Finance-filter. Does my early retirement plan pass the sniff test?
March 9, 2021 8:20 AM   Subscribe

Hello! I have always managed my own finances. I don't really trust financial advisors to not sell me things. But there's tons of resources online. Can you review my retirement plan and tell me if it feels right or not?

I am 30. We are a DINK couple, earning 200K a year, in pretty reliable jobs. We are currently saving around $60K/year pre-tax.

Assuming we spend the same in retirement as we do now, we'd like around 150K in income during retirement. Since we don't have kids, the oft-used 4% rule can be a 6% rule for us. Reversing the 6% rule, we would need $2,500,000 in the retirement account to retire.

At 60K/year, with 7% rate of return on our account, suggests we could get to 2.5M in 17 years, considering our starting balance of 200K.

I'm currently 30. That means I'd retire at 47. That feels early. At 67 (or whatever) we could potentially get a pay increase from social security.

Are there other considerations I need to make? Are we not saving enough? Are we saving too much, and should try to retire later? Has anyone retired early and regretted it? What do you do when you are 50 and retired and all your friends are still working and grandparents?
posted by bbqturtle to Work & Money (38 answers total) 7 users marked this as a favorite
Best answer: I've read a number of pieces arguing that the 4% withdrawal rate is pretty aggressive these days in light of low interest rates and low bond returns. 6% seems aggressive to me, but personal risk tolerance is a big factor in figuring this sort of thing out.

I'd also consider adjusting your idea of what "retirement" is. I think it's best thought of as "financial freedom." So, you don't have to work. But a lot of people who "retire" early continue to earn money doing something productive. But it may be part time, or it may be in a new field they've been interested in but that isn't as lucrative, etc. etc.
posted by craven_morhead at 8:26 AM on March 9, 2021 [3 favorites]

Best answer: The 4% was designed to give you 30 years of income, not infinite years of income. Unless you plan on dying by the age 77, this doesn't work. (There could be other problems -- I'm just pointing out this misapplication of the 4% system.)
posted by Winnie the Proust at 8:32 AM on March 9, 2021 [19 favorites]

Also, when you say you want about $150K in annual income during retirement, do you mean 2021 dollars, or do you mean 2038 dollars?

With 2% inflation, you'd need $210K to match the buying power of $150K this year.
posted by Winnie the Proust at 8:35 AM on March 9, 2021 [9 favorites]

I think putting away 60k/year right now is great, but I think it's way too early for you to extrapolate that out to retiring by a certain date. Lots of unexpected stuff happens, both good and bad. What I would focus on is: (a) making sure you are maxing out all tax-advantaged savings (401k, IRA, etc); and (b) make a plan to automatically save any increases in income that you have down the road -- i.e., don't raise the amount you spend, raise the amount you save.

Also, I agree with craven - you may hit a point in your life when you want to do something different that has less pay, but that isn't the same as "retirement." 30 is way too early to worry about not working in your 50s or whatever. When you are 50 it is unlikely you are just going to want to veg out on the couch or whatever all day - you'll likely be doing something, whether it is a different career, volunteer work, or something else.
posted by Mid at 8:43 AM on March 9, 2021 [3 favorites]

I think the 7% return assumption is way too high. Expected stock nominal equity returns are around 6%, so that's around 4% real (inflation adjusted), and if you have a more diversified portfolio, your expected return will be even lower. (Another way of saying what Winnie the Proust asked about inflation.)

If you are savings $60,000 of $200,000 salary and paying taxes, you are probably spending substantially less than $150,000.

Are you paying down a mortgage? That's a form of savings, and an expense that you won't have in retirement after it's paid off.

If you have employer-sponsored health insurance, that's a form of income that you won't have in retirement; budget for both the insurance premiums you will have and the risk of high out-of-pocket health costs.

