If you're retired, what's your withdrawal rate, and is it fixed or variable? If you're not yet retired, how do you plan to approach withdrawal? Let us know in the comments!
I was using 4% and planning to forgo inflation increase in down markets. In reality spending more like 3.3% in first 6 months of retirement. Be interested in what you think of new morning star report saying swr now 3.8% and up to 4.5% if you use dynamic rates
i'm pulling 4-5% out of my IRA. More than half of that is going into my Roth, a fair amount of the rest goes to pay the taxes. The plan is to continue moving money into the Roth until 2025 when the Trump tax cuts expire. After 2025 I become a spender.
@@craigmckinlay4308 I've not read the Morningstar report yet but those numbers jive with what I'm seeing in the CAPE-adjusted model based on my own conditions, as we talked about in this episode. -Jason
Hi Guys, of the thousands of retirement finance shows out there, yours is the most enjoyable and "useful". I admit i have re-watched the 3 in this CAPE series over and over. Retired last year at 60. I have used every system out there to determine a safe rate. I may or may not have enough. After seeing this and using Karsten's sheets i finally feel a bit more comfortable. I have been looking for a CAPE based system for a while now. I am pulling about 2.7 percent right now and also look at the sheets as a maximum rate. I am sure i don't have anywhere near as much saved as either of you, but i think i will manage. In the end though i still keep my own excel sheet que'd up just to play with the numbers. Great Job here. Thanks
I look at the extra withdrawl as a 'mad money fund' that you should pull out and put aside for that new car, cruise, re-landscaping the yard, giving away or whatever.
You are both incredibly articulate spokespeople for these concepts, both the practical and the emotional. I think when you're in Jason's situation (as I am) it raises fundamental questions about what you really value. I could spend more, but I don't find joy in consumerism. And too much dining out (for example) feels frivolous to me - it's not bringing joy. We go out whenever we really want to, but it's just not that often. So my spending ends up conservative, but I don't feel I'm denying myself anything I (or my wife) truly care about.
Retiring at the end of the month - currently targeting 3.3-3.5% SWR. I have about 3 years in cash and laddered treasuries to help with my mental "spend" transition and help with some sequence risk. Certainly on the conservative end and absolutely can relate to Jason in this episode!
I enjoy using the spreadsheet, but there is something pretty important that people should keep in mind. I fear people might misunderstand that the rates on the main page are what they can always withdraw from their portfolio. I was initially confused when using it, but with the addition of supplemental cash flows the rates on the main page are SCR (Safe CONSUMPTION Rate), NOT a SWR. The SCRs tell you how much you can SPEND as a function of your initial portfolio size, NOT how you can withdraw from your portfolio. To give a concrete example, in my case if I have a $1 million portfolio my SCR is 5.76%. This means I can spend $57,600/year. But this is factoring in cash flows from my pension and SS, so what I can actually withdraw from my portfolio is $57,600 minus my pension + SS. If I double my portfolio to $2 million my SCR drops, which initially confused me, to 4.44%. But this means I can spend $88,800/year. If you remove all of the supplemental cash flows then the SCR equals the traditional SWR and they won't change regardless of the initial portfolio size. I hope this helps.
I am probably 10 years away from retirement, but I will definitely be like Jason. Life is so unexpected, I am imagining all the things that can go wrong and I just cannot bring myself to spend money on things that my mind considers frivolous. Right now my only excuse is "I can work more and make more money, so we can spend on stuff". I also do a lot of modeling for work, and knowing how easy it is to screw up while making any model lowers my trust in any tool a lot...
You guys are the best!!! I watched the last 5 minutes of this twice. I am completely entertained by your wonderful unscripted content. So interesting to get a glimpse into the psychology of risk tolerance. Thank you!!!
Great discussion as always. Thank you Eric and Jason. Our planned WR is 3.5% but I do feel more comfortable at 3%. However balancing our spending needs now versus what we might need in the later years I am ok with 3.5% (seeing people I know at similar age having curable and incurable cancers, it makes sense so enjoy life now)
WOW! I have to say I just found you guys late last night as I am in my 3rd day of retirement research as my wife and I approach the idea of taking early retirement in January 2025 (less than a year out). You have a new fan. Within just a few hours, this toolbox (along with your explanations) is making me realize how incredibly risky it would be for us to start 'blindly' withdrawing from our target of 4%. Still have a lot to learn about how to input our out-year parameters but can already see the value. I'm a bit new to all this but need to get smart on treasuries and bonds. I'm one of those who fell into the ibond craze a few years ago... but still have a ton to learn. I'm thinking you guys are going to be my new bff's. And for what it is worth... I am also screaming about the insane cost of going out to eat. Paying $50--$60 bucks for the two of us to have a burger, fries, and a beer just plain makes me angry.
Great conversation yet again. I know I’m going to struggle with spending after retirement. I am so aligned with Jason as I get great satisfaction undercutting expenses even as those expenses are in line with my budget. We have been asked to join our son and his family on a five week European trip that will take place about 1 1/2 years after we retire. I’ve never been overseas but that is certainly something I want to experience before I reach the age of having health dictate my options. (I’m 65 right now) It would also be a great gift to share the experience with his family. Our travel budget already has more than enough to handle that kind of trip, but I know my head will be spinning as we pull the trigger. Eric hit it on the nose when he talked about the priorities we need to honor. There are so many who will not get the chance to have the experiences some of us hope to cross off our bucket lists. Even having a bucket list feels like a privilege. It’s just helpful to be privy to the back and forth. Good food for thought.
Loved this topic. Echoes the conversation on Mad Fientist with Ramit Sethi on how to spend! Looking forward to hearing about the evolution of your spending philosophy!
