This is my second post in a two-part series presenting my early retirement calculations.  I’m providing this as an example that will (hopefully) help you decide when you’ve accumulated enough money for your own early retirement.  In Part 1 of this series, I argued that it’s probably unwise for most people to rely entirely on simple online retirement calculators and rules-of-thumb for this momentous decision.  Conducting calculations specific to your own situation is relatively easy, if you have decent high school math and spreadsheet skills, and will increase your confidence in your retirement decision.  My last post presented my own calculations using historical stock return scenarios, and I found that:

• My retirement spending plan has an inflation-adjusted 2.8% annual rate of withdrawal.
• My retirement portfolio succeeded (doesn’t run out of money) in all the scenarios that used an inflation rate ranging from 2% to 4%.

Here’s a graph showing the 14 scenarios using historical sequences of stock returns going back to 1871 and the 2% inflation assumption.  Assuming 2% inflation, my portfolio was not depleted in any of the scenarios by the time I would be 86 years old.

In this post, I’ll evaluate these results to illustrate how I made my final decision to go ahead and retire early in January of 2018.  If you haven’t read Part 1 of this series, I suggest you do that before proceeding further here.  If you understandably can’t stomach reading two of my posts in succession, you should be able to understand the major points of this post just based on the above results summary.

As I noted in my last post, these results raise some questions that deserve more attention.  Answering these questions, using my situation as an example, should give you a general template for evaluating your own early retirement calculations.

What’s the best way to include inflation?

My portfolio seems almost unsinkable using a 2% to 4% range of inflation.  I used nominal (not inflation adjusted) returns, and I increased the withdrawal rate annually by the assumed rate of inflation to maintain my standard of living as retirement proceeds.

However, another equally valid (some would say “better”) way of doing these projections would be on a real-return basis, which automatically incorporates historic sequences of fluctuating inflation rates.  But there a pros and cons to both nominal and real return projections.  The problem with the nominal approach is that stock returns are correlated, although erratically, with inflation rates.  So, some would say that using historical sequences of nominal returns but with a constant inflation rate ignores this historical correlation.  Conversely, the real return approach problematically assumes that future inflation sequences will be linked to future return sequences exactly like they were in the past.

Because the historical correlation between stock returns and inflation has been very erratic, I find it unrealistic to assume that future returns and inflation will move together like an exact copy of the past.  So, I prefer the nominal approach where various constant inflation rates can be used to see how the results might change when inflation fluctuates.  As the far right column in this table shows, inflation rates have varied considerably since 1871.

Scenario	First Year	Last Year	Nominal Annualized Return (CAGR)	Annualized Inflation Rate
1	1872	1905	7.2%	-1.2%
2	1882	1915	6.3%	-0.2%
3	1892	1925	7.9%	2.6%
4	1902	1935	7.2%	1.7%
5	1912	1945	8.0%	2.0%
6	1922	1955	11.0%	1.4%
7	1932	1965	13.5%	2.4%
8	1942	1975	11.5%	3.7%
9	1952	1985	10.9%	4.3%
10	1962	1995	11.3%	5.0%
11	1972	2005	11.0%	4.8%
12	1982	2015	11.3%	2.8%

Deflation prevailed in the late 19th and early 20th centuries, and in the latter half of the 20th century inflation greater than 4% was common.

But today, the Fed is projecting “longer-run” inflation at around 2%.  A 2% rate is also the Fed’s long-term goal for Goldilocks inflation that’s neither too hot nor too cold for a healthy economy.  It seems likely that the Fed would take extraordinary steps (like those of 2008-09) to avoid the extreme deflation/inflation cycles of the early 20th century or the runaway stagflation of the 1970s.  So, I’m pretty comfortable approximating this inflation dynamic using a reasonable range of constant inflation rates.

Of course the beauty of doing your own projections is that you can choose either the nominal or real-return methods or both.  You could even use a hybrid approach where you vary the annual inflation rate based on the distribution of past inflation rates, but not necessarily in strict correlation with nominal returns.

Obviously, there’s some combination of extreme inflation and/or low return assumptions that would make almost any retirement plan fail, which implies it’s never safe or anybody to retire.  For example, I could instead assume the nearly 10% annualized inflation that occurred from 1974 to 1984.  But personally, I’m not sufficiently concerned about this unlikely “disaster” scenario to make it the acid test for my retirement decision.  A mindful perspective helps show that:

1. It’s generally unproductive to worry about unlikely disaster scenarios.
2. If a disaster occurs, having a few more dollars saved up probably won’t help matters much.

How do my results compare to generic online calculators?

As noted above, if I boost the inflation assumption to 4%, the “worst start” scenario comes pretty close to failing.  Here’s the graph for the 4% inflation assumption.

The rule-of-thumb for a safe withdrawal rate is 4%, and my withdrawal rate is a comparatively low 2.8%.  So, it makes sense that none of the scenarios fails completely.  But given one scenario comes close to failing, it seems prudent to compare my results to an online retirement calculator.

FIRECalc is one of the most flexible online calculators that I’ve come across.  It requires three basic inputs: starting portfolio value, expected annual spending, and years of retirement.  It outputs the chances of portfolio success by looking at all sequences of historical returns going back to 1871.  FIRECalc also allows somewhat limited inputs for other income sources, variations in spending rates, inflation rates, and asset allocations.

When I enter values into FIRECalc matching my own calculations as closely as possible including 4% inflation, FIRECalc reports that my portfolio was successful (didn’t run out of money) in all 45 scenarios calculated.  The smallest final terminal value of any FIRECalc scenario is nearly identical to my “worst start” scenario.  But FIRECalc calculates a maximum final value for the best performing scenario that is well below the maximum final value from my calculations.

What’s causing some of these differences?  After a careful review of FIRECalc and its supporting documentation (which is pretty vague), I identified three potential factors that are difficult to control for:

1. I have a some large one-time spending events in the first 10 years of my calculations beyond the base 2.8% withdrawal rate, which I could only roughly imitate in FIRECalc.
2. FIRECalc assumes annual rebalancing, while I use the sequential depletion approach noted in my last post, which avoids rebalancing.
3. The compounding frequency in FIRECalc is unclear, while my calculations use monthly compounding.