More generally, how wedded are you to the age 47 target? You have the freedom to now spend what you want, save the rest, and then choose in the future when or whether you want to retire. If you're in a career that makes it feasible, what about a sabbatical? Could you in effect take part of your retirement early by taking a couple of years off of work to travel or pursue other interests at some point? That experience would also help you decide about permanent (or indefinite) retirement planning.
posted by Mr.Know-it-some at 8:44 AM on March 9, 2021 [2 favorites]

Basically, you can't screw up unless you lose your jobs, and it doesn't look like you have a spending problem, so unless you it's really important to hit a certain year, just save as much as you're comfortable budgeting for and re-evaluate your retirement timing every year once you get into your mid 40s.
posted by michaelh at 8:58 AM on March 9, 2021 [4 favorites]

Since we don't have kids, the oft-used 4% rule can be a 6% rule for us.

The 4% rule has nothing to do with kids. Pick how much money you need an an annual basis and use the 4% rule to figure it out. Whether you're spending it on kids or a porcelain collection is irrelevant.

If you genuinely need $150K/year I think you're being very overly optimistic in how long $2.5 million can sustain that withdrawal rate. As noted above, it's designed for 30 years of almost complete safety, not 50+. And also as noted above, if bond/savings rates remain terrible, that may impact the 4% models in negative ways.

If you own a house, it will presumably be mostly if not completely paid off by then so your cost of living will go down.
posted by Candleman at 9:30 AM on March 9, 2021 [6 favorites]

There are several problems with your assumptions.

First off, the 4% rule isn't a rule. It is just a recommended guideline based on past financial history. There is no guarantee that it will hold in the future.

Second, why would the fact that you don't have children change the guideline from 4% to 6%. The guideline has absolutely nothing to do with children? It is based only on the amount of desired spending, $150,000 in your case, regardless of what you spend it on, children or no children.

Third, the 4% guideline is based on a 30-year withdrawal period. If you retire at 47, you could be looking at 50 years of retirement, not 30 years. The longer you are retired, the greater the risk of running out of money.

Fourth, your 7% return I presume is assuming that you are invested 100% in stocks which is a pretty risky allocation. Are you sure you can stomach that amount of risk? And as you approach your retirement date, any adverse decline in your 100% stock portfolio could torpedo your plans. So you might have to reduce your 100% allocation towards the end, reducing your expected return.

Fifth, I assume you are using 7% as expected real return, adjusted for inflation. But to make your retirement numbers come out right, you also have to adjust your $60K contributions for inflation, increasing them each year, assuming your salaries also adjust for inflation.

17 years is a long ways away. Just keeping doing what you are doing and re-evaluate in 10 years or so.
posted by JackFlash at 9:33 AM on March 9, 2021 [9 favorites]

Best answer: Other folks have covered the 6% thing (I also have no kids, am likely to retire early and am running my calculations based on 3%).

Another factor in your choices is that due to the power of compounding, you'll get more bang for your buck on retirement payments you make now, compared to ones you make in the future. So you can stash money away even if it's "too much", and then at some point, you'll have the retirement fund completed. Great! So then you can stop squirreling money away and start spending more - put significant money in home renovations to make your retirement better, go on nicer holidays, take a sabbatical, or take a lower paying job. You can get away from wondering whether you're saving "enough" - or in the event that your calculations are wrong and it's not enough yet, you've still plenty of time to add more.
posted by quacks like a duck at 10:08 AM on March 9, 2021 [6 favorites]

Not to be too negative, but you are going to be just fine. You just need to adjust your expectations somewhat for either annual spending in retirement or your retirement age, or both. It's good to have a plan but don't over-promise.
posted by JackFlash at 10:09 AM on March 9, 2021

I think you're assuming that the 4% rule allows for a lump sum to be left as an inheritance at the end. It doesn't, it allows you to (probably) take out the same sum in real terms (that is, increasing in line with inflation) for about 30 years before running out, and even then it may run out sooner if we're in a low return era. You probably need something closer to $5 million to retire very early.
posted by plonkee at 10:24 AM on March 9, 2021

When you say saving, I assume you actually mean investing More specifically, the usual recommendation is to invest in Vanguard index funds (bespoke combination or target date fund) on a dollar cost averaging basis (invest same amount each month) due to the very low fees and that the evidence shows it is difficult to be the market with active investment. If your target is very early retirement you will need to use a mix of retirement accounts and taxable investment accounts.

