Early Retirement Extreme Forums

So there's this thought exercise.

Where you lose if your hard earned capital goes to zero, and apparently also if you need to "go back to work" at some point past the accumulation phase and once you've entered RE.

Where going back to work means only one thing, getting back to a salary man job, and who in their right would hire an old outdated guy or gal with a big gap in their resume?

Where passive income also means being an utterly passive, helpless observer of market downturns and other catastrophes, with no fucks given and no action taken. You just sit and watch your castle go down or get washed out by the waves, or eaten by the inflation tides.

Well, maybe the probabilities and the math are sound, and maybe the warning is solid, but this exercise seems to disregard the human, and in our case, the ERE player.

That same ERE player who, to achieve FI/RE, has probably adopted a personal lifestyle makeover, followed methods that can work regardless of most external circumstances (I'm quoting the ERE book here), such as greatly and sustainably reduced expenses, acquiring dependable skills, lessening reliance on the marketplace, building integrated and resilient life systems, combined with a high savings rate (instead of relying on the power of compounding or once-in-a-lifetime investing and other opportunities).

Once you are FI and choose to stop working (and become RE), the mindset and skills that got you there don't just vanish in thin air.

On the contrary, the freed up time and life energy can get you even further.

Once you've entered post-consumer territory, once you've seen the light out of the cave, it is hard to let yourself slide back to loving the shadows of a consumer lifestyle.

It is hard to imagine that the ERE player would just be a passive observer, and, if passive income fails, happily eating their capital.

If you have successfully and sustainably dropped down to 1 JAFI, that's USD 10,000 per year, A 250,000 nest egg for the 4% rule (25x) and 330,000 for the (33x).

- If you have one or more years worth of liquid funds (cash or otherwise) sitting outside of the stock market, in the case of a bear market, you can keep from selling equities at a loss or at a discounted price for as long as these liquid funds permit.

- Then, if the downturn lasts longer, all you need to keep from touching the capital, is, at worse, getting USD 10,000 per year.

- It is hard to imagine that a skilled/resourceful ERE player cannot find that sort of income in one way or another in the course of one year.

- Yes, the spending levels can evolve over time, but not having a regular work can make it possible to drop them further or build in more resilience.

- Getting back to work does not mean you have to find a salary man job either. But even if you were to have to work periodically, or temporarily, is that really a failure?

- In case of a large medical bill, the math is there too: viewtopic.php?p=127678#p127678

- At a later stage, often, there is a pension or additional capital, that kicks in. Even more capital down the line.

The above only scratches the surface (and I haven't even talked about SemiERE).

So all in all, nobody should follow the 4% rule blindly, and nobody should assume that an ERE player will just see their capital go down to zero, instead of taking diligent actions against this or to keep from even having to touch their capital in the first place.

There are risks, but there also resources and possibilities.

Every time I read posts like the above I'm reminded that few on the ERE forums have lived through an actual, proper, lasting crisis. Usually, the immediate response is, oh but this would never happen, and it would surely never happen to US, the greatest nation on earth, and because "it won't happen to us", it's irrelevant. I find that it's very much relevant, though. Imagine living through the great depression. Imagine living through the post-Soviet collapse. Collapse of that magnitude "can't happen" until it does. World wars / resource depletion / climate-driven collapse don't happen -- until they do. Imagining that "you can always generate X money" and that the limiting factor is your "resourcefulness" strikes me as strangely naive and blind to how bad things can actually get.

I understand how this viewpoint can seem naive, and maybe it is. But the resourcefulness I am talking about is on top of a solid egg nest.

What is the percentage of the population who have savings of this kind and size? Last time I heard, even high earners would often have a hard time to cough up a few hundred dollars in case of an emergency.

Not shooting for absolute security is a conscious choice, and there is a price to pay if you choose otherwise too.

It is interesting that nobody here is talking about the UK pensions collapse that was just barely averted last week thanks to a bailout.

It seems to me that many of the pots of money that represent the denominators in the safe withdraw calculations are based on institutions with embedded growth obligations that are just plain impossible to maintain much further into the foreseeable future.

Am I crazy?

For reference https://www.nytimes.com/2022/09/30/busi ... gland.html

OutOfTheBlue wrote: ↑

Sat Oct 01, 2022 1:18 am

Although 6.5 millions is more like close to 0.1% of the global population, not 1%.

Still, millions.

Yeah, my bad on maths. Edited.

ertyu wrote: ↑

Sat Oct 01, 2022 3:56 am

Every time I read posts like the above I'm reminded that few on the ERE forums have lived through an actual, proper, lasting crisis.