There may be some other differences as well, but these seem to be the main ones.  Based on the available documentation, it’s hard to say whether the first factor would drive FIRECalc results to be more or less optimistic than my own results.  The second factor of rebalancing could also drive results either way, because regular rebalancing doesn’t always improve returns.

The third factor of compounding could be causing some of the differences in the maximum final portfolio values between FIRECalc and my results.  Given that FIRECalc starts with Robert Shiller monthly stock return data, it seems very possible that FIRECalc uses monthly compounding like I did.  However, the description of the calculation steps provided in FIRECalc seem to imply that they use annual compounding.*

These differences show how the specifics of your situation and relatively trivial-sounding calculation methods can make a big difference to your results.  While FIRECalc and its kind are very helpful, they can rarely mimic your exact situation, and they are all opaque to some extent on the exact details of the calculations.

Could I adapt my spending to further increase my chances of success?

I’m comfortable with the idea that there’s an outside chance my retirement plan could fail if I experience a particularly bad combination of poor early returns and sustained high inflation in the next 34 years.  But the real clincher to my early retirement decision is the flexibility I have to reduce my spending, should disastrous scenarios like this start to play out.

There’s plenty of debate about whether real spending in retirement is more likely to stay constant (per the 4% rule), decrease, or increase at the start and end of retirement.  Regardless of the merits of each argument, there are surely retirees out there who have, for idiosyncratic reasons, experienced all these spending trajectories as they age.  Personally, I’m absolutely certain that I could forego all the one-time spending events I included in the first 10 years of my calculations because they’re mostly for optional purchases like extended vacations.

So, I re-ran the “worst start” scenario assuming 4% inflation but eliminating all those optional purchases in the first 10 years.  Here’s how the key result (ratio of the final portfolio value to the starting portfolio value) changes:

• Full spending – 0.67
• Eliminate optional spending – 3.18

This one change increases my final portfolio value by nearly 5 times.  If the stock market tanks early in my retirement, I can simply forgo the optional purchases I built into my other projections.  And if that’s not enough, I’m pretty comfortable with the idea of not giving myself a cost-of-living increase each and every year.  Alternatively, I could limit my increase to 4%, even if inflation exceeds that level for a year or two.  All of these adjustments will help my portfolio withstand a disaster scenario.

Even further, as I’ve presented before, I plan to use cash to buy more stocks in the event that a major stock crash (very specifically defined) occurs in the first 8 to 10 years of my retirement.  This once-in-a-lifetime market timing decision would further bolster the recovery of my portfolio in most cases.

Conclusion

The differences between the results of my homemade calculations versus an example online calculator cause me some concern.  Because the exact methods of online calculators are rarely entirely transparent, it’s impossible to ferret out all the reasons for the differences.  All these calculations attempt to predict a highly uncertain future, so there’s no point in trying to find the one “right answer”.  Rather, the different results from similar inputs are best viewed as a measure of the margin of error associated with the decision to retire early.

When I step back and review the entirety of this exercise, it paints a picture of a very safe retirement plan.  If inflation remains within about the 2 to 4% range, my retirement plan will likely be successful by almost any measure.  If inflation really takes off in the next 30 odd years, and the stock market performs poorly at the same time, then I may have a bumpy ride.  But even in this case, I’ve got three layers of counter measures at the ready to bolster my portfolio’s longevity.  So, that’s why I decided at the start of this year that it’s reasonable to retire at the age of 52, but only so long as I keep a careful eye on my portfolio, inflation, my spending, and how these factors play out over time.

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*I used monthly compounding because the Shiller data are set up in the form of monthly returns.  However, I find the monthly compounding assumption (also used by some other calculators and studies) somewhat unrealistic.  All these stock return sequences use the price and dividend history of the S&P 500.  Stock price changes occur daily and withdrawals can reasonably occur on a monthly basis.  But dividends from the S&P 500 are paid no more often than quarterly, regardless of whether you invest using exchange-traded funds, mutual funds, or individual stocks.  And reinvested dividends represent most of the wealth generated by the S&P 500 since 1871.  This may be the reason my maximum final portfolio values exceed those from FIRECalc for the higher-performing scenarios.

If you hope to retire early, the big question is: Do I have enough money to retire safely?  Tons of websites, retirement calculators, and rules-of-thumb (like the 4% rule) try to answer this question simply.  But most of them don’t paint a complete picture because:

• The details behind the calculators or rules-of-thumb are often murky.
• You need to know the most reasonable or best inputs for your situation.
• You can’t entirely tailor them to your specific situation.

I think one of the best of these resources is FIRECalc, which allows for fairly detailed variations and estimates the probability that you might run out of money in retirement by calculating all possible sequences of historical investment returns.  But even in this case, some details of the calculations aren’t completely explained, it assumes a certain level of understanding about the appropriate calculator inputs, and many potential specifics are omitted.  I’ll cover a bit more about the features and limitations of FIRECalc in Part 2 of this series coming soon.

For my own early retirement decision, I conducted independent calculations tailored specifically to my situation.  And I suspect I’m not the only would-be early retiree out there who would prefer not to leave this momentous life decision solely in the hands of standard rules or generic calculators.  So, in this two-part series, I’m going to give you an overview of my own calculations (Part 1) and how I evaluated the results (Part 2).  If after reading this, you’d like to use my spreadsheets as a starting point for your own calculations, just contact me, and I’ll send you a copy.

Because I’m not a big fan of blogs with lots of “personal finance updates”, I’ll try my best to make these posts less “show and tell” and more an “instruction manual” to help you with your own tailored retirement calculations.

Gathering Information

If you think you might retire soon, you need to compare the size of your nest egg (or estimate your nest egg size a few years from now) to your long-term spending needs.  Many retirement calculators are unhelpful at this stage of life because they focus on the accumulation phase and ask for inputs like current salary, savings rate, and years to retirement.  For the would-be early retiree, that stuff is mostly just water under the bridge.

