ERE lifetime money ceiling

[Jin+Guice]

One of the frustrating things about volatility is, for the unsophisticated investor, there aren't many ways to take advantage of irrational market upswings. However, turning the concept of SWR on it's side I think there is a way to take advantage of market overvaluations for an advanced EREer (by which I mean someone with already high savings).

SWR provides us with years of living expenses saved. An SWR of 4% corresponds to 25 years saved. The conservative crowd here often saves 35+ years of expenses expecting the worst case. The last 9 years have provided the best case for stock investors. Furthermore, many end up earning some income or cutting expenses in "retirement" thus increasing their savings and decreasing their SWR.

Someone who FIRED circa 2009-2011 with 35 years of expenses and was invested heavily in stocks could easily be sitting on 70+ years of living expenses. This means they likely possess enough capital to fund the rest of their lives, absent positive returns (but provided non-negative real returns).

There exists a ceiling to how much money one will need in a lifetime. Stating an SWR already implies this ceiling. To calculate the ceiling the only additional information needed is the unpleasant estimation of how long one will live. Obviously, a "conservative" (in this case long lived) estimate should be used. I generally use 100, though I think it's unlikely I'll get there. This leads us to the calculation, given in terms of years of living expenses as

ceiling= 1 year of living expenses* estimated number of years left.

Stated in terms of SWR it is likely that even a relatively young person would cross this threshold between a 1-2% safe withdrawal rate. Someone in midlife would cross it somewhere between a 2-3% SWR.

Once the ceiling is reached the problem becomes one of capital preservation and inflation protection rather than taking on risk to gain more return.

Put another way, this is another leveraging of the concept of "enough." In non-ERE strategies it is always assumed that the investor wants more money; however, I believe most ERE investors would prefer reduced risk and reduced work (no more researching stocks) to more money in retirement.

This also gives a trigger point for when to "pull out" of an irrationally exuberant market and a possible way to take advantage of the upside of increased volatility. Once the ceiling is crossed who cares if the market kept going up?

I don't have a lot of investing experience nor am I in a position to take advantage of this currently. Has anyone reached the ceiling and begun to switch from a riskier 3-4% SWR strategy to a capital preservation strategy with plans to draw down the capital?

Is this a useful investment concept for EREs or the naive ramblings of a noob?

[jacob]

Yes, we got a few sub-1%ers around here.

Since I'm a dividend investor and therefore don't frame capital in terms of SWR (I have no plans to draw down capital), my strategy has been to go for lower payout rates. While my preferred ROE is over 15%, ROE is often boosted artificially by corporations levering up, so at this point I can also afford to demand higher ROAs.

By those metrics, there's no hard ceiling. OTOH, there's no hard floor either.

I'm not looking for more money as much as I'm looking for a smoother ride/not having to convince myself that everything goes up in the long run. I only have 30-50 years left in terms of life expectancy. That's not a so-called long run at these valuations.

[Tyler9000]

I see the passive investing thresholds a little differently:

• Safe withdrawal rate: total return strategy to not go broke

• Perpetual withdrawal rate: total return strategy to maintain your inflation-adjusted principal

• Fixed income: don't touch the principal and live on regular dividends & interest

• Live off the principal: Just put in into TBills to track inflation and spend 1/(expected lifespan)

I'm a total returns investor, so personally I'd base my money "ceiling" (as you describe it) on the perpetual withdrawal rate of the portfolio. Once you reach that level your money should theoretically last forever. Note that it's the same concept many college endowments are built on, and depending on your portfolio that number is a lot higher than 2%.

[BRUTE]

brute has never quite understood the perpetual mindset. unless the goal is to leave a large sum of money to (then-adult?) children, what is the purpose of dying with a positive amount in the bank?

drawing down, especially in the later decades of life, seems perfectly ok to brute if it means having to work less. that's why brute is quite comfortable with more aggressive WRs, e.g. 5% or even higher.

[jacob]

Perpetuities are a lot easier to deal with mentally. When I first started thinking in these terms, I was under 30, so I was effectively working with a horizon of as much as 60--70 years. That's effectively approximately infinity in that there's very little difference between a strategy that lasts 60+ years and one that lasts 600 years.

Once drawdown begins to figure into it, one has to fairly accurately estimate the longevity of the portfolio. Is it 19 years or 27? 29 or 41 years? The difference in payout for that level of uncertainty is 40% which is a lot.

Drawdown makes sense for a traditional retirement in which the retiree expects to be dead within the next 15 years ... and only very rarely after the next 30 years, e.g. age 63--93. In that case a 30 year horizon is a very conservative plan. The average WR for retirees, say age 65 to 79 (dead) is much higher: 8-10%.

