One of the things I enjoy is debating with still employed people about the appropriate withdrawal rate in retirement. I like hearing about all their money plans for after they leave a steady paycheck behind. The debate is not really a debate as I mostly just listen so that I can have something to revisit in the future.
You see, I used to be one of those people who thought I knew what post-work life would be like. I had all these estimates about how much money I'd spend and what I'd do with all my free time. As I grew older and more experienced, however, my views about retirement have evolved.
Even though it's been mostly a bull market since I left work in 2012, we did experience a correction in 2018, a 32% crash in March 2020, and another correction in 2022. Thankfully, we then rebounded.
It's hard to know what you don't know. This is why being open to the unexpected is wise. Writing about different viewpoints is insightful. However, if you are a betting man, you should seek to make bets with people who don't have as much information or are overconfident about the information they have. Over time, you will make a lot of money.
Let me share with you a conversation I had with a recently retired lawyer who used to disagree with my proper safe withdrawal rate in retirement. Let's call him Jack.
My main thesis is the 4% Rule is dead. Further, whatever withdrawal rate you think you'll use once you retire won't happen. Instead, you'll withdraw at a much lower rate in the initial years because you're so accustomed to saving and investing.
Retired At A Bad Time
On December 22, 2021, Jack, a 50-year old partner at a law firm, gave his two-week resignation notice. For the past three years, he had been earning between $700,000 – $1,100,000. The more he worked, the more he made.
Unfortunately, that was Jack's problem. He could only make big money if he put in the hours. There was no leverage in his occupation whatsoever. If he stopped working, he stopped making money.
With two kids ages 14 and 16, he felt bad working for more money instead of spending more time with them. Soon his sons would attend college and live their own lives. He kept thinking he'd regret choosing more money over his family. Therefore, with a net worth of ~$6 million, he decided to call it quits.
I encouraged him to try and negotiate a severance since he planned to quit anyway. What's the downside? But he didn't want to. Instead, he wanted to “walk away on his terms,” even though negotiating a severance is all about putting control in the hands of the departing employee.
With $4 million of his $6 million total net worth in stocks, he felt like he had the proper net worth allocation. His net worth also included ~$500,000 in bonds, ~$1.4 million in equity in a house worth $2.5 million, and $100,000 in cash. He planned to earn a 5% – 8% return and withdraw at an annual rate of 4%.
Unfortunately, within two months after handing in his resignation, the S&P 500 corrected by over 10%. What's more, ~$1 million out of his $4 million stock exposure were in individual growth stocks that declined by 40% on average.
Instead of retiring with about a $6 million net worth, at one point in time, Jack's net worth declined to about $5.1 million. Retiring near the top of the market is one of the 10 worst times to retire.
So what did Jack do with regards to his withdrawal rate?
Zero Percent Withdrawal Rate
The risk of receiving lower or negative returns early in a period when withdrawals are made from an investment portfolio is known as sequence of returns risk. It's too early to tell for Jack. However, returns could continue to go lower or flat-line for the foreseeable future.
As a result, Jack decided not to withdraw any money from his investment portfolios at all, including any dividend income. So what did Jack use to fund his expenses, estimated at about $13,000 a month after tax (down from ~$20,000 a month)?
He used his cash. But after going through $30,000 of his $100,000 stash, he started feeling uncomfortable. At his current pace, he would run out of cash in six more months. Further, with his net worth declining by almost $1 million since he handed in his resignation, he began to worry he had made a critical mistake.
Solution To Preserving Capital
The last thing he wanted to do was withdraw $160,000+ from his investment portfolio that was getting hammered. He couldn't use his cash to buy the dip either. Instead, he left his portfolio alone and found a better idea.
Jack reached out to his old law partners and asked if he could go back to work! However, instead of billing full-time, he asked if he could bill part-time. The senior partners said yes because Jack had valuable clients and connections. The partners didn't want him to leave in the first place.
The Income Starts Pouring In Again
With Jack's old job back, he started billing at a rate of $600 an hour for 25 hours a week. He gets to keep 60%, so $360 an hour X 25 = $9,000 a week in extra income.
Jack is relieved to have income coming in once more. He uses his income to pay for his living expenses and buy various stocks. He just couldn't bear not to invest after seeing so much carnage in some of his holdings so far.
Despite making $36,000 a month and working 25 hours a week, Jack has tricked himself into thinking he's retired. Not only does he think he's retired, he tells his friends he is retired.
You see, when you're working 50+ hours a week and making $72,000 a month, working half the amount of time feels like a walk in the park on a sunny day! It's funny how everything is relative in life and in finance, ain't it?
And when I asked Jack to tell me what his withdrawal rate in “retirement” is now, he told me it was 0%. He said,
“I'm not going to touch my retirement funds in retirement for as long as possible. Selling anything after a correction feels terrible. Instead, I'd much rather work part-time and start contributing to my investments again!
