Investment Returns, Conservative Projections, Low Growth, Early Retirement, Retirement Planningwe've learned

The Case for Conservative Early Retirement Investment Projections

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The Doom-and-Gloom Predictions

At least once a day now, I see something in my Twitter feed that says we should all be planning for conservative investment returns for the next decade or more, and therefore we should keep our early retirement projections conservative too.

There was this headline:

Jack Bogle believes the stock market will return only 4 percent annually over the next decade (CNBC)

And this one:

Lower for Longer: The world economy will struggle to gain altitude, forecasts Leo Abruzzese (The Economist)

And this report summary:

Bracing for a new era of lower investment returns (McKinsey)

And even this theme among investment banks, who have a vested interest in keeping you optimistic so you keep handing over your money to them:

Why market returns may be lower in the future (Charles Schwab)

The Optimistic Dissonance

At the same time, in the same Twitter feed, I see stories of retired bloggers increasing their net worth more than they thought possible (maybe some because of undisclosed blog income, but certainly others because of legit investment growth). To hear some of them talk about it, early retirement is a risk-free breeze, and no one ever runs out of money.

That in turn leads other bloggers to assert that we’re all being way too conservative in our retirement projections, and we’ll probably end up with tons of money leftover based on our planning, which really means that we’re all working too long for no good reason when we could be retiring that much earlier.

What’s the Truth?

As much as I hope we don’t end up in a situation like Jack Bogle and others are predicting — netting low single digit returns for the foreseeable future — the truth is that I never think that stuff is truly predictable. Even if we can make educated guesses about things like employment, job creation, consumer spending, interest rates and price-to-earnings ratios, the stock markets are not always rational, nor are they always tied closely to economic factors that should have at least some impact on them (hi, current overvaluations). Add to that the fact that we have added new, essentially guaranteed influxes of cash into the markets since the last sustained bear market in the 1970s (mainly 401(k)s) which should act as a long-term stabilizing force, and I’m skeptical that we’ll stagnate or stagflate that badly.

But then again, way smarter people than me are predicting this stuff, and they spend all their time looking at data and thinking about this. So I’d be a bonehead to dismiss this possibility out of hand. I’m famously* risk averse, so if there’s a chance that markets really could give abysmal returns for an extended period, I’m paying attention and counting our contingencies. (famous among people who blog at ONL, a pool of exactly one)

But then there’s that nagging question that all aspiring early retirees should be listening to: What if we have one more year syndrome? What if we’re actually set mathematically, and we’re working longer than we need to out of fear? What if we get to the end of our planned work timeframe and then decide we should keep going, just a little while longer? That is certainly not what we want either.

So how do we balance those two competing concerns — concern about low future returns, and worry that we might end up working too long? Today we’ll get into all of that, and make a case for the approach we’re taking.

The Case for Conservative Early Retirement Investment Projections

The Problem of Recency Bias

Let’s talk about recency bias. From WikiInvest: “Recency Bias is where stock market participants evaluate their portfolio performance based on recent results or on their perspective of recent results and make incorrect conclusions that ultimately lead to incorrect decisions about how the stock market behaves.” 

Consider for a moment that virtually every financial independence or early retirement case study you’ve likely heard of has been someone who achieved their goal fairly recently, most in the last decade. Know anything else about the last decade? Perhaps that much of it represented a historically bonkers run for the stock markets.

Historical growth of the S&P 500 // The case for conservative early retirement investment return projections

The stretch from 2009 to now is one of the steepest sustained lines you’ll see in the history of the S&P, and the same is true for the other market indices.

Now let’s look at that graph again, but accounting for when some notable personal finance bloggers began documenting their journeys:

Historical growth of the S&P 500, plus when notable bloggers started blogging // The case for conservative early retirement investment return projections

So JD Roth and Jacob Lund Fisker (Early Retirement Extreme) both weathered a short dip, but for literally everyone else you’ve seen write about our current conception of early retirement, they’ve only ever written in this gonzo bull market era.

Which isn’t inherently bad. I don’t want to say anything to piss off the bull market (we love ya, pal!), because it has treated us incredibly well, just as it has all the folks who are retired already and are watching their investments grow every year, even as they cash out shares.

Where we run into trouble is when we fall prey to recency bias, and assume that because everyone we’ve ever known to write about early retirement has ended up way ahead of their projections (at least so far), that must mean that coming out ahead of modest projections is an inherent part of early retirement.

And it’s soooo not.

Don’t let recency bias fool you into thinking times will always be swell, and forget that this stuff ebbs and flows.

When the Wave Crests

At some point, this run we’ve all been on is going to end, and at that point we’ll just hope that it’s a brief correction with a fast recovery. But we certainly can’t bank on that.

Japan’s lost decade should always serve as a sobering reminder of what could absolutely happen here: overvaluations driven by sustained low interest rates leading to a massive crash and long, slow, painful recovery.

Whether this market era ends with a little correction or a massive crash (knock on wood), those of us relying on investment growth to fund our retirement will be in a very different spot from the one we’re in now, at least for some period of time. We can’t know if that time will be short or long, but it could be long. And if that happens, those who are banking on getting returns in line with what we’re getting now, or even banking on less dramatic historical averages, will be in a tough spot.

The Case for Conservative Investment Returns Projections

I know we are freakish outliers who need more contingencies to sleep at night than the average bear (I said “we” but it’s really me), and our retirement budget is padded so that we could easily cut 30 percent from our spending and still enjoy life. But if given the choice, we would always rather end up with too much money at the end of all of this and be able to leave behind a large sum (preferably in the form of a comically large novelty check) to the charities of our choice. That feels so much better than risking running out of money because we were in such a rush to retire that we left a year or two before we were really financially ready.

I’ll be honest. There are some people who are already retired or will soon retire who I worry about. Whose projections don’t leave any wiggle room for a sustained bear market, or a health crisis, or anything other than smooth sailing. Whose projections are based on getting the historical average returns every year, which isn’t how this works. Some years will do better than the average, and some will do worse. We can’t bank on predictable, linear returns, and there’s a huge luck factor that plays a big role, namely the timing of when we retire relative to the markets, and sequence of returns risk.

Fortunately, there’s an easy way to compensate for all of that: aim low.

If your plan is built on optimism about future returns, you get points for positivity, but you also open yourself up to much larger risk, no matter what your Monte Carlo simulations might say. Simulations are all based on historical averages, which are known, not future returns, which are entirely unknown and largely unpredictable.

This is probably the only time I’ll ever say this, but when building your plan assumptions and projections, it pays to be pessimistic.

Let’s weigh the downsides of each approach:

Overly optimistic projections:

You might have to have a lot of lean spending years

You might have to exhaust your contingencies or forego important spending (like on health care)

You might deplete your positions early and be forced to go back to work or downgrade your standard of living permanently

You might run out of money when you’re least able to earn more

Overly pessimistic projections:

You might work a little longer than you needed to

It’s up to each of us to pick our own poison, but we’ll take the pessimistic downside any day over the possibility that we could run out of money by being too optimistic. If we worked a year or two longer than we ultimately had to, something we can only know in hindsight? No big deal in the scheme of things.

What Is “Conservative”?

We’re not financial experts and I wouldn’t begin to tell you what you should base your projections on. But I can share how we’re thinking about all of this.

The 3 Percent Rule

We’re in agreement with those who say there are serious problems with following the 4 percent rule now, especially the differences with interest rates and bond yields, and the assumption built into the rule that we’d have 60 percent stocks, 40 percent bonds, which most investors would find waaaay too conservative nowadays given yields. So if we were going for straight adherence to some percent, instead of our actual two-phase plan, we’d almost certainly be following the 3 percent rule instead to account for lower future growth projections, and to retain as much of our portfolio as possible each year, to give it the best chance of beating those projections.

Projecting Low

We built our two-phase projections ourselves because there weren’t any reputable tools at the time to account for different phases of retirement: early retirement with cash flow from selling shares of index funds, early retirement with index share sales and rental income, traditional retirement with 401(k) income and rental income, etc.

