Early Retirement Extreme Forums

https://investornews.vanguard/fueling-t ... -retirees/
https://www.msn.com/en-us/money/news/th ... uxbndlbing

One always has to be careful when making projections in the future, but the stats here are pretty stark for long term FIRE. When I ran simple simulations, the only withdrawal rate that prevented a 0$ balance was under 1%. This was assuming returns were normally distributed and follow normal returns and volatility. Small changes to any of these variables reduces probability of success.

This is just stats, but will this change anyone's behavior? One thing clouding current FIRE judgements in the ripping financial engineered bull market started under Obama/Biden/Yellen. At some point, financial engineering stops working and market returns will exhibit a negative or string of negative return years at some point in the future. This is another odd finding when one creates their own simulation, it's a run of seemingly small negative returns for consecutive years which busts retirement plans, not a severe 1-2 year bear market. Most risk tolerance quizzes ask something like "What would you do if the market were down 50% in one year?" while the better questions is "What would you do if the market were down 10% for 3/4/5+ years in a row?" in assessing risk tolerance in retirement.

I like to bend with the wind. I tried to go my own way but the markets don't care, and the markets are always right - they are the martkets after all. So nowadays I just try to catch the wave while the bonanza lasts, and I watch like the hawk for first signs of trouble.

Alternatively, open your eyes to the world. Plenty of undervalued markets out there, one example being the UK - still underwater due to the brexit penance, but widely predicted to outperform pretty much everything else over the next 5 years. There are plenty of oppotunities, sp500 is not the only choice.

WFJ wrote: ↑

Sat Jul 31, 2021 2:12 pm

Most risk tolerance quizzes ask something like "What would you do if the market were down 50% in one year?" while the better questions is "What would you do if the market were down 10% for 3/4/5+ years in a row?" in assessing risk tolerance in retirement.

Anyone still accumulating should be yearning for a market crash, since it's a wonderful buying opportunity. People close to/in retirement need a plan. Historically they'd just hold bonds. But the 40-years bull market in bonds is on its last legs, and bonds moved from 'risk-free return' to 'return-free risk'. As such, alternative solutions are needed. Personally, I aim at 28x annual expenses, of which 1.5 years will be held in cash, 1.5 in gold and the rest in equities (with a small allocation to cryptos). That should bridge any bear market similar to what we've seen in the last 40 years (for US-home biased investors: the 'naughties' weren't that bad as long as you held whole world/EMs etc.). If something like 70's happens, reducing expenses and rising price of gold would mean the reserve (cash & gold) lasts ~4.5-5 years. That's plenty of time to come up with a solution if the markets continue to dissappoint, but even if nothing else is done, chances are after 5 year bear market expected returns on equities will be high going forward.

So, to sum up: diversify, aim at a reasonably low SWR (but not a 'doomsday' 2% or anything silly like that), keep calm and carry on.

WFJ wrote: ↑

Sat Jul 31, 2021 2:12 pm

One thing clouding current FIRE judgements in the ripping financial engineered bull market started under Obama/Biden/Yellen. At some point, financial engineering stops working and market returns will exhibit a negative or string of negative return years at some point in the future.

Did the ripping financial engineering bull market start post-2008? My understanding is the catalyst to a lot of the financial engineering was the Fed lowering interest rates in the 80s after coming off the gold standard. If that’s the case, then one could make the argument (Chris Cole and others do) that the outperformance of the stock and bond markets over the past 40 years is really an anomaly. Of course, this calls into question all of the “prosperity” and “growth” that we’ve seen over the time period.

Bill Bengen, creator of the 4% SWR research, recently said 5% might be a better guideline.

https://www.marketwatch.com/story/the-i ... 1603380557

I've heard Michael Kitces hint at something similar. The kind of people who have the drive and ability to save a small fortune in their 20's or 30's don't really need to worry too much about running out of funds. If something goes wrong with their FI plans, they'll have a long time to correct the course and make adjustments.

The two worst periods for 4% withdrawal rates were the Great Depression and the persistent inflation of the 1970s. I'm not sure we're going to drop 87% like we did in 1929-32, but right now looks and feels a godawful lot like the beginning of another bout of structural inflation, and we're making a lot of the same mistakes we made back then.

I have I-bonds that pay CPI + 3% covering some five or six years of living expenses. (Actually more because part of my expenses will be paid for from stock dividends.) I ain't selling them anytime soon.

My stash might never be 4%. I don't consider work to be evil. If it comes to a 1929 crash, I have more troubles than just finding work. I do believe in there a is foolish consistency in thinking there can't be hard times. I will prepare by working now so I can later. Chopping wood is my p90x.

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.

IMO 4% was never alive. It was a model. If the model remained(s) useful it could (can) provide guidance.

Looking solely at the success of the portfolio is narrow minded. There are the interactions of your other resources that need to be considered. Do you have the capability or the assets that generate income that wouldn't be considered in a traditional portfolio? Are those assets connected to the broader market or is there some space between them?