Your Withdrawal Rate Won't Be What You Think It Is
I share Jack's story to illustrate how situations are different from what you imagine. We can crunch our numbers all we want, but our financial independence number is not real if we don't take action to improve a suboptimal situation.
In Jack's case, he thought his financial independence number of $6 million was real so he announced his resignation. However, only a couple months into his retirement, he realized that maybe he had underestimated how much he needed.
His net worth equaled about 35 – 38X his annual expenses and between 7 – 12X his annual gross income. It made sense for Jack to think he was financially independent given 25X annual expenses and 10X annual gross income is the often-accepted minimum threshold to be considered financially independent.
However, in Jack's case, accumulating 50X annual expenses or 15X annual gross income was probably more appropriate for his situation. He was used to making big bucks and living the good life.
The disappearance of a steady income and an abrupt drop in investment returns were too drastic for his financial situation to handle. Therefore, he logically did something about it.
Be Flexible With Your Safe Withdrawal Rate
The great thing about most of us is that we have the ability to adjust our withdrawal rate as we see fit. In a bear market, we will tend to lower our withdrawal rate and try to earn more money to stop the bleeding. In a bull market, we may increase our withdrawal rate given our investment returns are so great.
Jack's situation is not unique. Instead, it is completely rational. And so long as Jack thinks he's retired while working 25 hours a week, that's really all that matters. At the very least, Jack has found the appropriate work life balance where he may no longer want to retire in the traditional sense.
Given times and conditions are always changing, the best thing retirees can do is follow a dynamic safe withdrawal rate. Instead of rigidly following a safe withdrawal rate, follow my formula so you can change with the times.
My Latest Withdrawal Rate
In my case, I'm watching my equities burn to the ground as I continue to buy the dip with my cash flow. However, instead of investing as much into risk assets, I've reduced the investment amounts because I'd also like to boost my cash reserves. Even though inflation is reducing my cash's buying power, increasing cash still feels good in times of uncertainty.
Given I'm a pseudo retiree (these posts don't write themselves), my withdrawal rate is also currently at zero percent. It just feels so wrong to sell stocks after they've corrected.
Here is a hilarious chart of me buying the dip in VTI while it keeps on dipping. What a bummer. But I plan to continue buying in this taxable brokerage account as it has a 20+-year time horizon. There are no commissions so buying small positions is easy. Further it feels good to take some action by dollar-cost averaging.
Re-Retirement Goal
My original goal was to re-retire some time in 2022, but we're way past that now. With two kids in private school and a stay-at-home wife, I should probably do at least some part-time consulting. Raising kids is expensive in San Francisco!
Maybe I'll just continue to do what I'm doing and say I'm retired while working. After all, I spend less than 12 hours a week writing. It’s all the other stuff involved with owning a website that isn’t as enjoyable. Hence, if Jack can believe he is retired working 25 hours a week, maybe so can I!
I very much want to reduce my hours and spend more time living it up now that COVID has waned. I've almost reached my peak net worth goal. Now my plan is to focus on de-accumulation while I'm still healthy.
If interested, here's a case study on using my dynamic safe withdrawal rate in retirement from 2020 to 2024. If you are retired, I recommend you stay flexible with your spending. Be like water and change with the times.
After purchasing a forever home with cash in 2023, I'm now grinding my way back to financial independence. My goal is to replenish all the productive investments I sold buying my house by December 31, 2027. I'm excited for this journey because both my kids are now in school. Now I have the free time to earn!
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Related posts:
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Readers, if you are retired, what is your withdrawal rate during this latest correction / bear market? Have you changed your withdrawal rate or economic activity? How can we encourage gainfully-employed people to be more open to different retirement perspectives?
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“Maybe I’ll just continue to do what I’m doing and say I’m retired while working.
After all, I spend less than 12 hours a week writing.
It’s all the other stuff involved with owning a website that isn’t as enjoyable.”
Surely you can afford to hire someone or a service to handle the website stuff you don’t like to do & then focus on the enjoyable part (writing), & still make bank.
I found it harder than I thought to hire someone who cares about the details. But it is possible for sure.
Easy solution is to just do less and accept less.
“My hope is that more readers focus on the percentages, not so much the absolute dollar amounts.”
When you are throwing around monthly income that is greater than the median annual earnings in the country, this feels like a joke. At that point your lifestyle is a choice.
Also, one thing I don’t see people in the FIRE community talk much about is the obligations, real or imagined, of having and raising children. It seems that it only occurs to people after they have them that things like choosing a good school, not moving around a lot, etc. don’t really seem to hit home until they actually happen. At this point in my life I have one kid heading off to grad school and the other graduated from high school and working on a career. I have a TON more flexibility than just a few years ago and when both the kids are off the insurance and on their own two feet, my wife and I can pretty much literally pick up and do whatever the hell we want without worry.