My advice to Jason would be to get closer to a 4% WR, and use those additional funds towards discrenary expenses that can be easily dialed back in a bear market (which serves as an inherent buffer). For me, that would be experiences (travel, dining, entertainment) rather than stuff that leads to lifestyle creep. Being conservative may help sleep better initially, but you run the risk of not enjoying your wealth and leaving a far larger legacy that will be recklessly spent by the next generation.
I loved this conversation, thanks for the honesty, Jason! I struggle with this even pre-FI, saving vs spending. Y’all should try to get Ramit Sethi on for a conversation, I’d love to hear him talk to Jason about this!
Thanks for sharing, Great conversation! ...and I sympathize and agree with Jason, it's hard to just match a Top spend figure based on a number on a (very well-thought-out) spreadsheet, having also a realistic budgeted amount in front of you... keep up with these great videos!
We have a different and somewhat fortunate situation: my wife is retiring this summer with a defined benefit pension that's indexed to inflation. We are also in our mid 50s so things like Canada pension plan and old age security play an important role in planning. Deccumulation is fairly complex since these additional sources of income kick in later in retirement and provide a significant amount of security in the "no go" stage of retirement. All that to say withdrawal is likely closer to 5% in early retirement going down to 3% later. We also plan to reduce withdrawals if market situations demands. We have a fairly large "cash wedge" to cover a year's worth of expenses.
Great video as always! A perfect guest based on the discussion would be Ramit Sathi. You probably already know this but his whole thing is not just increasing your budget because you can but he pushes people to unpack their worries and feelings about money to spend on things they really value. I think it would be really interesting to hear where that discussion goes with both of you in your different situations.
Separate comment - the discipline to not go spend crazy when your WR could be increased per the CAPE model is the discipline muscle you develop from having a large enough savings rate to get to FIRE in the first place. This just dawned on me.
Plan to use cash plus small gains on protected assets ( CDs, Dividends ) in market year downturns and then pull more in up years to back feed that cash bucket. So some years we may not pull anything down expect those dividends and other years a large chunk like 80 to 100 K. Not worried about taxes because we can show an income of 115K and still be in the current 12% tax bracket.
Great discussion over safe withdraw rates. I completely agree that the appropriate SWR needs to be considered in connection with market conditions at the time one retires (and monitored throughout retirement based on one's then current WR relative to then current market conditions). Failure scenarios for the 4% rule are not random. They occur when the assumed retirement date is in a period of very high market valuations.
Recently come across your channel and have been playing with the SWR Toolbox (which is great). I'm 50 and I could RE, the SWR Toolbox says I have a 0% chance of failure at 4.5% SWR and I need approx 3.0% budget wise. Jason, I'm totally with you in terms of your conservative mentality as that is exactly my outlook and I too have some mental adjustment to go through over the next few years. Excellent video that really helps me with my apprehensions around RE.
Man, finding you guys has been such good fortune. I’m looking to exit in the next 5-7 years so a lot of great info to help me fine tune the approach. I’m in the Bay Area so it’s interesting to see Jason’s take on doing something similar (I’m staying in CA too). Thanks for everything.
Pulled retirement trigger at 58, two years ago. Wanted to protect my SWR from a market downturn. Went to large cash position 35% before retiring. Enough cash to ride out any bear till 70 and then collect SS. After 2 years living off cash with 10 years to go, I’m in good shape. I don’t need to sell beaten up stocks, in fact my cash position is earning 4.5 percent and may start laddering longer CD rates that are starting to push out over 5.25% 2 or 3 yrs out. Wasn’t counting on a cash being an income producer but just a large safety net. Income low enough to get large ACA insurance premiums for the wife and I. If I had listened to most people that said 2 or 3 years at most is plenty of cash, invest the rest. I would be tightening the belt right now. Instead we’re going to Hawaii (Maui) for 2 weeks. The cash position I built makes our retirement almost bulletproof. Remember offense wins games, Defense wins championships.
Just RE’d at 57, and my failsafe is 3.25%., but my actual starting draw is 2.7%. The difference between 2.7 and 3.25 is basically my emergency buffer for any chunky contingencies. The thing I struggle with Trinity and other similar studies is that cohorts that survived difficult stretches survived *because* there was no concept of giving yourself a “raise” in the good years when markets were up - expenses simply grew at the inflation rate. So, for my peace of mind I’ll stick with inflation only raises for the first 5 years or so regardless of market performance should this bull market keep running. I know in theory I could continue to adjust every month using the SWR toolbox, but that approach makes me uneasy.
I am still struggling with CAPE ratio. If one uses the CAPE ratio to determine withdrawal rate, what exactly is the balance upon which the withdrawal *amount* is determined? Is it the 1/1 balance every year using the 1/1 CAPE ratio? Is it the Year One of FI balance adjusted to the current year for inflation? I'm so confused by how to actually implement the additional precision. To be clear, the old way was 4% of the Year One balance, then increase that dollar amount for inflation each year regardless of the portfolio balance. Would love some clarification on what is being recommended. Thanks!
Jason, have you considered in months that the CAPE adjusted WR states you could withdraw more, taking that excess and putting it into cash/treasuries/bonds as a way to increase your cash buffer. I guess that's a rebalancing act, but it seems like this data could provide some benefit other than another peace of mind calculation.
Another great episode and I feel the cognitive dissonance of caution vs getting only one shot on the planet. I'm looking at an FI life from Q2 2024 and it will be stepped at 3% 2024-2027 (when in the UK I can access pension funds) and then 3.5-3.75% depending on CAPE ratio levels, with a further review at yr 7. Big thanks for introducing me to the SWR Toolbox and the wealth of analysis that Big ERN has done.