Our retirement income sources over time // Conservative investment returns in early retirement

These aren’t our real numbers — I REPEAT, THESE AREN’T OUR REAL NUMBERS — but this gives you a sense of how we’re planning for each phase:

Income by retirement phase // Conservative investment returns projections in early retirement

We run all of our projections at the 4-6 percent ranges shown here, as well as at 3 percent. And we only consider a number safe if it lasts us until the next source of income kicks in at 3 percent year-over-year returns, which is suuuuuper pessimistic over the long term, we know. And these are assuming present-day values, so inflation would actually have to be added on top of these percents, meaning that 3 percent growth actually requires 4.5 to 5 percent returns with inflation, and even that not-too-optimistic 5 percent then becomes 6.5 to 7 percent or more when inflation-adjusted, which is then in line with past historical averages and well above what Bogle and others are predicting for the intermediate-term future.

Paying Off the House

When we paid off our house back in January, a small motivation to do that was future-oriented pessimism and the financial conservatism that accompanies that. Our rate was around 3.5 percent, which is an easy number to beat with investments in a bull market like the current one, but isn’t at all easy to beat in a bear market. So rather than follow the plans of others who invest more to make mortgage payments in retirement, we decided we’d sleep better keeping our fixed costs as low as possible in retirement by paying off the house first. That way, if our investments take a serious hit one year (or multiple years), we don’t have to lock in those losses by selling off enough shares to pay the mortgage. We can cut back the fun expenses and not freak out that we’re plowing through our portfolio too quickly.

What Are You Projecting?

I know we’re the conservative investing outliers, so tell us — what are your projections based on, numbers-wise and logic-wise? Any other conservative planners out there who want to raise your hands? Anyone going even farther than we are on the pessimistic assumptions? Got views that confirm or contradict Jack Bogle? Want to try to talk us out of this thinking? We’re all ears, er, eyes. ;-)

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179 replies »

  1. ONLs:

    You have been put in a place of great opportunity, and then you have been doing incredible things with this opportunity. So, first, hat’s off to you and keep up the good work! I’ve only been reading for a few months, but ‘conservative’ seems to be a theme. So, you may have to work an extra year to help you sleep at night. It hurts to write that, but it’s a first world problem, so really not all that bad if you step back and think of it. (This is great advice, I might have to take it myself.) Instead of the stock market stability, we could be living in Syria, and watching the instability in our government, which results in the instability (and bombing) of our home! Man, I needed to hear this myself!

    Please don’t read anything in to this, and keep up the awesome work! Sometimes a step back just helps our perspective!

    • Fortunately I don’t think there’s any scenario in which we actually need to work one more year, given that we’re pretty far ahead of where we thought we’d be, so if we see some backwards motion from a market correction, we’ll still be okay. But thanks for your support either way! You’re SO right that it’s an incredible privilege to even get to consider these questions, and not to have to worry about the basics of survival every day. As Buffett would say, we’ve hit the ovarian lottery big time! :-D

  2. This topic has been on our minds a lot recently. A lot of factors go into the bigger picture:

    1. Capital preservation or depletion – legacy or spend it down
    2. Age you retire and life expectancy – no chance of answering the latter
    3. Risk tolerance I.e equities to bonds ratio
    4. Impact of SS – a lot less than you think. For very early retirees, not even a factor.

    Do I have the answersto this stuff? No.
    But I know a man who does.!!

    Check out the magnificent series from ERN (Early Retirement Now) especially his Part 2. Print them all out, read them and re-read them. A treasure trove of knowledge.

    A number of highly respected names in the investment community are actually projecting lower than the numbers from Bogle. Meb Faber’s latest post summarizes the projections. And they are projections!!

    Our withdrawal rate will be somewhere between 2.1 and 2.5. We will be aiming on the low side of this range in the early years. With a diversified portfolio including a decent international allocation, there is not much more we can do other than watch the spend very closely and keep it reined in.

    Good luck in your decision making IF you are considering one or more year.

    • Wow, that’s a low withdrawal rate, even by our admittedly (financially) conservative standards. (Not conservative overall, as you know! Hahaha.) And you all have a pension that you get soonish, no? So that helps pad things a bit. I definitely don’t blame you for keeping such a low withdrawal rate if you can afford to, given all the unknowns out there, including what we all hope are good, long lives! And you’re right — I didn’t even pick the bleakest projections! Certainly there are those who think we’ll be much worse off overall, especially if certain political changes happen. :-/

      • Yes, the modest although not insignificant pension, helps to keep things a little lower in terms of withdrawal rate. I could work to 65 and get a much fatter pension……bad idea! Never gonna happen.

        Dr. ERN’s stuff on social security impact on the SWR will also help us much further down the line with both of us paying sizeable chunks of pay-checks into that for the past 19 years. Although let’s see how that all shakes out along with healthcare. Projecting that stuff is even harder than projecting market returns, LOL!

      • For what it’s worth, please also look at my post here:
        It studies how different initial withdrawal rates and stock/bond allocations perform depending on the initial equity valuations. It’s always so cringeworthy to see people apply the 4% rule that was averaged over many decades when we have quite unrepresentative and unattractive equity and bond valuations today!
        The good news: even when equities are expensive, you’ll have a good chance to succeed with a 3.25% SWR even over very long horizons (60 years!). 3.00%should be very, very safe!
        But careful with the bond allocation: 40% bonds may look like a low-risk, conservative allocation. But bonds create more risk of running out of money in the long-term. Remember, a lot of the folks who are warning about low equity returns also argue that bonds are even worse.

      • You didn’t exactly say it here, but I think your thesis is one I agree with: People should actually understand what the heck the 4% rule is based on if they’re going to build their plan around it! ;-) And totally agree with you on bonds — I used to see them as safer, but they come with loads of inflationary risk, just like a low-yield savings account. Very different situation than when many of the financial advice books were written! (Like in YMOYL, where they say you should only invest in treasury bonds — laughable advice today, but legit at the time.)

  3. I’m with you and am conservative in my projections as well. I’ve written several posts on these topics since I think it’s so critical to consider. Importantly, I’ve learned to be more grateful for the good parts of my job so it’s much easier to work a bit longer now, which makes huge difference financially. The way I see it, we’re trying to manage our finances (and the non-finance parts too) to optimize our lifetime happiness, not just our short-term happiness of leaving work ASAP. We FIRE folks should know the value of delayed gratification by now (within reason).

    For the nuts and bolts, I agree that a 3% withdrawal rate is the right one to plan for currently (and I’m actually planning even more conservative at 2% since I really, really don’t want to be forced to beg for work in the future). This assumes a high stock allocation (at least 70% – I see no appeal for long-term bonds here). I expect long-term real market returns to be 4-6% (historical US real return has been 6.5%), but I’m planning for success based on a real return of 2% in my own plans since near-term returns could be much worse than the long-term averages.

    There is a reasonable probability of a “lost decade” in the markets (especially US) over the next decade. This would wreak havoc from the sequence of returns perspective. It’s also probable the market roars significantly higher from here over the next several years so you can’t avoid investing. No one knows what will really happen but obviously returns have been very good the last 8 years and we’d be foolish to expect this will continue in a straight line. It pays to be conservative if you’re planning to retire soon.

    Thanks for the post on such an important topic for the community!

    • You know I love hearing that thinking all of this stuff through has given you more gratitude. That’s the best outcome. <3 And I'm impressed that you're even more conservative than we are on both your withdrawal rate and your projections! High five for caution. ;-)

  4. At the moment I’m predicting reaching my retirement number based on contributions alone, so I guess I’m conservative. I’ve set a date irrespective of the number, but the number itself I follow my work planning model. Under promise early deliver. I once ran my numbers with a four and six percent market return and the number came into reach five and ten years earlier then predicted. Not a big deal given the dates fairly set, but it definitely points to how my mind works.

    • That IS conservative, but I love hearing that. We’re pretty close, too, at least on phase 1. We won’t be saving every single dollar we anticipate needing, but we’re not factoring in much growth at all, a position we’re lucky to be in given that we’ve made much faster progress than we’d expected these last few years. Let’s hope you’re way oversaving and you come out ahead at the end!

  5. I like how you do the side by side comparisons. I actually run at 2,3,4%. I like to play the conservative game also, mostly because with kids, I suspect they will cost more than I imagine, not less. I think it is wise to be conservative…I worry about running out of money at 80 and having to be a greeter at Walmart. We will in almost any case have to tap out 401ks early, we put money way heavily into them the last few years instead of saving outside of it. And, according to my cost predictions we are withdrawing at a 3.5% rate most years…. That feels safer to me!

