Both of those make some very, very optimistic assumptions about how reality works.
Pretty much any major negative event will add a decade and pretty much everyone has at least a one of those. A single one can wipe out years of savings, even at a 50%+ savings rate.
In the real world, you aren't in control of your savings rate for decades on end. No one is. I understand the illusion of that control is appealing but it simply isn't how reality works.
There is a reason the majority of the bankruptcies are from medical issues with 5 figures out of pocket and into the 6 figures when you count lost income.
> Pretty much any major negative event will add a decade and pretty much everyone has at least a one of those. A single one can wipe out years of savings, even at a 50%+ savings rate.
Define "major negative event" here. Assuming you have insurance for catastrophic events, few things should be able to wipe out hundreds of thousands in savings, which is what you'd quickly build up with a high savings rate, especially in a high-paying field.
And even if one of your desired safety margins is a pile of savings, the higher your savings rate the sooner you build up those buffers. If you assume one of those events will happen and wipe out a pile of savings, that's an added drain that you'd have to account for, but a high savings rate still means you'll retire sooner than you would have with a lower savings rate.
> Define "major negative event" here. Assuming you have insurance for catastrophic events, few things should be able to wipe out hundreds of thousands in savings, which is what you'd quickly build up with a high savings rate, especially in a high-paying field.
Health insurance never provided 100% coverage and you can get into 5 figures with health insurance. I'm not sure why you disbelieve it given its a pretty accepted fact when talking about medical bankruptcies with insurance.
Similarly, if you are having a major medical event, if you cannot work for months...failure to earn income is a cost.
Other major negative events are extended bouts of unemployment that will chew through savings while creating a failure to earn income for months, etc.
Hell, even being sued can be a problem if you have a high networth because you have access to resources. In the past 12 months, I've literally had people track me down to drag me into such fights over money.
> And even if one of your desired safety margins is a pile of savings, the higher your savings rate the sooner you build up those buffers. If you assume one of those events will happen and wipe out a pile of savings, that's an added drain that you'd have to account for, but a high savings rate still means you'll retire sooner than you would have with a lower savings rate.
I'm saying he is selling you a dream that you can do it at the age you stated. Black swan events do happen to people and you have no real safety margin for them with his lifestyle advice after you retire.
A "silver plan" is 70% coverage. If you have a 6 figure medical event, that wipes out your entire planned income for the year.
The 4% rule has been found to be overly optimistic. Similarly, RoI greater than safe withdrawal rates are assumed. [Hint: SWR and RoI are equal and equivalent in real terms over an extended period. MMM claims otherwise and I find it depressing people believe him, especially given that isn't what happened to him. ]
The reality is, for most people, even with a high savings rate you are looking at 25+ years of work.
1400000 [35*40k]
2015 40,000
2016 81,600
2017 124,864
2018 169,859
2019 216,653
2020 265,319
2021 315,932
2022 368,569
2023 423,312
2024 480,244
2025 539,454
2026 601,032
2027 665,074
2028 731,676
2029 800,944
2030 872,981
2031 947,900
2032 1,025,817
2033 1,106,849
2034 1,191,123
2035 1,278,768
2036 1,369,919
2037 1,464,716
Assuming everything goes perfectly, it takes you 22 years. However, you are going to be unemployed for at least a couple of those years and you are likely to have some kind of major medical expense [or your wife, or your kid] in that time as well.
The ability to do it faster is an illusion created by a bull market and lucky timing.
Of course not; it's designed to limit liability in the case of disaster, not pay for absolutely everything. The term "Out of pocket maximum" may prove relevant here; there's a limit to your annual liability, which is what you're paying for.
> Black swan events do happen to people and you have no real safety margin for them
Read the article I linked about safety margin, which talks about several tiers of safety margin. The very last of which, after a half-dozen other possibilities, is "you can always go back to work".
> The 4% rule has been found to be overly optimistic.