Hi Adam. Good to hear from another based in the UK. Will you be turning 55 (private pension access age in the UK) in 2027, and will you be factoring in your state pension at 67? What kind of expenses do you think a UK couple would need per annum to have a decent retirement in the UK? Thanks
As Jason mentions people tuning out, im leaning forward and turning the volume up a tad. :) I think most people who consume this content probably did the same
Another excellent episode guys. I wonder if getting the spouses more involved in the calculations and budget in a way that connects to them would reduce the emotional burden, particularly when considering more spend. My husband and I learn and communicate quite differently, however by us both being up to speed on the impact of increasing some spend, we can agree pretty quickly on how much and what to spend money on. It takes practice and creativity and can be frustrating or comical at first.
That 3% vs 4.5% wr is not super substantial month to month, but extrapolated over a year or even a few years that’s tens of thousands of unspent dollars. It just becomes more magnified and larger with every passing month.
Naturally. But so long as it’s at or below your SWR, it’s all good. The former “risks” you dying with a lot of money remaining, while the other is more likely to leave you with whatever you targeted as your portfolio end value. It’s just a choice.
@@TwoSidesOfFI of course. All I was intending to say is month to month it might only seem like you’re foregoing a minimal amount of money, but it looks a lot different over the course of a year, or even a few years. Though I also recognize that it’s not entirely foregone, it could still be withdrawn, it just hasn’t been. Anyways, love the channel and the always premium content!
I like how Eric really articulates the practical value behind retirement tools and concepts. His perspective helped me expand my understanding on these topics Jason talks about. Also, I noticed Eric emphasizes simplicity for long term portfolio maintenance, while Jason emphasizes financial forecasting with modeling, which combined helps hedge against market uncertainty and supports management sustainability. This is an aspect that makes these videos interesting, at least to me since both are important. BTW; thanks for uploading another quality video.
Hi guys, thanks for another great episode! I have a question: as I am projecting future retirement (several years from now), how do I account for the additional contributions to my portfolio between now and retirement date?
Most calculators assume you have all your money at the start and draw it down. Not my case. Also I've had years I've taken over 10% and many years I take nothing. My spending also varies wildly year to year since we're debt free and flexible.
After putting my numbers in last week it came in around 6/7, I almost fell over. Checked it multiple times. Matched it against another tool and my spreadsheets and they came somewhat in line together. I still hold 3 years cash equivalents (for my sanity). 18 months until I pull the trigger
The less you spent today, the more you spent tomorrow, thats applies to retirement as well. If you withdraw 3% when you can 4,5%, the 3% will grow, but when you withdraw every dolar to the limit, on average, it will be more or less constant value. Especially if you retire early you still have many decades for your money to work for you. In the worst case scenario you leave your money to your children, which most people want to do anyway.
I love the overthinking portion!! Sometimes 'its the principle of it' creeps into purchases (sometimes keeps us from making it) or the DANG IT reaction afterwards :-) good stuff
Annuities can have a role for part of many people's portfolio - often to cover the so-called "dignity floor" of essential expenses. To be clear, neither of us rely on Monte Carlo simulations to determine our likelihood of success, though they are an interesting and useful tool.
I have an unresolved issue with the SWR Toolbox. I change one value only, the portfolio size from the default $3M down to $2M. looking at the Main Tab, the results seem to have improved. For example, the 4% WR failure rate goes from 34.82% (CAPE>20) to 26.18%. This makes no sense to me and I worry that there is a problem with the cash flow algorithms.
if you have future inflows of any substance i suspect they are improving the SWR by having a larger percent impact on your smaller portfolio. i say this because when i take Karsten's demo data and change $3M to $2M the failure rates definitely go up. he does have both future inflows and outflows in the demo, but these aren't large enough of an impact to yield the result you're seeing. correspondingly, when i remove his future inflows + outflows and do the same test ($3M => $2M) you see the expected result of the failure rates being identical.
@@TwoSidesOfFI Thank you for looking at this. I'm still seeing a different result, using only the demo data. When I change portfolio size from $3M to $2M, the 5% failure rate at CAPE>20 goes from SCR 3.60% to 3.72%. If I drop it to $1M the SCR at 5% failure rate goes to 4.06%. I suspect this has to do with the difference of SWR vs SCR, but I haven't quite wrapped my head around that yet because I'm so ingrained in thinking about SWR... Love the podcast BTW. I'm new and have been catching up on many past episodes. Your content is fantastic and really resonates with me. So thank you!
@@greggarner9515 I just downloaded the most recent toolbox and verified there is nothing in the cash flow assist columns. When I change the size of the portfolio, it has no effect on the SCR for a given failure rate.
The detailed instructions for obtaining the toolbox are provided in Part 1 of this series. You can find a link to all three parts of this series and the show notes at twosidesoffi.com/toolbox
Great epidose guys. I downloaded the tool and put in my specifics and it was in line with what i expected. I then decided to see what the numbers would like if i put in a portfolio value 3x what mine is. When i did this, the SWR actually dropped? And when i lower the amount from my current value, the SWR goes up>. Any explantation for this?
It's because of the supplemental cash flows that you added. It's a bit confusing, but the rates on the main page are SCR (Safe CONSUMPTION Rate), NOT a SWR. The SCRs tell you how much you can SPEND as a function of your initial portfolio size, NOT how you can withdraw from your portfolio. To give a concrete example, in my case if I have a $1 million portfolio my SCR is 5.76%. This means I can spend $57,600/year. But this is factoring in cash flows from my pension and SS, so what I can actually withdraw from my portfolio is $57,600 minus my pension + SS. If I double my portfolio to $2 million my SCR drops, as you noticed, to 4.44%. But this means I can spend $88,800/year. If you remove all of the supplemental cash flows then the SCR equals the traditional SWR and they won't change regardless of the initial portfolio size. I hope this helps.
Im wondering with more semi liquid products availalble to affluent investors, with equity like returns and fixed income volatility, does that increase the SWR? there is little history to those private vehicles but it looks pomising that they can reduce sequencing risks
Who knows? The answer is probably yes some years and no others. We don't suppose there is a consistent answer, as with any investments. Neither of us include any of the more exotic asset classes to which we could be entitled should we want to be accredited investors. For more on things like private real estate funds, see Karsten's ERN blog.
