{"id":6830,"date":"2020-05-02T03:32:01","date_gmt":"2020-05-02T03:32:01","guid":{"rendered":"https:\/\/sallybzhao.com\/?p=6830"},"modified":"2024-01-24T20:18:02","modified_gmt":"2024-01-25T04:18:02","slug":"bpmoney120-are-fire-naysayers-bad-at-math","status":"publish","type":"post","link":"https:\/\/sallybzhao.com\/bpmoney120-are-fire-naysayers-bad-at-math\/","title":{"rendered":"Are FIRE Naysayers Bad at Math? Yes."},"content":{"rendered":"\n<div style=\"height:20px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h6 class=\"wp-block-heading\">Notes for BiggerPockets Money Podcast 120<br>Guest: Michael Kitces<br>Audio time: 1 hr 23 min<br>Read time: 2 min<\/h6>\n\n\n\n<div style=\"height:20px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h5 class=\"wp-block-heading\">One Line Summary<\/h5>\n\n\n\n<p class=\"\">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.<\/p>\n\n\n\n<h5 class=\"wp-block-heading\">Origin of the 4% rule<\/h5>\n\n\n\n<ul class=\"wp-block-list\">\n<li class=\"\">In the past, 7-8% withdrawal rate was considered \u201cconservative\u201d<\/li>\n\n\n\n<li class=\"\">In 1994, <a rel=\"noreferrer noopener\" href=\"https:\/\/en.wikipedia.org\/wiki\/William_Bengen\" target=\"_blank\">Bill Bengen<\/a> saw that 7% worked on average but might not account for bad years (recessions)\n<ul class=\"wp-block-list\">\n<li class=\"\">Analyzed <a rel=\"noreferrer noopener\" href=\"http:\/\/www.retailinvestor.org\/pdf\/Bengen1.pdf\" target=\"_blank\">historical data<\/a> and found that a 4% withdrawal rate covers most worst-case scenarios<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li class=\"\">4% is the one rate that worked in the worst historical market sequence<\/li>\n<\/ul>\n\n\n\n<!--more-->\n\n\n\n<ul class=\"wp-block-list\">\n<li class=\"\">Retiring right before financial crisis of 1907\n<ul class=\"wp-block-list\">\n<li class=\"\">Retiring on the eve of Great Depression 1929<\/li>\n\n\n\n<li class=\"\">Retiring in 1966 (had to wait 15 years until 1982 before stock market was back to where it was when they retired)<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li class=\"\">Historical safe withdrawal rates aren\u2019t based on historical averages. They\u2019re based on historical worst-case scenarios<\/li>\n\n\n\n<li class=\"\">What kind of portfolio is assumed? Large-cap US Stocks, intermediate government bonds<\/li>\n\n\n\n<li class=\"\">If you stretch out the time horizon to 40-50 years (pertains to early retirees), withdrawal rate drops to about 3.5%<\/li>\n<\/ul>\n\n\n\n<h5 class=\"wp-block-heading\">5 years Cash Cushion: Good or Bad?<\/h5>\n\n\n\n<ul class=\"wp-block-list\">\n<li class=\"\">5 year cushion hurts more than it helps. In fact, anything more than 2 years is not beneficial<\/li>\n\n\n\n<li class=\"\">If you have a diversified portfolio (including bonds), you shouldn\u2019t need that much of a cash cushion<\/li>\n<\/ul>\n\n\n\n<h5 class=\"wp-block-heading\">Bonds: When to Invest?<\/h5>\n\n\n\n<ul class=\"wp-block-list\">\n<li class=\"\">During the &#8220;red zone&#8221; (5-10 years before and after retirement)\n<ul class=\"wp-block-list\">\n<li class=\"\">This is when your portfolio is the largest and bad markets hurt the most. Good to own bonds during these times.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li class=\"\">Determine your capacity for risk and tolerance for risk\n<ul class=\"wp-block-list\">\n<li class=\"\">Younger people are usually deemed more risk-<strong>tolerant<\/strong>, when in fact, it&#8217;s their <strong>capacity<\/strong> for risk that is high because they have a longer time horizon<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n\n<h5 class=\"wp-block-heading\">FIRE Adjustments<\/h5>\n\n\n\n<ul class=\"wp-block-list\">\n<li class=\"\">Levers you can pull to move 4% number up or down<ul><li>Time horizon: shorter time horizon \u2192 higher withdrawal rate<\/li><\/ul>\n<ul class=\"wp-block-list\">\n<li class=\"\">Diversification: lift <\/li>\n\n\n\n<li class=\"\">Taxes: drag<\/li>\n\n\n\n<li class=\"\">Spending flexibility: lift<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li class=\"\">Make small adjustments as you head towards your goal<ul><li>Analogy: flight plan from DC to SF<\/li><\/ul>\n<ul class=\"wp-block-list\">\n<li class=\"\">If you head west towards SF, you\u2019ll generally get there +\/- 500 miles<\/li>\n\n\n\n<li class=\"\">If you want to hit the nail on the head, you make small adjustments throughout the flight course<\/li>\n\n\n\n<li class=\"\">You don\u2019t want to wait until Nevada to make a sharp turn towards SF<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n\n<h5 class=\"wp-block-heading\">Reaching FIRE<\/h5>\n\n\n\n<ul class=\"wp-block-list\">\n<li class=\"\">FIRE movement has become too much RE and not enough FI<\/li>\n\n\n\n<li class=\"\">Mindset should be: I\u2019m going to accumulate enough money so that what I decide to do with my time is no longer dependent on money.<\/li>\n\n\n\n<li class=\"\">Mindset should not be: I don\u2019t have to work anymore<\/li>\n\n\n\n<li class=\"\">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)\n<ul class=\"wp-block-list\">\n<li class=\"\">If they could\u2019ve planned to be making money at retirement, they could\u2019ve FIREd a lot sooner<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li class=\"\">What\u2019s 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 \u201cretirement\u201d (side hustle, or a job they enjoy that pays little), they could decrease their FIRE number and quit earlier<\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>Notes for BiggerPockets Money Podcast 120Guest: Michael KitcesAudio time: 1 hr 23 minRead time: 2 min One Line Summary The&#8230;<\/p>\n","protected":false},"author":2,"featured_media":6840,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"nf_dc_page":"","om_disable_all_campaigns":false,"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[121],"tags":[],"class_list":["post-6830","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-real-estate"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v23.9 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Are FIRE Naysayers Bad at Math? 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