Not that I ever could have, or currently can afford not to work (soon…..), but there are a lot of stories I’ve read about people retiring at 32 and then “oh my god kids!” and the associated food, housing, school, etc. and realizing they have to go back to work to live the lifestyle they want. Even before the current inflationary environment, the continually rising cost of education seems like it should have been more of an issue to think through before pulling the trigger on retiring.
Love the site. Always thought provoking.
Hi Sam,
I am going to love winning!
What am I ?? too confident or miss informed?
betting man, you should seek to make bets with people who don’t have as much information or are overconfident about the information they have. Over time, you will make a lot of money.
Cheers
JJ
Neither! I am the overconfident one, which means you are likely to win.
But if you are interested in betting more money for next week’s Fed rate hike amount and the average mortgage for the 30Y mortgage at end of 2023, I’m down to increase the bet size by another 50%.
I simply do not believe the Fed has the guts to raise the fed funds rate by more than 25 bases points in March.
So $350/$7,500. But for the Fed Funds hike bet, I’m willing to go up to $500, your original desired amount.
No I can’t press up to 50 B points for the Fed this week…but I will accept the additional $2500 for the original bet.
In addition I will offer you two more bets…5k on both 5.5% and 6.25%, 30 year fixed end of 2023. And if I win I will donate half the $$ to your favorite charity and the other half to mine…
JJ
Ok great! Confirmed on upping bet from $5,000 to $7,500 regarding the average 30-year fixed rate will be below 6% by end of 2023.
In hot tub now with family, so let me get back to you regarding betting $10,000 more.
Do I have to take both bets? Or can I just take the under on 6.25%?
A more symmetric bet would be 5.75% and 6.25%.
So symmetry in bets don’t really equate. Sometimes when you know you’re taking the worst of it you need better odds …I know I am taking the worst of these bets currently… I will just accept the 7500$ for the 6% end of 2023. That’s all.
Cheers and good luck…
JJ
OK, sounds good. Honestly, anything can happen. Look at the price of nickel, and wheat, and oil this month. Completely ridiculous.
The one thing we know as investors to stay ready, because really anything can happen when we least expect it.
Interest rates should definitely be higher than they are now.
Good example Sam of the most important part of the equation: your mindset. Sounds like your lawyer friend was not quite ready and could only see the choice as binary. I think for professionals, and I count myself in this group, a “gear down” approach is very helpful. Why waste all the career experience? Working less only on the highest value areas of your job will be acceptable to most employers, you may have to be a little creative to make it happen but it’s worth it. Sounds like your friend has that now.
Great article! I agree with your assessment on Jack his asset allocation of 90/10 stocks was too aggressive for a retiree plus he lacked passive income streams to support his lifestyle. The other problem is his cash reserves were way too low I would suggest 3-5 years of living expenses in cash so that you can weather any storm, -Luis with his high income he should have paid his house off with two young children. I plan to retire in 5-10 years so I’m at 30-40% bonds and cash and plan to continue to increase my bond/cash allocation as the time approaches quickly.
I think having a $100,000 cash balance, or eight times his monthly expenses is pretty good for most.
General range is between 6 to 12 months of annual expenses. So maybe if Jack was at $150,000-$175,000, that would’ve made them feel better.
But it still feels bad going from saving a lot to spending a lot.
i would offer that it should be 2 yrs of expenses because thats how long it might take for the market to come back.
Yes Tim that’s a great point the average bear market is 2 years I like that for cash reserves
I’d go with ~1 year cash + ~1 year of 99% guaranteed 1 year income (dividends, bond interest, etc) over the two years if possible but yes enough cash to outlast a big drop is good.
Hey Sam, like you I have a mix of real estate / shares / businesses.
How would you apply the 4% (or other appropriate ratio) to someone with a range or asset classes like yourself?
I don’t. I will withdraw nothing during a correction/bear market and will be adding to my positions instead. Currently, I’m fortunate enough to have enough passive investment income and active online income not to have to draw down principal.
imo, the biggest threat to jack’s retirement isnt a bear market or a correction, if hes diversified properly. (at 50 yrs old, looking to retire early and at 88% stocks/11% bonds, he clearly wasnt). the biggest threat is his wife waking up one day, discovering she “needs to go find herself” and filing for divorce. especially in a community property state. if that happens, jack will be right back at 70 hour weeks. alimony, child support, losing the house and legal fees will destroy that retirement dream faster than a bear market.
This thought never even crossed my mind. Thx for sharing.
Did you go through a sudden divorce? If so, could you share what happened and why?
