The SWR studies that we’ve been discussing here for 3 decades plus is LITERALLY a study of the sequence of returns risk!
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I did retire at the 2000 peak and then went through the dot com melt down. That 2x safety factor came in handy.
I would not retire voluntarily on the 4% minimum. Some reserves beyond that are a good idea.
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Re: S&P 500
The S&P 500 is an easy choice for many. But it suffers from the same weakness of all indexes. They always include losers that hold down returns.
You can almost always beat an index by sorting through its list of holdings and buying the winners. Avoid the losers. Sometimes the difference is large.
Recall the no doc loan crisis. For months we knew that banks and mortgage companies had big problems. Index fund investors owned them anyway and prayed for recovery.
Yes, beat down stocks can sometimes recover and do very well. But it can take a long time and does not always work. Buying winners is a better strategy.
Any list of stocks can be sorted into three groups. Winners, losers, and in betweens. My philosophy is sell losers and buy winners.
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Exactly! “Sequence of returns risk” is just another “fear, uncertainty and doubt” advertising slogan to get you to hire a financial planner to manage your retirement distributions. If you’re following the “4% rule”, the “sequence of returns risk” is baked into the 4% along with everything else that’s happened in financial markets since the US Civil War in the 1860’s.
The biggest threat to your retirement is what you’re losing to “fees, commissions, trading costs, and taxes”. Minimize that, and everything else takes care of itself.
If you’re paying the 2% of assets in fees and expenses that Wall Street business model demands, you need to save about twice as much money for retirement. For every retiree who’s invested in a low-fee index fund, Wall Street needs to find someone who will buy an annuity with much higher costs.
intercst
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Nope. If I was starting out today, I’d put it all in FXAIX or one of the “no-fee” Fidelity funds like:
Fidelity ZERO Large Cap Index (FNILX)
Invests in large-cap U.S. stocks, including Apple, Berkshire Hathaway, and Johnson & Johnson
- Fidelity ZERO Total Market Index (FZROX)
Invests in nearly every U.S.-listed stock, excluding companies that are too small
- Fidelity ZERO International Index (FZILX)
Invests in developed and developing international stocks, including financial and industrial companies
- Fidelity ZERO Extended Market Index Fund
Invests in extended market stocks
Back in 1994 when I quit working and retired, the expense ratio on the Vanguard Index 500 fund was around 0.20%. I was was paying 2 or 3 basis points in commissions on my portfolio of about 20 stocks where I only made 1 or 2 trades per year. Since you can buy an index fund today for 1.5 basis points, there’s no reason to bother with stock picking.
intercst
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I started the Retire Early Home Page in 1996 to share what I’d learned on “the arithmetic of early retirement”. There wasn’t any reason to spend the time required to monetize it like “Mr. Money Mustache” since my investment returns were making me comfortably wealthy without much effort beyond doing a few hours of tax planning the last week of the year deciding on how to fund the next year’s living expenses. It’s really that easy if you can just prevent yourself from getting cheated and robbed.
In May 1999 I started the Retire Early Home Page discussion forum on the Motley Fool website and it accumulated almost 900,000 posts over the years before TMF shut it down in 2022. There really isn’t a business model in hosting a discussion board on low-fee investing. You need to be selling something to make it a business, which of course is at odds with the whole “low-fee” thing.
https://retireearlyhomepage.com/fire.html
intercst
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If you ever want to come out of retirement, Generation X needs some sound, straight shooting “fee only” financial advisors… 
But it sounds like your website has everything a DIY pre-retiree needs to have a successful retirement…
Yep. But it’s very hard to pick the 20% of the 500 companies in the index that are responsible for most of the return. That’s why about 95% of professional money managers and 98% of amateur stock pickers under perform the index.
In the 30 years I’ve been retired, the S&P 500 index has grown about 20-fold. If your personal investing activities haven’t matched or beaten that, it makes sense to rethink what you’re doing.
The way I explain it to people.
“What if I told you that you could go to engineering school, never attend a class or crack a book, and still get a salary and lifetime income better than 95% of your classmates? …”
It seems like a scam, but it’s just arithmetic.
intercst
They’re listening to the fraudsters on Youtube. What you really need to do can be explained in a few pages, but nobody is willing to read anymore.
