Is 4% dead?

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Qazwer
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Re: Is 4% dead?

Post by Qazwer »

@unemployable - my economics knowledge is not the greatest - but wouldn’t options having a large tail risk just give an implied utility function negating the free lunch? I mean, couldn’t the risk/benefit function be a rational one?

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unemployable
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Re: Is 4% dead?

Post by unemployable »

If I understand your questions, the answer is yes to both. The majority of participants in the options market want downside protection while staying net long (long puts) or are doing covered calls, willing to sacrifice some upside in exchange for guaranteed premium immediately (short calls). There's no other way to get a return profile like this so no other markets to compete with options or arbitrage the skew away.

Enough people are worried about a crash that they must pay up over the actual probably of one occurring. Losing hurts more than winning feels good. This is also why there's an insurance industry.

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Seppia
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Re: Is 4% dead?

Post by Seppia »

unemployable wrote:
Sun Aug 01, 2021 5:15 pm
Well, this is ERE, I thought 50k/yr was supposed to be considered extravagant and wasteful. :)
The taxation goes according to revenues, not expenses. Since at the time in the US I was living in NYC, making less than $40k/year was a rather uncommon scenario (our 23yo uneducated new hires in back office jobs were making around 30k).
Again my bad.

jacob
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Re: Is 4% dead?

Post by jacob »

unemployable wrote:
Sun Aug 01, 2021 5:15 pm
One the r/leanfire subreddit they ban you if you claim annual expenses of more than $20k. Wish I were kidding.
Oh, really? The leanFIRE line used to be set so much higher (40k) that I always found myself wondering what was so "lean" about it.

From the originator of leanFIRE:
viewtopic.php?p=179222#p179222

Salathor
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Re: Is 4% dead?

Post by Salathor »

unemployable wrote:
Sun Aug 01, 2021 6:28 pm
Options premiums are one of the few free lunches in finance. Firstly implied vol is systematically higher than realized vol is. Secondly the vol skew structurally overvalues puts relative to calls. (Some other assets have skew, for example oil and oil products are skewed to the upside.) So yes, selling options has a positive mean. The problem is tail risk. When you lose you lose big. The stock market dropped some 35% in less than a month last year, and has dropped 28% in a day within my lifetime. That never happens in the other direction.
That's probably because the real point of options isn't to let retail traders YOLO OTM calls/puts, but to provide hedging/insurance for large holders of equity. It makes sense that the person providing that insurance would make some profit for the risk they're taking on.

But in FIRE, a catastrophic loss of capital due to the long tail event would be a pretty huge bummer. It's probably better from a FIRE perspective to be on the side of the guy buying that insurance, unless you want to be forced to rebuild your stash.

Salathor
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Re: Is 4% dead?

Post by Salathor »

Seppia wrote:
Sun Aug 01, 2021 10:16 am
Our own tyler9000 has written a great article in response to the vanguard piece that the OP mentions
https://portfoliocharts.com/2021/07/20/ ... he-4-rule/
Wow. Yeah, Tyler9000's post is great!

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Lemur
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Re: Is 4% dead?

Post by Lemur »

To be specific, the Reddit Leanfire uses 20k spending limit for a single person an 40k spending limit for a family. There has been a recent cultural war on that sub lately for adjusting that # with inflation but they've held for a few years at those limits to encourage creativity in keeping spending low. They don't care about what your income is just that you project or live within those limits. The 'keep spending the same' argument in essence is that the sub wants to avoid becoming just the regular FIRE sub or just another personal finance sub. I agree with that. I used to frequent the regular fire sub and it used to be like what LeanFire is today. The former skewed with much higher spending levels...which is why FatFire ended up being created.

@Salathor - With the right options strategies, and risk/reward balance, tail risk is not a concern. Your methodology should change depending on your goal - as in are you trying to accumulate funds or are you in it for the capital preservation. I am curious whether I can use options strategies in the future to reduce sequence of returns risk - something I am meditating on.

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unemployable
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Re: Is 4% dead?

Post by unemployable »

The FIRE subs have completely stratified to the point where I'm not sure which ones are serious anymore. In addition to unprefixed, lean and fat, we now have:
  • povertyFIRE, clearly below leanFIRE
  • baristaFIRE, which might be a joke sub
  • leanishFIRE, slightly above lean
  • chubbyFIRE, slightly below fat
  • coastFIRE, which I think is "still working but probably enough to retire and not caring about advancing in your career"
and probably a couple others.

I think vanFIRE would be a worthwhile addition. The normal vandwelling sub has some reverse gatekeeping going on, where they can be hostil towards people with money.

