can mine BTC using a computer. There is a certain amount of gold in the world and there is a certain amount of BTC. BTC is created by calculating using an algorithm and as each “coin” is mined by successful calculation that coin is added to the ledger. Once in the ledger that coin can be traded just like gold can be mined assayed turned into bullion and traded. The price of gold is set by a market mechanism and the price of BTC is set by a market mechanism. You can store gold in a safe and you as well can store BTC on a thumb drive in a safe. Once your purchase is on the ledger it remains on the ledger. The algorithm is virtually uncrackable which is why its called crypto. The ledger is peer to peer meaning it’s not stored in one place but is stored everyplace. Since the ledger data is “everyplace” it can’t be stolen or falsified. The algorithm understands cheating and won’t allow it PERIOD. BTC can be stolen like a bar of gold can be lost or stolen. You can loose your thumb drive for example or throw away your computer and loose your account info. No account info no BTC. (not entirely true if your BTC is stored on an exchange). BTC is anonymous. It’s like a Swiss bank account on your phone. You are a number and your account value is a number and there is no way for the system to understand who you are. A brokerage understands but the algorithm does not and it’s perfectly legit to trade outside the exchange. There could be tax consequences for that however. The exchange of value in a transaction is instant. No clearing house or bank or regulators involved. The transactions are world wide, no exchange rates currency markets central bank or government manipulation allowed. This means I can be a sandal maker on a mountain in Peru, I can call NYC and sell a load of sandals to BillyBob’s sandal store for a price in BTC using a satellite phone and as soon as the button gets pressed value is subtracted from BillyBob and added to my account. The transfer is perfectly liquid and perfectly transparent to the ledger and permanent. All that’s left to do is ship the sandals.
This is a HUGE advantage. Consider the infrastructure required to transfer money from NYC to Peru to your bank and have funds become available consider import and export taxes consider the currency manipulation balance of payments etc. All of that is eliminated in peer to peer. The other thing is BTC remains liquid whether the banks freeze up or not. This is the reason I first purchased BTC in 2015. It was during the Greek banking crisis and some rich guy was vaca in the Greek islands. The banks froze up and he most you could get is $50 a day and you had to wait online for that. No credit cards, no checks. All you could spend is the money in your pocket. The guy wanted to go home but he couldn’t buy a ticket. He had BTC, bought a ticket and split for Cali. I had some spare money and decided I wanted some of that kind of liquidity and libertarian money.
Now I see BTC as a diversifier. It has a long enough history it is not going to zero. There is 180B of stored value in the system presently as well as the cost of the infrastructure, which is a world wide peer to peer computer network. The value of the network is probably trillions so there is inherently stored value in the system, and there is no government allowed to borrow against that value or just print money. In the future BTC maybe the reason the internet was invented and not just watching porn. Freedom is a very hard thing to keep in a box once you taste it. BTC is a little like owning BRK-A it’s value is what it’s value is. It is not manipulated by stock buyback or stock splits or leverage. It’s not really open to financial engineering and so doesn’t carry that risk. I read 19% of S&P value is due to financial engineering not productivity. If that’s true owning BTC is way safer than owning SPY for example. If SPY becomes un-engineered 19% of its value disappears. BTC is volatile but if you own a coin you own a coin. aka transparently. If you don’t want to own the vol of BTC, don’ buy it.
It turns out BTC is uncorrelated to stocks, bonds, gold. and cash. It is a fifth form of diversity
You can see its seriously non correlated with any other asset class. Given my understanding and strengthening conviction of a world wide recession on the horizon I want my portfolio to be spread across as many non correlated assets as possible. But I also don’t want to throw the baby out with the bath water. I’ve made a lot of money investing. In the last 25 years stocks and bonds have been the place to be. Stocks are volatile, bonds have steadily ground higher and continue to do so. The long bond hit 1.9 today and the yield curve once again inverted. It is what it is. So now is my time to re-balance percentages out of concentration, and into the safety of greater diversity. To me that means own all 5 non correlated asset classes by selling some (not all) of the most profitable (sell high) and spreading that loot around. This keeps me 100% invested just not 100% invested in stocks. Will I loose money? Relatively unclear. What is clear is if the stock market crashes I WILL loose money, a lot of money because the risk is concentrated. If the dough is better risked across classes I will loose less and maybe even make some in some categories because of the non correlation. People gotta keep their dough somewhere and one categories loss is often another categories gain.