Accordingly, to decide whether it’s time to retire early, you’ll need to gather the following more relevant information:

• Total retirement savings, broken down by tax-advantaged and taxable accounts.
• An at least rudimentary plan for how you will invest your retirement savings (e.g., all stocks, 50% stock/50%bonds, etc).
• An annual spending budget (either before tax or after tax, depending on how you like to think about it).
• A spending plan for the period before your tax-advantaged accounts are accessible without penalties.
• Social security or pension income and when you might choose to receive that income.
• Any other income (such as rental properties or ongoing “side gigs”)
• Other specifics that may substantially impact any of the above, such as plans to,
  • Sell a home and invest the proceeds,
  • Move to a cheaper area
  • Pay off a mortgage
  • Use tax minimization tactics
  • Achieve more or less rental income over time
  • Have one time or periodic extra spending needs (kids college education, living abroad, big purchases, etc.)

If developing all this information seems daunting, then I’d say your generally unprepared for early retirement, not for financial reasons, but for planning reasons.  Retiring early without being clear on these sorts of details is pretty much like playing Russian Roulette.  It might all work out in the end, but only because you got lucky.

If instead you’re worried about exactly how much flesh to put on these bones, I’d suggest to you start simple and work towards more detailed information where necessary.  Starting with broad estimates allows you to discover which parameters drive your chances of success and where you need more detailed inputs.

For example, I didn’t build an elaborate spending budget, because my wife and I practiced for several years by spending what seemed reasonable for our future retirement.  For social security income, I used the projections of future income mailed out periodically by the Social Security Administration.  I also had a pretty good ball-park estimate of how much money I would have accumulated for various potential retirement dates and used my past tax records to estimate future rental income.  My investing plan is mostly consistent with the articles presented here at Mindfully Investing.  In a nutshell, this means I have a portfolio of 80% stocks and 20% cash at the start of retirement for reasons detailed in the articles.  The other details were all pretty obvious for us, including that we had already paid off all mortgages, had no plans to sell any real estate or move, and defined some one-time additional expenses related to a plan to live in France for a year and my daughter starting college four years from now.  I also calculated our expected taxes before, during, and after various income streams came online and devised some plans (like a Roth IRA conversion) to further minimize taxes.

Calculation Set Up

I actual spreadsheet I set up was pretty simple, at least in the first iteration.  Here’s a blank example of the set up.

The rows represent each successive year of retirement.  I projected out for 34 years*, when I will be 86 years old, if I make it that far.  It seems like a reasonable time span based on my family history and the fact that my wife is a bit older than me.

The right-most three columns start at the top with the amounts of money we accumulated in each of these accounts as of retirement, with the fourth column being the total.  “Retirement accounts” refers to tax-advantaged accounts like IRAs and Roth IRAs.

The rows in the “annual return” column contain the nominal (not inflation adjusted) annual return assumed for each year.  Of course, no one can accurately predict future asset returns in the next year, much less for the next 34 years.  To represent this uncertain future, I  conducted multiple iterations using various historical sequences of nominal returns to see how the growth or decline of the overall portfolio might vary.  Looking at many potential future return scenarios is critical, because sequence of returns is one of the key determinants for retirement portfolio success.  Because the non-cash accounts are 100% stocks, I used the historical sequences of stock returns from Robert Shiller going back to 1871.  If you have a portfolio that includes bonds, you can also get historical estimates of bond returns from this same article.  (For historical returns of other assets, you’ll need to do your own research, but Portfolio Visualizer is a good place to start.)

You often see probabilistic analyses that use every possible sequence of historical returns.  In my case, I simplified this considerably by using 12 historical return sequences with the start of each sequence shifted forward by 10 years.  So, the first sequence was the 34 years from 1872 to 1905, the next sequence was from 1882 to 1915, and so on, with the last sequence ending in 2015.  I also added two more “worst case” sequences, one of which represents the lowest annualized return for any 34-year period and another that starts with the largest single stock crash around 1929.

The “spend budget” is the amount we expect to spend each year.  This value is inflation adjusted at the rate assumed in the next column.  For my first iterations, I assumed a 2% (1.02) annual inflation rate.  Also, in this column, I added specific big-ticket expenditures in the years that I expect those to occur.

The next columns are social security and rental income we expect to receive.  For rental income, I assumed some moderate rent increases to keep pace with inflation.

The “withdraw need” column calculates the amount that we would need to withdraw from one of the first three columns to fulfill our spending needs after including rental and social security income.  Consistent with the Mindfully Investing bucket plan, I made some simple assumptions about the source of the spending money in any given year.  The cash accounts are drawn upon first.  The tax-advantaged accounts are drawn upon last, mainly because the government penalizes withdraws from tax-advantaged accounts before you reach retirement age.  Also, as you get older, there are Required Minimum Distributions (RMDs) from tax-advantaged accounts.  Our actual withdrawal plan is considerably more nuanced than this for tax minimization reasons.  But the main goal of this exercise is to check whether we could run out of money in retirement.  The exact details of money shuffling between accounts won’t impact that determination much.

The last two columns are mainly informational and track the cumulative effect of the selected sequence of annual returns and how much the portfolio is drawn down during sequences involving market declines.

The key result is whether the “total money” column goes to zero before the end of the retirement period (34 years in the future).  You might also be interested in how much money is left over at the end of the period, if you are hoping to pass on some inheritance to relatives or charity after your death, but that’s not a big concern for us.

Calculation Results

The set up of the various sequence of returns and some select results are shown in this table.

Scenario	First Year	Last Year	Nominal Annualized Return (CAGR)	Annualized Inflation Rate	Worst Cumulative Draw Down	End Value/ Start Value	Lowest Value
1	1872	1905	7.2%	-1.2%	0.0%	5.59	0.79
2	1882	1915	6.3%	-0.2%	14.1%	3.52	0.79
3	1892	1925	7.9%	2.6%	13.8%	6.95	0.80
4	1902	1935	7.2%	1.7%	10.2%	5.39	0.86
5	1912	1945	8.0%	2.0%	3.4%	7.15	0.87
6	1922	1955	11.0%	1.4%	0.0%	25.74	1.20
7	1932	1965	13.5%	2.4%	5.8%	38.70	0.92
8	1942	1975	11.5%	3.7%	0.0%	30.95	1.14
9	1952	1985	10.9%	4.3%	0.0%	23.91	1.08
10	1962	1995	11.3%	5.0%	9.2%	17.10	0.89
11	1972	2005	11.0%	4.8%	26.0%	22.28	0.70
12	1982	2015	11.3%	2.8%	0.0%	28.75	1.13
Worst Start	1931	1964	10.4%	2.0%	63.2%	3.90	0.37
Worst CAGR	1881	1914	5.5%	0.2%	13.9%	2.60	0.77

The second to last column displays the key result in terms of the ratio of the ending portfolio value divided by the starting portfolio value.**  The key finding is that none of these ratios is zero, which means that none of these sequences of returns resulted in our portfolio running out of money within 34 years.  This graph traces the ups and downs of each scenario.