If we're talking FI, the picture changes. This does require the ability to contribute more later on. The difference between FI and FIRE is that the latter has a ratchet and does not presume the ability to go back and make up for shortfalls with more work.

In some sense, it is a bit weird that "kids" are using a rule of thumb that was designed for people almost twice their age---especially now that we have portfolio longevity analysis available at the press of a button.

Add: Another way of thinking about this is to realize that as the horizon increases, the sequence-of-return risk converges to zero.

[BRUTE]

40% uncertainty is certainly a lot, but if the alternative plan has basically a 100% certainty to over-save? seems a bit like searching for the keys under the light, not where they were lost.

[Lucky C]

We are switching to part time work where we are able to hold a very low yielding conservative portfolio (for now) while still saving most of our income. This is partly because of the dangers in the market right now and partly because we really don't mind reduced work.

We will probably end up with much more money than we need. Rather than seeking to use 100% of the money for selfish purposes, excess money can be used for selfless purposes, which become more appealing once one's own needs and desires are met.

[Mister Imperceptible]

Get your SWR under 1% and establish a dynasty.

[classical_Liberal]

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[Seppia]

Standard FIRE'ees make the exact opposite argument. They assume higher levels of spending have more "fat to trim", if initial WR was overly optimistic. IMO this is an expression of how ERE and standard FIRE are fundamentally different

I don't see a huge practical diference between assuming higher spending and planning for lower WR, as they amount to the same thing (margin of safety), but it's revelatory of the mindset difference.
The funny thing is that even if I'm much closer to the typical MMM follower in terms of financial profile (I make more than the average italian, and spend less, but not 3x times less), I find much more affinity with jacob's approach, and the people on this forum in general VS MMM/other less hardcore blogs/forums.

[jennypenny]

I can't find it now, but there was a thread on how ERE is different because it's starts with a budget of $0 and adds things as needed, whereas most FIRE advice talks about reducing budgets from typical to frugal. I suppose both approaches could end up in the same place but I much prefer the start-from-zero approach. It forces you to apply the 'Is this really necessary?' question to every expense and not just the easy targets. It helps refocus the lens from getting things for less to letting go of things entirely.


I'm a big believer in absolutes (vs. relativity) so I agree with C_L that hard numbers matter. The two big benefits of viewing spending in absolute terms are that (1) you disconnect your spending comfort zone from your income at any given moment, giving you a more accurate sense of what is best/necessary, and (2) really low spending eventually brings you to a sub-2% WR, which is a truly liberating feeling ... you no longer have to play the game if you don't want to. Think of all the discussions on here about the different between 3%, 4%, and 5% withdrawal rates and how getting under 2% eliminates that issue entirely. It's worth the effort IMO.

[classical_Liberal]

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[Jin+Guice]

One of the reasons I asked the original question is it requires a mental shift. I was wondering if someone conservative and savvy enough to make it to a 1-2% withdrawal rate would then be able to start drawing down on principle once they safely had enough to make it until they died. Instinctively I want to say that living from investments and the perpetuity model is safer, but is it? If you're getting a return there's always some risk. I'm really just apprehensive to give up the giant nest egg I spent years building (all hypothetical to me, of course).

I guess in practicality you're not going to just sit on cash you're going to put it in TIPs or a CD ladder. Still want I'm interested in is the mental shift going making your income largely as an investor to just drawing down your nest egg.

@Jacob: Does being a dividend investor immunize you from this question? Your portfolio still has a value, no? You might not care about anything but the cashflow (until you're selling of course), but at some point that $$ value of your portfolio if you sold everything will cross a number where you know you'll never spend it all. At that point is it not less risky and easier to hold it as cash or cash equivalents?

[jacob]

@J+G -

That point has been crossed. My NW in years exceeds my remaining life expectancy by a factor 3 or so. However, there's inflation to deal with. (Hyper)Inflation can very quickly erode an all cash portfolio. Why not TIPS then? Well, maybe, but I trust my investments in toilet paper and chlorine-making companies more than I trust government's ability to repay and properly inflate my payouts.

And annuities are too expensive and carries their own risk (company failure).

If there was a way I could buy into social security ("the single-payer annuity") and buy a stipend so to speak, I'd do that.
(Maybe that's not really different from TIPS...)

[The Old Man]

In non-ERE strategies it is always assumed that the investor wants more money...

This is not the case. Most of wealth management is focused on wealth preservation. It is only the "poor" people that focus on making more money.