Do you model in your portfolio the tax liability on the portion of your portfolio from 401k or other pre-tax buckets because I see 4% of total portfolio for expenses per year but you need to account for a significant higher number needed if your buckets are like 50% pre-tax funds.
Jason here - I'm only spending from after tax accounts presently given my age. While it's important to consider the tax consequences of these assets, it's basically immaterial at this stage. We're well below the 0% capital gains ceiling as well.
50% payout estimate for Social Security is incredibly pessimistic, hard to imagine that there will be any popular support to such a drastic cut to any Social Security recipient, I use 75% in my projections. If I were to guess on how it will be resolved - FRA rises 1-2 years in a phased in approach, taxes rise a bit - again phased in.
Agree, 50% is very pessimistic. Anyone over 55 should be able to plan on 100%, anybody younger should still be able to count on at least 75%, but the most likely impacts are going to be increased payroll taxes, raising the FRA and 62 minimum by a few years, and likely means testing (but this would likely only be those with multimillion portfolios).
I need to do more planning for the specific number because I agree with the CAPE impact and can't say for sure the percent on top of the fact that it'll be at least partially variable. Considering in 13 years, there will be a pension that will cover all of my family's necessities, our largest considerations are how much discretionary we desire and if I am going to work the entire time before the pension kicks in(it's not my pension).
Does not the cost of withdrawals in good and bad times not naturally make you spend less in bad times? Small children cannot defer eating a treat for five minutes even if they get five treats as a result but I am not like that.
That's the idea, Simon. For me, I suspect the impact would more likely be on unusually large purchases as opposed to routine budget spending. What I mean is that my budgeting/spending practices weren't any different in 2021 as opposed to 2022, despite the economic climate being very different. But if I had an optional larger home construction project I wanted to do in 2022, I might have delayed until market conditions were better, so long as there wasn't any negative impact. -Jason
@@TwoSidesOfFI When you use the CAPE adjusted SWR, lets say your first year the SWR was 4% but the CAPE changed and the next year it is 4.25%...do you multiply that by current portfolio value or original portfolio value?
Good conversation, but I suspect Eric will be less cavalier when he starts withdrawing. Withdrawing in this current economy is a little rough. And as for going out to eat, I’ve had to do a double take a couple times lately at the bill. Nothing seems to have gone up like going out. Last week I had a beer that had to be a $1 per ounce and it wasn’t that great. Anyways, good stuff.
Eric here...perhaps I'll feel differently when I'm in his seat. However, I'd argue that moving from a 3% to a 3.5% w/r in Jason's case where the math says he can draw 4.5% as a ceiling isn't all that 'cavalier'.
I listened to this on audio and did chuckle aloud on my walk today at some banter at the end. Have either of you read/reviewed Bill Perkins’ DIE WITH ZERO book? He was a December (?) guest on the All The Hacks pod. Worth a listen about slotting life experiences in the right timeframe to yield what he calls “net fulfillment” and reaping the “dividends of memories”.
I thought about pulling the early retirement trigger two years ago. I’m so glad I didn’t because it would have been an awful sequence of returns. Last year was bad, this year is starting to look even worse. Tomorrow when the banks open will be extremely interesting with the whole SVB failure
The 4% rule includes the worst events in history and isn't an average. Its the worst of the worst. The SVB failure was just another blip in history. The 4% rule is more than safe.
CAPE. SCHMAPE. I just think the analysis is way too detailed. What do you fine chaps think about the 1/n withdrawal method where n=number of years you want to take cash. Seems far simpler and therefore better. Am I missing something?
The premise behind incorporating CAPE is that 4% when the market is overvalued is not the same degree of safety as 4% when the market is undervalued, and everything in between. They're trying to introduce that valuation as a factor. Perfect comparative example would be starting FI on 1/3/22 when the market was at a peak compared to 1/3/23 after a 20% drop.
@@rpguitar I see your point. I guess I’m happier to have a simple system at the expense of certainty of returns. As long as there are guaranteed social security payments coming, everything else is gravy. I’m more concerned with losing my marbles and being unable to follow complex systems as I age.
If you're retired, what's your withdrawal rate, and is it fixed or variable? If you're not yet retired, how do you plan to approach withdrawal? Let us know in the comments!
I should be getting a pension and so our plan is to just pull in the spending when the market is bad and spend our 4% when the market is good 😊
I was using 4% and planning to forgo inflation increase in down markets. In reality spending more like 3.3% in first 6 months of retirement. Be interested in what you think of new morning star report saying swr now 3.8% and up to 4.5% if you use dynamic rates
i'm pulling 4-5% out of my IRA. More than half of that is going into my Roth, a fair amount of the rest goes to pay the taxes. The plan is to continue moving money into the Roth until 2025 when the Trump tax cuts expire. After 2025 I become a spender.
@@craigmckinlay4308 I've not read the Morningstar report yet but those numbers jive with what I'm seeing in the CAPE-adjusted model based on my own conditions, as we talked about in this episode. -Jason
Variable based on returns. Negative years like 2022 I spend less 2.5-3.5 percent.
These gentlemen have the sharpest financial content on TH-cam.🎯🎯🎯
Thanks, David!
Totally agree!!
Hi Guys, of the thousands of retirement finance shows out there, yours is the most enjoyable and "useful". I admit i have re-watched the 3 in this CAPE series over and over. Retired last year at 60. I have used every system out there to determine a safe rate. I may or may not have enough. After seeing this and using Karsten's sheets i finally feel a bit more comfortable. I have been looking for a CAPE based system for a while now. I am pulling about 2.7 percent right now and also look at the sheets as a maximum rate. I am sure i don't have anywhere near as much saved as either of you, but i think i will manage. In the end though i still keep my own excel sheet que'd up just to play with the numbers. Great Job here. Thanks
Thanks so much for the kind words! Wishing you all the best in your journey. Please keep us posted on how you're doing!