    • I almost did a double take, because at first glance I thought you were Mr. SSC. ;-) But of course it makes sense that YOU would project out at such low rates. Hahahaha. And there’s something comforting to me about having both places to project: in assumed market gains AND in withdrawal rate. So your 3.5% SWR feels safer because it’s based off of low market returns, not high ones. If you were projecting 5, 6 and 7, then 3.5% would feel slightly high to me, but you’ve built safety in on both ends. High five! ;-)

  6. We’re probably way more conservative than we need to be, but we plan on never touching our capital, only our investment income.

    It means that we have to work a lot longer. It also means we have to diversify our holdings: several properties, the stock market, land, our own business, etc. It’s more work upfront, but it makes everything easier in retirement: we don’t need to sell anything, we’re just going to collect the checks every month. It also makes it easy to see when we can retire: when our monthly income from our investments is going to be enough to cover our expenses.

    As any other investment strategy, it’s not full proof, but I believe we’re doing the right thing. I also actually enjoy the process, so, you know, it’s not a hardship. I would love to retire tomorrow, but if I can’t do that, I’ll take pleasure in growing the family fortune.

    • Kudos for listening to your gut on this! Your plan certainly isn’t for everyone, but I totally see the value in that approach. You can never run out of money if you only spend what your investments kick out, not your principle. You guys will never have trouble sleeping at night, or at least not as much as those of us who are doing something closer to winging it. ;-)

  7. I, too, agree with all my fellow FIRE-starters before me. :) I’d likewise rather work longer and be safe in retirement than be too cocky and think “what could possibly go wrong!” and then run out of money. Despite geographical arbitrage etc. etc.

    I’ve taken my current budget and mapped it to a retirement budget to find the figures I’ll need in real terms. (Moving away from expensive London to a less eyewateringly money-siphoning place to live e.g.) Then shall convert that into a nominal figure I need in 25 years, when I can access my pension savings and used that as input for my calculations. Working with 3% SWR and 4% annual ROI for the investments.

    But to be fair I’m only just starting out, I don’t know how things will develop over the next decade at all. So far this is the best plan I have but I’m fairly sure I’ll have to adjust *something* on the road to financial independence.

    • High five for taking a more cautious approach in your planning! And LOL on “less eyewateringly money-siphoning.” ;-) One thing to consider as your plan evolves is how you’re accounting for inflation. If your 4% accounts for inflation, that’s much different than if you’re factoring 4% growth plus inflation to keep your spending power level. As long as you account for that one way or another, with logic that lets you sleep at night, then you’ll be in good shape. ;-)

  8. *Raises hand* early retirement blogger from 2006 here ;-). There are more of us unicorns out there than you might think. Or there were, as many moved on to other interests.

    I think we won’t see high investment gains due to the overvaluations as you mentioned. Historically, 8-year bull runs are not followed by huge average gains over the next ten years. Or at least I don’t think they do.

    This is one of the reasons why I argue for international stocks. Many of them haven’t had the huge bull run and aren’t nearly as overvalued.

    Is anyone arguing against conservative projections? Some bloggers might pontificate on 10% returns a year. In 2006 or 2007, Vanguard floated 12% as the number that should be expected over the long-term based on 80 years of data. I was more than happy to run with that authoritative number as it was exciting.

    At that time, early retirement was a theory that was way off in the distance. When early retirement gets closer to being “real”, I think it’s fair to err on the side of caution.

    I’m new to this “one more year” syndrome, but I would think that you can only play that card once unless the numbers drastically change like a market crash.

    • Sorry, my friend! I didn’t have enough room on the graphic to highlight everyone, especially as a lot of your contemporaries are now long gone in the blog space. ;-) But the fact remains that virtually all FIRE bloggers have existed for the most part in boom years, and that’s who we’re all reading and at least in part basing our thinking on. And you’d be surprised who’s arguing — maybe not in those words — for a far less conservative approach. I’ve seen quite a few financial plans that are based on 4% SWR and 6% annual returns PLUS enough extra to cover inflation. Those numbers just make me nauseous! And others are even arguing that we’re all working too long because FIRE bloggers are all coming out ahead. (The pinnacle of recency bias!) And thankfully, at least in our case, OMY (one more year) isn’t an issue because we’re significantly ahead of schedule on our plan. But I know it’s seen as a trap that a lot of bloggers are afraid of falling into. And agreed — you can only do that once, at least if you make your plan known!

  9. I don’t want to share this with Fergus — he’s way more conservative than I am. XD

    For me, 4% withdrawal rate is where I’d consider us to be financially free (What up, ONL article reference! ;). Actually retiring would be more 3-3.5%

    Level of income makes such a huge difference in the “worth it” olympics of working more now vs having some optimism. If you’re able to save 50%+ of income, working more could be a year or two. A lower income family likely can’t save as much, and going from 4% to 3% could mean a decade of work. Add on the ability to work part time or side hustle…I could definitely see the appeal of being optimistic vs cautious.

    Omg retirement calculators XD
    Fergus and I know our way around some JavaScript — I’d love to collaborate on a calculator/tool that makes more sense, just saying ;) [currently have a “landlord vs stock lord” calculator on our site if you want to check out a project we’ve done (still in beta)]

    • Do you need the lecture on how you’re already financially free, too?!?! Hahaha. I think the way you slice it makes total sense: 4% for FI, 3-3.5% for ER. You’re right that the timeline for getting from one to the other could be drastically different depending on circumstances, and I can for sure see the allure of optimism if the gap between the two is long. But I’d still argue it’s not worth rushing. And if you’re serious about that calculator, OMG YES LET’S DO IT. !!!!!

      • I’m 100% serious! :D

        Others like Piggy and Kitty have also recently lamented the lack of good calculators; there’s definitely a gap to fill . Simple, interactive, transparent, and flexible for things like risk aversion/income after “retirement” would be my goals. ^_^

        Monte Carlo optional ;)

      • I would love it if you guys put together a calculator! I am just starting out in this whole area, and am having a really hard time just trying to make a plan and figuring out what number should be my goal – some sort of calculator would help. I definitely don’t feel like I have a good grasp on how to do these calculations! To be fair, I haven’t really sat down and tried to work it all out as right now I’m still writing down all my spending so I can get a feel for how much I spend in a year, anyway.

        I’m especially interested in something that could be used to help calculate an ONL phase 1 and phase 2 plan. I will be getting a partial pension when I turn 60, will have a 401k-esque plan I can draw from, and may also qualify for social security (although I don’t want to count on that anyway and it can just be a nice bonus if it happens) and may even get another small pension from another source. depending on how long I stay in my current job. So I’m definitely looking at a 2 phase plan and am having a hard time deciding what number I want in my taxable versus tax-deferred accounts, etc. and a lot of the calculators seem aimed at just assuming you’re drawing from the same pot all the time.

        Just wanted to let you know there is interest out there! :)

      • Thanks for chiming in! I know we would have loved to have had a resource like you’re describing, and I totally agree the two phase approach would have major value, because it’s not all the same money for the two (or more) phases. Keep tracking your spending — that’s where all the calculations begin! ;-)

  10. I started Dividend Growth Investor on January 20, 2008. I have been talking about dividend stocks, buying and holding dividend stocks through the recession and the bull market. I weathered the bear and the bull. I have seen so many jump off the cliff when stocks were down, never to return back. I have also seen to many sell everything during the bull, missing out on gains, while expecting a bear (which hasn’t come yet). On the other hand, I was lucky that I focused on US securities. Those who had too much foreign equities, didn’t earn more than what a savings account returned over the past decade.

    My goal is to live off dividends in retirement. A well diversified portfolio could easily yield roughly 3% today, and if history is any guide, it would grow at slightly above the rate of inflation. Dividends are more stable that capital gains/and the price returns that generate capital gains. If you look at the dividend income trends over the past 80 – 90 years, dividends are rarely down from year to year. It is just easier to ignore/handle stock price fluctuations when you get cold hard cash deposited to your account on regular intervals. This cash comes from real earnings, and you can spend it, or reinvest it as you please.

    • Dividend investing is for sure its own whole philosophy and approach, and the upside is clear: never depleting your principle. I 100% get the allure of that! We took a look and realized we’d have to buy significantly more shares with that approach than we do under our sell-off-shares plan, which we decided wasn’t a trade-off we wanted to make. But if you’re happy with that plan and it’s working for you, AWESOME! And as for the next bear, let’s all hope the recovery is as swift as it was after the 2008 crisis! That was pretty fast by historical standards, which we all have no doubt benefited from.