As BTC has been mined initially it was very elastic in terms of supply and demand. In the beginning it was easy to mine, you could do it on a raspberry pi. As more coin is mined the computing horsepower needed has risen exponentially. There are now specific rigs that are dedicated to mining that are basically super computers in their architecture. In addition collaborations of mining computer owners join together to form a mining consortium of computing power and then split the coin according to some algorithm. About 80% of the 21M coin has been mined and as mining progresses it becomes asymptotic in terms of mining horse power vs return. This model in my opinion will inflate the price naturally as the cost of inputs grows. also I think as the number to be mined dwindles the price will become more inelastic and scarcity should drive price. After the crash I predicted the price would stabilize around 9 to 10K. BTC has never gone to zero. It has steadily risen but in a very volatile way so imagine climbing a mountain with a LOT of steep hills and valleys along the way. It’s not that different than the S&P 500 in some respects. There are all kinds of excesses and crashes but the climb is relentless. I expect BTC’s chart will have a similar look 50 years from now. I think the algorithm is designed to pretty much insure that with it’s ever increasing scarcity of new coins. Some predict 25x growth some 40x present value. I’ll be happy with 2-3x. If you own say 100K and in 5 or 10 years that becomes 300K, not a bad deal. In 10 years 100K to 300K @ 2% inflation is 10% return.
China Russia NK Iran and several other countries are proposing a members only crypto currency. This would allow the countries to trade directly without converting currencies or pegging to say the dollar. If China needs natural gas and Russia has some they merely deliver the NG and get paid in crypto and the US doesn’t have anything to say about it or any way to manipulate it. Sanctions smanchtions. The crypto in that system is backed by gold. Presently China has something like 13000 tons of gold and Russia about 10000 tons. US has 8000 used to have 20000. Russia is the second largest gold miner in the world. That crypto is not BTC but if it comes to pass will totally legitimize crypto as world wide concept
The worst month for markets is traditionally Sept. There are 3 days left in Aug and a hurricane is scheduled to arrive at my front door in 5. There’s a metaphor in there somewhere.
Existential Doc asked my macro view. I ran across this video that pretty well sums up where I’m at. I think we are on the precipice if not in recession. I’ve written about the moral hazard and over leverage based on the idea it’s now the FED’s policy to save the day, in lieu of unemployment and inflation. This video sets up a model of forward leaning indicators which in some respects describe the future. The model does not look at levels either absolute or relative it looks at first and second derivative data, i.e. the rate of change, change in direction of the rate of change, and acceleration in the rate of change (rate of change of the rate of change). The model looks at multiple descriptors of Economy mathematically and it looks at cycles in which these changes have happened before. So the video is a little mathematically dense and quantitative but is explained in a totally accessible way.
The speaker is clear the trigger has not been pulled yet on recession. He gets paid the big bucks to not over analyze or under analyze but to correctly analyze. I get paid no bucks and may be over analyzing a bit, but I’m concerned enough to make some changes to my risk profile toward risk off based on the economy, and I haven’t done that since 2007.
I’ve watched about 20 videos this past couple weeks and not one was rosy. Some non committal but cautionary to the down side, some flat out predicting recession 100% and some touting terror. Some have an agenda to support so I don’t take everything as truth, but when the happy talk disappears with the smartest players in the room, the diagnosis, natural history, and prognosis starts to become visible. Yes a 9 cm mass in your lung could be pneumonia or fungal but most likely it is what it is.