I look at the extra withdrawl as a 'mad money fund' that you should pull out and put aside for that new car, cruise, re-landscaping the yard, giving away or whatever.
You are both incredibly articulate spokespeople for these concepts, both the practical and the emotional. I think when you're in Jason's situation (as I am) it raises fundamental questions about what you really value. I could spend more, but I don't find joy in consumerism. And too much dining out (for example) feels frivolous to me - it's not bringing joy. We go out whenever we really want to, but it's just not that often. So my spending ends up conservative, but I don't feel I'm denying myself anything I (or my wife) truly care about.
Cheers, Mike...thanks for the comment and your support! We appreciate it.
Retiring at the end of the month - currently targeting 3.3-3.5% SWR. I have about 3 years in cash and laddered treasuries to help with my mental "spend" transition and help with some sequence risk. Certainly on the conservative end and absolutely can relate to Jason in this episode!
I enjoy using the spreadsheet, but there is something pretty important that people should keep in mind. I fear people might misunderstand that the rates on the main page are what they can always withdraw from their portfolio. I was initially confused when using it, but with the addition of supplemental cash flows the rates on the main page are SCR (Safe CONSUMPTION Rate), NOT a SWR. The SCRs tell you how much you can SPEND as a function of your initial portfolio size, NOT how you can withdraw from your portfolio. To give a concrete example, in my case if I have a $1 million portfolio my SCR is 5.76%. This means I can spend $57,600/year. But this is factoring in cash flows from my pension and SS, so what I can actually withdraw from my portfolio is $57,600 minus my pension + SS. If I double my portfolio to $2 million my SCR drops, which initially confused me, to 4.44%. But this means I can spend $88,800/year. If you remove all of the supplemental cash flows then the SCR equals the traditional SWR and they won't change regardless of the initial portfolio size. I hope this helps.
I am probably 10 years away from retirement, but I will definitely be like Jason. Life is so unexpected, I am imagining all the things that can go wrong and I just cannot bring myself to spend money on things that my mind considers frivolous. Right now my only excuse is "I can work more and make more money, so we can spend on stuff".
I also do a lot of modeling for work, and knowing how easy it is to screw up while making any model lowers my trust in any tool a lot...
You guys are the best!!! I watched the last 5 minutes of this twice. I am completely entertained by your wonderful unscripted content. So interesting to get a glimpse into the psychology of risk tolerance. Thank you!!!
Thank you so much, Lori! We appreciate the kind words and your support.
Great discussion as always. Thank you Eric and Jason. Our planned WR is 3.5% but I do feel more comfortable at 3%. However balancing our spending needs now versus what we might need in the later years I am ok with 3.5% (seeing people I know at similar age having curable and incurable cancers, it makes sense so enjoy life now)
Thanks, Anh. You're 100% right that we need to think about that balance!
WOW! I have to say I just found you guys late last night as I am in my 3rd day of retirement research as my wife and I approach the idea of taking early retirement in January 2025 (less than a year out). You have a new fan. Within just a few hours, this toolbox (along with your explanations) is making me realize how incredibly risky it would be for us to start 'blindly' withdrawing from our target of 4%. Still have a lot to learn about how to input our out-year parameters but can already see the value.
I'm a bit new to all this but need to get smart on treasuries and bonds. I'm one of those who fell into the ibond craze a few years ago... but still have a ton to learn. I'm thinking you guys are going to be my new bff's.
And for what it is worth... I am also screaming about the insane cost of going out to eat. Paying $50--$60 bucks for the two of us to have a burger, fries, and a beer just plain makes me angry.
Great conversation yet again. I know I’m going to struggle with spending after retirement. I am so aligned with Jason as I get great satisfaction undercutting expenses even as those expenses are in line with my budget. We have been asked to join our son and his family on a five week European trip that will take place about 1 1/2 years after we retire. I’ve never been overseas but that is certainly something I want to experience before I reach the age of having health dictate my options. (I’m 65 right now) It would also be a great gift to share the experience with his family. Our travel budget already has more than enough to handle that kind of trip, but I know my head will be spinning as we pull the trigger. Eric hit it on the nose when he talked about the priorities we need to honor. There are so many who will not get the chance to have the experiences some of us hope to cross off our bucket lists. Even having a bucket list feels like a privilege. It’s just helpful to be privy to the back and forth. Good food for thought.
Loved this topic. Echoes the conversation on Mad Fientist with Ramit Sethi on how to spend! Looking forward to hearing about the evolution of your spending philosophy!
My advice to Jason would be to get closer to a 4% WR, and use those additional funds towards discrenary expenses that can be easily dialed back in a bear market (which serves as an inherent buffer). For me, that would be experiences (travel, dining, entertainment) rather than stuff that leads to lifestyle creep. Being conservative may help sleep better initially, but you run the risk of not enjoying your wealth and leaving a far larger legacy that will be recklessly spent by the next generation.
Great guidance, Anil. Stay tuned for more on what Jason ends up doing!
I loved this conversation, thanks for the honesty, Jason! I struggle with this even pre-FI, saving vs spending. Y’all should try to get Ramit Sethi on for a conversation, I’d love to hear him talk to Jason about this!
Thanks, Katherine! Oh wow if only we could get him. Love his stuff. Give him a call! 😂
So much pleasure taken when watching these episodes guys. Thank you.
Thanks, Shawn! We appreciate your support
Thanks for sharing, Great conversation!
...and I sympathize and agree with Jason, it's hard to just match a Top spend figure based on a number on a (very well-thought-out) spreadsheet, having also a realistic budgeted amount in front of you... keep up with these great videos!