I don't post to any of the FIRE subs, in case you want to try to dox me over there, so don't know the backstories.

7Wannabe5
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Re: Is 4% dead?

Post by 7Wannabe5 »

What would you say are the factors or characteristics that most differentiate those who choose or exhibit FatFIRE vs SkinnyFIRE?

bottlerocks
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Re: Is 4% dead?

Post by bottlerocks »

jacob wrote:
Mon Aug 02, 2021 7:47 am
Oh, really? The leanFIRE line used to be set so much higher (40k) that I always found myself wondering what was so "lean" about it.

From the originator of leanFIRE:
viewtopic.php?p=179222#p179222
No, not really. Some of the most voted posts week after week are consumer driven sentiments of "spend money on what makes you happy" forest for the trees stuff. No one is being banned.

Sidebar states 20k individual/40k household is the guideline for discussion. Mods are very lenient. IIRC there are >200k subs now so of course the hivemind starts changing. Still some good discussions and case studies to be found every now and then, though.

tyd450
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Re: Is 4% dead?

Post by tyd450 »

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Last edited by tyd450 on Wed Nov 10, 2021 12:34 pm, edited 1 time in total.

WFJ
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Re: Is 4% dead?

Post by WFJ »

tyd450 wrote:
Wed Aug 04, 2021 12:35 pm
Michael Kitces always makes me feel really good about the 4% rule and I highly recommend you watch this interview

https://youtu.be/7sUl_04g-CQ
I would not base my retirement decision from someone with below background.

My journey of learning and sharing led me somewhat randomly to the world of financial services, where I landed in search of a job after completing an undergraduate degree with a major in psychology logo-batesand a minor in theater and a pre-med concentration (an education I used to figure out that I didn’t want to go into psychology, theater, or medicine!). I started out as a life insurance agent the first business day after college, and although I turned out to be a terrible salesperson, that first job helped me discover this thing called financial planning.

I saw an interview with Kitces and sounded more like an actor reading from a script than anything unique or insightful.

WFJ
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Re: Is 4% dead?

Post by WFJ »

The 4% rule for an ERE individual has a higher probability of failure due to a violation of the "Relevant Range". The probability of a long run of negative returns occurring in a 50 yr retirement vs. a 30> yr retirement is the mechanism for the higher failure rate. Making an estimate for 30 years, then extrapolating beyond this is a violation of basic stats principles. ERE and others tend to focus on a crash, which is not a risk for ERE, but a long slow drawdown, which probability increases exponentially with a linear increase in duration, and a big risk for long term retirees. There is also a practical consideration of conditional retirement as one would not expect to retire during or at the end of a long run of negative returns, thereby further increasing the probability of longer run retirement durations failing more often (ballpark 2x) than a typical 30 yr retirement.

The simplest example of relevant range violation is the "Pepsi Challenge" where individuals are given a 1-ounce shot of Pepsi and Coke and then asked to record their preference. In this case, Pepsi is always preferred, but only a statistician can easily spot the violation when making the statement "People prefer Pepsi over Coke". The only statement that can be made is "People prefer drinking one ounce of Pepsi over one ounce of Coke" beyond this amount is a violation of the relevant range. When individuals are given a 12 oz or more of Pepsi and Coke, Coke is always preferred. There are many other violations of this used in media and politics (Global Warming, COVID being recent examples) and make any statistician crazy (maybe why they typically remove themselves from society). The 4% rule for a 30+ year retirement is one such violation.

Selling options, is risky and requires a lot of management, time and is really kind of boring once one does it for a few months. Also, does not produce much value relative to a $15/hr job unless one has mid-7 figures, and then what is the point of selling options? Unplug, enjoy life :)

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Lemur
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Re: Is 4% dead?

Post by Lemur »

@WFJ

Risky is subjective and dependent on what options strategy you're employing.

Boring is in the eye of the beholder...I mean it is kinda boring. Especially if you do it through Vanguard lol.

And also will disagree with relative value...Just this month I made $1.4k on premiums selling far out of the money 21 DTE naked puts. Will be $700 after all buy-to-close points trigger. Management is easy in this way; it can be very set it and forget it. Maybe once every Friday one could check on there options to determine if anything should be rolled and also open any new positions once previous contracts have closed.

My point is there is a lot of value created here. On a 1 JAFI budget, that alone covers all expenses for the month. No 7 figures required. On higher budgets, employing these strategies can have an significant impact on your SWR.