I have always thought about spending the last half of my life with my wife.
i am divorced but that occurred many years ago. at one point, i was living in a house. the guy across the street had been divorced 3 times (having to give up his dream house that he had custom built in 1 of his divorces and half his 401k in another) and the guy next to me was going through a divorce. statistically, 70% of divorces are initiated by women and most of those men never see it coming because they too have “always thought about spending the last half of their life with their wife”. those guys are always the most shocked and unprepared. a woman once told me she filed for divorce at 50. when i asked why, after so many years of marriage, she said that she realized one day that “she didnt want to spend the last part of her life the way she had spent the first part” and that was that. say goodbye to your paid off home, your equity, half your 401k and other assets. say goodbye to your retirement plan.
I do enjoy your nihilist point of view and bringing divorce into the discussion about withdrawal rates and bear markets. Thank you.
If you google “divorce financial samurai” you will find a lot of divorce articles that you may enjoy reading.
As a divorcee, any advice on how to not get a divorce and for new couples considering getting married?
I would recommend a prenuptial agreement for just about every couple getting married. It is not a romantic notion, but at least both parties never have to wonder if the other is in it for the money nor do they have to worry that at some later point, a divorce erasing half of their networth. It is just one less stressor in a relationship and minimizing stress goes a long way in keeping people (couples) happy.
Kind of depends what the pre nup says. No matter what, the assets are getting split somehow
Hi Tim – Sorry you are hurting and alone. No amount of money will fill that hole inside.
Probably best to see a therapist. Because forcing your thoughts about divorce onto other topics isn’t healthy. You’re probably also bringing other people you interact with in real life down.
btw for someone who believes we must all prepare for black swan events and who was contemplating the effect that a potential WW3 might have, im surprised that the thought of divorce never crossed your mind. its a relatively common event (much more than a world war) that could destroy your finances and retirement plans and you havent thought about it? espec since you live in a no-fault, community property state.
Maybe it’s a reflection of the state of my existing relationship with my wife. During bear markets and rough times, I find comfort in spending time with the people I love.
At the end of the day, our friends and family are what’s most important. When it’s a bear market, that appreciation for loved ones increase.
In fact, I’m gonna go hug my wife and kids now. Been spending too much time working this morning!
But I see your point. I would think more about divorce if I was unhappy.
In another 20 years your gonna be so happy you were buying VTI when it was still in the 200”s!
I’ve been buying the whole way down as well. I’m getting my ass handed to me. If it hurts your doing it right.
Jack is kicking butt. I like hearing success stories like his.
And never feels good buying during the correction or a bear market does it?
But psychologically, it feels better buying something after a 10% plus correction. I’m just gonna keep on buying with my cash flow.
FIRECalc says that a $4.6mm portfolio and $156k annual expenses have a 99.1% chance of success lasting for 40 yrs. after the 10% correction overall and 40% drop in $1mm worth of his stocks, he still had $3.1mm left and 4% of that is $124k. he couldve used 64k from cash stash to augment that over 2 yrs while the market came back. yes that means burning through the emergency cash but thats literally what its there for.. emergency cover in case of a market crash. by the time hes got his $4.6mm portfolio back, its generating $230k annually on 5% returns. if jack enjoys his solution then great but speaking of lies that we tell ourselves, “one more year” syndrome is a big one.
My point is that we can use calculators and crunch the numbers all we want, there’s no overcoming the psychological aspect of money once you are faced with the decision.
Did you retire recently? And if so, what multiple of expenses or income to do used to retire?
i used 35x expenses as my retirement number + 2 yrs of expenses in cash. jack was treading a little low at 25x imo. and 50x is just overkill..we’ll never retire if 50x is the bar.
One of your best articles, because it talks about the topic we all THINK we want. Retirement. The thing is, for most over-achievers, full retirement is a pipe dream. The same mindset that got us into a position to retire early is the SAME mindset that’s probably going to keep us from fully retiring.
I “retired” a few years ago. But about 3 months before I was to receive my last check, I chickened out and went and got a job that only required me to work 15 hours a week. Since I went from 60-70 hours a week down to 15 a week I, too, honestly felt that I was retired. And I told everyone I was retired (even the people on my new job. LOL).
Anywho, I plan to REALLY retire in 4 more years (I’m serious this time!) and here’s my strategy:
1. Stop having my dividends reinvested back into the stock and have that paid to me.
2. The dividends will only account for about 1-2% of my planned 4% withdrawal, so I plan to sell off the other 2% from growth stocks during a Bull market and sell off value stocks during a Bear market. (I do understand that a 4% withdrawal every year may not be plausible)
3. The rest will come from passive income
P.S
To all us over-achievers out there. Here is my definition of REAL retirement:
1. You don’t work for anyone at anytime.
2. You are drawing down your retirement accounts.
Now, after spending our entire lives NOT doing these two things…..how many of us will be able to completely turn that off?
those of us who “over achieved” outside of work by cultivating a rich life outside the office will have little problem. those whose lives revolved around their work will have considerable difficulty. of course, many of those wont have much choice in the matter as many retirements are involuntary once you reach a certain age. even over-achievers fall victim to ageism, corporate shifts, and health issues. they wont have to worry whether they can turn it off, it’ll be turned off for them and they’ll have to face the realization that they failed to create much of a real life outside of work.