One thing to consider is the world was rolling over before the trade war. So trade wars are not a cause but a side bet that will be used as a scapegoat against Trump. If somebody like Warren or Sanders gets in, fergitaboutit.
the divine plan for humanity, from creation through redemption to final beatitude.
the method of divine administration, as at a particular time or for a particular race.
Obsolete. the management of household affairs.
FIRE is in fact defined by the obsolete definition of economy. All of the books, bogglehead rants, WCI’s Robbin and Collins of the world are subsumed in the normative definition this ONE NOUN. It boils down to frugal or parsimonious expenditure, and the efficient productive use of excess. The more efficient and the more parsimonious the more productive the system becomes. It’s really quite useful to have a one word understanding. Intimately understanding that one word gives you the arrow needed to point at the target and hit the bulls eye.
David over at FIPhysician wrote a provocative article claiming there is no such thing as market risk. With regard to retirement there is some truth to that. If you own a portfolio, what you own is portfolio risk. If your portfolio is 100% passive equities, say VT or VTI you own 100% market risk. Market risk and portfolio risk are identical. If you own 100% 3 month T-bills you own 0% market risk. 3 month T-bills are considered “the risk free asset”. Davids point is you don’t control market risk. The market does what it will.
The Market is a pricing mechanism. In accumulation it converts work into property. You are born with your maximum human capital, the amount of time you have to be productive. You can’t get any more human capital you only spend human capital. You CAN modify the value of your human capital. You can spend some human capital and multiply the value of your human capital through education and experience. You possess less human capital but it’s more valuable and its value is also set by a market. A cardiac surgeon’s human capital is worth more than a nurse practitioners. The parsimony and productivity aka the economy of that is obvious at least in the present market. If a NP’s wages rise and a Surgeon’s wage falls at some point the excess cost of training and practice costs (malpractice etc) will overtake the benefit of being in the workforce an additional 10 years and bearing none of the excess costs. It’s a market driven economy on the value of human capital. Even the cash value of your time is based on a complex analysis of cost and efficiency.
Yea, yea, but what about the damn portfolio! You don’t control market risk but you do control how much risk you own. The market is a pricing mechanism. When you enter the market you convert risk free assets into risky property. Today I added to my BTC position. I took some cash and bought some property. I put the cash “at risk”. BTC is up 3.19% today compared to when I bought so I “made some return” for my trouble. I made some return but what I bought is risk. Given the volatility of BTC I could as easily be down 3% and may be by morning. I don’t own BTC to make money I own BTC to not loose money. It turns out BTC and VTI (the market) are non correlated so it reduces my risk. I also own EDV which is not correlated with BTC and is negatively correlated with VTI. Gold is also not well correlated with any of the other 3. So owning this quartet reduces my risk and the amount of risk I own is all I can control. I don’t control my return. The market controls my return. Owning the quartet does mean I make the same relative return for less risk. This is a parsimonious, frugal and productive use of capital, aka it’s economic, i.e. possess he quality of economy. Here are the correlations
I’ve decided maybe 3 – 3.5% in BTC might be useful, but be very clear BTC is making a bet, but then buying and owning any risk asset is making a bet. 4 x 25 is making a bet.
Back to the portfolio. Retirement portfolio’s have a job. Their job is to pay for your expenses when you quit working. When you quit working you relinquish your remaining human capital. If you retire normally age wise, typically your human capital has all been consumed anyway. Your productivity and efficiency tends to decrease, and you get tired or develop medical issues. The society’s social systems are designed around “normal” retirement. It’s actually a great boom to the younger generation. In times past it was the families job to bear the cost of the elderly parent. In China it’s still the case. Sons are expected to step up and pay. This is why the one child policy generated so many sons in excess of daughters. China does not have SS. No son no old age income. In america we are more communistic we pool the risk and let everybody’s sons and daughters pay for everybody’s parents. This dramatically reduces the families out of pocket expense. If you kvetch about SS you should consider the cost if it wasn’t there. It dramatically reduces your risk. SS therefore reduces your risk to a relatively capped fixed cost while you are accumulating and reduces your risk in retirement because it covers part of your retirement expense. Medicare is there to reduce your cost as well. The “government” aka you pays a discounted amount to cover your parents when they are most likely to get sick. Imagine if it was up to you to cover that expense! At age 65 you don’t have that long to live so the expenses are relatively capped. It’s a societal bet that you run out of breath before the corporate cost of your living becomes uneconomic. Be very glad you pay SS and Medicare you would hate paying full the load as opposed to the discounted pooled load.