Savings accounts are usually at serious risk of inflation erosion over the long term and we have been in a low interest rate era for a while.
posted by plonkee at 10:28 AM on March 9, 2021 [1 favorite]

The fact that you haven't mentioned health insurance or medical costs in your planning question indicates to me that your plan is pretty weak. Those costs only grow over time, and you are probably going to be surprised at how much medical care you 'consume' as an older person. Even with Medicare, seniors still have to kick in a fair amount of cash for prescriptions, co-pays, etc. The amount you save by not having a daily work commute or not buying professional clothes is nothing compared to the insurance and medical costs, even as a fit 50 year old.

That's not to say that early retirement can't be achieved. But to adequately prepare you have to be really clear on your living costs as a 50, 60, 70, 80 etc year old person.

Others above got into the the weaknesses of the withdrawal rate models.
posted by stowaway at 10:58 AM on March 9, 2021 [3 favorites]

Best answer: Just from a cost/benefit analysis, you might find it more than worthwhile to invest a thousand bucks in a fee-only financial planner, who isn't trying to sell you anything other than their advice. Others have noted the assumptions in your numbers, I would just underline that no one knows what the future holds, other than there will be major gyrations in the market sometimes. Are you psychologically prepared for the inevitability of a major (~50%) drop in your investments? Or a decade-long period of poor performance? The market has been basically going straight up for years (minus a marked but brief dip a year ago). Right now your investment accounts are equal to your annual income, which is great for a 30-year-old! But it can get really scary when those accounts are 10x and suddenly you've lost more money in a month than you've made in any year of your life. I had a relative who couldn't handle the anxiety of the Great Recession market drop and sold near the bottom, locking in a 40% loss on a lifetime of saving. Know thyself, is what I'm trying to say.

A planner could also help you take advantage of the so-called "mega backdoor Roth IRA", which is a huge tax break for people who have otherwise maxed out their tax-advantaged savings. You might also want to get an umbrella liability policy, if your net worth is greater than the limits on your auto policy. You might also research investment options, a target date fund is the default for very good reason but you might also look at I-bonds since your time horizon is so long. I would also like to retire early, though we're not saving as much as a fraction of our income as you are, but I think you're doing the hardest part, which is choosing to live well beneath your means. I bet with some luck, good advice, and continuing your diligent saving, you can acheive what you want to.
posted by wnissen at 11:11 AM on March 9, 2021 [5 favorites]

Response by poster: Thanks everyone. I am investing in low cost index funds. I have lots of questions to research based on your feedback. A few responses:

Various sources say that the 4% "rule" isn't great, but also that it's typically overly conservative. If you do want to use your money rather than leave it to kids, a higher withdrawal rate is permissable.

I know I'm doing well, and I'll keep saving, but my ideal world is getting to a point where I can say "okay, we're on track to retire." I can now take a sabbatical / buy a Tesla / buy cash negative solar panels / live less below my means.

I don't fully understand why anyone would buy bonds, even in retirement. Feels like "timing the market" to me. Even if the stock market shrunk to 50% of it's size for a year or two, it would come back up a year or two later. That would probably be a great question for a fees-based financial advisor.

I have not thought about health Care at all. I sure as hell hope it's universal by then. Can't count on it though.

Thanks everyone for your thoughts.
posted by bbqturtle at 11:33 AM on March 9, 2021

The thing with the 4% withdrawal rate is that is offers a relatively small risk that you will run out of money in your lifetime which means that in most cases you will have more than enough. When you start moving out to say, a 50 year retirement, the difference between enough to last your lifetime and enough to last forever is almost equivalent. So, you probably want to start out withdrawing at the conservative rate and then as you see how your investments do, you can ease up as your retirement years go along.