      • “We took a look and realized we’d have to buy significantly more shares with that approach than we do under our sell-off-shares plan, which we decided wasn’t a trade-off we wanted to make”

        I get this response quite often and it puzzles me. A $1M portfolio invested in dividend stocks ( or a dividend ETF like VYM) would yield roughly 3%. Spending the dividends results in something like $30K annual income.

        A $1M portfolio invested in a mix of index funds using a 3% rule you get $30K to spend (and a large portion of that 3% will come from divs and the rest from capital/capital gains).

        I do agree however that you should do what you are comfortable with and what makes sense based on your analysis. So I am not trying to tell you my way is better than yours ( or vice versa). I am just sharing (and caring ;-) ) If you can stick to your plan, you gotta do what makes sense in your situation.

        I consider a 4% withdrawal from a traditional stock/bond index portfolio is risky for someone retiring today due to stretched valuations. Having 40% of assets in a 10 year bond yielding 2% will not return more than 2%/year if you hold to maturity ;-)

        But my initial comment was more about how people change their plans mid-course. The term knee-jerk reaction describes it best. Plenty of people have been fighting the bull market and selling.

      • I am not contesting the overall approach of dividend investing, which tons of smart people, including yourself, find to be the preferable route. For us, it’s very much based on our two-phased approach, and the fact that our much larger assets are in our 401(k)s, which we plan not to touch for 20 years or so. The taxable component of our investments, which will provide for us in most of the first phase, are significantly less than the $1 million level you are citing, and therefore would not return nearly enough to us just based on dividends. If we were looking at just a single pot of investments to support us through our entire retirement, it could be a very different calculus! But given that we are fine spending down the assets for phase 1, and then transitioning to a completely separate pool of assets for phase 2, it’s a very particular set of considerations. Make sense? ;-)

  11. I remain cautiously pessimistic. I’ve been friends with some early retirees for over ten years, and they’d been retired for maybe or more ten years before that, so I’ve been able to watch how the market treated them leading up to the Great Recession and then their long recovery. I do think this market is overvalued and likely due for a crash but I’m not crazy enough to try to predict when or how it’ll happen. I know the limits of what I know :)

    I know I can rely on people to remain irrational whatever the market is doing and I know that people who have a certain amount more in their portfolios weather crashes better than those who have less, but the exact numbers are something I’ll be asking them to discuss with me. Those who weathered it well didn’t have unfinite wealth and they did have lean years after 2008-2010, but they didn’t have Go Back To Work lean years and that’s the medium that I’m looking for.

    • I think you can be optimistic overall but pessimistic on your projections. ;-) And amen to not trying to predict what the markets will do and when! You know I’m in agreement on the irrational market stuff, so while it may be true that the markets SHOULD return less in coming years, that should have also been true that last three to four.

  12. I was mostly joking. The “literally everyone else” got my attention as “literally” is a pet-peeve of mine. You did say you were highlighting a couple of notable bloggers. For all practical purposes though, you are right, the FIRE bloggers that are being read are from this bull run.

    I guess I’m blessed to only read a subset of the FIRE bloggers that seem to make reasonable projections.

    I’m with you on the 3% SWR. I’ve written about how it should be the rule of 3% and 33x instead of 4% and 25x. I’m hoping to go with a 0% SWR. I think we can reduce our expenses to live well on military pension, rental property income, my (meager) blog income, and, of course, dog sitting income.

    • Haha — touche. Bad grammarian for misusing “literally.” Bad! ;-) And, to clarify my earlier note on bloggers, much of what I’m referring to may not actually be on blogs (though I suspect it also is), but is what several bloggers email us on a regular basis, along the lines of “Stop worrying so much and retire already!” I’m guessing these are mostly new readers who don’t know that our original plan was to quit in 2020, we’ve shaved three years off our timeline and have no intention of going into “OMY” territory at the end of this year, pretty much no matter what, even if health care effectively disappears. Totally agree with your framing if it as 3% and 33x!

  13. I am a laissez-faire kind of guy, so I support you working longer if you think that’s what you need to do. But since this is an opinion piece, I give my opinion below :)

    I think it always helps to be old (age 41 here, woot woot). The period of 2000-2010 is widely seen as the lost decade in the stock market. You can’t look at any period in a vacuum. To say that 2009 until now is unheard of is totally cherry picking and ignores the steep decline, 38%, that occurred in 2008.

    I am also very conservative, and cringed when my in laws said they have withdrawn 90-100k per year, or a 9% withdrawal rate over the last 10 years, and never touched their principal. I think 6% is very conservative but, knock on wood, we should come in a bit lower than that.

    Our strategy is to divest two years worth of living expenses into a high grade corporate bond fund. As the market rallies, we may divest more, as it declines, we will spend that money first. It’s not a perfect recipe, but retiring at 41 is very flexible as far as jobs go, but the need for one will be very low. It’s always good to have a back up plan though.

    This is where I get my expected future returns from, which in my opinion, is not cherry picked at all and from a very reputable company, 9.7% on average.

    • Yeah, you’re suuuuuper old. LOLOLOLOL ;-) To clarify, WE are not working longer. That is just the general choice that each of us faces! We’re far enough ahead on savings that we can withstand a significant market drop and be fine, and could potentially have the opposite problem: of realizing in hindsight that we could have already retired by now and been fine. (So grateful for that!) But we’d rather be in that situation than have less of a buffer. And re: 2008, do keep in mind that although that was a huge drop, it was also one of the fastest recoveries we’ve ever seen from that big a drop. So while it was no doubt a major event, it didn’t have the long ripple effects that we might expect in the future from an equally large crash. We can’t expect it to be apples to apples. ;-) And yeah, I’d cringe too at that withdrawal rate your inlaws are using! Though 6% also feels to me for you guys, all the more so if that doesn’t factor in inflation. But what I think doesn’t matter one bit — what matters is that you guys are clear on your plan and your back-up plans, and you’ve thought it all through enough to let you sleep at night! ;-)

      • 6% is very adequate, 9.7% historic, albeit uneven returns, leaves plenty of room for inflation. I am talking in nominal terms. I have no problem having a 3 year decline like we did in 2000-2002, as I would also experience the gains preceded by that time-frame, which was 1995-1999 :) Over time, the market corrects to the mean.

        Also, the 4% takes into account the depression, but totally ignores deflation that occured during that timeframe. A $1 in 1929 was worth far less than a $1 in 1936, when my dad was born :)

      • Gotcha re: how you’re accounting for inflation. Knock on wood that none of us get in trouble with sequence risk, which is all a matter of luck and dictates whether we do have those preceding year gains or not when we need them.

  14. Agreed on paying off the house. Our rate is 2.6 but knocking off housing expenses forever is a massive psychological win and helps prep for bad markets.

  15. I’m sorry to be one of the doom and gloomers on your twitter feed :/

    I think if you *REALLY* plan to draw down on your portfolio for 60+ years, you need to be conservative in your analysis. With that long of a retirement, you’re exposed to sequence of returns risk, personal inflation, and black swan events. I think it’s healthy to consider all the contingencies, especially for later in life (say age 75+) when your cognitive abilities might slip.

    All that said, I think your assumptions are sound. If push comes to shove, you’ll take a job operating a ski lift which will also save you a grand on ski passes. Is that really such a bad life? I think not.

      • Yes he is, and MMM actually retired in 2005. He started his blog in 2011, so he went thru the GFC and came out the other side fine. Although I don’t think he would have anticipated “blowing up” the blogosphere.

      • Thanks for confirming re: Jacob! And yes, totally right about MMM — but his blog doesn’t reflect a real-time reflection on those great recession years, so it’s a slightly skewed view. ;-)

    • Hahaha. You know I appreciate the reality checks along the way! ;-) And totally true — 60 years of retirement (let’s hope!) is a looooooong time. There could be a whole slew of market forces present by then that we can’t even imagine now, in addition to all the stuff you mention. And yeah, we aren’t above working as lifties if need be, but we don’t want to bank on it! ;-)

  16. This is one of those instances where I’m actually glad that I have another 9 years until I’d like the option to retire. It’ll be interesting to see what the market does and how early retirees do over that time.

    Right now I’m using a 6% rate of return in my projects and a 3% SWR. But I’m very aware that a market downturn could happen at any time and for any length of time. In fact, I’m very much expecting it.

    I suppose it also helps that I’d be 50 when I retire so it’s a shorter time frame than many early retirees, making the 3% withdrawal rate that much safer.