It turns out that our starting annual spending budget is about 2.8% of our starting portfolio.  Given that a spending rate starting at 4% of the initial nest egg is considered pretty safe for 30 years, it’s understandable that my retirement portfolio can successfully weather just about any stock market storm.

However, before launching into retirement, there’s one detail about this type of analysis that needs some further consideration.  I noted that these calculations are all on a nominal-return basis, with the withdraw rate boosted each year by 2% to account for inflation’s impact on the purchasing power of the money.  This assumption seems reasonable given that the table above shows it’s pretty rare for inflation to stay above 3% for more than 30 years.  But some long periods of 4 to 5% inflation have occurred in the past.  So, what if I instead assume that inflation is 4%?  Here’s what that looks like.

Scenario	First Year	Last Year	Nominal Annualized Return (CAGR)	Annualized Inflation Rate	Worst Cumulative Draw Down	End Value/ Start Value	Lowest Value
1	1872	1905	7.2%	-1.2%	0.0%	3.81	0.78
2	1882	1915	6.3%	-0.2%	14.1%	2.08	0.78
3	1892	1925	7.9%	2.6%	13.8%	5.12	0.80
4	1902	1935	7.2%	1.7%	10.2%	3.73	0.84
5	1912	1945	8.0%	2.0%	3.4%	5.28	0.86
6	1922	1955	11.0%	1.4%	0.0%	22.09	1.20
7	1932	1965	13.5%	2.4%	5.8%	34.96	0.92
8	1942	1975	11.5%	3.7%	0.0%	29.42	1.14
9	1952	1985	10.9%	4.3%	0.0%	21.72	1.08
10	1962	1995	11.3%	5.0%	9.2%	13.62	0.89
11	1972	2005	11.0%	4.8%	26.0%	19.73	0.69
12	1982	2015	11.3%	2.8%	0.0%	27.09	1.13
Worst Start	1931	1964	10.4%	2.0%	63.2%	0.67	0.31
Worst CAGR	1881	1914	5.5%	0.2%	13.9%	1.43	0.73

Even with the 4% inflation assumption, none of scenarios run out of money before the end of the projection, although the “worst start” scenario comes close.  The worst start scenario illustrates how the annual withdraws start to sky-rocket pretty quickly as the inflation adjustment is increased.  For example, with 4% annual inflation, an initial withdraw of $50,000 per year becomes almost $110,000 per year after 20 years.  This shows the value of doing your own projections.  You can change a specific assumption and see exactly how it impacts your results.  It also shows that the amount you plan to spend strongly impacts your chances of retirement success.

Conclusion

These results raise some new questions.  What’s the best way to include inflation in these sequential return estimates and evaluate the results?  Is the 2% or 4% inflation assumption more realistic?  Do my projections appear conservative or aggressive in comparison to more generic online calculators?  How could I adapt my spending to decrease the chances of failure in a “worst start” type of scenario, particularly if inflation starts to increase substantially?

In other words, completing the calculations is really just the end of the beginning of deciding whether you can safely retire.  In my next post I’ll get into the more intricate matter of evaluating the results, which should finally answer the question, “Can I Retire Now?”

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* This specific number comes from the fact that last year I conducted these projections for a 35 year period and now one of those years is in the rear-view mirror.  I didn’t want to revise all the calculations just to add one year back.

** I know some readers were probably hoping to discover my net worth.  When it comes to broadcasting my financial details all over the internet, I guess I’m pretty old-fashioned as compared to a lot of personal finance bloggers.  So, I’m presenting all the results as ratios of the starting nest egg value.

So far this year I’ve read hundreds of personal finance blog posts about the wonders of FIRE (financial independence/retire early).  It seems to be an accepted truism that working toward FIRE is enviable, laudable, ethical, and just all around better for the planet and human beings as a species.  Some folks gently resist and say that FIRE is a personal choice; see Ben Carlson’s recent post as an example.  But few bloggers actually question the merits of FIRE as a personal choice.  A couple of recent exceptions are posts from “Tired, Broke, and Over It” and “Ninja Budgeter”.   If you’ve read any of my blog, you know that my delusion detector is fully activated when everyone seems to agree on the same thing.  Contrarian thinking is a hallmark of prudent investing, and it’s also a mindful way to approach personal finance and life in general.  The best method I know to understand whether accepted wisdom equals truth is to look at both sides of the argument.

FIRE Is Bad for the Planet

Maybe FIRE is good for you, but is it good for me?  Is it good for society?  I can cite numerous reasons why FIRE may light your fire, but doesn’t do anyone else much good:

• Since when is being unproductive a good thing?  Great, you get to go travel hacking and witness poor people around the world.  What happened to the sense of helping to better the world?
• If everyone is on FIRE, living frugally, and paying the minimum taxes possible, what happens to all those wonderful government services we all use?  You can name your favorite poison here: Social Security, Medicare, Medicaid, Obamacare (or what ever replaces it), infrastructure, schools, protecting the environment, immigration and law enforcement, services for the poor, medical/scientific research, defense, veterans benefits, food safety, disease control, etc.  Perhaps your politics disparages some of these programs, but almost everyone sips from the government punch bowl occasionally for some reason.
• Economic growth and development are the hallmarks of a healthy civilization.  Make your favorite criticisms about democratic capitalism (and all its variations throughout the world), but the combination of regulated free markets and representative government still seems to be the best social system yet devised by man.  (It certainly beats a long list predecessors that now reside firmly in the trash bin of history.)  Who’s contributing to economic growth if most of us are on FIRE?  Did you like the way the last recession felt?  What do you think a real depression will be like?
• Getting paid to do good work produces good outcomes.  There are certainly numerous mindless 9-to-5 jobs that are harmful to society, but I’d argue there are likely many more 9-to-5 jobs that improve life either for a few or many.
• If you give up regular pay, what’s the incentive to do good in the world?  In my case, I could get paid working on reducing pollution (my day job), or I could tootle around town visiting people on my bike all day because it’s good for my health and doesn’t cost anything.