Also, as you research withdrawal rates, you want to find a number that the "real" (after inflation) rate of return. That way you can think about the numbers in ways that make more intuitive sense. So, you want a $150k annual withdrawal after inflation. From the research I did a while back, a 2.7% withdrawal rate was practically bullet proof in terms of both inflation and market movements and also extreme life expectancies. (I'm looking for a nest egg to take care a disabled dependent so it needs to last up to 70 years. Obviously that is more conservative than you wan to be.

It might help to think in terms of what threshold makes you feel like you have a reasonably secure retirement and you can adjust as needed so it is OK to slow the savings rate and what number is enough that it will serve for your retirement if you don't take any out until hit a retirement age (in other words you just need to earn enough to cover current living expense but not add to your savings) and then finally the number that makes feel secure enough to retire today.
posted by metahawk at 12:07 PM on March 9, 2021

Various sources say that the 4% "rule" isn't great, but also that it's typically overly conservative. If you do want to use your money rather than leave it to kids, a higher withdrawal rate is permissable.

Once again, it is designed for 30 years of safe income, such that you may have money to leave behind at the end but that at worst you die penniless but with having sustained your lifestyle up until that point. It's not overly conservative and it is based on historical data that may no longer be as accurate because of the fact that interest rates have been crushed for the past 14 years. And if you're planning on needing money for more than 30 years, you need to be reducing the withdrawal rate rather than raising it.

I don't fully understand why anyone would buy bonds, even in retirement. Feels like "timing the market" to me. Even if the stock market shrunk to 50% of it's size for a year or two, it would come back up a year or two later.

Historically, bond rates were much, much, much higher than they are now and offered high enough rates that it made sense to hedge against the market crashing by accepting slightly worse returns by keeping 2-3 years of savings in them at all times when you were close to or in retirement.

And depending on how risk averse you are, you also need to plan for a crash followed by a long recovery. If your experience is just the past decade and change, the low interest rates and inflation we've had has been an anomaly. The United States has run up some significant debt during that time that will come due in some form or other and we don't know exactly what that will do to the economy. The US has been the dominant hegemony during the past century as well which has helped insulate our market from some problems and that may not hold true in the future.
posted by Candleman at 12:11 PM on March 9, 2021 [2 favorites]

Various sources say that the 4% "rule" isn't great, but also that it's typically overly conservative. If you do want to use your money rather than leave it to kids, a higher withdrawal rate is permissable.

I don't know any responsible financial adviser who would say that. You might start by reading here.

The 4% guideline was based on the Trinity Study which assumes a 30-year retirement and portfolio going to zero. It assumes you spend it all leaving nothing to your heirs so has nothing to do with kids. With a 50 year retirement and a 6% withdrawal you might have a 40% to 60% chance of going broke based on past history.
posted by JackFlash at 12:11 PM on March 9, 2021 [2 favorites]

Even if the stock market shrunk to 50% of it's size for a year or two, it would come back up a year or two later.

" took 8 years for S&P 500 prices to recover after the dot-com bubble burst in 2000, which was immediately followed by the crash of 2008. Following that crash, it took about 6 years for prices to recover to their previous all-time highs."

And because past performance is no guarantee of future results, it could take more than 14 years to recover from the next crash. Just because insurance is expensive doesn't mean it's not worth having, and investing in safer assets (at the expense of lower expected returns) is a form of insurance.
posted by Mr.Know-it-some at 12:15 PM on March 9, 2021 [5 favorites]

In principle you're right and you have done these calculations correctly.

Others have noted the 4%. This originally comes from the Trinity study which was based on returns over a particular historical time period and asked the following question:

If a person retires at normal retirement age (65 I think they used) what % of the capital can they draw down a year that would have been safe and not left them out of money before they died at any point in our historical time series? This is then the safe withdrawal rate.

It's conservative in the sense that most of the time in the historical data the notional person would have died with some money left but that is by design! Clearly if you're happy to take a bigger risk of living on only social security then you can be more aggressive in draw-down.

There are things that can make that % go up as well as down.