Excellent point, Tim! You’re right, we all need to definitely “over-achieve” outside of work because they absolutely will “turn it off” for you. I’ve seen it done. I’ve had to do it.
Oh well. Where are my darn tennis rackets?
Thanks for sharing your story and your honesty! I wish more people would share this type of insight.
“ 1. Stop having my dividends reinvested back into the stock and have that paid to me.”
I can do this, or I think I can, instead of always reinvesting dividends. But if the principal value is also going down as well, It may be harder.
The thing is for you, maybe there will be no bull market in three or four years, then what?
I say to always retire by a certain age, not by a certain financial figure. Time is finite, money is not.
Good point, Sam. No matter how you slice it….a 3-4 year bear market will/is going to be tough.
The market good resume back to a bull market for the next three years and then be back at him bear market the time you retire.
“2. You are drawing down your retirement accounts.”. Don’t underestimate the psychological impact of this after a lifetime of earning, saving, investing, and becoming wealthier each year. Particularly during a bear market. Yes, this is necessarily part of the formula for most (or we could never retire), but it can be very stressful regardless of what the math says.
My portfolio is still holding so far this year, even if its been clobbered on many sides. It’s been a tough start of the year, needless to say. I hope the sell off can be over soon.
Here are the performance of my 5 biggest positions (at the start of 2022) :
1 – Couche-Tard -7.9%
2 – Suncor +28.0%
3 – BCE +8.2%
4 – Barrick Gold +29.1%
5 – TC Energy +20.0%
I’ve been hit hard on positions 6 & 7 – Apple (-12.9%) and Tesla (-24.7%) – and many other smaller positions.
Overall, my portfolio return is -0.3% so far this year. So, nothing to brag about. But not a disaster either.
But this illustrate the importance of having a diversified portfolio. It was impossible for me to predict a war would start on February 24 2022 in Europe. Yet, my portfolio was ready, with oil, gas and gold reacting very well. I still hope this conflict to end soon, even if it means those investments would do pretty bad.
Since you asked, today was the day of my first transaction so far this year. I bought 27 shares of Alibaba (2500$). Just tipping my toes. I was not planning to buy anything. But the price was so ridiculously low, I had to take advantage of it. It’s possible I start buying more agressively, but I would have to sell other stocks to do so. And since a lot of my stocks are down, that’s not really interesting for me at the moment.
As for withdrawals, I withdraw once a year at the end of the year. My dividends are enough to cover my annual expenses. So I don’t really have to worry about market volatility, as long as my stocks don’t go to zero – or dividends are cut. I try to focus on investing in the best companies I can find at the lowest possible price instead.
For people looking to retire, I think they should only invest in index funds, unless they have the ability to generate consistent investment income over a long period of time (ie. at least 10 years). Otherwise, I think individual stocks should not be more than 5% to 10% of your portfolio. I also think people should expect at least -20% to -30% drawdown in their portfolio. This is not unusual. In fact, this is pretty normal.
Sadly for Jack, if his entire portfolio went down -40% while the S&P500 was down “just” -12% (or a 28% underperformance to the index), it is absolutely impossible for him to retire now or at any point in the future… The reality is that a -28% “real loss” on a 4 000 000$ stock portfolio is a 1 120 000$ “real loss”. He can’t outwork his investment loss even with the already great salary that he has… And if his portfolio was bigger, he would only have lost even more.
So the only solution is to change his investment strategy. Maybe index funds ?
Obviously, this is a very short term period to judge someone’s performance. If he had made +20% annual return in the last 10 years, then he should not be worried, and my comment would not apply to his situation.
Down 40% only only $1 million of his position, not the entire $4 million.
Flat is good. Congrats! Can you provide some guidance on how big your portfolio is? I wonder if size and risk parameters are different.
It’s between 1M$ and 1.5M$.
I don’t think that size matter. I manage the same way as I did when I started with only 5K$.
The only thing different is that it is easier to diversify and to average cost down with a larger portfolio.
Oh it makes a big difference Manuel. 10 percent down doesn’t sound like a bunch until you got a 10 million portfolio. Lose a million in a couple months and see how you feel. Sure you still got 9 million but damn you just lost a million dollars!
I would say it makes a big difference as well. Losing $1 million does feel more painful than losing $100,000, even if you started with $10 million.
Bigger wealth is the reason why capital preservation is so much more followed. One’s net worth has to be compared to one’s income generating power, to be able to make up for lost wealth.
I use FS-SEER.