You are right. My mom was born in the US during WW2. The biggest American crisis of her lifetime was the Great Recession. By then she was already an affluent retiree. But part of being resilient to these types of crises is being young and flexible. I can attempt to keep myself mentally and physically fit but at the end of the day I am never going to be 25 again.

I am currently to trying to mindfully spend about 2 JAFI per person per year. It is actually kinda hard for someone that is wired as frugally and as anxiously as myself. But being a person who says yes to more things and having more of an abundance mindset has been good for me.

Ego wrote: ↑

Sat Oct 01, 2022 6:30 am

Am I crazy?

Can't answer that one mate.

Ego wrote: ↑

Sat Oct 01, 2022 6:30 am

It is interesting that nobody here is talking about the UK pensions collapse that was just barely averted last week thanks to a bailout.

It seems to me that many of the pots of money that represent the denominators in the safe withdraw calculations are based on institutions with embedded growth obligations that are just plain impossible to maintain much further into the foreseeable future.

I don't know enough about the topic but my understanding is that a lot of those funds are defined benefits funds. These funds pay out a regular income. I think these funds are inherently risky and they also promote a certain type of investment (bond heavy) to meet their regular payout commitments that longer term is more risky.

I do think it's a bit nutty to get worked up about WR's. There are so many other factors within your retirement success that are more important than your WR.

FI is about saving up enough money until you feel you don't have to work.
ER is about making a decision to retire and live off your investments without having to go to work.

What are you invested in ?
What are your back-up plans ?
What are your average expenses ?
Can you manage increased expenses ?

If you are extremely risk averse when it comes to what is your FIRE point then you will pay a really large cost in some other way.

steveo73 wrote: ↑

Sun Oct 02, 2022 10:24 pm

I don't know enough about the topic but my understanding is that a lot of those funds are defined benefits funds. These funds pay out a regular income. I think these funds are inherently risky....

Yeah, I have several friend whose entire living-large retirements rely on monthly payments from similar inflation indexed funds. It seems to me haircuts or government bailouts are bound to happen someday because they seem to rely on increasingly unsustainable returns.

What happened last week seems very similar to what caused the GFC with the Bank of England announcing that they will buy bonds on "whatever scale is necessary to restore orderly market conditions", yet it never made it off the business pages.

Ego wrote: ↑

Mon Oct 03, 2022 7:54 am

Yeah, I have several friend whose entire living-large retirements rely on monthly payments from similar inflation indexed funds. It seems to me haircuts or government bailouts are bound to happen someday because they seem to rely on increasingly unsustainable returns.

The system is screwed. It's a simple fix as well. You just get rid of the concept of defined benefits. You receive in your retirement what you saved and not some on-going income.

Any system reliant on defined benefits (a pension) is unsustainable.

Ego wrote: ↑

Mon Oct 03, 2022 7:54 am

What happened last week seems very similar to what caused the GFC with the Bank of England announcing that they will buy bonds on "whatever scale is necessary to restore orderly market conditions", yet it never made it off the business pages.

Probably but for a different reason.

There is still a problem though, that the ratio of working age people to retired is falling in most parts of the world. Switching from defined benefits to defined contributions won't resolve that.

ducknald_don wrote: ↑

Tue Oct 04, 2022 1:08 am

There is still a problem though, that the ratio of working age people to retired is falling in most parts of the world. Switching from defined benefits to defined contributions won't resolve that.

Is that a problem ?

It's not a problem for your savings. You only get what you put in plus investment growth less fees. If you don't have enough keep working or spend less or make whatever adjustment you have to make.

If you are making an argument for a long term structural decline well you may be right or you might be wrong. The future is inherently hard to pick. If you are right it mightn't make any difference to your investment returns. No one knows.

The trick is to create a portfolio that you are comfortable with and then let it rip.

WFJ wrote: ↑

Fri Sep 30, 2022 4:04 pm

The Sharknado fallacy

@steveo - But does defined benefit in practice really exist ? Even index linking relies on official inflation rather than actual inflation.

chenda wrote: ↑

Tue Oct 04, 2022 7:17 am

@steveo - But does defined benefit in practice really exist ? Even index linking relies on official inflation rather than actual inflation.

Someone should check this specific situation in detail. Sorry but I just can't be bothered right now.

This process though definitely does exist unless you are talking about crazy conspiracy theories about inflation. If your pension for instance is worth 40k per year it is typically indexed to inflation. The issue is the pension fund has to pay out 40k (plus inflation) every year.