Retiring earlier will make it go down (more years to cover)

Being able and willing to take less during market down periods, including extended ones will increase your base safe withdrawal rate.

I have also seen simulations done by people who plan to semi-retire but keep doing enough work that they are still in the professional work-force for the first few years of financial independence. This increases the % in good years a lot since the really catastrophic event for an early retiree is to run out of money at a point when they are no longer easily employable, but still have may years left to live therefore the optionality that comes from staying in touch with your professional discipline is very valuable. (having this happen a year into early retirement is much less serious because you can just go back to work, that is probably not an option at 57 having been away from work for a decade)

Lower long term real returns will make it go down.

For what it's worth, my assumption for planning is 5% real compounding and a 3% withdrawal rate. I figure that if things don't go as well as that I'll just work for a few years more. I think if you just put a very big chunk away into investments your plan is relatively robust to calculation errors.

Another thing to discuss with a financial planner is some kind of annuity or other definite "for life" vehicle to add to social security. These are not great value if used for a large amount of your portfolio but you can use part of your capital to guarantee yourself an income floor that protects you from total ruin if everything goes wrong. Managing out the extreme down-side risk scenarios can also let you safely withdraw a little more aggressively from the remaining capital since you have locked out the catastrophic scenarios.
posted by atrazine at 12:16 PM on March 9, 2021 [1 favorite]

Best answer: My spouse and I started saving pretty aggressively in 2000, and are now 45/46. We're in the region where the "4% rule" would tell us we can retire today. Instead of full retirement, I chose a half-time job with lots of flexibility, and my spouse chose to start a consulting business. Saving for the past 20+ years was a great idea, it lets us do what we want now. It turned out that what we wanted wasn't full retirement, right now. Our goal as we changed how we worked was to have enough income that we didn't have to touch investments, but had a lot more control over our lives. (and both our lines of work have brought in enough that we've been able to continue investing anyhow)

Aside from the simple 4% rule, another useful tool is the monte carlo simulation. The linked scenario represents how the 4% rule (it's set to withdraw 4% of an initial $1,000,000 investment yearly) might play out over many different scenarios. But with a time horizon of 50 years (retire age 45, die age 95), the outcomes range from ending up penniless by age 88 10% of the time to ending up dying with $80 million ($23 million, inflation-adjusted) 10% of the time. Well, I'm not sure that cleared up much...
posted by the antecedent of that pronoun at 12:22 PM on March 9, 2021 [5 favorites]

This is discussed at length and frequently on the Bogleheads forums. There's def a subset of people there who are laser-focused on early retirement, and modeling out what they'll need. The issues are diverse.

Also, there are simulators, discussed here (and linked in the post above mine), that will calculate the probability of success (as in, failure means 0 money) given a bunch of parameters. Just looking at what they ask for input might be informative for you.

For instance, it discusses sequence of return risks -- retiring into a recession can be bad news, if you're forced to start withdrawing at low valuations.
posted by Dashy at 12:30 PM on March 9, 2021 [4 favorites]

Best answer: I've been saving about half that amount for about 20 years. I think you should round up to $3m, which at your rate will be 2 extra years of working.

I think there are lots of misunderstandings in this thread.

Inflation: at least not in the way that people are suggesting in this thread, because inflation doesn't scale to $2m dollars, and advances in tech and consumption patterns means lots of things decrease in price (or stay the same), it doesn't mean every expenditure you have will increase at the rate of inflation. So increasing your withdrawl to match inflation yearly is not realistic or correct.

Bonds are great ways to retain a large amount of money, being overweighted in bonds when you are accumulating is not a good idea.

I also don't really get why people are giving you so many questions about the 4% rule in this thread. Again, it doesn't scale to $2.5million dollars. Or is everyone assuming that everyone retires with the equivalent of $2.5million? So you want $150k, but you have rough year and can only withdraw $110k. You're still top 15% in the US.

Not only that, if your invested return is higher than the 4% rate, then your portfolio doesn't really go down by much, and you will presumably have other assets, like a home that will be increasing at approximately the rate of inflation.