FIRE Is Good for the Planet

The FIRE aficionados counter all this with the numerous benefits of FIRE including:

• Those working toward and living the FIRE life generally use fewer resources, which causes less pollution and green house gas emissions, which creates a greener, better world.
• FIRE counter balances the senseless lifestyle inflation and consumerism culture rampant in developed economies.  If enough people are on FIRE, the whole culture could shift to something more sensible and sustainable.
• People on FIRE are not under the pressure of stressful and depressing regular jobs.  More people on FIRE means a less stressed out population with fewer mental and physical health problems, which would have the added benefit of reducing health care costs.
• FIRE is an ethically superior way to live.  People on FIRE have more freedom to choose ethically sound activities.  They aren’t forced into sometimes ethically questionable situations and work just to feed their families.
• For all the above reasons, there is greater human dignity in FIRE than most day jobs.

I’ve probably missed a few pros and cons, but these lists are reasonably sufficient for our purposes.

People will balance these pros and cons differently and reach opposing conclusions that are largely a matter of personal preference, experience, and outlook towards the world.  I won’t sit here and call you “wrong” if you come out on either side after considering all these arguments, although I will call you wrong if you fail to fully consider them.

A False Assumption

However, I would say none of these pros or cons are the key to this debate.  These things simply take with one hand what was just given by the other hand.  For example, going FIRE arguably causes less pollution, but if everyone ends up living in caves, is that really a net benefit?  For me, there is an unstated assumption causing FIRE to be not only acceptable, but a net benefit for society.  But first, a corollary example might help illustrate my point.

You may have read that multiple experiments with “Universal Basic Income” have been started recently.  The idea behind UBI is that some or all citizens would receive a relatively small payment from the government regardless of whether they work or not.  It’s a FIRE seekers dream come true!  There are many variations on this idea, and I won’t go into those details or attempt to discern which versions might work best.  The central concept is that some of everyone’s income would come from the government with no strings attached.  This stipend would not be determined by how much you work in any given month or year.  I won’t take a side on the conservative versus liberal view points on such an idea, which you can probably guess all by yourself.  The question from this debate that most interests me is whether UBI would remove the incentive to work, lower productivity, and give us a society of lazy and unmotivated people.  It’s basically the same question I have about FIRE.  Does FIRE generate a society of couch surfing do-nothings?

In one Canadian experiment in a small town in Manitoba in the 70s, the addition of basic income reduced working hours for men (the main work force back then) by only 1%.  People didn’t suddenly stop being productive just because they got a stipend from the government.   It will be interesting to see the results of the other ongoing experiments in UBI.  Even without these results available yet, some proponents hypothesize that UBI could create the freedom (there’s that word again) and economic security for people to be more creative, seek out new opportunities, become entrepreneurs, and be more productive, not less.  Others call these claims wishful thinking.

Would the expected benefits of UBI pan out if it was applied on a large-scale?  I have no idea.  Maybe not, and maybe there would be some unexpected side effects.  But the existing evidence and potential societal gains are tantalizing.  It gives me hope that:

• There is something larger in the human spirit than the going rate for hours labored.
• Humans are not entirely (although perhaps fundamentally) animals driven by the incentive to collect more food, goods, and services.
• Given some space, time, and freedom to think, most of us will gravitate to doing something more creative, productive, and good.
• Life can progress beyond punching a clock to feed our families.

So, the pros definitely outweigh the cons if we assume and expect that people on FIRE really do more than just sit around, count their pennies, and distract themselves with tourism and sports.

Make Sure You Deserve FIRE

To me the answer is crystal clear.  You don’t deserve FIRE if your main post-retirement goals are to live as cheaply as possible, make the minimum possible contributions, and aspire to nothing beyond a life of ease.  You deserve FIRE if you plan to give something back*.  I define giving back in the widest possible terms including anything from spending more time with your children to starting a new charity.  The examples of “giving back” are too numerous to even scratch the surface here.

You could wrangle all day over the absolute best way to spend your time in early retirement, but that’s largely a waste of time.  Instead, just pick something productive, large or small, apparently trivial or potentially monumental.  The point is that you are giving instead of taking.  You are a source of positive flow instead of a net negative.  The FIRE movement could create a whole new definition of what constitutes a productive member of society that goes way beyond the amount of money and possessions a person collects.  If everyone who wants FIRE makes a commitment to deserve FIRE, then the FIRE movement will fundamentally transform society for the better.

 

*Obviously, there are exceptions.  For example, if you are mentally or physically ill or disabled, a goal to simply achieve enjoyment in life is reasonable.  I don’t find anything dishonorable in that.  And there are certainly other valid reasons to set more moderate retirement goals.

Article 8.3 defined the contents of three buckets for mindful “old” investors.  Here’s where we put them together into an overall mindful plan so that all the buckets work seamlessly together.  You can read all the articles by going to the Articles section of this website.

The mindful bucket plan for “old” investors

Based on all the information presented in Articles 8 through 8.3, we can see that:

• Cash and bonds historically have performed nearly identical ballast functions in terms of portfolio success rate.
• Using some bonds in place of cash for ballast will increase (perhaps only slightly) the terminal value of your portfolio in most cases.
• After a period of about 2 to 3 years, the risk of permanent losses from intermediate duration bonds is low.
• After a period of about 5 years, the chance of permanent losses in stocks is likely less than about 20%.

To honor all these facts, a mindful break down of the buckets is:

• Short-term – The next 3 years-worth of spending in cash
• Mid-term – The following 2 years-worth of spending in intermediate duration bonds (with a potential preference for TIPS to hedge against inflation).
• Long-term – The remainder will be in stocks, representing any spending that is more than 5 years away.