    • I don’t blame you for taking relief in your timeline, most especially on health care. It’s bananas that our lawmakers seem to be fine with all this uncertainty they’re giving folks. And you’re right that retiring at 50 will give you less risk, because your “gap period” will be shorter!

  17. Ha! I had settled on 3-3.5% and ran my numbers at 3.25% but hope/plan to spend 3% or less. Data shows that *should* last for 60 years. Here is the thing I think might be true for many ER folks: there are lots of ways to earn income whether it’s a blog or not and for
    folks who tend to be highly motivated I think opportunities to earn some “consulting” income or whatever you want to call it are abundant. Any income you earn will offset those requirements. And that important piece is not factored into those numbers. I don’t really want to work… but a little bit of stuff here and there might be fun and meaningful. Even just $12,000/year would reduce my required withdrawal rate even lower. I think you will be fine and I’m not really worried personally.

    • This whole post is based on a “no extra income” assumption, so obviously that would make a difference, potentially a huge one. But I think folks should only plan for income if they essentially plan to go into that consulting or part-time mode immediately, unless they only plan for minimum wage. A big resume gap will give folks a way bigger obstacle to future employment than many of us want to acknowledge!

      • Agree, but also respectfully disagree…. How do you define a “big resume gap”? I know people who have taken off 5 years and then stepped right back in where they were. And honestly, I think that resume gap dealio is important if you are continuing on the same path and expecting that upward trajectory. I mean no disrespect by this at all, but if I needed the money, I’m not above folding t’shirts at the gap to make ends meet. Or whatever. We are pursuing early retirement to get out of “the rat race” or whatever we want to call it, anyway. $10,000-$20,000 of extra income, can really make a difference in these types of projections even if it were to happen every 3-4 years or so. I would never expect to make the kind of income I make now after a 10 year early retirement vacation. Nor would I want to go back to this pressure cooker! I don’t want what I’m about to say to come off the wrong way, but I think folks who are clever, motivated and hard working which is how I would describe every person I’ve ever met (virtually as well) who is pursuing ER, can figure out ways to make income if necessary, resume gap or no resume gap. Maybe I just have way more of an abundance mentality about the money and working. This of course assumes you have no sort of disability that prevents you from working. But I agree, let’s not blindly follow the 4% rule and think that this bull market will go on indefinitely. Like I’ve said before, I’ve taken a risk on a couple of alternative investments in my after tax accounts which theoretically aren’t going to be highly correlated with the stock market. Until things change, I won’t know how this will all play out. I’m ok with the uncertainty though, and dare I say, at peace with it! :) I’m ready.

      • I’ve actually done a bunch of research on this very question: And there are a whole bunch of reasons why I still think many FIRErs, as clever and resourceful as we are, are still overly optimistic about work prospects, *especially* in times of widespread economic hardship. (Like if the markets are going swimmingly, you won’t need work. You’ll need work if markets turn south, which will also be when a lot of other people are out of work and looking.) There will always be anecdotal exceptions, but the data are not on our side on this. I for sure think the hustle mentality is an asset, but there are a lot of forces working against the long-term unemployed, even if we don’t see ourselves as “unemployed.” And it for sure helps if you’re willing to take a McJob, but I think a lot of early retirees used to a life of leisure would find the reality of a minimum wage job fairly hard to stomach. Of course, my hope is that none of us ever need to use these options, because we will have planned so thoroughly and well! ;-) And it’s a totally different ballgame if you have some form of continuous part-time employment in ER that keeps you current on skills and keeps those gaps minimal.

      • You might be right. I’m likely clouded by the skill set I possess which can function across many industries and the fact that I’m a doer. Though I really don’t want to work. I just want to get to the end. Let me tell you – the last 60 days are going to be the slowest. :)

      • Oh, amen to that! The first quarter of the year flew by, and now it has slowed back down again. I’m working hard to savor it, which is helping!

  18. I’m on record on my blog being pessimistic when it comes to stocks at this point in time. So far you’re getting a lot of “amens” in the comments, but I continue to read fairly well known bloggers who say that stocks will “always” go up if given enough time (say, 10 or 20 years) and that 7-10% returns are normal. It’s an interesting modern day myth, that one can indiscriminately buy shares of companies without regard to price. [And please note: Warren Buffett did not make his fortune this way. He bought undervalued stocks and full on businesses using leverage and consistent cash flow from insurance companies!]

    A quick explanation before I get to FIRE implications … The hidden danger of the current prevalence of “passive” index investing is that there is no proper price discovery — the process of determining a proper price for something based on supply and demand. Individual stocks are bought indiscriminately, as a pool, without regard to the dynamics of each individual security (which is what “makes a market”). It’s like buying a car lot instead of a car, or a neighborhood instead of a house.

    Unfortunately, this means that selling will be the same — indiscriminate. And the large holders of these securities are not early retirement bloggers but investment banks and hedge funds that can deleverage with one click of a button and send an index down rather quickly. The banks will be fine, but if you are retired, drawing down on investments, and take a 50% haircut (which has happened a few times in the past 20 years) … it could get ugly.

    Traditional retirement investing advice had people almost completely out of stocks during retirement. This has shifted significantly in recent years, with some saying we should hold mostly stocks into old age. Caveat emptor.

    All I can say to that is I’m with Full Time Finance. My projections are based on contributions rather than returns. Sorry for the long comment!

    Another great post from you, this is my favorite blog. –Rich

    • Found your first comment in spam! Yay! (But boo for going to spam.) Agree with you — there are still TONS of voices out there projecting unrealistic/unsustainable growth. And indexing, yeah. We know the risks, but they are not talked about enough. And those of us who evangelize for indexing should consider whether we really want MORE indexing, or whether that defeats the whole purpose. ;-) AND you totally made my day with your nice note. That’s a wonderful compliment coming from someone with so much financial and investing savvy! :-D

  19. Darn I had an awesome comment I accidentally erased. Just imagine how good it is!

    Count me pessimistic, I’m on record as such on my blog. There is a danger to index investing that few realize, which is the lack of price discovery on individual securities (you know, making a market and all that). It’s indiscriminate buying, regardless of price. Like buying a parking lot unseen instead of buying a car from a person. [It’s not what you do for any other product, and it’s not what Warren Buffett does either. If you want to be like buffet, build a furniture and insurance empire first!]

    I don’t need to tell you that many fish bigger than early retirement bloggers are also doing this, and these fish can deleverage quickly with the push of a button. Indiscriminate buying can lead to indiscriminate selling.

    Traditional retirement had people out of stocks almost entirely by the time they stopped working. This thinking has shifted and the “stocks always go up in the long run” mythology has gained steam. You were right to point to Japan as a counter-example.

    All I can say about people wanting to retire is that anyone retiring should probably do so without needing a rate of return to make it work. Caveat emptor.

    • Oh man, I’m sad to miss the greatness! ;-) Thanks for being game to retype something for us. And you’re totally right about this stuff. It’s like my belief that indexing is great as long as too many people don’t index, just as early retirement investing is great as long as too many people don’t follow our lead, stop buying stuff, and make stocks tank as a result! Hahaha. (But also seriously.)

  20. Thanks for being the voice of reason here.

    Being in my late 50’s, I weathered through the Great Recession of 2008 and held on to my investments. While the current bull market has certainly worked in our favor, I adopted the “3% rule” in my financial planning as well. (Actually, it works out to be about 3.1%, but who’s counting?)

    Being a program manager in my past life, I have learned to hope for the best but plan for the worst, and have a plan B and plan C in case plan A fails (my favorite program manager quote: “Don’t worry – if plan A fails, there are 25 more letters in the alphabet”).

    I was using 3% inflation and 4% returns for my projections as my basis for making the decision to retire. The results are not as pretty as 2% inflation and 6% growth, but I don’t think it’s unreasonably pessimistic, either, especially given I have no idea what my health care costs are going to be over the next few years. That’s where plan B and even plan C may need to kick in…

    • I don’t know that I’m all that, but glad you enjoyed the post! ;-) That’s super smart of you to live by 3%, though I’m sure you were plenty scarred by the Great Recession, which no doubt affected the risk-tolerance for many of us. And yeah, totally with you on the alphabet of backup plans. We’re good through at least H, but I’m sure it will be M or N by the time we pull the plug. ;-)

  21. I agree partly with what you are getting at. If you are ONLY planning on investment returns to provide income it pays to be conservative…of course this breaks down almost immediately depending on what you really end up doing.