Of all the people I know who retired (early or regular time) the only ones low on money did really dumb things with their money, like investing based on talk radio.

The real advice is:
1) try not to get divorced.
2) stay within the bounds of the law and legal system.
3) maintain your health the best you can.
posted by The_Vegetables at 12:35 PM on March 9, 2021 [8 favorites]

You will also have 20 solid years where you can earn some income, even if it's not with your current job, so your portfolio will still be growing.
posted by The_Vegetables at 12:37 PM on March 9, 2021

It may remove some pressure from you to realize that you're very unlikely to retire at 47.

It's great to have independent wealth and the ability to quit a job if you want, but almost no one does if they're not in a field that requires high physical exertion.

For most professionals, the next dozen years (47 to 59) are peak professional status time: higher earnings, more control over your work-life, all the other perquisites of rank and seniority, and still with enough stamina to do swing late nights and travel when needed.

There's also the crushing costs of healthcare, even without kids, before Medicare eligibility ... $30,000+ a year post-tax today for good coverage, could be much more down the road. I know plenty of people with paid off houses and lots of money in the bank who are done with their primary wealth-accrual phase of life, who still have a low-stress 9 to 5 because they simply can't bear to stroke that private healthcare premium check even if they have the ability to do so. But that income still ends up reducing or eliminating any draw on savings.
posted by MattD at 1:20 PM on March 9, 2021 [4 favorites]

Personally I'm going with 3% rather than 4%, but otherwise I'm on a similar plan (but delayed due to poor financial decisions in my 20's).

As The_Vegetables points out, unless you're going to be making hard commitments to spending $150k a year, you should have a fair amount of flexibility if things turn out worse than expected (especially if you're not location constrained due to a job). If you were planning for like $50k/year in expenditures this would be less true, but a couple without kids can live quite well on considerably less than $150k [Don't get me wrong, it's a fine target and I assume you want to be able to travel, etc, but at least it's not a "if I get this wrong and cut it in half I'll be in trouble" situation].

Health care in the US is the big risk/unknown, IMO. Healthcare costs are somewhat unbounded, so a run of bad luck can wipe out almost any reasonable savings. But it's also hard to plan for that. [Personally we are handling this by assuming we will retire in my wife's country which has reasonable healthcare, but obviously that kind of option may not be available to you... worth considering if you do have any possibility of establishing residence in another country, especially while still working, if that appeals to you at all].

Some people in this thread clearly love work... but I'll say that at my current age (43) I'd retire at 47 (or, uh, 43) in a second if I could. I have a job many people would envy, but I can't wait to be done with work. My current target is around 55, just based on financial reality.
posted by thefoxgod at 1:23 PM on March 9, 2021 [3 favorites]

On the bonds question from the OP I have some municipal bonds, about 15% of my portfolio. They pay 6% tax-free (municipal bonds). Obviously I bought them a while ago, as bonds are returning next to nothing now. You probably know the old saw that when stocks go up bonds go down, and the reverse. Holding both is an approach to diversification so that if one tanks you have some hedges.
I also have a guaranteed annuity, another 15%. Then I have stocks in funds, with different emphasis in each one, and with different risk assessments. I am retired but not withdrawing yet, as my spouse is still working. I was wary of hard-sell from profit-driven advisors, and am also not happy about doing my own on-line financial trades, so I went to my bank. It's a large one which has a "wealth advisor" (this term makes me cringe with undeserved privilege, and I wish the bank would reconsider their terms! Looking at you Citizens Bank.) Their advisor took stock of what I had and where I had it - a variety of accounts without any organization or overall plan. He asked A LOT of questions about our goals and our approach to investing (pretty hands off but clearly the disorganized mess I had was stressing me out). I felt I had been a bit lazy as I really dislike the complexity I think competent financial management requires.