Eventually I’ll boil it down to a large print book with graphs and pictures and offer the .pdf file of the book for free on my website.
Today, Reddit has a financial independence forum with 2.3 million members. That’s likely the modern day equal of the discarded REHP board on TMF.
https://www.reddit.com/r/financialindependence/
intercst
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TMF was at the forefront of the FIRE movement well before MMM showed up. There were a lot of us discussing FIRE. @intercst was one of the pioneers, but there was an entire community in various stages of FIRE on TMF.
‘Rule Your Retirement’ grew out of what the TMF free community, including the FIRE community, developed. Many of us never bought any of the TMF premium services.
AJ
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Congratulations you are able to achieve your goals and enjoy the life. I approach things slightly different.
- You don’t need to win the game twice; So, when you step out of the court, absolutely make sure, you don’t have to step back in.
- There are things that are beyond your control and you cannot mitigate everything, but you should accommodate reasonable things.
- Change of taxation laws; This could reduce the deduction for capital gains, dividends, social security etc
- Markets can go, decade or so on sideways.
- Inflation can run faster while market goes sideways for a decade
- Some major health challenges requiring extended care or higher health expense.
- Lastly, while I consider myself lucky if I see lat 60’s, god forbids and I end up living to 90’s, will I have sufficient money?
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I’m not sure if I trust them to keep the fees that low. I can imagine putting money in, letting it grow over 20-30 years, and then suddenly they bump fees up to .1% or .2%. Then, it’s too late to sell, because the capital gains hit would be huge. For an IRA, it would be fine.
I agree. I’d only trust them with the IRA where I could bail without tax consequences if they jacked fees.
But you have the problem with the tax consequences of selling an investment in a taxable account, no matter what you do.
I’m just relieved that Warren Buffett promised me this weekend to not pay a dividend.
intercst
This is of course true. However, I look at two different things when it comes to fees/expenses:
- Transaction costs. These I can still control in a way … by choosing to make no/fewer transactions.
- Ongoing management fees. These I can do nothing about. Once I am “invested”, let’s say 20-30 years with embedded capital gains, I can’t do anything about it if they choose to increase management fees.
And we well know by now that even “higher” one-time transaction fees have MUCH less of an effect on overall net returns than those insidious ongoing “management fees” and “expenses” (the “skim”).
Well, my largest position consists of a stock that hadn’t paid a dividend, and that was one of the reasons I liked it so much. Then after a decade or two of owning it, they suddenly started paying a dividend, and not only that, they increase it every year! And sadly, Buffett is going to die, and then other people will take over, and other people may make different choices someday.
Hi @darrellquock,
What I did was use the Lifetime Planner in Quicken.
In a down stream post you mentioned kids and other things. Those tidbits add to the complexity of the plan.
While we were working and planning, I had these things in the Planner:
- Our ages and planned retirement age.
- Our income including an annual raise factor and end dates.
- Our SS estimates from SSA reduced by 30% with start dates.
- Our pensions with survivorship percents and start dates.
- Our annual expenses, excluding income taxes because Quicken calculated them.
- All our real estate including mortgages, taxes, etc.
- Used 8% for an annual portfolio growth factor.
- Used 4.5% annual inflation, reducing it later to 4% then to 3.8% currently.
- All our portfolio holdings including 401K’s, trad IRA’s, Roth IRA’s and taxable accounts.
- Known future events like the amount to build a house starting in 2004.
- All current and future mortgage info and other loans.
- Disposition of assets like planning to sell our current house with a projected value and time frame.
- And more …
Bottom line, Quicken had every bit of financial info and I used it to plan ahead.
Everything updated when changes happened like pay days, buy/sell stock, download stock quotes, etc.
Once I had a base plan, made a list of my base parameters. This allowed me to change some percentages, start/stop dates, add additional one-time expenses, etc. I could then see the affect on the plan.
In your case, you can put in a future event for college expenses for each child. It can be inflation adjusted.
The planner allows you to look at all the money flows for any year in the plan. You can see a breakdown of the planned income, taxes, expenses, withdrawal amounts, RMD’s when due and other components.