There is time and labor required - sure. But I'd rather spend 30 minutes to an hour once every few weeks or so then a part-time job so...totally worth it. Even doing so keeps you plugged into what the latest economics/financial news is...which I've to imagine most are going to be reading about periodically anyhow if they're maintaining a financial portfolio to live off of.

Perhaps it could definitely make sense to sell puts during down years (when market likely reverses) and you may not have to do anything while market is gaining. Your other option is to get part-time work if you need additional funds...I choose the former :D
Last edited by Lemur on Fri Aug 06, 2021 9:04 am, edited 1 time in total.

zbigi
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Re: Is 4% dead?

Post by zbigi »

7Wannabe5 wrote:
Sun Aug 01, 2021 8:52 am
What if your labor, which can currently be commodified at $25/hr., can be commodified at $100/hr 20 years from now? I think there is a tendency to catastrophically depreciate skills upon retirement. A strategy that included periodically once again selling skills if/when pertinent markets hit relative high tide mark might prove advantageous.
In the corporate world, that's probably not that realistic option. Technical skills depreciate rather quickly, and, for non-technical ones, the companies would probably be very wary of someone coming back to work after say 15 years of retirement. Part of the corporate job is (pretending to) be on board with a certain set of values (hardworking, ambitious, married to the corporate world), which assure that the company will get their's money worth out of you, as you will drive yourself and not just do the bare minimum - and, unfortunately, you've clearly demonstrated your lack of ambition and drive by retiring. So, you're damaged goods.

ducknald_don
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Re: Is 4% dead?

Post by ducknald_don »

Self employment is the obvious solution to that problem although it comes with its own difficulties.

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Lemur
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Re: Is 4% dead?

Post by Lemur »

Or a very very niche specific skill like machine learning or natural language processing. In my industry, people who have these skills literally just took a Coursera or something…

zbigi
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Re: Is 4% dead?

Post by zbigi »

I really doubt that, in 15 years, ML/NLP will be in any way as hot a market as it is now. There will just be a new fad that's the hot thing of the year. ML will still exist, but will now be a mature field, requiring a strong CV (years of experience, no signs of losing faith in the corporate system etc.) to get jobs. That's what I saw happens over time to every other technical field.
Of course, you could try just jumping on the latest bandwagon, but I suspect that, a person at say 55 who hasn't worked for 15 years may not really have the stomach for it any more - esp. since they will be competing with twenty-somethings, for whom building a career is the most exciting thing in their life. Not to mention that companies will greatly prefer those twenty-somethings.
For me personally, I suspect that if I just FIREd for good now, I could still maybe get a job in Scala/Java/BigData/ML (my specialties) 7-10 years from now, with a lot of preparation and catching up before applying. The job will likely be bottom of the barrel and will pay 30% of what I make now. 15 years from now, the technical world will move on so much that I might as well be programming in Turbo Pascal.

2Birds1Stone
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Re: Is 4% dead?

Post by 2Birds1Stone »

@WFJ from a purely mathematical/statistical standpoint that may be true, but the flexibility one has with a 50 year horizon is tremendous. As Lemur also pointed out, even a relatively (by normal standards) small supplemental income changes the math drastically. I doubt anyone is going to sit there for 50 years and draw down an inflation adjusted 4% while SORR or some other factors slowly erode their purchasing power.

ERN did an extensive series on SWR, and has a great sheet that can show the impact of AA, timelines, etc to provide a historical failsafe WR. (https://earlyretirementnow.com/2018/08/ ... s-part-28/)

DW and my current asset allocation has a 0% historical failure chance using a 3% WR, but a 4% WR fails 51% of the time in our current CAPE10 environment. This is using a 60 year model.

One can easily prevent catastrophic failure by having some resiliency built into their plan.....but something as simple as renting out a spare bedroom or picking up easy PT work 1-2 days a week for a spell can have a tremendous impact vs. just relying on some fixed % WR for half a century.

7Wannabe5
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Re: Is 4% dead?

Post by 7Wannabe5 »

The juncture at which you do not want to sell assets might also not be the best time to sell your labor. Instead, one might use rule of thumb such as “any time I can easily find temporary/flexible enjoyable employment that pays more than $X/hr (or maybe something tied to objective financial market), I will cover Y% of yearly draw with employment income.”

I was just thinking about how I could easily make 5 or 6 times hourly wage at age 56 that I made selling same bottom level skill at age 16. So, the professional wage you are earning now might equal a non-skilled wage 40 years from now. Therefore, if it is still your intention to live on same draw, you would be no worse off earning more money flipping burgers in future world than developing code in present world. OR we might all be gnawing on tree bark covered with wet mud under scorching sun...

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