I came back a couple of weeks later to meet again to discuss options he suggested, and I was free to proceed or walk away. For no fee. However, I felt his suggestions were good ones, and for 1.25 % fee per year I was happy to go with his bank. I get monthly updates, he's available at any time for consultation or meetings at no charge, and in the past 3 months I have increased my portfolio by 11.75 %, from which I must deduct his fee. I feel for the first time that my finances are organized and purposeful, match my desires, for example no fossil fuel holdings, and am sleeping better. Congratulations to you for tackling this at such an early stage of your working life. You have MUCH more time to accrue, and time is a most valuable asset for investing.
posted by citygirl at 1:40 PM on March 9, 2021 [1 favorite]

The US median household income in 2019 was $68,703, and you're saving $60,000 a year at 30 years old. You are on track to retire.

I verified on the calculator you linked that you would hit $2.5 million in 17 years. But you don't mention wanting to retire early; just because you hit your magic number of $2.5 million at 47 doesn't mean you have to quit your job and start drawing down. If you decided to continue working, living off your salary until the 67, that $2.5 million would continue compounding yearly for 20 years, reaching over $9.8 million - even if you never saved another cent.
posted by smokysunday at 3:20 PM on March 9, 2021 [2 favorites]

Best answer: I concur with the suggestion about the fee-only financial planner.

Like you, I too am good at saving and I too am good with math. That said, I do not spend all day, every day, thinking about finances and investments, and I do not have years of experience working with people as they plan and execute their retirement and estate plans.

My financial advisor does. She has perspectives and tools that I do not have that have time and again proved valuable to me in planning and decision making. My advisor's fee is $600 a year and I feel like I have more than gotten my money's worth in working with her. Further, having worked with her for many years now, she is part of my team. We schedule a yearly review session, but I can reach out to her at pretty much any time about any kind of financial decision where I'd appreciate an outside opinion. In fact, I started working with her at pretty much the same place financially that you are--starting to have some real assets to manage, trying to get a handle on the big picture. Best decision I ever made. The older I get, the more relieved I am that I don't have to figure everything out myself.
posted by Sublimity at 4:16 PM on March 9, 2021 [3 favorites]

Best answer: Not only that, if your invested return is higher than the 4% rate, then your portfolio doesn't really go down by much

This is a dangerous mathematical fallacy. Stock market returns are quite variable from year to year. Even if your average return is greater than 4%, it does not mean that you can always safely withdraw 4% each year. You can have some years in which your return is much less than 4% and some years in which you have a loss instead of a gain. The sequence in which these losses and gains occur affects the success of your withdrawals, even if the average return is more than 4%. This is especially important if the lower return years occur early in your retirement.

This is what was demonstrated in the Trinity Study. 4% was generally safe but going to 6% withdrawals greatly increased your risk of going broke during your retirement. Here is another pictorial analysis showing success rates for various rates of withdrawal, portfolio allocations and years of duration. Check the conclusions at the bottom.
posted by JackFlash at 4:56 PM on March 9, 2021 [8 favorites]

Response by poster: Don't know if this is weird/not allowed, but to follow up on the answers, does anyone have a fees-only financial advisor they'd recommend? I've had some bad experiences with financial advisors before (though not fees-only), where they just talked down to me the whole time due to age. So, uh, anyone that doesn't do that? Should I look for someone in my state, or does that not matter?
posted by bbqturtle at 7:02 AM on March 10, 2021 [2 favorites]

It's really important to note that the vast majority of wisdom around long-term performance of equity portfolios is driven by dollar cost averaging inflows. It's (Post World II historically been) impossible to lose money in even the medium term, to say the least of really long term, if you steadily keep buying the dips. When you have fixed dollar withdrawals it's pretty easy to destroy value because it compels you to sell disproportionate numbers of shares at market troughs.
posted by MattD at 7:33 AM on March 10, 2021

The sequence in which these losses and gains occur affects the success of your withdrawals, even if the average return is more than 4%. This is especially important if the lower return years occur early in your retirement.