In 2020, I use the one-time event to see about building this house we are living in. Although I “knew” we could do it, putting this in plus the sale of our old place solidified the decision.
I even used this to model our Roth conversions and formed a plan to do it while keeping our taxes relatively level.
Does that help you?
Gene
All holdings and some statistics on my Fool profile page
Profile - gdett2 - Motley Fool Community (Click Expand)
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Yes, but your anecdotal experience is not proof of concept. Your own site shows that someone investing 100K in 1999 and using the SWR, would have only $51k left if they had a 75/25 stock portfolio - and now their withdrawal amount exceeds 10% of their remaining balance. They have a high probability of running run out in the next five years - before 30 years is up.
That same port in 1994 became worth over $600k.
Average returns of 10% are only relevant if you actually get consistent returns. Having a long string of losses followed by a big gain isn’t going to help someone recover to the average. Their personal rate of return will likely be half the average of the market.
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It sounds like you didn’t quite understand what the SWR studies concluded. The main definitive study said that if you invest in a typical 60/40 portfolio, and you withdraw 4% inflation adjusted each year, you will not run out of money over the 30-year period IF AND ONLY IF THAT 30-YEAR PERIOD IS NOT WORSE THAN THE 30-YEAR PERIOD OF THE GREAT DEPRESSION (~1928-) OR THE 30-YEAR PERIOD OF THE GREAT STAGFLATION (~1966-). So, if the 30-year period beginning 1999 is worse than those two periods, you will run out of money, but if the 30-year period beginning in 1999 is not worse, you will not run out of money. It’s that simple.
The 75/25 portfolio had slightly different results, but the basic idea is the same.
This is LITERALLY the reason the SWR study results in a 4% withdrawal rather than 6 or 7 or 8% one!
You should have been here in the 90s and 00s when the main SWR discussions took place! The Motley Fools were incredibly foolish to discard all that collected discussion, some of which contained important wisdom.
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You are preaching to the choir.
I think you misunderstood my objection to intercst’s braggadocio about his good luck at moving from a 4% rate of withdrawal to a .3% rate of withdrawal. In other words, context.
I was for the later half. I think I joined in 2005. And I agree about the loss of all that institutional knowledge and discussion.
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I think the point @intercst was making is that in MOST cases of withdrawing 4%, the terminal value is high, and usually even higher than the starting amount. Part of the never ending SWR study was - what happens if you reset the 4% periodically. Let’s say you start at 4%, index for inflation, and then 10 years later you are suddenly down to 1%. What happens if you “start over” and begin at 4% again? The answer is nothing happens unless the next 30-year period is worse than the two worst ever 30-year periods. That is, nothing happens other than a lower terminal value, of course.
Now if you want some real context, take me for example. When I first started discussing this stuff (early retirement, financial independence, etc), I was single with a medium good income as an engineer. And I lived a properly LBYM life, and I saved quite a bit more than average. But as the next 3+ decades passed, I got married, had 5 kids, and life progressed as usual. In the end I didn’t retire until my late 50s, and even then I would have worked another few years if I hadn’t been forced out by a senior management change (ironically the senior manager that forced me out to make room for his own guy was unceremoniously booted out less than 2 years later LOL).
And as far as “good luck”, @intercst did indeed have good luck in that early on he chose some stocks that did extraordinarily well. And that he never married or had children, when that happens, your expenses go up DRAMATICALLY. And the expenses don’t end for quite a long time (I just paid for two weddings over the last 6 months!!!). But the principle still holds for someone who invested in a simple S&P500 index fund.
Yep. You didn’t need to buy DELL and Pfizer in the early 1990’s. You would have done just fine holding the S&P 500.
1994-2024 Terminal Value after 30 years of withdrawals
95% S&P 500 = 8.8X initial portfolio balance
90% S&P 500 = 8.0X
80% S&P 500 = 6.7X
60% S&P 500 = 4.4X
Also my 2024 portfolio withdrawal was reduced by my 2012 purchase of a home for cash. My monthly housing cost was reduced by 75%, while the home has more than tripled in price since 2012 roughly matching the 357% return of the S&P 500 over that time. This illustrates the effect of using a rent vs. buy analysis to inform your housing decisions.
intercst