3.3% SFR then 5% after 5 yrs?

[FI Obsessed]

So I obviously know there are a ton of variables but the previous GCC post has me wondering what the math would say if you underspent for 5 years then what SWR could you realistically spend assuming all other variables were constant. Assuming average rates of return ect.
I understand his argument that he feels he can reset his withdrawal rate to 4% of his new total and agree he can do that because he has income and can decrease spending dramatically. I also agree that even without the income he could probably do that because he?s past the critical point of time. That?s what I understood from the article although I read it pretty quickly and may have missed another point so feel free to correct me.
My concern is that FIRE calculator says I could end up with 25M(under the best circumstances in history ) when I die at a 4% SWR?that would be dumb! Id rather spend more at some point. How do u know. Is there a too big to fail point? Not that I really know what we would spend that much more on but we could donate.

[prognastat]

It's mostly...well really it's all about risk. When you go with a 4% SWR in FIRE you have a 95% chance of success of not running out over a 30 year period. However most failures happen due to a bad market the first few years and never successfully recovering from this, if you make it through the first few years with a good return your odds go up even higher that you will make it to 30 years and probably even end up with much more than your started with.

GCC had good returns and lower spending leading him to make it through those first years successfully. He could have kept his spending the same only adjusting his original amount by inflation each year and would probably be close to a 100% odds of success if he had kept it that way. He decided though that if he found a 95% success rate acceptable when he originally FIREd that he would/should be ok with the same risk now and that it was worth it to him to increase his spending. So he is back to a 95% chance of succeeding over a 30 year period if he withdraws 4% of the amount he had when he decided to "reset". This does mean his chance of success will be lower than it was before he decided to reset his SWR % yet no more than the amount of risk he accepted when he originally FIREd.

It's all up to the amount of risk you are willing to take. Some people save enough to maintain a 3.5% SWR of the initial savings inflation adjusted at which point you would have been successful over any 30 year period over the past 100 or so years. Some feel confident with the 95% success of a 4% SWR. Some feel confident they can adjust their spending down if they have a bad run in the market early on to compensate for greater risk.

My current plan is to work my current job/field until I achieve a 4% SWR then to coast doing jobs that I have an interest in learning rather than what they pay and use those to coast to 3.5% at which point I could RE with 0% risk whenever I don't feel like doing anything else anymore.

As for your situation you could underspend up front and then at a later time reset your risk, but I would stick with at least a 4% SWR at the 5 year mark you mention. Depending on the returns in the market this likely would be quite a bit more than 4% was at the year 0 mark.

[FI Obsessed]

Wow! Great response! I agree that working a fun job would be a great way to add security. Also keeps life interesting. I started setting up my fun job?art gallery. Oddly enough I found that I enjoy finding original work and meeting the artists. That turned  into a big commercial real estate project when I was trying to purchase space for a gallery! Not 100% sure it will get great returns(8%++) but it?s a good example of accidental income. It was a ton of work initially so I?m not sure I?d recommend it to others.
I?ve also wondered if just increasing from 50-50(what the 4% rule is based on) to 75-25 is enough to give a 100% chance of success at 4%? Also social security included? Then adding any additional income and spending flexibility, maybe it?s overkill? I know inflation is a major concern. Your last sentence made me think about year 0, a big negative return then could really have an impact.
Thanks again! Awesome response!

[prognastat]

It's based on the performance history of the US stock market.

Certain calculators such as FIREcalc take your planned spending amount and your starting amount and create multiple historical projections on how it would have fared during different 30 year periods in the market and then calculates in how many of those you would have made it to the end of those 30 years without running out. the 4% rule simply comes from the fact that at about 4% you have about 95% chance of still have some amount of money left after 30 years. It's a little arbitrary in the sense that it's simply that enough people agreed with 95% chance of success being a good level of risk and so the rule spread.

As such there's also a 3.5% rule which is that if you have a SWR of 3.5% you would never have run out of money after 30 years in any 30 year period of the US stock market's history.

This would of course assume a 100% stock portfolio and one matching the stock market as closely as possible. Often something like a S&P 500 index funds etc.

There is also a camp of people that say the 4% rule is way to conservative for early retirees as you are still capable of working and you could always take on a side job if there is a market downturn and reduce your withdrawal rate during down times to avoid some of the losses that lead to you running out of money.

In the end it comes down to how much risk you are personally comfortable with, as you can see from my own plan I'm pretty risk averse in that I'm shooting for 4%, but then planning on coasting to 3.5% before fully considering myself FIRE. I'm comfortable enough with quitting my current job and moving to less lucrative things once I do reach 4% though. As for my actual allocation between stocks and bonds I'm far more comfortable with risk as I have about 95% in stocks, I feel comfortable that once I reach 3.5% SWR even with an allocation of 100% stocks there isn't really any risk of running out.

[gocurrycracker]

I?ve also wondered if just increasing from 50-50(what the 4% rule is based on) to 75-25 is enough to give a 100% chance of success at 4%? Also social security included? Then adding any additional income and spending flexibility, maybe it?s overkill? I know inflation is a major concern. Your last sentence made me think about year 0, a big negative return then could really have an impact.
Thanks again! Awesome response!