Thanks, Enrique!
We have a different and somewhat fortunate situation: my wife is retiring this summer with a defined benefit pension that's indexed to inflation. We are also in our mid 50s so things like Canada pension plan and old age security play an important role in planning. Deccumulation is fairly complex since these additional sources of income kick in later in retirement and provide a significant amount of security in the "no go" stage of retirement. All that to say withdrawal is likely closer to 5% in early retirement going down to 3% later. We also plan to reduce withdrawals if market situations demands. We have a fairly large "cash wedge" to cover a year's worth of expenses.
Great video as always! A perfect guest based on the discussion would be Ramit Sathi. You probably already know this but his whole thing is not just increasing your budget because you can but he pushes people to unpack their worries and feelings about money to spend on things they really value. I think it would be really interesting to hear where that discussion goes with both of you in your different situations.
Thank you! We would love to talk to him. Perhaps if enough of you tell him we exist he'll check us out!
Separate comment - the discipline to not go spend crazy when your WR could be increased per the CAPE model is the discipline muscle you develop from having a large enough savings rate to get to FIRE in the first place. This just dawned on me.
Exactly.
Yep! It’s a tough transition for many people. We are learning with each day.
@@TwoSidesOfFI we are learning alongside you. Thanks for your content.
Plan to use cash plus small gains on protected assets ( CDs, Dividends ) in market year downturns and then pull more in up years to back feed that cash bucket. So some years we may not pull anything down expect those dividends and other years a large chunk like 80 to 100 K. Not worried about taxes because we can show an income of 115K and still be in the current 12% tax bracket.
Great discussion over safe withdraw rates. I completely agree that the appropriate SWR needs to be considered in connection with market conditions at the time one retires (and monitored throughout retirement based on one's then current WR relative to then current market conditions). Failure scenarios for the 4% rule are not random. They occur when the assumed retirement date is in a period of very high market valuations.
Thanks! We're in agreement
Greatly appreciate your FI conversation guys!
Thanks!
Recently come across your channel and have been playing with the SWR Toolbox (which is great). I'm 50 and I could RE, the SWR Toolbox says I have a 0% chance of failure at 4.5% SWR and I need approx 3.0% budget wise. Jason, I'm totally with you in terms of your conservative mentality as that is exactly my outlook and I too have some mental adjustment to go through over the next few years. Excellent video that really helps me with my apprehensions around RE.
Great! Thank you for your support
Man, finding you guys has been such good fortune. I’m looking to exit in the next 5-7 years so a lot of great info to help me fine tune the approach. I’m in the Bay Area so it’s interesting to see Jason’s take on doing something similar (I’m staying in CA too). Thanks for everything.
Pulled retirement trigger at 58, two years ago. Wanted to protect my SWR from a market downturn. Went to large cash position 35% before retiring. Enough cash to ride out any bear till 70 and then collect SS. After 2 years living off cash with 10 years to go, I’m in good shape. I don’t need to sell beaten up stocks, in fact my cash position is earning 4.5 percent and may start laddering longer CD rates that are starting to push out over 5.25% 2 or 3 yrs out. Wasn’t counting on a cash being an income producer but just a large safety net.
Income low enough to get large ACA insurance premiums for the wife and I. If I had listened to most people that said 2 or 3 years at most is plenty of cash, invest the rest. I would be tightening the belt right now. Instead we’re going to Hawaii (Maui) for 2 weeks. The cash position I built makes our retirement almost bulletproof. Remember offense wins games, Defense wins championships.
Loved the conversation but my prior comment to this video is receiving "what's up" spam.
Just RE’d at 57, and my failsafe is 3.25%., but my actual starting draw is 2.7%. The difference between 2.7 and 3.25 is basically my emergency buffer for any chunky contingencies. The thing I struggle with Trinity and other similar studies is that cohorts that survived difficult stretches survived *because* there was no concept of giving yourself a “raise” in the good years when markets were up - expenses simply grew at the inflation rate. So, for my peace of mind I’ll stick with inflation only raises for the first 5 years or so regardless of market performance should this bull market keep running. I know in theory I could continue to adjust every month using the SWR toolbox, but that approach makes me uneasy.
I am still struggling with CAPE ratio. If one uses the CAPE ratio to determine withdrawal rate, what exactly is the balance upon which the withdrawal *amount* is determined? Is it the 1/1 balance every year using the 1/1 CAPE ratio? Is it the Year One of FI balance adjusted to the current year for inflation? I'm so confused by how to actually implement the additional precision.
To be clear, the old way was 4% of the Year One balance, then increase that dollar amount for inflation each year regardless of the portfolio balance. Would love some clarification on what is being recommended. Thanks!
I love your motto. You are doing a good job.👍
Thanks
Best one yet...Jason sounds just like me.
Thank you!
Jason, have you considered in months that the CAPE adjusted WR states you could withdraw more, taking that excess and putting it into cash/treasuries/bonds as a way to increase your cash buffer. I guess that's a rebalancing act, but it seems like this data could provide some benefit other than another peace of mind calculation.
Thanks for the idea, John. I hadn't considered it but I appreciate you sharing it. Jason
Jason might get some good insight from Ramit Sethi. Possible guest?
Love the show!
Sure thing - let him know we'd love to have him on! Check out some of our more recent episodes as I've come to terms with spending more :) -Jason
Another great episode and I feel the cognitive dissonance of caution vs getting only one shot on the planet. I'm looking at an FI life from Q2 2024 and it will be stepped at 3% 2024-2027 (when in the UK I can access pension funds) and then 3.5-3.75% depending on CAPE ratio levels, with a further review at yr 7. Big thanks for introducing me to the SWR Toolbox and the wealth of analysis that Big ERN has done.