Because of the inherent uncertainties about future market and economic conditions and your specific health and retirement situation (among other factors), somewhat different buckets may be more mindful and rational for you.  For example, if you expect to spend more early in retirement, you might make the short and/or mid-term buckets bigger.  Similarly, if you intend to tighten your belt in the first few years of retirement as a safety measure, you might make these ballast buckets smaller.  And given some of the studies I reviewed in Article 8.2, I can make a mindful case for simply holding 100% stocks along with a plan to reduce spending if/when a stock crash occurs.  Even with these sorts of personal variations, I would say the facts support that most investors should define:

• The short-term cash threshold as no more than 5 years, because too much cash is a substantial drag on portfolio performance.
• The mid-term bond threshold as no more than the next 5 years for the same reason that too much ballast will drag down portfolio performance.  Also, the risk of a permanent bond loss is extremely low beyond this threshold.
• The long-term stock threshold as no more than 10 years, because stock returns are very unlikely to be negative when held for more than this time span.

Bucket Maintenance

We must also consider 1) how to use the bucket contents as market gyrations unfold and 2) how/when to replenish shorter term buckets with money from longer term buckets.  This process has been described as bucket “maintenance”.

Mechanical Approach – The simplest approach to bucket maintenance is to let money flow from one bucket to the next each year as shown in my rudimentary graphic.  (I know. I shouldn’t quit my day job for a career in graphics production.)

This is sometimes called the “mechanical” approach.  To implement the mechanical approach in any given year you would:

• Replenish the short-term cash bucket by selling a years’ worth of bonds from the mid-term bucket
• Replenish the mid-term bucket by selling a years’ worth of stock from the long-term bucket

This process is then repeated each year.  It maintains 5 years’ worth of spending as ballast in the short and mid-term buckets, or about 20% of your portfolio, assuming you are using the mindful bucket plan described above.  (Of course as the stock value moves up and down and eventually grows over time, the ballast won’t represent exactly 20% of the total portfolio value all the time.)  One clear problem with the mechanical approach is that in the very first year we must sell some stocks, even though the original intent was to hold stocks for at least 5 years.  If we intend to avoid the threat of permanent losses by selling stocks too soon, the mechanical approach doesn’t help us much.

Sequential Depletion Approach – It’s important to remember that we are trying to avoid the scenario of permanent stock losses in the vulnerable period, which is early in the spending phase.  Consequently, we don’t need to keep the short and mid-term ballast buckets full throughout the entire spending phase.  We only need the ballast in the first few years, because we have established that after about 5 years the stocks will likely have a positive return.  This is the reason that Michael Kitces and some others recommend that ballast be maintained only in the first part of the retirement period, which creates the so called “ascending glide path” for stocks as discussed in Article 8.2.  We need an approach where we deplete the ballast over time to reduce the need to sell stocks early in the spending phase.  The simplest of such approaches is to use the ballast in sequence without replenishing it.  You can accomplish this “sequential depletion” approach by using:

• The short-term cash bucket over the first three years (and not touching the mid or long-term buckets)
• The mid-term bond bucket over the next two years (years 4 and 5)
• The long-term stock bucket after year 5.

Using this “sequential depletion” approach, the first bonds you sell will have been bonds for at least 4 years and the first stocks you sell will have been invested as stocks for at least 6 years.

However, if we look at the amount of ballast in the first five years of the “sequential depletion” approach, it gets progressively smaller each year.  As I discussed in Article 8.3, to boost the recovery of your portfolio after a crash in the vulnerable period you want a substantial amount of ballast available to buy stocks.  By using a simple no growth assumption, which is one possible scenario for stocks and bonds over any given 5-year period, we can eliminate a variable and make a rough comparison of the ratio of ballast versus stocks for any given ballast depletion plan.  For the sequential depletion approach, the percentage of ballast in the first six years looks like this:

• Year 1 – 20%
• Year 2 – 17%
• Year 3 – 13%
• Year 4 – 9%
• Year 5 – 5%
• Year 6 – 0%

For the five years before the ballast is gone, the ballast only averages 13% of the portfolio.  This means for most of this period you won’t have very much ballast to invest if a stock market crash occurs.

Hybrid Depletion Approach – We are looking for a bucket maintenance approach that provides a balance between selling too much stock too early and not having enough ballast in the critical early part of the spending phase.  We can accomplish this by moving some stocks into ballast during the first few years of the spending phase, but not so much that we lock in large permanent losses should the stock market crash in those specific years.  Such a “hybrid depletion” approach looks something like this in the first 12 years, with no change in the pattern in the subsequent years.

Summary of the Hybrid Depletion Approach
	Years Invested in Each Bucket Before Being Spent			Percent Ballast (No Growth Assumption)
Spending Year	Cash	Bonds	Stocks
1	1	0	0	20%
2	2	0	0	21%
3	3	0	0	22%
4	3	1	0	23%
5	3	2	0	19%
6	3	2	1	15%
7	0	5	2	11%
8	0	5	3	6%
9	0	0	9	0%
10	0	0	10	0%
11	0	0	11	0%
12	0	0	12	0%

This table needs a little explanation.  The columns headed “Years Invested in Each Bucket Before Being Spent” track how long each years’ worth (let’s call them “chunks”) of money was invested over time before it was spent.  For example, the chunk spent in Year 6 would have been previously invested as cash for the last three years, as bonds for the two years prior to that, and as stocks for one year prior to that.

This hybrid depletion is accomplished by:

• For the first four years, spend the available cash and replenish the cash bucket each year by selling some stocks to buy bonds and selling some bonds to provide cash
• In the fifth year, start sequential depletion of all remaining ballast (cash and bonds) and hold all remaining stocks until the ballast is all spent. The ballast will be finally depleted at the end of the eighth year.
• Sell stocks to fund spending from the ninth year onward.

The red text in the above table shows the critical period where you would be spending chunks of money that had been invested in stocks for only one to three years.  But because these same chunks were subsequently invested in bonds for 2 to 5 years, some or all stock losses for these chunks might be recouped by the subsequent bond returns.  So, there is some susceptibility to permanent stock losses with the hybrid depletion approach, but it is mitigated somewhat by the subsequent investment of that same money in bonds.  The other side of the balance we are trying to achieve is maintaining a substantial ballast proportion during the vulnerable early phase.  The left most column in the table shows the hybrid depletion approach keeps the ballast right around 20% for the first 5 years, which is considerably better than using sequential depletion.