Just say the present value of that investment is 1.5 million but the market returns plus your savings only totaled 1.2 million the pension company is forced into a ponzi scheme situation using current payments into the fund to pay out the pension.

This won't happen if there is no defined benefits pension. Then you'd only get your 1.2 million or alternatively a smaller pension.

steveo73 wrote: ↑

Wed Oct 05, 2022 4:41 am

This process though definitely does exist unless you are talking about crazy conspiracy theories about inflation. If your pension for instance is worth 40k per year it is typically indexed to inflation. The issue is the pension fund has to pay out 40k (plus inflation) every year.

Just say the present value of that investment is 1.5 million but the market returns plus your savings only totaled 1.2 million the pension company is forced into a ponzi scheme situation using current payments into the fund to pay out the pension.

This won't happen if there is no defined benefits pension. Then you'd only get your 1.2 million or alternatively a smaller pension.

In the private pension realm in the US, which granted is fading away, pensions typically are not inflation indexed. In the older system I was grandfathered into at my company employees did not contribute, all the funding was done by the company, so there isn't any sort of Ponzi Scheme going on since all the money comes from the same source. But it is a huge liability for the company which is why they changed over to a system of employee contribution (plus company contribution) into an "employee account" (rather than a general pension fund) separate from the 401k plan that can be converted into an annuity upon retirement if the employee opts to do so, or rolled into an IRA. With the annuity option the monthly payment is not known until a candidate retirement date in the near future is evaluated.

It's a different matter when it comes to government pensions since the government can grant itself the power to "borrow" (spend) "pension" money on other things, which will lead to things like Ponzi schemes.

You can have defined benefit pensions, at least insofar as the sponsoring entity has the money to make good on them, although when push comes to shove nothing is absolutely guaranteed. But because there is such a large potential liability it's going the way of the dinosaur.

At one time GM was purported to have a pension fund that was larger than the market value of the corporation. Don't know for sure if that's true or a bit of an exaggeration, but it points to the difficulty an entity has in trying to manage a pension fund.

IlliniDave wrote: ↑

Wed Oct 05, 2022 9:10 am

But it is a huge liability for the company which is why they changed over to a system of employee contribution

I read your point on inflation but it's still a massive risk.

To me it's pretty simple:-

1. Employees contribute and receive what they've put in plus market returns less fees.
2. Society needs some of social security for retirement age. This is just my opinion.

IlliniDave wrote: ↑

Wed Oct 05, 2022 9:10 am

It's a different matter when it comes to government pensions since the government can grant itself the power to "borrow" (spend) "pension" money on other things, which will lead to things like Ponzi schemes.

It is sort of a ponzi scheme in that new tax payers pay money and older people who used to pay tax receive the benefits from the new payees. The government though is there for our benefit (society as a whole) and I personally think developed societies should be able to provide health care, education and some form of social security.

IlliniDave wrote: ↑

Wed Oct 05, 2022 9:10 am

You can have defined benefit pensions, at least insofar as the sponsoring entity has the money to make good on them, although when push comes to shove nothing is absolutely guaranteed. But because there is such a large potential liability it's going the way of the dinosaur.

I can't justify this to myself at all. Sure it's theoretically possible but it doesn't sound right to me for one entity to bear that risk. I think I'm right because the market is phasing out these schemes. I'd add the risk is also to the recipient of those benefits. If the entity can't pay then they lose their benefits for good.

steveo73 wrote: ↑

Wed Oct 05, 2022 9:27 pm

I can't justify this to myself at all. Sure it's theoretically possible but it doesn't sound right to me for one entity to bear that risk. I think I'm right because the market is phasing out these schemes. I'd add the risk is also to the recipient of those benefits. If the entity can't pay then they lose their benefits for good.

The entire life insurance industry is built on the same actuarial principles. And while they've all been bitching over NIRP/ZIRP, and will be bitching about balance sheet effects of bonds (corporate or governmental) going down, they should expect to write a lot more business in years to come as real interest rates rise above zero.

steveo73 wrote: ↑

Wed Oct 05, 2022 9:27 pm

I read your point on inflation but it's still a massive risk.

To me it's pretty simple:-

1. Employees contribute and receive what they've put in plus market returns less fees.
2. Society needs some of social security for retirement age. This is just my opinion.