Hi Adam. Good to hear from another based in the UK. Will you be turning 55 (private pension access age in the UK) in 2027, and will you be factoring in your state pension at 67?
What kind of expenses do you think a UK couple would need per annum to have a decent retirement in the UK? Thanks
Keep smiling and laughing!!! Luving it.
As Jason mentions people tuning out, im leaning forward and turning the volume up a tad. :) I think most people who consume this content probably did the same
Great! Glad you liked it
Another excellent episode guys. I wonder if getting the spouses more involved in the calculations and budget in a way that connects to them would reduce the emotional burden, particularly when considering more spend. My husband and I learn and communicate quite differently, however by us both being up to speed on the impact of increasing some spend, we can agree pretty quickly on how much and what to spend money on. It takes practice and creativity and can be frustrating or comical at first.
That 3% vs 4.5% wr is not super substantial month to month, but extrapolated over a year or even a few years that’s tens of thousands of unspent dollars. It just becomes more magnified and larger with every passing month.
Naturally. But so long as it’s at or below your SWR, it’s all good. The former “risks” you dying with a lot of money remaining, while the other is more likely to leave you with whatever you targeted as your portfolio end value. It’s just a choice.
@@TwoSidesOfFI of course. All I was intending to say is month to month it might only seem like you’re foregoing a minimal amount of money, but it looks a lot different over the course of a year, or even a few years.
Though I also recognize that it’s not entirely foregone, it could still be withdrawn, it just hasn’t been. Anyways, love the channel and the always premium content!
@@jakeoswald8017 Going from 3% to 4.5% is a 50% increase in withdrawal. Seems substantial to me.
I like how Eric really articulates the practical value behind retirement tools and concepts. His perspective helped me expand my understanding on these topics Jason talks about. Also, I noticed Eric emphasizes simplicity for long term portfolio maintenance, while Jason emphasizes financial forecasting with modeling, which combined helps hedge against market uncertainty and supports management sustainability. This is an aspect that makes these videos interesting, at least to me since both are important. BTW; thanks for uploading another quality video.
Hi guys, thanks for another great episode! I have a question: as I am projecting future retirement (several years from now), how do I account for the additional contributions to my portfolio between now and retirement date?
Most calculators assume you have all your money at the start and draw it down. Not my case.
Also I've had years I've taken over 10% and many years I take nothing. My spending also varies wildly year to year since we're debt free and flexible.
After putting my numbers in last week it came in around 6/7, I almost fell over. Checked it multiple times. Matched it against another tool and my spreadsheets and they came somewhat in line together. I still hold 3 years cash equivalents (for my sanity). 18 months until I pull the trigger
The less you spent today, the more you spent tomorrow, thats applies to retirement as well. If you withdraw 3% when you can 4,5%, the 3% will grow, but when you withdraw every dolar to the limit, on average, it will be more or less constant value. Especially if you retire early you still have many decades for your money to work for you. In the worst case scenario you leave your money to your children, which most people want to do anyway.
I love the overthinking portion!! Sometimes 'its the principle of it' creeps into purchases (sometimes keeps us from making it) or the DANG IT reaction afterwards :-) good stuff
So true, right? I'm getting better but still more growth is yet to come -J
5-6% fixed annuity for 5-10 years might be better than trusting in Monte Carlo analysis ?
Annuities can have a role for part of many people's portfolio - often to cover the so-called "dignity floor" of essential expenses. To be clear, neither of us rely on Monte Carlo simulations to determine our likelihood of success, though they are an interesting and useful tool.
I have an unresolved issue with the SWR Toolbox. I change one value only, the portfolio size from the default $3M down to $2M. looking at the Main Tab, the results seem to have improved. For example, the 4% WR failure rate goes from 34.82% (CAPE>20) to 26.18%. This makes no sense to me and I worry that there is a problem with the cash flow algorithms.
if you have future inflows of any substance i suspect they are improving the SWR by having a larger percent impact on your smaller portfolio. i say this because when i take Karsten's demo data and change $3M to $2M the failure rates definitely go up. he does have both future inflows and outflows in the demo, but these aren't large enough of an impact to yield the result you're seeing. correspondingly, when i remove his future inflows + outflows and do the same test ($3M => $2M) you see the expected result of the failure rates being identical.
@@TwoSidesOfFI Thank you for looking at this. I'm still seeing a different result, using only the demo data. When I change portfolio size from $3M to $2M, the 5% failure rate at CAPE>20 goes from SCR 3.60% to 3.72%. If I drop it to $1M the SCR at 5% failure rate goes to 4.06%.
I suspect this has to do with the difference of SWR vs SCR, but I haven't quite wrapped my head around that yet because I'm so ingrained in thinking about SWR...
Love the podcast BTW. I'm new and have been catching up on many past episodes. Your content is fantastic and really resonates with me. So thank you!
@@greggarner9515 I just downloaded the most recent toolbox and verified there is nothing in the cash flow assist columns. When I change the size of the portfolio, it has no effect on the SCR for a given failure rate.
How do i get hold of the toolbox?
The detailed instructions for obtaining the toolbox are provided in Part 1 of this series. You can find a link to all three parts of this series and the show notes at twosidesoffi.com/toolbox
Great epidose guys. I downloaded the tool and put in my specifics and it was in line with what i expected. I then decided to see what the numbers would like if i put in a portfolio value 3x what mine is. When i did this, the SWR actually dropped? And when i lower the amount from my current value, the SWR goes up>. Any explantation for this?
It's because of the supplemental cash flows that you added. It's a bit confusing, but the rates on the main page are SCR (Safe CONSUMPTION Rate), NOT a SWR. The SCRs tell you how much you can SPEND as a function of your initial portfolio size, NOT how you can withdraw from your portfolio. To give a concrete example, in my case if I have a $1 million portfolio my SCR is 5.76%. This means I can spend $57,600/year. But this is factoring in cash flows from my pension and SS, so what I can actually withdraw from my portfolio is $57,600 minus my pension + SS. If I double my portfolio to $2 million my SCR drops, as you noticed, to 4.44%. But this means I can spend $88,800/year. If you remove all of the supplemental cash flows then the SCR equals the traditional SWR and they won't change regardless of the initial portfolio size. I hope this helps.