I agree losing a certain amount on a bigger portfolio feels much worse. But it’s only a feeling. Mathematically, 10% is 10%, no matter how much you have…
To overcome bad feelings, I try to rationalize as much as I can. For example, market volatility is normal. But losing -10% on bad investments when the stock market is increasing +30% would be very bad.
On the other hand, losing -10% if some stocks I want to buy went down -50% or more could end up being a fantastic opportunity.
The real question is, in which situation are you richer :
– having 10M$ in Alibaba last year at 230$ (43500 shares)
– having 9M$ in Alibaba today at 86$ (104500 shares)
* Assuming no diversification for simplification purpose
Personally, I would take the 9M$ portfolio …
I wish you continued luck Canuck. It’s all luck. Influenced by your overall financial framework and your level of discipline and courage.
Losing or just feeling you have lost millions with no end in sight is the abyss. And staring the abyss in the face is a wake up call and many do not answer the call well.
“ The real question is, in which situation are you richer :
– having 10M$ in Alibaba last year at 230$ (43500 shares)
– having 9M$ in Alibaba today at 86$ (104500 shares)
* Assuming no diversification for simplification purpose”
I don’t get this comparison. Can you elaborate? It seems so obvious which one is better, but maybe I’m missing something.
I meant that the dollar amount of the portfolio is not always what is most important. What you have inside the portfolio is what matter.
You can have 10% less – or a 10% (1M$) loss – and end up with a better portfolio in the end.
That work the same in real estate. If the prices your properties go down -10%, but you are able to buy new properties for -20% less that they were selling before, you can end up richer after making new purchases, even if the dollar value of your real estate portfolio is lower.
By that, I mean, the earning power of your overall portfolio. Or, what we usually call the “cash flow”, in real estate.
Sometimes we place too much importance on the dollar value of our net worth without considering enough the quality of the assets we own.
In my oversimplistic example, I was trying to illustrate that a portfolio of lower value could be better than a portfolio of higher value and that a 1M$ loss could be a good thing, and not a bad thing, since it allowed portfolio #2 to take advantage of an opportunity that would not have been possible without the loss.
Everything is a question of perspective …
OK. To answer your question, I’d rather have $9 million in Alibaba today at 86$ (104500 shares) than having less than $5 million in Alibaba today because it went down by more than 50% since last year.
But I think 99.9% of people would say they’d rather have $9 million than $5 million.
This was an example comparing 10M$ with 9M$.
If you prorate to your situation, taking a 5M$ stock portfolio as an example, would you be willing to take a -10% loss to have a 4.5M$ portfolio with more upside potential ?
Many people would answer “no” – in real life – to this question, even if the answer is obvious when we look at some numbers coldly, without thinking about the amount of the loss and the impact on our personal life.
Hence, portfolio size doesn’t matter, except in our minds…
Sorry, I just saw the confusion – I did not meant to have a 50% loss on portfolio #1. That would imply it’s possible to know the future, which I don’t think anyone can do.
So let’s be more precise :
Portfolio #1 – 43500 shares of Alibaba, assuming the shares still trade at 230$, and not knowing the shares could trade at a lower price in the future;
Portfolio #2 – 104500 shares of Alibaba, assuming shares can trade at 86$ for many years, and could eventually never go back up.
You also have the possiblity to do want you want with the portfolio, including going all cash and have 10M$ or 9M$, or buy real estate with the money…
Option #1 seems the most obvious. Who would refuse to have 1M$ more ?
But the difference is in the earning power of both portfolios.
Current predictions for 2023 are of net earnings of around 9$ per share.
So, earnings power for both portfolios are as follows :
– Portfolio #1 : 391 500$ per year
– Portfolio #2 : 940 500$ per year
If this was all paid in cash every year (via dividends) and that the amount was guaranteed, portfolio #2 becomes the preferred option.
But Alibaba doesn’t pay a dividend and futures earnings are not guaranteed.
That add a fair amount of uncertainty. And probably most people would choose #1 and sell a fair amount right away.
As for myself, I choose portfolio #2 because it gives an earnings power that is almost impossible to find anywhere else in any other investment, including in real estate.
In real life, however, my allocation to Alibaba is only 1%, because I know there are risks involved and that it’s impossible for me to know the future…
Full disclosure : I bought Alibaba last year at 230$ and yesterday at 89$, for an average cost of 185$.
Even if I’m down at lot on this position (-54%), I still feel better today, now that I have more shares.
And I think I have a better portfolio today than I had a year ago…
Also, I don’t advocate anyone going all-in on any investment. This was just an oversimplification.
Everybody would rather take the $9 million portfolio today than have $10 million last year and now have less than $5 million.
Maybe you are wording things wrong?
My portfolio is over $5 million. The swings are more painful than a $1-$1.5 million portfolio.
But you will only know how it will feel after you get there.