Not for over a century, including the Great Depression and the .com crash, according to various studies as well as publically available data from which anyone can make the same calculations. Evidence, please?
> Similarly, RoI greater than safe withdrawal rates are assumed.
By 1%, and that's justified elsewhere in the articles, but even if you go with 4% that doesn't wildly change the numbers.
> 1400000 [35*40k]
[...]
> it takes you 22 years
First of all, 22 years is a lot better than most people's retirement plans. That means you can retire in your 40s, rather than your 60s.
Second, could you please clarify what numbers you're using and assumptions you're making? I don't know where your multiplier of 35 is coming from. From the numbers in your table, it looks like you're assuming 40k/year of savings. It matters whether that's 40% of 100k or 50% of 80k; the percentage determines your years to retirement, not the absolute amount.
If we're talking about saving 40% of 100k, then yes, you get to retirement after 22 years, but the operative calculation is how soon your savings will reliably generate $60k/year in returns (since that's what you're spending). If we're talking about saving 50% of 80k, then you need to know how soon your savings will reliably generate $40k/year in returns.
Third, you've mentioned bad things that can happen over that period of time, but then you've also not allowed for good things, either. For instance, the assumptions behind the years-to-retirement calculation assume you never get a raise that allows you to save faster, and you never get a better return on investment (or if you do you spend it all), and you are incapable of adjusting your spending based on your returns.
> Not for over a century, including the Great Depression and the .com crash, according to various studies as well as publically available data from which anyone can make the same calculations. Evidence, please?
1) Even the author of the study doesn't say what MMM does in regards to the 4% rule.
> "The word planning is emphasized because of the great uncertainties in the stock and bond markets. Mid-course corrections likely will be required, with the actual dollar amounts withdrawn adjusted downward or upward relative to the plan. The investor needs to keep in mind that selection of a withdrawal rate is not a matter of contract but rather a matter of planning."
> What the "4% SWR" means is not that you can treat a portfolio as if it were a guaranteed annuity.
> . From an international perspective, a 4 percent real withdrawal rate is surprisingly risky. Even with some overly optimistic assumptions, it would have only provided "safety" in 4 of the 17 countries. A fixed asset allocation split evenly between stocks and bonds would have failed at some point in all 17 countries.
4) Even if you believed in the 4% rule, it was designed for 30 years. Long periods raises the failure rates.
etc.
You need to realize the 4% rule is a cute thing that journalists latched onto in the 90s and was never intended to provide 100% coverage. It also has a non-zero failure rate. Under certain market conditions it does fail. Pretending it doesn't is silly and even in the Trinity paper it is stated its not 100% reliable.
I'm really not going to get into the rest of it since you don't even know the basics of what you are talking about and I've wasted enough time arguing with you.
What you fail to grasp, and what I am pretty sure you are going to refuse to believe at this point, is the 4% rule applied as you and MMM are suggesting is the same trap of overfitting that many people who engage in backtesting do.
If you are not in the historical US, you have a success rate of ~23% with the 4% rule. Even the US? Is not the historical US. Its a new entity that is not guaranteed to perform 100% identically to the historical entity.
Best of luck to you, believe what you want, I honestly don't care.
I get that you want to believe a bunch of optimistic assumptions about reality but the reality is, they are optimistic.
The study was for the US, and never claimed to be otherwise, nor am I claiming otherwise. If you start talking about other countries, you're changing the parameters of the analysis. Get the numbers for your target market and run the analysis.
And yes, of course you have to be prepared to adjust based on conditions. You shouldn't just blindly withdraw 4% every year. Withdraw what you actually spend, and one of your many backup plans should be to spend less.
More to the point, fine, if you don't think it's safe, have other backups in place. Work a few more years, or have access to means of part-time work, or build supplementary incomes, or any number of other solutions. What's your alternative proposal? "This doesn't work perfectly in all life circumstances, so give up and plan on retiring at 65"?