This can all be modeled in cFIREsim. Try it
http://www.cfiresim.com/

100% stock has greater volatility than 75/25 or 50/50. Volatility combined with a poor sequence of returns can mean worse results. In the original Trinity Study data, 100/0 and 50/50 have worse results than 75/25. (See Table 2 in this post: https://www.gocurrycracker.com/what-is-your-retirement-number-the-4-rule/)

The 4% rule is not based on 50-50. It is based on a wide spectrum of portfolio allocations.


There is no right answer to the question of how much you can increase spending, but the answer is similar to the early retirement question: how much do I need to save?

The only additional risk factor in continually stepping up spending is that at some point you will reach a peak in the market followed by some poor market return years. That peak might be a case where the 4% rule fails going forward. But then again it might not.

The question to ask yourself: will this incident be worse than the worst time to retire in history? And if so, what am I willing to change in regard to spending or earning to compensate (Worst time to retire example: https://www.gocurrycracker.com/the-worst-retirement-ever/)
(Note that the worst case retirement wasn't at a market peak - the market plunge didn't happen until 10 years in)


Or, another way to look at it: https://www.gocurrycracker.com/the-go-curry-cracker-endowment-fund/

[FI Obsessed]

Thanks for the response! All those are classic posts but oddly enough the first one is the article that probably had the greatest impact on my FI plan. I remember reading that when you first posted it! I can?t believe I made the two mistakes of saying the 4% rule was 50/50 and I could end up with a crazy sum of money when I croak! The 96% chance of success applies to a 50/50 stock/bond portfolio and the tens of millions applies to a 100%  stock portfolio after 30 years. Correct? Of course they vary vastly in volitility and the first 10 years would make a big difference. That article about the worst 10 years was great too but may not help me sleep! I?m going to have inflation nightmares! Apparently  that?s been solved by the FED and all the new monetary policy? 
I guess the moral of my story is that I set my plan up -save X number of dollars for X number of years plus pay off  debt then try to figure out how to be happy. The first part is math and the second part is multidimensional. I?m really about 4 years into my plan with about 35ish months to go. 25 for FI and 10 for ER. Thanks for all the help over the years. Great forum!!
To anyone out there?what about going 100% stock up until the last year or two then ending 75/25 and never rebalancing?unless major downturn? Also if that 25% in bonds is enough to support you for more then a couple years does that mean you should go with 4% because the average recession is relatively short(in the grander scheme of a 40+ year retirement)?  Also is it possible to request a mild recession in the next twelve to twenty four months so I could retire into an upswing🙂

[prognastat]

Two upside that people who FIRE have over those that retire at the regular age are:
1. Chances are you might still make money somehow during your long time being FIRE.
2. If things turn bad you are young enough that you could still work a job to recover if a worst case scenario does decide to ruin your carefully planned strategy.

[FI Obsessed]

Very true. I?ve read about it being almost difficult to avoid earning income. Some fun projects lead to lucrative part time jobs. Although it sometimes turns into work as my commercial real estate project did. I?ve also read about people who like to have potential alternative revenue streams initiated before retiring.

[gocurrycracker]

then try to figure out how to be happy.

I would do this first

I can?t believe I made the two mistakes of saying the 4% rule was 50/50 and I could end up with a crazy sum of money when I croak! The 96% chance of success applies to a 50/50 stock/bond portfolio and the tens of millions applies to a 100%  stock portfolio after 30 years. Correct?

You might be overthinking this. There is no point in measuring with a ruler when you are going to cut with an axe. Just save and invest.

If you want to really analyze this stuff, use cFIREsim. There is no consensus, so you'll get different opinions from each person you ask.

I?m going to have inflation nightmares! Apparently  that?s been solved by the FED and all the new monetary policy? 

Maybe, but maybe not. Things change. Policies change. But... Is the future going to be worse than the worst that has ever happened?

If you think the answer is yes, then you can save more. Work a year or 5 longer, nbd

[FI Obsessed]

Being happy/content is hard for me?I grew up in a?what?s next life?military brat. The Buddhist practice of mindfulness helped me temporarily but I?ve always been obsessed with my goals(I?m still working on living in the moment and appreciating it?goal #1). Goal #2 is FI then ER. Although when  I make it to $X(what I thought would give me a great sense of accomplishment)then I think $Y will be more of a relief. It?s a perpetual let down. I?m hoping for a complete financial disconnect after achieving ER. At least it will give me a little different perspective. My modest and ever changing background probably influences my perception of ER. I have learned that for me the greatest happiness has been what I find when I?m with my kids, so I do try to savor those moments.
As far as investing I?ve been currently adding 1.5% a month so that heavily outweighs returns. I really shouldn?t worry. That same amount was more like 10% when I first started aggressively adding 4 years ago. I?ve also tried multi-unit commercial real estate and that has been going surprisingly well. More luck and good friends helping then skill?so again not an endorsement of that strategy, you have to have the time and temperament. I had a few meltdowns then a friend started helping me manage it. If it was debt free it would cover about a third of our income needs. 
You are right again about my inflation fears. The worst time ever to retire should be a lot worse then a current downturn even with moderate inflation in the future. I DEFINITELY don?t want to work 5 extra years. That makes me physically ill thinking about it.  I?d rather fight that insidious viral doubt by working part time when we are in the states if I must.
New goal #3?think of myself as an axe and throw away all my rulers!! Thanks for the blog and great job on the forum!