@@earlyretirement1459 Yes, the term "SCR" is very confusing! Your explanation and example was VERY helpful for me. Thanks!
Im wondering with more semi liquid products availalble to affluent investors, with equity like returns and fixed income volatility, does that increase the SWR? there is little history to those private vehicles but it looks pomising that they can reduce sequencing risks
Who knows? The answer is probably yes some years and no others. We don't suppose there is a consistent answer, as with any investments. Neither of us include any of the more exotic asset classes to which we could be entitled should we want to be accredited investors. For more on things like private real estate funds, see Karsten's ERN blog.
Do you model in your portfolio the tax liability on the portion of your portfolio from 401k or other pre-tax buckets because I see 4% of total portfolio for expenses per year but you need to account for a significant higher number needed if your buckets are like 50% pre-tax funds.
Jason here - I'm only spending from after tax accounts presently given my age. While it's important to consider the tax consequences of these assets, it's basically immaterial at this stage. We're well below the 0% capital gains ceiling as well.
50% payout estimate for Social Security is incredibly pessimistic, hard to imagine that there will be any popular support to such a drastic cut to any Social Security recipient, I use 75% in my projections. If I were to guess on how it will be resolved - FRA rises 1-2 years in a phased in approach, taxes rise a bit - again phased in.
Agree, 50% is very pessimistic. Anyone over 55 should be able to plan on 100%, anybody younger should still be able to count on at least 75%, but the most likely impacts are going to be increased payroll taxes, raising the FRA and 62 minimum by a few years, and likely means testing (but this would likely only be those with multimillion portfolios).
Jason here - I don’t disagree! But it’s intentionally pessimistic. It’s just a failsafe calculation on my part.
I think if they do nothing, benefits will have to be cut by ~%25 so that's a good number for planning.
I need to do more planning for the specific number because I agree with the CAPE impact and can't say for sure the percent on top of the fact that it'll be at least partially variable. Considering in 13 years, there will be a pension that will cover all of my family's necessities, our largest considerations are how much discretionary we desire and if I am going to work the entire time before the pension kicks in(it's not my pension).
Does not the cost of withdrawals in good and bad times not naturally make you spend less in bad times? Small children cannot defer eating a treat for five minutes even if they get five treats as a result but I am not like that.
That's the idea, Simon. For me, I suspect the impact would more likely be on unusually large purchases as opposed to routine budget spending. What I mean is that my budgeting/spending practices weren't any different in 2021 as opposed to 2022, despite the economic climate being very different. But if I had an optional larger home construction project I wanted to do in 2022, I might have delayed until market conditions were better, so long as there wasn't any negative impact. -Jason
Can you do the CAPE adjusted withdrawal just annually instead of monthly? I am pretty lazy...
I don’t see why not
@@TwoSidesOfFI When you use the CAPE adjusted SWR, lets say your first year the SWR was 4% but the CAPE changed and the next year it is 4.25%...do you multiply that by current portfolio value or original portfolio value?
Thanks
Good conversation, but I suspect Eric will be less cavalier when he starts withdrawing. Withdrawing in this current economy is a little rough. And as for going out to eat, I’ve had to do a double take a couple times lately at the bill. Nothing seems to have gone up like going out. Last week I had a beer that had to be a $1 per ounce and it wasn’t that great. Anyways, good stuff.
Eric here...perhaps I'll feel differently when I'm in his seat. However, I'd argue that moving from a 3% to a 3.5% w/r in Jason's case where the math says he can draw 4.5% as a ceiling isn't all that 'cavalier'.
I listened to this on audio and did chuckle aloud on my walk today at some banter at the end. Have either of you read/reviewed Bill Perkins’ DIE WITH ZERO book? He was a December (?) guest on the All The Hacks pod. Worth a listen about slotting life experiences in the right timeframe to yield what he calls “net fulfillment” and reaping the “dividends of memories”.
Jason here - I haven't read it yet but it's on the list!
hahhaha $90 for "salad and drinks" Been there ! It's a Oh hell no... but yeah get the feeling. :)
Right??? 😂
🎉🎉
We're all one step from "Get off my lawn!"
Ha! True
I think Jason is there and has not recognized it. It's ok. Welcome 😁
First
Yep! See the pinned comment + let us know what you think after viewing
I plan on 3.5 maybe up to 4.5 in first couple of years depending on the market.
I thought about pulling the early retirement trigger two years ago. I’m so glad I didn’t because it would have been an awful sequence of returns. Last year was bad, this year is starting to look even worse. Tomorrow when the banks open will be extremely interesting with the whole SVB failure
The 4% rule includes the worst events in history and isn't an average. Its the worst of the worst. The SVB failure was just another blip in history. The 4% rule is more than safe.
CAPE. SCHMAPE. I just think the analysis is way too detailed. What do you fine chaps think about the 1/n withdrawal method where n=number of years you want to take cash. Seems far simpler and therefore better. Am I missing something?
The premise behind incorporating CAPE is that 4% when the market is overvalued is not the same degree of safety as 4% when the market is undervalued, and everything in between. They're trying to introduce that valuation as a factor. Perfect comparative example would be starting FI on 1/3/22 when the market was at a peak compared to 1/3/23 after a 20% drop.
@@rpguitar I see your point. I guess I’m happier to have a simple system at the expense of certainty of returns. As long as there are guaranteed social security payments coming, everything else is gravy. I’m more concerned with losing my marbles and being unable to follow complex systems as I age.