    In our case, I’m aiming for a 4.5% real return…yes that is high, but also have a web of other factors contributing to that choice. First off, my wife wants to keep working for another five years after I leave my job, so that provides some buffer to keep our withdrawals to less than 2% of the portfolio for the next five years. I live in Canada where healthcare isn’t the same issue as the US. I plan on doing some ‘fun’ work after I leave my current job later this year…that income isn’t include at all in our projections so it’s all extra money for vacation upgrades or other nice to have items. I don’t have any inheritance in my plan despite the fact I will likely get somewhere north of $250,000 later on in life. We paid off our mortgage back in 2012 and have no debt. I also haven’t include any government retirement benefits which potentially could cover about half our budget.

    So in my case, at 3% planned return on top of all of that sounds utterly OVERKILL to me. The issue of course is context…what works for one person won’t for another because of their particular choices. Yet I guess that is why blogs are so much fun…you get to see other people’s choices played out for you.

    Good luck on your retirement.

    • This is all built on the assumption of no work income, so certainly work income would lessen the pressure on a portfolio! However, I also think folks are too flippant about assuming they can “always” go back to work. Sure, maybe that’s true, but it might not be good work or highly paid if you have a sizeable resume gap and haven’t kept up your skills — obsolescence happens fast now! For your sake, I’m glad you live in Canada where you don’t have our health care uncertainty — that’s HUGE! And I also appreciate that you aren’t budgeting for that likely inheritance — not budgeting for those windfalls has been the biggest secret of our success. And you’re totally right overall that context matters a ton, as does individual comfort. What we think is necessary doesn’t have to work for everyone else and vice versa. Kudos for finding your own path. ;-)

      • Oh, I agree I won’t be going back to my old career for work…like not ever. Instead I would enter a new field. I think people tend to confuse ‘some work’ with ‘full time work at your old career’…it can be something else. In my case, I’m a chemical engineer so playing in a microbrewery would be a fun job where some pay would be nice, but honestly I could care less if it is minimum wage and half time hours.

        I completely agree that individual comfort is part of it…risk is different for everyone.

        Keep up the great work on your blog…I’m enjoying it.

      • Thanks for that nice note! And yeah, I think a lot of us relate to what you’re saying. It’s not work on its own that we don’t want necessarily, it’s the demands of more-than-full-time work with lots of stress. In my case, what I don’t want as a schedule, but I will always have projects I’m working on when I choose to, so I’ll never quit working.

  22. We’re planning on a 3-3.5% withdrawal rate…but of *current* portfolio, rather than inflation-adjusted percentage of initial portfolio. That makes income more volatile, but but it means we cannot run out of money. If the market returns an average of 3.5% or greater, we’ll end up with the same amount we retired with, or greater, no matter what the sequence of returns. If at any point the market declines enough that 3.5% can’t cover our expenses, we know it’s time to source some income.

    Combine that with a budget heavy on “contingency” expenses—set-asides for healthcare spending, infrastructure purchases, etc. that may or may not materialize—and I think we have a plan that is a bit more bulletproof on the downside, and allows us to benefit in the likely scenario that the market returns more than our withdrawal rate.

    • Wow, that’s extra conservative! I love it. If you can afford not to build inflation assumptions in, more power to you. Of course, it probably means you’re working slightly longer than you might need to, but if that’s your comfort level, then rock on. :-D And your contingency line items made my heart go pitter patter. ;-)

  23. Great Post!

    I think there are a lot of variables to each individual’s situation that would affect their SWR. My personal decision was to use the 4% rule (although after 4 months of retirement I have been operating closer to 3.2%) with a big “insurance” policy…being a capable 36 year old. It seems like we are living in a time where finding side hustles is becoming increasingly easier (think UBER economy). Who knows, I may even make the decision in a few years that I missed the kind of work I was doing before and try it again…and in the off chance a skills gap keeps me from this then oh well, not the end of the world as it really seems like there are endless possibilities for other careers. I tend to be an overly optimistic person though and I realize this line of thought isn’t for everyone.

    Additionally Mad Fientist had a great post around SWR’s a while back for anyone that hasn’t read it. Essentially there is a very low chance for the 4% rule to fail.

    • I totally appreciate optimism, but I do think our community tends to underestimate the challenge of going back to work if times get tough. Here’s some research I did on it a while back: That said, I think having a hustle attitude is a huge plus, and will put you ahead of others, but if a large number of people are out of work, there will be a glut of Uber drivers (and every other side gig we can imagine), and it won’t be lucrative like it is now when most people do NOT need to be Uber drivers. We tend not to think about the fact that the times when we’re most likely to need money will be when it’s hardest to come by. ;-) But again, I totally love the optimism and think it will serve you well!

      • Thanks for sharing. A lot of good points in that post about going back to work. I especially like the point about checking your ego if you are in the unfortunate position where you have to find work. Certainly a high unemployment environment changes the job equation. A big variable in this conversation is if your monthly expenses are an MMM like $2000/month vs someone living on a luxurious $10,000/month budget…would make a difference if you could actually survive as a Wal-Mart cashier or not. As you mention though, starting/executing a side hustle when you don’t need it is a great hedge against the downturn.

      • Such a good point! If your bare minimum budget is teensy, you don’t have to do much work to cover it, but if your budget is high, different story. And yeah, we are all for starting the side hustle before you really need it, even if it’s something small that you don’t ramp up until you feel the squeeze!

      • I am going to have to dissent on the comments about not being able to find work. I worked at McDonald’s for four years (high school) and there were always positions available. All it required to get hired was some flexibility but most of our day shift was women in their 60’s who worked as a hobby, and one or two really old men.

        My mom worked until she was 70 on the phone (outbound survey calls) and my dad worked well into his 50’s before he died. When my mom was laid off, due to company bankruptcy in 2009, she received extended unemployment for TWO YEARS. She still had extra income coming in, even though she had no intention of going back to work, for 24 months. WOW.

        It always pays to grow up poor, as you see what is possible for the poor. Low income jobs, even in recessions, are by far the easiest to get. You only need a moderate amount of income, if at all, if you have planned properly. During the last recession, I heard it put this way best on talk radio, and this was the height of unemployment (I worked the entire recession), “if 10% of people are unemployed, think about it, 90% of the population is still working.” Bingo.

      • Counterpoint: McDonald’s pledged in 2015 to raise all workers to around $10 an hour by end of 2016 (, so let’s assume that’s where they are now. Even if you work *full-time* at McDonald’s (which not every store will let you do, because they don’t want to risk overtime pay and a half), that’s only $20K a year. So while you might technically be able to get that job, you would have to work a LOT to make even a small amount of money to offset market losses or whatever else. I think most people who retire early do so with no desire to ever work full-time again, certainly not in a job that requires them to be on their feet the whole time, dealing with sometimes angry customers and maybe working around hot grease, etc. So speaking for me, at least, that is not what I’m talking about when I say it would be tough to find work in a recession. I would rather keep working in my many-times-minimum-wage job a little longer than face possibly having to work for minimum wage or just above it. And I think most FIers have no desire to go on unemployment. But that’s a whole other discussion.

  24. I am hoping to FIRE within a year at a 4 to 5% withdrawal rate. I am not retiring as young as most of you. I can start social security within 10 years, and the timing will depend on finance and health of my wife and me at the time. Once SS kicks in, it will pay about 50% of expenses, and our withdrawal rate will drop to 2-3%. I realize this is a bit backwards from the preferred low risk method, but it also is a closer match to how older people tend to spend less as they age. Thoughts? Caveats?

    • Two thoughts: 1. I think withdrawing 4-5% for a short time is probably fine given that SS will kick in and reduce that rate dramatically in the near future. That’s a whole different calculus! and 2. I don’t actually at all buy the notion that we spend less as we get older. First, health care costs are still a HUGE X factor, Medicare doesn’t cover everything (or even close to it), and it’s currently on the block to get trimmed anyway. Matt at the Resume Gap did a really thoughtful dive into this question a while back:

  25. Thanks for the social media chatter, ONL!

    “At the same time, in the same Twitter feed, I see stories of retired bloggers increasing their net worth more than they thought possible (maybe some because of undisclosed blog income, but certainly others because of legit investment growth).”
    I’m one of those latter guys. I’ve disclosed my writing income (>$15K to date) and I give it all to military-friendly charities. It’s the foundation of blogger credibility.