Agree with the feeling. I’m still trying to cope with the volatility my 1M$-1.5M$ portfolio. It’s much bigger than it was in the past. I’m getting more used to it.
The question was, do you manage your portfolio differently now that you have more than 5M$ ? Have you reduced your risk ? Increase the cash / bond allocation for example ? Do you take any of your decisions differently ?
Thanks !
If I end with losses this year, I intend on converting my IRA to a Roth IRA up the amount of my losses. I might as well start accumulating future capital gains tax free.
Fortunately I have a govt pension so I have not needed to tap into my investment accounts.
Smart! And congrats on the government pension. Having one is like winning the lottery nowadays. Stay healthy! And may you live forever.
Yes, this is exactly why I decided to purchase a website late last year. I wanted to bolster my cash flow and help to bring a bit more flexibility into my withdrawal plan. I still like to sit on close as much cash as I can to make it through bear markets, and any surplus profits from the business will go towards keeping that stockpile as large as possible.
I practice buy-and-hold with non-retirement investments, and the non-retirement funds I invest in favor that approach as well.
However, here in New York, the first 20k each that we draw from our retirement plan accounts each year is exempt from state taxes (so about 30k total, after Federal income taxes). To reduce eventual RMDs, I plan to take every bit of it every year, regardless of the economy.
Of course, if the market has just “corrected” I would probably turn around and reinvest it in a non-retirement account, at least until the market recovered (so as not to be guilty of selling the dip). As a bonus, instead of paying income tax rates on the money lost during a correction, we would be paying capital gains on that money instead, once prices recovered.
But that is only possible because our take-home in retirement, from passive income and other retirement income, and due to tax advantages and the end of 401k contributions, will exceed our current take-home and therefore will be sufficient to live on.
That is by design as, no longer constrained by annual vacation days, we plan to do a lot of vacationing, and even more if I don’t feel constrained to reinvest the money from drawing due to having to sell at a bad time.
Thanks for sharing the story. The point about pivoting and staying flexible is very important. We can do as much calculations and savings as we want. But we just don’t know how we will feel until that moment arrives.
Retiring off only 25X annual expenses is pretty thin. A bear market could easily reduce it down to 23X in a matter of months.
I wouldn’t call working part-time retired, but it does sound like a much better balance for him. If he feels like he’s retired, that’s great. I know an 80+ year old doctor with two specialities and he decided to retire from one and just focus on the other 2 days a week. It’s a much better balanced life style for him because he loves what he does and can still see patients, but doesn’t get as tired anymore and has more time to relax. It’s hard to retire if you love the work you do, so cutting back on hours can be a nice compromise.
Imagine if he had even one rental property that was spitting out $2000-$4000 a month consistently. It would not cover his entire spend but it would ease the pain. Multiple that by a few properties and life starts to seem more certain in retirement.
I guess he could downsize his house and use the proceeds to buy rental properties for more passive income. Just have to wait several more years until his kids go off to college.
Agreed. 12 years ago I was being doubted by my friends who were solely investing into the stock market, while I focused more on acquiring rental properties. They’ve been sweating it out the past couple of months and now constantly worry about a bear market while I’ve been able to take the recent market dip in stride knowing I have a steady stream of passive income to buffer the blow.
The situation is pretty ideal now for rental properties. It’s the turtle versus the hare.
Nice to have steady income and not see daily price changes or declines. But I really real estate prices continue to go up.
Sounds like Jack made the right decision here. Markets change, personal financial situations change. He adapted to those changes, and didn’t let his ego come in the way, nor let himself get too anchored to his original assumptions about “retirement” life. Bravo Jack!
I’m actually curious how Jack pulls it off at only $13K/mth with 2 dependents (which works out to just 17% of his average annual gross income, and is fantastic). Does he have a spouse? He is/was a high wage earner, but does he also live in a high wage/high expense coastal city? Anything you can share here would be great.
Ego is something we all must fight if we want to feel financially secure.
I’m not sure how many people would go back to their employer to ask for work again so soon. However, if you have a good relationship with your employer and the various people in charge, it’s so much easier. And, a good lesson before anybody retires is to keep good relationships. You never know what will happen.
Jack said he was spending closer to $20,000 a month while working. So his $13,000 a month is his new retirement budget. I’ll clarify that in the post.
Yes, either way you cut it, Jack and his family are relatively frugal, despite the large numbers.
I think traditional retirement is an antiquated notion. Work to the bone all your life then chop off your routine, purpose, drive, and social group at year X and all will be well? Psychophysiologically, that’s impossible. Perhaps we think of this as necessary because of our grandparents who worked hard labor jobs. But things are different now… even aging.
For those of us that work at desk jobs, there’s nothing keeping us from doing this until death if we keep our minds sharp… which, incidentally, is exactly how we keep our minds sharp. I worked hard in my 20s not just to get a financial bump, but to get the position I would be happy in forever, which I’m currently in. I’d be happy doing this until Rapture, but I’ll flip to consulting when I’m FI or forced out.