In “early” retirement You create a bigger burden on society. You sop paying your fair share and start consuming. You also throw away large chunks of your human capital and productivity. Your “need” will be considerably greater than your cohort who works later so in effect you are stealing some of his productivity and then turn around and call him a dope for not retiring early. If everybody 4 x 25’d it the economy would collapse. So be damn glad and not smug that your neighbor doesn’t retire early and throw away his human capital and productivity. In a low productivity economy, FI becomes AFU.
W hen you buy a portfolio to take over for your job, you need a set amount of money. That’s what 4 x 25 means. In it’s main you save 25 times, and if it was all in inflation adjusted cash aka a risk free asset you could live 25 years. Standard retirement allows you to lever up your 25x principal using risk assets to pay for 30 years of retirement. You expect to gain 5 extra years of retirement for free because you bought the risk. This scheme, and it is a scheme is a bet. It is no less of a bet than BTC is a bet. And just because buckets of digital ink have been consumed extolling it’s safety it’s a bet. The problem with the bet is that it can turn your expected 30 years of money into only 20 years of money. Risk giveth and risk taketh away. All you can control is risk since that is what you buy when you buy risk assets. Buy more risk and maybe you’ll reap bigger return, maybe not. Maybe much smaller return.
David’s article was about mitigating risk over 3 epochs of portfolio life accumulation transition and deflation. Peak risk is the year of retirement. It’s a bet. You retire because you hit your “number” which likely means the market has been going up and your risk has been paying reward. Lets say your FI number is 3M and you retire in 2019 after the longest bull market in history and you own market risk i.e 100% stocks. The market drops the value of your property in half, aka 1.5M. You are no longer FI according to your definition. You presume the market recovers but what if it doesn’t? To stay solvent for say 30 years you have to cut consumption in half. That’s the bet you make with a levered retirement.
If you retire early you get to cut consumption by 2/3 because you have a lot more years to cover. In addition you are far away age wise form “normal” conditions like SS and medicare. Smugness turns to uggness. Therea re means to limit your risk on the journey. Since risk is highest at retirement 10 years before retirement you can sell some risk. Get out of some stocks and get into some bonds. Hold the reduced risk for at least 15 years AFTER retirement slowly ratcheting up over time like a glide path, that’s what David recommends. I’ve seen alternative recommendations of 5 years before and 10 years after retirement. That would constitute 15 years out of a 35 year period or you should reduce risk about 40% of the time. If you’re going to do that you should probably save a bigger pile to start since owning a bigger pile is a means to reduce risk. There are all kinds of variations of risk reducing strategies, peri-retirement, my favorite is the 2 portfolio different risks. One large more risky portfolio to use when times are good, one small low risk portfolio to use when the market drops in half.
It’s all about creating true economy out of granularity. If you think 4 x 25 is safe don’t ever criticize me for buying BTC. I have only a tiny bit at risk.
When I awoke, the dire wolf Six hundred pounds of sin Was grinning at my window All I said was, “Come on in”
Don’t murder me I beg of you, don’t murder me Please don’t murder me
My wife and I went to my first local Choose-FI meeting this afternoon in the Orlando area. Nice venue, super friendly and knowledgeable people. Fellow pilgrims on the road. Then out to dinner. Good times! If you have a Choose-FI near you I recommend!