Maybe so, but since the OP is picking his retirement date, then it's not really very likely that he will retire into a recession.
Historical unemployment rate for those making over $100k (high income class) hovers in the 2%-3% range, so odds are high that even if the OP is downsized, they will able to get a new job Statista Unemployment Rate by Income Cohort
posted by The_Vegetables at 8:05 AM on March 10, 2021

Maybe so, but since the OP is picking his retirement date, then it's not really very likely that he will retire into a recession.

You only know a recession after the fact. I know people who retired in late 1990s - 2000s. Things looked great but you can have a severe recession in the first 10 years of retirement that can severely affect the later years of retirement. That was one of the worst decades to retire in history.

Some financial advisers call this "sequence of returns risk." It is not symmetrical. If you have a series of poor investment returns in the early part of your retirement, it can deplete your portfolio that isn't made back up by superior returns in the later half of your retirement. This is a mathematical certainty, not something that you can just wave away. As the Trinity Study showed, even with 7% real (inflation adjusted) returns, 4% withdrawals are not guaranteed if you have bad luck in timing.

The problem is caused by the need to make fixed withdrawals even in bad markets in order to pay your bills, as MattD points out. If you have enough discretionary spending in your budget that you can temporarily cut spending, that helps. But not all people can do that. Another thing that can help is to convert some of your portfolio to a guaranteed income using an annuity, but that comes at a cost that reduces your income somewhat. The best guaranteed annuity of them all is Social Security. The closer you can reduce your budget to your Social Security level, the less risky your results.
posted by JackFlash at 8:27 AM on March 10, 2021 [1 favorite]

I'm in the Boston area. If you're nearby (or, heck, even if you're not) feel free to MeMail me if you'd like my advisor's name.

Otherwise, the best way to find someone you like and trust to work with is to start asking people. Think about the people you know who seem like they have life pretty well figured out, tell them you're looking for a fee-only financial adviser, and ask if they have a referral. This isn't weird--people ask for referrals for professionals of all kinds, all the time. When you get a few names, schedule an introductory session just to get acquainted and figure out whether you'd like to work with this person.
posted by Sublimity at 10:29 AM on March 10, 2021

bbqturtle, they encourage keeping questions to one thing, but asking about an advisor in a retirement planning question is, in my opinion, germane. I would get someone in your state. For one thing, different states have different rules on the tax treatment of things like municipal bonds, different rules on what assets can and cannot be excluded from bankruptcy, and obviously different tax rates that would affect your investment choices. I'm sorry you have been condescended to. It goes without saying that you want someone who gets your goals, so I wouldn't hire anyone who you don't feel is working well with you. There is no "right" answer for financial planning, intentions and psychology matter a lot.
posted by wnissen at 10:58 AM on March 10, 2021

Best answer: JackFlash makes an important point. If you retire and your portfolio drops 40% that year, you have to decrease your discretionary withdrawals by 40% in order for the probabilities to hold. Though you of course continue to receive Social Security, pension, annuity, and other income.

I really like that article on the Trinity Study for longer time horizons. It is very illuminating that for the 40-year time horizon, in order to have a 95% chance of your money lasting, you have to choose a withdrawal rate of 3.5% or less. But the median account size at the end of those 40 years is going to be 12x your starting balance! Hard to square those two, isn't it? How can you have a 5% chance of going broke but a 50% chance of accumulating a horde that is 350x your spending at retirement? Not to get too off track, but you're basically self-insuring against the remote possibility that you will both live a very long time and get very unlucky in your investment timing. Thus why (stay with me here) pensions are dramatically cheaper than individual saving. Retirement is expensive, but the U.S. "system" of individual accounts makes it much more so. 5% is perfectly safe as a withdrawal rate for a pension fund because not everyone is going to retire in the middle of a terrible market, and not everyone is going to live to 85. It's only a few percentage points, but the difference is saving an additional 7.5x your annual spending! Most people have barely a few years saved at retirement, so this whole discussion is irrelevant for most of the population, but the numbers don't lie.
posted by wnissen at 11:33 AM on March 10, 2021 [5 favorites]

sending you a pm with my fee-based financial advisor who I love!
posted by stellaluna at 5:01 PM on March 10, 2021 [3 favorites]

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