Make plans to retire sooner than 65, and be prepared to adapt based on conditions. If you make a plan to retire at 40, and something goes wrong, maybe you'll retire at 45 instead. Oh no, you're only retiring 20 years sooner than everyone else; woe is you.
I'm not making optimistic assumptions; I'm making tentative assumptions and estimates that I can adapt over time.
For my particular case, for instance, it helps that while I'm saving like someone who wants to retire in my 30s, I don't plan to quit when I get enough to retire. I plan to keep working indefinitely, because I'm enjoying myself doing so. But it's sure nice to have backup plans, and to build a substantial excess for charitable purposes.
> You: The study was for the US, and never claimed to be otherwise, nor am I claiming otherwise.
> Me: What you fail to grasp, and what I am pretty sure you are going to refuse to believe at this point, is the 4% rule applied as you and MMM are suggesting is the same trap of overfitting that many people who engage in backtesting do.
> 5. I do not understand the meaning of backtest overfitting. If a strategy worked in the past, why shouldn’t it work in the future? Could you please provide a simple example?
> Any random sample extracted from a population incorporates patterns. For example, after tossing a fair coin ten times we could obtain by chance a sequence such as {+,+,+,+,+,-,-,-,-,-}, where “+” means head and “-” means tail. A researcher could determine that the best strategy for betting on the outcomes of this coin is to expect “+” on the first five tosses, and for “-” on the last five tosses (a typical “seasonal” argument in the investment community). When we toss that coin ten more times, we may obtain a sequence such as {-,-,+,-,+,+,-,-,+,-}, where we win 5 times and lose 5 times. That researcher’s betting rule was overfit, because it was designed to profit from a random pattern observed in the past. The rule has absolutely no predictive power over the future, regardless of how well it appears to have worked in the past.
> The point: Investors don’t know how many hypotheses the managers examined, didn’t like, and chucked out, before they found the perfect backtest. The more the data is tortured, the likelier the result is just a fluke. So: How often is a fluke passed off as “alpha,” or some kind of amazing financial innovation?
-----
I'm just putting this here because you clearly missed the boat on my post and its possible others will to.
I understood your point. Past performance is no guarantee of future results. And I've seen multiple people (including MMM) make that same point in several different places; nor am I relying only on one source for advice. (Though if you're suggesting it has no predictive power for long-term averages, that's ridiculous; it's simply that predictions are not in any way guarantees, nor do they in any way let you time the market.)
But even if you don't buy into the 4% rate, or even if you want to make a more conservative assumption, the math for an estimate still works; just use a different multiplier. And you still shouldn't treat that estimate as a guarantee. Retirement doesn't need to be a binary one-way process, where once you retire if you didn't plan well enough you're doomed. One of the lovely advantages of retiring early is that you're still more than capable of working if you want to, or doing some other kind of work.
Nor should you assume that because you planned for 4% (or 3%, or whatever you like), you should withdraw that much like clockwork every year. You might plan for 4%, but then spend 2.5% because that's what you happened to need. And if the market happens to grow 10% in a year, great, but you shouldn't spend 2.5x as much that year. Whatever you don't spend stays in place, growing your buffer even more for future downsides. If you steal away every unexpected upside, averages stop working, and you'll be more screwed by unexpected downsides rather than just living a little more frugally for a while.
Estimates are just that: estimates. They're useful tools for planning, not guarantees.
Again, see the article I linked about safety margins. You're talking all about all the horrible things that could happen. So, have backup plans, and backup backup plans, and you still can retire before your 60s.
Pretty much any major negative event will add a decade and pretty much everyone has at least a one of those. A single one can wipe out years of savings, even at a 50%+ savings rate.
In the real world, you aren't in control of your savings rate for decades on end. No one is. I understand the illusion of that control is appealing but it simply isn't how reality works.
There is a reason the majority of the bankruptcies are from medical issues with 5 figures out of pocket and into the 6 figures when you count lost income.