My strategy is to only spend interest/dividends. The capital will only be spent down in an emergency - most likely medical related.

[malindi]

Greetings, I am new to ERE and have spent a good chunk of time reading the portfolio charts site. What an incredible resource! I live in Canada, and in particular, in BC. Our tax rates are different for dividends between provinces (and certainly between the US and Canada!). Some of our dividends, called "eligible dividends" are tax-free to receive up to (in BC) about 51,640 per year per person, married or not. In my circumstance (single), I don't even need that much to live quite comfortably. Given that I won't "eat" any of my capital in my planning, what sort of metrics do I look at to maintain a margin of safety? I also save about 16% of my income in my retirement account (401K equivalent tax shelter) and it gets invested into dividends again monthly. On the non-sheltered (but tax free in my case) side, I save 14% of my monthly income. I am looking for a way to calculate if my "lift-off" velocity is sufficient .. I have 31 dividend paying stocks in a range of industries, maybe 20% US exposure, the rest Canadian. I'm 50. Any ideas on resources that could help much appreciated.

[Jin+Guice]

@Jacob:

Ah so it's more of a vehicle problem. You've pointed out before that hyperinflation will bascially screw you no matter how much you have, except under very specific circumstances... i.e. if hyperinflation hits is having 2,000,000 that different from having $300,000? Either way you're pretty much sunk.

I guess my question is why aren't you bond or cd laddering? That seems safer than owning stocks, no? Are you confident enough in yourself as a dividend investor that you believe you'll always be able to pick stocks that pay a higher dividend than the interest rate? Is it just because interest rates are low? Is there some risk in short term bonds and cds that I'm not seeing?

I've always wished there was a "zero-risk" single payer annuity I invest in so I could work, save money and then just retire confidently once I crossed the finish line. I was thinking you could set this up for yourself if you had 100% of the money and didn't require any return. Inflation risk will be there of course but it seems like you should be able to beat this (except hyper-inflation) with bonds or cds.

@The Old Man:

What are the wealth preservation strategies they use?

[classical_Liberal]

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[jacob]

@J+G -

These are the factors I consider when I select an investment strategy:

• Tax environment
• Investment environment
• Competence
• Temperament
• The ability to recover losses with earned income

From this it does not seem obvious that there's any one single optimal [lifetime] strategy although I can certainly understand why newbies and technicians currently gravitate towards DCA'ing index funds. However, that's not what they were doing even 10 years ago much less 20 or 30 years ago. Recall, the YMOYL advice to invest in a rolling LT treasury portfolio. Probably the best example of navigating a 50+ year retirement wrt different investment strategies is the Terhorst story.

@cL -

Yes, it's hard to recall the original thought process. At that point I was aware that 25x was unrealistic for long term survival and already aiming for 3% (as described in the ERE book). However, I did retire at 25x because the market had dipped deeply enough for me to trust that it had substantially more upside than downside. I retired from physics on 3/31/2009. That was about one week after the market bottomed out

Yes, concerns and priorities definitely change with NW, age, and retirement/career status. For example, I am more more focused on wealth preservation today because I have more money and because it would not be as easy for me to go out and make up for losses---it would take me many years to build up 100+ years in savings. So that's an inflection point.

There certainly is such a point of diminishing returns. I stopped actively trying to accumulate more many years ago but yet it still happened. At this point my portfolio will generally add faster than most jobs I could conceivably be hired for. (This also, unfortunately, decreases my interest in trying.) That's another inflection point.

Associated with this is that the money spigots are operating faster than I can conceivably(*) spend it. This opens to the whole "what to do with the surplus" question. Not being Bill Gates or Elon Musk, starting a my own foundation or space company is not possible. This leaves donating to charity and a bunch of other stuff like venture capitalism. This is something I've been thinking about lately. I'm leaning more towards the venture part than the capitalist part.

(*) I simply lack the imagination to spend frivolously.

There are also two different ways of measuring wealth which I've come to appreciate. One is the traditional x years which makes sense in the FIRE community. However, civilians have no clue what that means ... so with rippedFIRE at <$10,000 if you say you have 30x saved, most people will not understand. They'll ask what that is in dollars ... and you say, it's $250,000 at which point they'll dismiss you: "How can that be enough?!" However, once you become the proverbial millionaire even math-resistant idiots (well, except certain prime time money experts) understand that this is a lot of money. So there's a social status factor. It's a pretty expensive social factor though just to get people off your back This also changes things.

These do not necessarily appear in the order listed. There's also overlap. Some eventually get internalized.

[classical_Liberal]

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