That's pretty much how it works here in the US. Anyone with earned income can contribute to an IRA, many can contribute to an employer's 401k, 403b, etc., all of which cover 1). In addition they and their employer pay payroll tax towards Social Security for 2). Some employees, such as employees of my former employer who hired on after a certain date, even have a third option: contributing to a "future income" plan (which the employer contributes to as well). Upon retirement those funds plus the returns they earn can be converted to an annuity the payout of which is determined by the market at the time of the conversion.

steveo73 wrote: ↑

Wed Oct 05, 2022 9:27 pm

It is sort of a ponzi scheme in that new tax payers pay money and older people who used to pay tax receive the benefits from the new payees. The government though is there for our benefit (society as a whole) and I personally think developed societies should be able to provide health care, education and some form of social security.

For a long time the US SS system operated with a large surplus and built up a trust fund which is now nearing depletion and unless that is fixed it will turn into what you describe. The rub with the trust fund though is that it was invested in special treasury bonds (i.e., the gov't loaned it to itself and spent it along the way). So some would argue it's been a Ponzi Scheme all along.

steveo73 wrote: ↑

Wed Oct 05, 2022 9:27 pm

I can't justify this to myself at all. Sure it's theoretically possible but it doesn't sound right to me for one entity to bear that risk. I think I'm right because the market is phasing out these schemes. I'd add the risk is also to the recipient of those benefits. If the entity can't pay then they lose their benefits for good.

It's not mandatory and my employer voluntarily offered it (a defined benefit pension) as a benefit when I hired on back in the 1980s, and when they did away with it in favor of defined contribution they voluntarily grandfathered those of us who hired in before the change into the "old" system and allowed continuing accrual of benefits. Fair or not that's what they chose to do. Unlike the gov't they have funded a pension fund managed by a third-party trustee that is better than 80% funded against future liabilities. In addition it's insured by the federal gov't. So it's true that in my case I am not absolutely guaranteed the full defined benefit for life, the floor is 50% which is what the gov't insurance would pay of something happened to the company's pension fund. Since it is not inflation-adjusted a few more years of inflation like 2022 and the fund will most likely be overfunded against future liabilities. Irrespective of fairness, it does entail risk, and having future liabilities on the books is something Wall St holds against a company. And such benefits are being phased out as you note.

So at least here in the US there are a number of options. At minimum a person can contribute to some version of tax-advantaged retirement accounts (IRA, 401k, 403b, etc.) and will through tax withholding earn Social Security benefits assuming they meet the threshold in terms of working enough years. In addition some earn a defined contribution "pension" through their employer. There are even a few like me who managed to get it on the old defined benefit convention.

The downside in the US is that there's not much consistency and there's a significant burden on the worker to be proactive about their retirement and a lot of rules to navigate. Only Social Security is mandatory.

I came out pretty well in that I have the annuity benefit from my former employer, > 30 years contributions + earnings in the 401k sponsored by my former employer, a modest IRA (Roth) I funded independent of my employer, a decent-sized regular "taxable" brokerage account funded on my own, and if I live long enough, I'll receive SS benefits. Further, I have the option of using funds from the 401k, IRA, or brokerage account to purchase an annuity should I desire more "monthly income" (an option open to all).

I don't think we're in disagreement. I was just describing the landscape here in the US. Since I'm a recipient of a defined benefit retirement benefit, I just wanted to point out that they can and do exist, so are possible not just in theory, but in practice. Shoulda just kept my mouth shut maybe.

All of these discussions just highlight the importance of educating yourself and applying a plan to your life. And being adaptable to the situation.

And nothing is fair: While I was still employed they changed the rules several times regarding retirement and contributions. I still remember one change where in a six month span that encompassed the beginning of a new calendar year one recruit class was hired under the 20 and out rule while the next (six months later) were under contract for 25 and out. Talk about a kick in the nuts. Imagine being that guy or gal that caught a five year sentence simply because they missed the hiring window by 6 months. Now imagine the guy or gal that will never have the opportunity for a pension, 25 years or not.

It's all relative I guess and how one adapts to their situation.

ffj wrote: ↑

Thu Oct 06, 2022 8:57 am

... All of these discussions just highlight the importance of educating yourself and applying a plan to your life. And being adaptable to the situation.
...

Yeah, like the quote Dave Ramsey likes to cite (forget it's origin): if you aim for nothing you'll hit it every time. Can't emphasize enough how important it is to get a plan started early on. Far more important than the details of the plan which can generally be tweaked along the way.

IlliniDave wrote: ↑

Thu Oct 06, 2022 5:32 am

Since I'm a recipient of a defined benefit retirement benefit, I just wanted to point out that they can and do exist, so are possible not just in theory, but in practice.

I know they do. I also know if you have one it's probably going to turn out pretty darn good for you.