I think it is more resilient to have considered and built those things outside of just a portfolio.

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/

The Italian version of the 4% rule is somewhere around 3.5%, as we have higher taxation on dividends (26% to the US' 15%) plus we pay 0.2% of our asset value yearly.
As I somewhat enjoy what I do for work (much less now that travel within Asia isn't happening any more, but it should resume sooner or later I hope), I aim to get closer to 3% which should take me another couple years or so

I don't believe so. I think we've plenty of catalysts this century such as green growth, artificial intelligence, semi-conductors technology is only getting better, computing, cloud storage, artificial meat, etc. We also have some headwinds like the printing of money and inflation. So it is a wash to me sans the increasing climate destruction. Maybe some of that will be offset by projected population decrease?

Anyhow...this is why I trade options anyway. I have a ton of flexibility to react. Options trading can make one resilient. I can still gain in a bear and neutral market while still riding the upside.

Here is an example. You can sell naked puts ATM (0.50 delta) about 30+ days out to remove gamma risk. From there, the game is to maintain your delta - roll out and down a strike as the underlying increases to capture gains. If the underlying falls, you do nothing - let the option sit, gain extrinsic value by rolling out when the option gets to 21 DTE, and maintain your strike. This works because each roll down captures and secures gains that simple buy and hold do not - maintaining equity shares makes you subject to underlying volatility while this option strategy allows you to skim the profits and even gain if the underlying falls. The obvious risk here is if the underlying never recover....so bear that in mind. It is an art of knowing when to get out.

Alternatively, if we're in a long bear/neutral market you can sell covered calls on your shares and still gain even when the market is not going up. Again you trade away upside.

This is all to say that I think with options you can financial engineer your own success and play the game like the big boys do. Hell you probably could live off of theta alone with ERE level spending. Another very simple strategy if you really believe we're headed for a long bear market - long dated index puts as portfolio insurance. You could even go back to work and earn enough money to offset the insurance costs if you like. If you're right - then your puts will gain in value and you easily secured further retirement. If you're wrong, then you lost nothing anyway but some time working while your portfolio gained.

In my personal opinion, options trading and the resilience and flexibility gained from that is better than simple buy and hold index investing and crossing fingers - though the former requires labor/time and that labor/time is up to the user. I don't recommend if that labor/time is better spent elsewhere.

@Seppia - thanks for sharing the link & @Tyler9000 - thanks for writing it! Really interesting analysis.

Seppia wrote: ↑

Sun Aug 01, 2021 10:16 am

taxation on dividends (26% to the US' 15%)

US dividend tax is zero if your overall gross income is less than $50k or so, and then the 15% rates and above are marginal. Dividends are considered the same as long-term capital gains as long as you hold the stock for 60 days surrounding the ex date. Most states with an income tax will still tax it as ordinary income.

Thanks for the link, Seppia.

Long story short -- no, I don't think the 4% rule is dead. If anything, I think it grossly undersells the SWR of truly diversified portfolios that think beyond old-school large cap stocks and intermediate bonds.

IMO, the Vanguard paper is probably best interpreted as content marketing for their advisory service rather than a neutral evaluation of the breadth of options available to educated investors. Note that it references "VCMM" (their proprietary "financial simulation engine") 23 times.

You can also do some primitive market timing when selling assets to cover living expenses. Sell the things that have run up the most or are the most above their historical valuation, or at least don't sell the things that have crashed. Retirement spending models never seem to address exactly how you draw down your portfolio, and I strongly believe this is an area that deserves further research.

USA real GDP 1900-1949 was 3.3% annual growth
USA real GDP 1950-1999 was 3.6% annual growth
USA real GDP 2000-2020 was 1.8% annual growth

The 4% Rule was based on the historical performance of a USA stock/bond portfolio when the USA economy grew at an annual rate of 3+% real. For the last two decades real growth has been sub-2%. There is, however tenuous, a connection between the real economy and the financial economy.

For the 4% Rule to hold then the apparent slow down in the economy for the past two decades will need to have been a temporary aberration.

unemployable wrote: ↑

Sun Aug 01, 2021 2:15 pm

US dividend tax is zero if your overall gross income is less than $50k or so, and then the 15% rates and above are marginal. Dividends are considered the same as long-term capital gains as long as you hold the stock for 60 days surrounding the ex date. Most states with an income tax will still tax it as ordinary income.

Yes you’re correct, I just always considered 15% as it’s the tax rate (IIRC) that one pays on dividends if they make above 40k but less than somewhere around 500k.
Which basically covers 99% of my potential scenarios

Well, this is ERE, I thought 50k/yr was supposed to be considered extravagant and wasteful.

One the r/leanfire subreddit they ban you if you claim annual expenses of more than $20k. Wish I were kidding.

Lemur wrote: ↑

Sun Aug 01, 2021 10:57 am

Hell you probably could live off of theta alone with ERE level spending.

Sounds like setting up a tent on a volcano because it keeps the heating bill down.

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.