It’s important to note that the above table represents only one flavor of hybrid depletion.  You can tailor your own bucket maintenance to achieve slightly different goals consistent with your specific situation.  As appropriate, you could replenish ballast for more or fewer years than the above example before starting the sequential depletion procedure.  If you have absolutely no interest in attempting to tailor your own plan, I think the above example would work well for most, but perhaps not all, “old” investors.

Switching Horses – All the above scenarios assume that the stock market does not crash like it did during the six worst events in history that I discussed in Article 8.3.  Obviously, if the stock market crashes in the first few years of your spending phase, the ballast should be immediately invested in stocks and the ballast buckets would all go to zero, except for your most immediate spending needs.  This was the whole point of holding the ballast in the first place.  If a crash happens in the first five years of your spending phase, that’s when you will need to buckle your seat belts, use all your mindfulness powers, and invest almost all your “safety” money during a time when there’s blood in the streets and every news headline screams “sell everything”.   Knowing that you planned for years to execute exactly this game plan will mostly likely help steady your nerves and allow you to proceed.

One remaining concern is deciding when it’s time to depart from the hybrid depletion plan, switch horses, and convert any remaining ballast to stocks.  Should you convert the ballast to stocks if the market declines by 20%, 30%, 50%, or something else?  There are an infinite number of stock market scenarios that could play out, and we can’t anticipate them all.  However, we can develop some general guidelines about which horse to ride, and for how long, during various possible stock market gyrations.  I will discuss that subject in more detail in Article 8.5 on “Timing the Market” (coming soon).

Withdrawal plan for “old” investors

Our mindful investment plan for “old” investors is taking shape.  We now know how much money to allocate to cash, bonds, and stocks at the start of the spending phase, and we know how to maintain and use the buckets as we proceed through the spending phase.  However, for the plan to work, we need a third leg to the stool, which determines how much to withdraw each year during the spending phase.  Because the Mindfully Investing website is focused more on how to invest than how to spend, I won’t get into the withdrawal rate topic in detail.  However, there are a few key spending and withdrawal concepts I should briefly describe to help you create a stable investing stool.

The 4% Rule – If you regularly withdraw more than your portfolio of investments can sustain, you may end up poor at a relatively young age.  You probably noticed that I keep using a 4% withdrawal rate assumption in the previous discussions of portfolio success rates and performance.

(It’s important to note at this juncture that in the previous analyses I often assume a constant 4% withdrawal rate to provide simple examples of what percentage of a portfolio would be held in each investment type.  In other cases, like determining the success rates of various portfolios over 30 years, I use an inflation-adjusted withdrawal rate or online calculators that do the same.  In this case, the withdrawal rate starts at 4% of the total portfolio value but then increases by the amount of inflation each year.  The 4% rule that I discuss below is based on the inflation-adjusted approach unless otherwise noted.)

The 4% “safe withdrawal rate” assumption comes from the so-called “Trinity Study”.  The Trinity Study, and related studies pre- and post-dating the Trinity Study, are described at the Bogelheads website in more detail.  Although the results vary somewhat across these studies, they all support the concept that there is very little chance of running out of money in a 30-year period with a 4% withdrawal rate, if you have a substantial portion of your portfolio in stocks (typically in the 30 to 80% range).

The blogger calling himself the “MadFientist” reviews the 4% rule for early retirees using mostly information from Michael Kitces and concludes the 4% rule is “very safe”.  He also notes that even for very early retirees, a 3.5% rate is the lowest you would probably ever need to go.  I highly encourage you to read his article, because it is very consistent with a mindful approach (it’s rational, relatively objective, and empirically based).  So, I won’t repeat that discussion.

Similarly, the folks at Early Retirement Now (ERN) conducted a very detailed analysis and posted a 12 part series on safe withdrawal rates that specifically targets early retirees.  They calculated over 6.5 million safe withdrawal rates based on all possible combinations of:

1. retirement starting dates from 1871 to 2016
2. retirement horizons ranging from 30 to 60 years
3. portfolios with 0 to 100% stocks
4. five different final asset values
5. nine withdrawal patterns.

In other words, it’s a comprehensive analysis!  You can read more of the details of the methods and results over at ERN, but the key results are shown in this table.

You can use this table to pick the withdrawal rate that you consider “safe” for your situation.  Assuming you are using the mindful bucket approach described above (80% stocks in the vulnerable period ascending to 100% for the rest of retirement), a 3.5% inflation adjusted withdrawal rate is very likely to ensure you have sufficient money in retirement, even over 60 years.  Using a mindful perspective, where you don’t worry so much about low probability outcomes, might lead you to a withdrawal rate that is a little higher than 4%, especially if you think your retirement period is likely to be 40 years or less.

Tailoring Your Withdrawal Rate –  Because there are many variables, I highly encourage you to conduct your own calculations or closely review detailed studies like the one at ERN and avoid rules-of-thumb in general.  The 4% rule is a good starting place, but why would you leave your retirement up to a one-size-fits-all estimate?  In addition to the ERN analysis, you can use online calculators such as:

• Portfolio Charts
• cFIREsim
• Portfolio Visualizer
• FireCalc
• Four Percent Rule

Using any of these approaches you will need to consider factors such as:

• The types of investments you expect to make (like the bucket approach above)
• How you will maintain your investing plan over time (like the hybrid depletion approach above)
• How much in dollar terms you would like to withdrawal annually
• A reasonably conservative estimate of how much money you expect to have accumulated by the time you start retirement (or the spending phase in general).

To help determine this last variable (how much you will have at retirement), various free retirement calculators are reviewed by:

• Can I Retire Yet 
• Rob Berger at Forbes

By planning your spending just like you plan your investing, you can answer questions like:

• Is your planned retirement date reasonable? Or does it need to change?
• What is the amount you will have to live on year-to-year? Is keeping to this level of living expense realistic for you?
• What are the dynamic spending options applicable to you that might improve your plan’s probability of success?
• How much flexibility do you have to drastically reduce your spending during and after market downturns?
• How aggressively (more stocks and less ballast) do you need to invest to meet goals that are consistent with the answers to these other questions?