    I’ve been investing since 1986 (remember Black Monday ’87?) and I retired in June 2002 (about four months before the NASDAQ hit bottom). Our peak-to-peak volatility in 2008-09 was -56%, although it started from “way too much” and ended at “just enough”. Yet our net worth has more tripled since 2002. If that’s a lost decade then I’m good.

    Our asset allocation for that entire time has been >90% equities. (We held two years’ expenses in cash until after 2014… sequence of returns risk.) Downward volatility is still no fun, but having an AA plan helps you ignore the hysteria.

    By the way, the 4% SWR works just fine and the vast majority of its outcomes will enrich your heirs. (Admittedly the model can’t replicate human behavior.) Is it really worth working the extra years for a 3% SWR or a dividend lifestyle? How far are you willing to go to drive the success rate even higher? And enrich your heirs even more?

    Instead of seeking a 100%++ success rate, I recommend taking the 4% SWR and insuring against its (small) failure rate with a small SPIA or a deferred annuity. (Know that Social Security might be all the annuity you’ll need.) Hold a little extra cash for the first decade of sequence-of-returns risk. Variable spending (Bob Clyatt’s 4%95% rule) works great too, even if we can’t model it very well.

    After 15 years of retirement, I see opportunity everywhere. Our expenses have dropped, our overall spending is flat, and life is the best ever.

    Your finances will survive on the 4% SWR, or you’ll see trouble coming and take the appropriate steps for you. In the meantime you’ll probably find enjoyable activities that can easily generate cash if necessary.

    I’d hate to see someone working longer to secure their 4%-portfolio party pants with a thick leather belt, extra suspenders, and a nailgun.

    • Thanks for sharing what your approach has been. Fortunately we’re not working any longer than we’d originally planned (in fact three years fewer!), since we’ve gotten way ahead of schedule. And we’re not ourselves following any percent rule, at least until “traditional” retirement, but I am positive that when we hit that point we’ll explore some of the things you talk about. If SS is still a thing, great. If not, an annuity at that point could be a great option to provide some certainty. As for 4%, there’s been some great discussion on that topic here today with some excellent research cited!

  26. I think that one thing some people don’t account for is a health issue with a spouse. If they end up with early onset alzheimer’s or other medical issues and require a lot of care at home or in a facility, insurance doesn’t cover all of that. You could potentially exhaust all your savings taking care of a spouse. After seeing this happen to a family friend, she is now living off social security with very little savings. We had planned to let go of our life insurance but now realize that life insurance will help the remaining spouse if the cash and investments get used up.

    • I think people underestimate ALL the potential costs associated with aging. Plenty of us will need long-term care, for example, and even Medicare doesn’t cover everything a lot of younger folks think it covers. So yeah, it’s smart you’re thinking ahead. Though I’m curious: How does your life insurance help you if your spouse is still alive? Is it whole life? If so, it might be worth pricing out if long-term care insurance gives you better value.

  27. Great to see some sensible conservatism Mrs ONL, as a lapsed accountant I’m all for a cautious outlook. Somebody wiser than me (although now that I’ve written this down it will end up being Yoda or Kermit the frog!) once said “hope the best, plan for the worst”.

    My numbers are based around being able to live off the sustainable recurring passive income streams thrown off a diversified mixture of investments. Kristy from Millennial Revolution described this as “living within the yield shield”… she is much better at marketing than I’ll ever be!

    I’ve been able to mark progress by ticking off each bill or budget category as my passive income streams earn enough recurring income to reliably cover them. It definitely gave a warm fuzzy feeling the day I saw I’d never need to worry about how I was going to pay a gas bill again!

    My theory is that capital gains are lovely when they happen, but it is cash flow that will pay for the groceries this week. For example I’ve owned properties where the values stagnated for 7-8 years, the result of a single government decision regarding resourcing allocations. On the other hand more often than not I’ve “earned” more in unrealised capital appreciation from property/shares in a year than I actually earned while working for a [humble brag] very comfortable living.

    We’ve all grown to take bull markets and endlessly appreciating portfolio values for granted, which I think is a dangerous thing. As you mentioned Japan, and also folks from Spain or Greece might have a differing view on things. Hopefully that kind of thing doesn’t happen anywhere, but shit has a way of happening whether we want it to or not.

    To my way of thinking it would suck pretty hard to run out of capital in my mid 70s when I was too old to be able to do much about it. Were I lucky enough to live until I was 100 that would be a long time to be eating cat food on a government pension (if they exit by then)!

    • “The yield shield” — I like it! And I totally love that idea of ticking off expenses as your passive income grows to cover them! How cool. That’s its own form of pay-off. And yeah, knock on wood that no one experiences a lost decade, but we’re fools if we think it can’t happen here. It’s not like Japan isn’t full of super smart people who tried to fix the problem! As our trip there taught me, they think of EVERYTHING, so if Japan can’t figure out a way out of a lost decade, then I have a hard time believing we could, especially if it happened in the current political atmosphere!

  28. Count me in under conservative planner.

    Regency bias isn’t just for investment returns but also could apply to expense projections. I’m watching my grandmother now spend more than double per month for her assisted care center as her entire annual salary earned when she retired at 23 upon marriage to my grandfather. That spending excludes activities, medical copays/deductibles, clothing, travel, phone, tv, etc. She moved in following a stroke at 89 that left her wheelchair bound and confused. The long term care insurance she had only paid the first three years, during which she physically recovered to walking with a cane but mentally declined significantly and is too much to be cared for at home. On her good days she is already planning her 100th birthday party. My other grandmother is 95 and also in similarly expensive assisted living and so-so health. In my retirement projections I’m having a hard time fitting in the possibility of annual spending around age 94 that is more than 30 times my salary at 23 without being super conservative.

    Our plan is to reach FI with a paid for house in our early 40’s and then transition to fun jobs that earn enough to cover current expenses including some bucket list items. These jobs may be self-employed, consulting, part time or seasonal to keep current work experience, allow our investments to grow, gain more experience and gather more information on what the future may hold. We aren’t planning on both fully retiring to never work again before our mid to late 50’s at the earliest.

    • Stories like your grandmothers’ are so heartbreaking. It kills me that as a society we can’t just decide to take care of people with dignity. When my grandmother was in her final years, her kids had to liquidate her assets so she’d qualify for Medicaid for her assisted living, which just feels so wrong. You force people to become penniless to pay for basic needs that insurance doesn’t have to cover. Anyway, given what you’re witnessing, I don’t blame you at all for taking a conservative approach and working enough in your ER-ish years to cover expenses and leave your investments alone. Maybe we’ll do that if the right opportunities fall into our laps! ;-)

  29. I’ve started paying into an HSA the past two years now that a high deductible health insurance plan is an option to me. My hope is to put as much money in that as allowed, without taking any out. One possibility that has occurred to me is, depending on how big I can get it, to not include that in my “net worth”/withdrawal calculations and just keep it as my back-up/emergency fund if I face some big medical challenges in my old age. I know some have written about how it’s a great savings tool and that as long as you keep track of your medical expenses, you can then use that documentation to make withdrawals at any time even if not’s actually directly for medical reimbursement – but I wouldn’t be surprised if that rule changes at some point. In any event, I’m sure this isn’t a new idea and I haven’t completely thought this through and I realize the rules for HSA’s could change at some point, so if anyone else has thoughts on this (or if someone has posted about it elsewhere), let me know!

    • Good luck! I hope you can pull that off, filling up the HSA without needing to take anything out! :-) We’ve never had HSA access (not complaining — we’ve been lucky and have had excellent health insurance through my employer), so I will confess not to know all the ins and outs of what acceptable uses are, but I agree that it’s safe to assume the rules might change!

  30. I’ve been following along here for several months now and I’m impressed both with your level of integrity AND your optimism. I retired at 41 (several years ago) after a full military medical career with the security and relatively modest lifestyle habits necessary to live very comfortably. However, I wish I would have stumbled across your blog earlier as I would likely have made a few different investment decisions. And I would also have started blogging sooner of course. I can see that this is a joy for you both and that in and of itself is a reward that often compounds over time regardless of market conditions.
    Thanks for including us in the process, and for the warnings about overly optimistic projections.

    • Thanks so much, Gabe. I know you said it, but it seems hard to believe that you did much “wrong” if you were able to retire at 41! ;-) That’s pretty incredible — congrats! Blogging is for sure something we both love, but it’s a ton of work, too. It’s work I’m happy to do for the most part, but it’s still a major force in our lives now. :-)

      • I know exactly what you mean! So much “behind the scenes” work- but it’s surprisingly engaging, and blogging has become it’s own reward.

