A Graphical View of Retirement

FIRE types use formula to determine retirement.  It goes “take your retirement amount multiply x 25 and withdraw 4%.  Or multiply x 33 and take 3%.  People think this is “safe” based on looking in the rear view mirror.  A 1998 study looked at 30 year aliquots of time from before 1900 to 30 years ago and judged nobody ran out of money so it must be safe.  The 30 years was expected to cover from say age 60 to 90.  This some how was generalized to save 25 or 33 take 4% or 3% and you’ll never run out of money so once you hit the “number” pull the trigger.  Some problems:  1. Past performance does not equal future result.  2. It doesn’t really make mathematical sense.  Retirement is based on both Risk and Reward, not just projected Reward.  Here is a graph of Human Capital:

The red line represents what your potential earnings capacity is from birth to about age 70.  After 70 consider yourself burned out.  

This graph represents a “Mr. normal retirement”  The orange line is saving and investment from ages 20 to 60, and the blue line is deflation from retirement at age 60 till death at 90.  He gave up a dab of red line earnings retiring at 60 but he accumulated over 40 years and so he has more than  enough to cover 30.  The area under the triangle represents the money you made during accumulation or the money you spend in retirement.  You generated 1.33 times more money in accumulation than you spent in retirement.  He will die with money in the bank and a cushion in case of bad times.  He could guarantee his 1x in TIPS and put .33 in riskier assets and likely leave his kids a nice chunk.  His risk of running out of money is extremely low.


This is Mr. FIRE.  He accumulates from 20 to 38, 18 years and then deflates for 52 years.  He’s hard charger with a great job and lives in his mother’s basement so he basically saves it all.  He gives up a huge chunk of earnings potential (ages 38 to 70, 32 years potential) and he needs to generate twice as much money during retirement as he generated in accumulation to satisfy 52 years.   To generate twice as much money he needs to be in fairly aggressive assets with high risk.  As risk goes up failure goes up.  He waves his hands a lot about side gigs and such but hand waving may or may not generate that extra needed to cover till death do us part.  This guy is essentially retiring in debt.   He is not covered.   He presumes it will work out.

This is Mr. middle of the road.  He retires in his 50’s, say 52 after working 32 years of saving his ass off plus working a second job and spends his 32 years of accumulation on 38 years of retirement.  His retirement money is invested in safe assets which return an extra 6 years of free retirement.   His failure risk is low.  Mr. middle of the road retires a tiny bit in debt but his potential compounding over 38 years should easily make up that difference.   No Walmart jobs starting at age 70 for this joker he has fishing on his agenda.  Remember we consider age 70 as burned out regarding Human Capital.

3 retirements, 3 pictures of risk.  Every picture tells a story don’t it.

Here is another picture of risk.  Wonder which portfolio is best suited to survive this?


My coloring book version soon to appear on Amazon!

4 Replies to “A Graphical View of Retirement”

  1. The more I read about this stuff, the more it makes me want my husband and I to stay at it a bit longer. It helps that we kinda like Medicine. We always did things our way. We took plenty of detours along the way. The journey itself has been more fun than any amount of stash we accumulated.

  2. I did it my own way also, and worked till I was done. How I knew I was done is I totaled up my medicare wages for the 49 years I worked. (a measure of how much your life cost during the working years). I realized I had twice as much in the bank than how much it cost me to live 49 years. At that point continuing to work was only courting liability. Continuing to work would not change any outcome in my future, so I got some health care together and quit. No way am I living another 49 years, My wife could live 40 (2% chance) but she’s covered also.

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