Earned income should be an element of your financial strategy for as long as possible.
i think tying your purpose, drive, and social group entirely to your job is an antiquated notion. at some point, most people will be pushed out involuntarily. reorgs, ageism, health issues, etc. if leaving a job means youve lost your purpose in life and your social group, then you did a poor job of cultivating your personal life. i cannot wait to never see my coworkers again and spend more time with my real friends and family. and my purpose in life extends far past what i was paid for.
These things are not 100% at my job, but definitely 80%+. I love my coworkers, and I interact with them more than my neighbors due to sheer hours spent, so there’s almost no choice. I still have strong relationships with coworkers from past jobs as well, so a force out wouldn’t necessarily mean the end of it all. Frankly, I wouldn’t have it any other way. I bet it’s the same for most employed readers here too.
It seems to me that Jack’s biggest problem is his monthly expenses are ~$13,000. I wonder what steps Jack could have taken to reduce his expenses before retiring—while not optimal, perhaps paying off any debt, including low interest rate debt—which would in turn have reduced his withdrawal rate.
If you were making between $60,000-$90,000 a month for the past three years of your career, how much do you think you would be spending a month?
$13,000 a month is less than 30% of Jack’s lowest monthly gross income. What percentage of your gross income do you spend a month? Thanks
I spend about 20-25% of my gross, which is approximately 15% of Jack’s. I’m also a single person with no dependents, so I’m in a different situation. It’s hard to say how much I would be spending if I made $60-90k per month. I suppose that’s more of a question of priorities in life and what’s important to each person.
Got it. My hope is that more readers focus on the percentages, not so much the absolute dollar amounts. Because at the end of the day, everybody’s situation is different.
Taking care of yourself is much easier than having to take care of a family. I remember the days when I only had myself to worry about and it was a walk in the park. I could easily live off just a couple thousand dollars a month.
Also, in the second half of your life, you will probably want to spend more and enjoy the fruits of your labor more than during the first half of your life. What stage are you in?
Yeah, that’s certainly a fair point. Maybe it’s because I’m young and have never had a family, but I find it hard to understand spending that kind of money every month — it seems exorbitantly high. I do appreciate that you bring a different perspective on withdrawal rates from many in the FIRE space!
The other thing to keep in mind is the $ amount spent is also based on your geographical location in a big way, ie, HCOL or LCOL areas.
If you recall from the hot post Sam had from a couple of years ago regarding the cost of living a middle-class life in the coastal cities. The numbers were so spot on (I live in NYC) that it was scary.
Sam didn’t mention where Jack lives but from his home being $2.5m it’s very unlikely it’s in a LCOL area. But that he’s living it large while having his expense at only $13k/mon he’s almost certainly not in a coastal city either. $13k/month in a coastal city is just living a middle-class lifestyle.
Here is the post you are referring to:
Why $300,000 Is Required To Live A Middle Class Lifestyle Today
Things change A LOT as you get older. Lifestyle inflation is real (and not necessarily bad or unintentional). The difference between a single person and a family is huge. Think about movies or a ball game for 4 people. Your studio works for you – for 4 people, you need a much bigger space. Tutors and education, activities for the kids, date night, vacations. Treating yourself to a nice restaurant might be $60. For a family of 4, with some wine, Pellegrino, etc., might be $250.
You might say well, someone doesn’t need all that. But then what’s the point of it all?
It’s also much easier to inflate your lifestyle than deflate. Living in your studio (making this up) is great now, but guess what? The minute you move to a 1 bedroom, moving into a studio seems super cramped
I am actually impressed that he spends so little given his former gross income. I don’t make nearly as much as him and would easily spend about 14k a month in retirement (including about 2500/month for healthcare premiums/cost for a family of 3). And i dont even live in SF, NYC or LA. Bravo Jack!
As someone who retired several years ago, then un-retired, and now considering retiring again, I can confirm that the psychological element of personal finance is just as important if not more so than the ‘numbers’. One’s target net worth, estimated spending needs, predicted withdrawal rate, etc. shifts from theory to deadly serious very quickly once the last paycheck arrives. For myself, I know that I need more money for peace of mind than I truly need to support my lifestyle. So I will work a bit longer.
I chose to withdraw at 4% per annum, but only on the actual fund balance. I receive more funds when times are good, less when they are worse, and will never run out of funds. This also accounts for receiving social security in a few years and declining living expenses as we age (except long term care risk, yikes).
Both TR Price and Vanguard are able to do the calculations automatically on the monthly balance.
Thank you for sharing. Being able to collect SS in a few years will be a nice boost. Do you plan to continue withdrawing at 4% this year if stocks stay depressed or continue to go down? Any changes to spending?