In Sept 2007, I was talking to a friend out California way and she asked me “what about this market” in a “how ’bout them Cubs” kind of way. That question crystallized my trepidation that had been growing over what I saw as a looming debt crisis. I was long the market quietly trying to recover from the dot.com bust and rebuild my portfolio, By 2007 I had a pretty balanced portfolio in things like S&P 500 & S&P 400 and VOO and cash and bonds. I had studied modern portfolio theory and was on board. It was before all the calculators came online so my portfolio was kind of guesstimated but it wasn’t horrible like my portfolio was in 1999. I told my friend I was scared to death. The debt bubble was obvious, and the coming crash was obvious, I just didn’t know how to play that. I had read some books based in the “men are men and the sheep run scared” mentality of never sell and take your lumps, you chicken shit. I see that bravado on display today in the FIRE community. All I can say is whip it out someone gonna cut it off.
Soon enough I had lost my second million dollars in 8 years playing the stand tough game. I recovered the lost million by dollar cost averaging into the market. after selling the debacle in 2000. In 2000 many things actually went to zero or nearly zero. In other words some of my holding never could or would recover. An example is GE. It peaked around 70 I sold at 20 and today it’s 8. So I managed to have some cash left to reinvest. In 2003 we were headed into war with Iraq and the market had bottomed. I asked my self do you bet with or against the US? Being a Navy Vet I decided WITH and plowed 1M into the market at it’s lowest point in 2003. This paid off and due to the credit bubble. I had made back my lost million plus some.
History was about to repeat in 2008. I could see the crisis on the horizon, it was obvious. You can’t own 2 new cars a boat a McMansion on a cabbies salary, default was a comin’. But I still stood pat and lost another million. This time I didn’t have to sell because companies did not go to zero. The fed stepped in and did some fancy footwork and made what should have been a flat out depression into a multi year recession. It took 7 years for the market to reach the 2007 peak. I made back my million plus a lot more because I had some risk management on-board in 2008. By then I was on the efficient frontier so my loss was muted because my risk was managed, and I was made whole in 2011, 2 years earlier than the 2013 recovery of the stock mavens. I was already compounding when they were just getting even, so my period of compounding for this expansion has bee from 2011-2019 not 2013 – 2019. I have 2 years more compounding.
In the mean time I’ve retired. Being retired requires even better risk management because you are not adding more W2 money to the pile anymore. You instead are spending portfolio money to stay alive. I’ve been listening to videos by some damn smart finance people and not one of them is bullish. They are either neutral aka don’t have a clear conviction or they are all the way to 100% we are headed toward OR ARE ALREADY IN a recession. Dalio thinks we are replaying 1929 . 2008 was the once in a lifetime event just as 1929 was the once in a lifetime event of that century. What followed ’29 was ’37. He thinks were are headed to our version of ’37. Every expert I listened to was either about collapsing risk to the long side (reducing equity exposure) or actually getting ready to short equities (increasing risk to the down side).
In 2007 there weren’t really good ways to buy downside risk against credit swaps, at least I didn’t know how to short that, but today there are plenty of short and levered short ETF’s available so you can trade a crash, but I’m not doing that because I have no W2 to take up the slack if I’m wrong.
Neither am I stupid enough to just stand there and take it because I no longer have a W2 as a backup. So what I did was sell some equities at the top of the longest economic expansion in history. In my case I was able to sell tax free since I have tax efficiency built into my portfolio. Given the impending corporate debt crisis and pension debt crisis and the baby boom underfunded retirement picture and the fact the rest of the world is already in recession I bought long bonds. Germany just today issued 30 years with a negative interest rate. World wide banks have PE’s of about 8. US banks are at 12. That difference has to arbitrage and if Germany is issuing negative debt on all their paper all the way to the 30 year Bund, German banks are sunk and can’t rally, meaning US banks must fall. The FED must therefore cut rates or increase QE or both forcing US 30 years lower, so my 30’s will appreciate. If the US goes negative my 30’s will appreciate a lot. I also bought GLD which tends to rally when it hits the fan. Selling stocks reduces my risk. I sold enough to reduce my risk by 12% and with the other moves may see no change or even positive in my return. My other advantage is I’m living off cash so even though I changed the risk profile the portfolio is closed to SORR, I improved my sequence risk with no SORR risk at least till my cash runs out. SS kicks in 2.5 years from now further improving my cash flow.
