Are FIRE Naysayers Bad at Math? Yes.

Notes for BiggerPockets Money Podcast 120
Guest: Michael Kitces
Audio time: 1 hr 23 min
Read time: 2 min

One Line Summary

The 4% rule still works in times of recession because it was modeled for the worst-case scenario over years of historical data, including 3 of the biggest financial crashes in the last century.

Origin of the 4% rule

• In the past, 7-8% withdrawal rate was considered “conservative”
• In 1994, Bill Bengen saw that 7% worked on average but might not account for bad years (recessions)
  • Analyzed historical data and found that a 4% withdrawal rate covers most worst-case scenarios
• 4% is the one rate that worked in the worst historical market sequence

• Retiring right before financial crisis of 1907
  • Retiring on the eve of Great Depression 1929
  • Retiring in 1966 (had to wait 15 years until 1982 before stock market was back to where it was when they retired)
• Historical safe withdrawal rates aren’t based on historical averages. They’re based on historical worst-case scenarios
• What kind of portfolio is assumed? Large-cap US Stocks, intermediate government bonds
• If you stretch out the time horizon to 40-50 years (pertains to early retirees), withdrawal rate drops to about 3.5%

5 years Cash Cushion: Good or Bad?

• 5 year cushion hurts more than it helps. In fact, anything more than 2 years is not beneficial
• If you have a diversified portfolio (including bonds), you shouldn’t need that much of a cash cushion

Bonds: When to Invest?

• During the “red zone” (5-10 years before and after retirement)
  • This is when your portfolio is the largest and bad markets hurt the most. Good to own bonds during these times.
• Determine your capacity for risk and tolerance for risk
  • Younger people are usually deemed more risk-tolerant, when in fact, it’s their capacity for risk that is high because they have a longer time horizon

FIRE Adjustments

• Levers you can pull to move 4% number up or down
  • Time horizon: shorter time horizon → higher withdrawal rate
  • Diversification: lift
  • Taxes: drag
  • Spending flexibility: lift
• Make small adjustments as you head towards your goal
  • Analogy: flight plan from DC to SF
  • If you head west towards SF, you’ll generally get there +/- 500 miles
  • If you want to hit the nail on the head, you make small adjustments throughout the flight course
  • You don’t want to wait until Nevada to make a sharp turn towards SF

Reaching FIRE

• FIRE movement has become too much RE and not enough FI
• Mindset should be: I’m going to accumulate enough money so that what I decide to do with my time is no longer dependent on money.
• Mindset should not be: I don’t have to work anymore
• After people endure the last few years of working and reach FIRE, they become bored and end up going back to work (becomes Uber driver just to do something)
  • If they could’ve planned to be making money at retirement, they could’ve FIREd a lot sooner
• What’s the worst is someone who is currently still working at a job they hate, so they can reach their FIRE number and never work again. If they factor in potentially making money during “retirement” (side hustle, or a job they enjoy that pays little), they could decrease their FIRE number and quit earlier