I may do some blog posts in the future that explore the whole spending and withdrawal rate discussion more, but I’ll stop here for now.

Conclusions for the “old” investor

We’ve come up with a pretty mindful investing plan for the “old” investor.  Although there is no perfect answer or ideal plan that works for everyone in all future unpredictable situations, the Mindful Investing Plan for the “old” investor sets some key guidelines you can use to develop your own plan:

• When you enter the spending phase, you need to avoid the bad luck of early stock declines, so called “sequence of return risk”
• The best way to avoid this bad luck scenario is to add some ballast (intermediate bonds and cash) to your portfolio just prior to and during the vulnerable period; long-term bonds should not be used as ballast.
• Even experts don’t agree that one ballast approach is always better than another
• Bucket investing is one useful concept to help you decide how much ballast to include in your portfolio and how to maintain or deplete that ballast over time
• Ballast in the 20% range that is maintained for the first 5 to 10 years of the spending phase provides a reasonable safety margin against bad luck, while not dragging down your overall portfolio performance too much
• Ballast should be used to buy stocks if a large stock market decline occurs early in the spending phase; this is the primary way that ballast mitigates portfolio declines
• Your withdrawal approach must dovetail with your investment plan to ensure you balance spending with reasonable growth expectations for your overall portfolio.

We can safely say there are quite a few possible investing plans for the “old” investor that fit these mindful guidelines.  Moreover, when you start to build in flexibility to change your withdrawal rate over time, many more mindful options become available.  For example, you can reasonably decrease the amount of ballast in your plan if you intend to:

• Adjust your withdrawal rate relative to changes in your portfolio value
• Reduce your withdrawal rate later in the spending phase
• Severely reduce your withdrawals if an early stock market crash occurs
• Start with a relatively low withdrawal rate, like 3% or less, and assess changes to the withdrawal rate as you start to see how your portfolio growth is playing out.

Also, per the Estrada study, a 100% stock portfolio might perform better than some ballast approaches even if you maintain a preset inflation-adjusted withdrawal rate.  So, if you add in the benefits of a highly flexible spending plan, a 100% stock portfolio is likely the most mindful approach, and you can simply ignore the mindful investment plan presented in Article 8.3 and above.  This makes me wonder why I even wrote that stuff!

Other important conclusions for the “old” investor worth reiterating or mentioning are discussed below.

Bucket Mirage – Michael Kitces discusses that bucket investing is in some ways a “mirage”.  He notes that bucket approaches typically produce outcomes that mimic simply holding similar amounts of ballast and proportionally withdrawing from all holdings each year.  However, if we apply Kitces observations to our mindful investing evaluations, I would say the portfolio ratio should still be about 20% ballast and 80% stocks in the vulnerable period, which provides a good balance of portfolio success rate with reasonable expectations for portfolio growth.  In contrast, Kitces and others often recommend higher amounts of ballast early in this period.  A mindful approach also suggests moving toward holding 100% stocks after the vulnerable period, and Kitces would agree with this “ascending glide path” for stocks based on his research with Pfau.

No Ideal Plan – Although there may be more ideal “looking” ballast plans based on back-testing (like the Kitces bond tent idea), any ballast approach will still be subject to future market unpredictability.  Just like the diversification discussion in the Article 7.3, trying to highly optimize a retirement plan is fooling yourself into thinking you have more control over your investments than objective facts indicate.  Therefore, a simple investing plan that does not attempt to be “ideal” is often going to be an easier one to follow and maintain.  For this reason, Ben Carlson rightly points out that we should all:

• Have a plan, even if it’s a bad one.  A bad plan is better than no plan at all.

Bonds Still Problematic – The mindful bucket plan described above makes some assumptions that, moving forward, bonds will at least approximate their historical function in the mid-term bucket.  However, as I have copiously pointed out in the Article 6 and 7 series, the current economic and market conditions strongly suggest bonds are unlikely to provide this historical function anytime soon.  As of the writing of this article, a typical 3-7 year bond ETF (like symbol IEI) yields only about 1.3%.  A typical 5-year TIPS ETF (like symbol TDTF) currently yields only 1.9%.  And importantly, these bond funds (and their underlying bonds) may soon produce negative returns if they are not held for a sufficient duration.

In contrast, it’s easy to start a savings account right now for amounts as little as $10,000 that currently yields 1.0%, and with almost zero risk of losing principal.  From a mindful perspective, a virtual guarantee of a 1% return is likely better than taking a gamble that you will either gain a mere fraction of a percent return or possibly just lose money.  As interest rates rise, intermediate duration bonds are expected to slowly return to their proper place in the mid-term bucket, but for right now, an equally good choice for “safe” ballast in the mid-term bucket is cash.  As suggested in Article 7.3, intermediate bonds will probably make sense again when the yield on a 10-year U.S. bond is around 4%.  This assumes inflation does not unexpectedly flare up, in which case it would be prudent to seek an even higher bond yield.

Other mechanics

There are quite a few other mechanics involved in retirement investing, particularly related to retirement account regulations and tax laws.  This includes issues like:

• When to use tax advantaged accounts
• Different ways to use tax deferred versus tax-free (Roth) accounts
• How to reduce your tax burden both early and late in retirement
• Considering different tax rates for capital gains, dividends, and ordinary income
• Minimum required distributions from tax advantaged accounts
• Factoring in Social Security or pension payments
• And other issues.

These are important details that, if properly considered, can save you substantial money, boost your portfolio growth over time, and provide a wider range of sustainable withdrawal rates.  Although I may hit some of these topics in future blog posts, for now, I refer you to:

• J.L. Collins
• The MadFientist
• Michael Kitces
• Wade Pfau
• Early Retirement Now

Article 8.5 (coming soon) will address another aspect of investing over time: whether it is prudent to attempt to “time the market” as part of executing either “young” or “old” investing plans.  Article 8.5 will also present some broad guidelines for when to convert ballast to stocks as market gyrations unfold during implementation of your Mindful Bucket Investing Plan for the “old” investor.