What did I give up? The market will probably rally some in the short term and become more volatile. I’ll miss out on some of that rally but also more of the volatility. I calculated my loss of return:loss of volatility ratio to be 0.4:1 meaning for every 10 bucks I lose if the market crashes I only lose 4 bucks of return since my return is not strictly dependent on the market but diversified. If the diversity was a good bet I may loose nothing in return as the alternatives (30 yr and GLD) pay off. It’s very non bogglehead approach, to sell some but I did not cash out only managed my AA to a lower risk. I moved to a AA I can afford to hold for the long term which is a bit different than market timing risk on risk off. I own cash but I didn’t add to cash so my portfolio is still risked, just less risked. I have enough money and a short enough retirement horizon and a small enough WR, I can easily afford to live with less risk.
Ray Dalio is a true Maven. He uses a template to analyze his deals and the economy. You make money by buying low selling high and Dalio uses the template to analyze what’s going low or high.
He created a YOUTUBE video explaining the economy as a machine. I came to a similar understanding in my own investing career but not as well thought out as this video. Especially pay attention to the long term credit cycle. It’s been about 90 years since 1929.
In the last post Existential Doc posed the question what to do? I went through how I would analyze it but a more formal presentation might be useful.
What would happen to survivability if the stock market dropped in half permanently? How does AA affect this? Lets start with the good old bogglehead triple fund. The triple is a 80% stocks 20% bonds fund of US stocks Global stocks and total bonds and if you used it as your retirement portfolio for 30 years and a 4% WR the probabilities would look like this:
82% survival for 30 years. I’m going to treat this as an 80/20 portfolio socks to bonds. Let’s say stocks fall in half. A 1M portfolio now becomes 200K in bonds and 400K in stocks so the portfolio is worth 600K and the AA is 67/34. Lets monte carlo that 67/34 portfolio using the same ratios and WR on the 600K principal
43% survive at 40K/yr WR. If you knock the WR down to 28K we are at 82% survival once again. So to survive a 50% equity hair cut using an 80/20 bogglehead at equal levels of survival and a 1M start you’re 40K/yr WR must drop to 28K/yr or a 30% cut. That’s almost 2500/mo. What about a 60/40 Stocks v bonds at 4% WR and 30 year horizon?
Just by changing the AA to 60 /40 and getting rid of foreign survivability goes to 96%. What happens if we loose 50% of the equities? on a 1M portfolio the bonds are 400K and the stocks are 300K, so you immediately start with an extra 100K in the bank compared to the BH3 example. The AA of that 700K is 43/57 stocks v bonds so lets MC that sucker 700K, 40K WR and a 43/57 AA
so a 40K WR on 700K drops survival to 70% What if we re-balance back to 60/40?
74% It helps a little, so let’s keep 60/40 and try reducing WR to 30K/yr
We see a 94% success at 30K/yr nearly the same as the original 96%.
So what does all this mean? It’s how you plan. What do you do if you loose 1/3 of your money? What do you do before you loose your money? We saw what happened to a typical 80/20 portfolio not on the efficient frontier. WE saw what happened to a safer 60/40 portfolio on the efficient frontier, and we saw the survival rates. To get the bogglehead 3 to 92% survival required dropping the WR from 40K/yr to 19K/yr after the disastrous loss.
The other thing that matters is when SS kicks in. If you are close to SS when the disaster hits you are largely immunized. If you are far away from SS because you retired early…