      • It’s awesome that you’re finding it so worthwhile so quickly! A lot of folks burn out quickly after they realize how much work it is, but I love when people stick around. :-)

  31. Better safe than sorry!

    I’ve got a case of FMY syndrom (Four or Five More Year syndrome), and I’m in the third year, currently.

    Like you said recently, it’s alright to retire early from a job you enjoy, and it’s also much easier to work a few more years in it for the added security and increased likelihood of leaving a legacy to heirs and / or charity.

    We should be good to go with about a 3% withdrawal rate when I leave. And of course, that’s ignoring any fully disclosed blog income.


    • Haha — I swear I am not trying to give you a complex about disclosing blog income! ;-) As long as you are transparent about how you are supporting yourself, it’s all good. But I definitely love that you’ll be aiming for 3% SWR instead of 4, with an end result perhaps even lower than 3% as your blog continues to kick ass and grow!

  32. Great blog and excellent thread – thank you for your collective efforts. Sorry if this is repetitive but a suggested site for more information on topics discussed in this thread is then click on “full ORP”. This site (among other topics) is itself I think an excellent and flexible “calculator”. It is one of the few publicly available that I have found that takes account of income taxes in the long range plan. It also offers quite a bit of input flexibility to adjust and customize to your individual circumstance and perspective on things. The base engine is a LP (linear programming) optimization equation as is well explained in the documentation. Also included in the documentation (and related links to research papers) are some great plain English references to studies looking into the question of “do you spend less as you age?”. It may be worth checking out for those who haven’t already found this other site. Thanks again and keep up the great work!

  33. Raising my hand here! We’re taking a more conservative approach to early retirement. We recently made some moves to reflect this. Our goal is to invest more in real estate after we retire so we shifted some assets in preparation for that.
    We’re planning to exit the workforce in 2019. I like to hope for the best and prepare for the worst so our goal is to have a 3% withdrawal rate from our portfolio. With funds available to pay off house and other real estate assets providing income we should be more then ok.

    • I like your plan a lot! We’ve decided we have no interest in being landlords on a larger scale, otherwise we’d probably do something like what you guys are doing! And doing 3% plus keeping cash on hand to pay off mortgages feels nice and comfortable. High five!

      • Thanks! The “landlording” part is still TBD. Maybe we’ll take a less active role but still invest in real estate through passive investments. We’d explore those options more once we retire. It’s so great to have options. Our long-term goal is to reduce our net worth stock exposure to 35%. Great job on your plans!

  34. I think everyone should be concerned about retiring at the (possible) end of a bull market run. If you run any historical sequences on cFIREsim, it’s obvious that the failures happen when retiring right before a long bear market. Just last week I wrote down a “blog post”^ about what it’s like to be staring the end of this bull in the face and what my plan is.

    Unlike basically everyone above, I’m not planning a static withdrawal rate, but rather a variable withdrawal rate. I’m about a year behind you guys (should be end of 2018, fingers crossed!), but my contingency plan is to over-save my original “number” by 20%, and then spend 4% of that original figure as my baseline. This way I can weather a 20% drop without blinking and a larger one by cutting out spending. And my yearly spending will be more in tune with market movements, higher when up and lower when down, obviously.

    Of course it’s a lot easier for me than most people to have variable spending, because I’m planning on traveling full time. So it’s not really a matter of taking a lifestyle hit by spending less, as much as it will be a location change or a speed of travel change (slower is cheaper).

    But I think that in general the “4% rule is doomed” chorus that we hear a lot about lately is overblown, simply because none of us are robots. We’ll intuitively make spending adjustments when our balances drop and won’t just continue to spend to $0 if it’s obvious that the original plan isn’t working. So while the 4% rule *as written* may be a bit risky right at the moment due to possible sequence of returns risk, 4% rule in practice is safer than the robot version, which is already pretty safe.

    ^ I say “blog post” because I write sample blog posts to myself on google docs to see if I think I might have the chops to actually write a blog once I start my retirement travel adventure. :)

    • That’s pretty impressive that you write blog posts for yourself as an experiment! But what a great exercise to test your thinking and also test your writing commitment and chops. To your point about the 4% rule, Mr. ONL always jokes that if you take out 4% of your portfolio every year, by definition you’ll never run out of money. ;-) (Of course you might end up only being able to spend a few dollars, but you’ll never run out…) And to your point about spending less when things dip, we wrote about that here: We basically plan to mirror market activity in our spending, and we can absorb up to a 40% dip that way. Any more and things will hurt, but it helps to have a budget that has padding in it, instead of planning to live on a bare bones budget with no wiggle room.

  35. I’ve been pounding the drum on the 3% rule for awhile now. Jack Bogle is right. A quick look at GDP growth rates and markets prics at higher multiples to invested capital, make it pretty clear that the general market (which Bogle is talking about) *will* have lower returns.

    Now, there will be some winners and losers within this group, but the market as a whole won’t be providing the same level of returns that made the 4% rule possible.

    My prediction is that the vast majority of these early retirement blogs are going to disappear when the next big recession hits…

    Most folks could not live on sub 3% rates of return for a decade while the market “normalized”.

    • Aw man, what an apocalyptic prophecy for our blog community! :-( That piece hadn’t even occurred to me. Though of course I hope folks find a way to make it work despite whatever those market circumstances end up doing. If I had a nickel for every time someone told me that FIRE types are more resourceful than the average bear and will find a way to hustle no matter what, I’d already be retired. ;-) I don’t know if we’re all that different from regular folks, but I suspect you’re right that the next recession will bring a lot of things to light.

  36. The key for us is to be flexible. We’re shooting for more passive income and hope to get there before Mrs. RB40 retires. However, if she leaves before then. That’s fine too. Our withdrawal rate would be less than 3%. If the market crashes, then we could cut back on our expenses. Worse case, we could move to a cheaper location. There are a lot of things we could do to keep cost down. Going back to work part time would be another option.
    Yeah, I’m not optimistic about the stock market either.

    • I’m super glad to know that your target withdrawal rate would be so low! That’s awesome for you guys. Also awesome that you have multiple backup plans in place, though I appreciate that you listed cutting back expenses first. That should be everyone’s first step if/when the markets turn south.

  37. I’m with you on this one. I like a nice big (HUGE!) safety net if I have the choice.

  38. I wouldn’t call 2007-2009 a “short dip” haha. More like a mega-crash. I’ve seen people say “I’m going to retire at 40 on $1 million”. That’s hardly enough. You need to factor in inflation, the odd market crash, unexpected medical expenses, etc. It’s better to be safe than sorry.

    • All depends on perspective. ;-) It was for sure more than a dip, but it was one of the quicker historic recoveries. (Don’t get me wrong — I don’t want to face a crash like that anytime soon!) And re: the amount, I do think that it’s person-specific (like a million bucks plus owning your home outright is totally different from a million and no other assets, and everyone’s spending varies), but I’m totally with you that everyone should be sure they have ample cash in reserve and multiple contingency plans in place, to be able to weather this stuff.

  39. I am probably ALOT more conservative than most of you here. However, I just stopped working and am on leave without pay until the end of August when my retirement should take effect. That is giving us a pretty good idea of how well we can live on what we have coming in, without touching the principle of our investments. So far so good. However, I know things will change as time marches on. Cost of living goes up, interest fluctuates, and then who knows what we can afford. So all of my projections were based on a withdrawal of no more than 2.5% and accounted for a 1% rate of growth of our investments for the duration of my simulations. Planning on a 2% increase in cost of living, we should be fine until age 94. Of course, we have no idea what cost of living increases will come in our other sources of income (retirement annuities, social security, rental property, etc) so we are still not 100% sure. Still, I am confident that we will be fine, provided we don’t live into the triple digits.

    Thanks for your insights, and best wishes as your retirement looms ever closer.

    • YOU WIN. You’ve officially put us all to shame with the level of conservatism in your plan. ;-) And odds are excellent that you’ll get more than 1% growth at least sometimes, so you should still be fine well into triple digits. Thanks for sharing your rock solid-sounding plan, and for the well wishes! :-D

  40. Some thoughts here

    1- The 4pct rule does not hold up for me. I think when the end game starts, I will start to use 3,5. That being said, my planning tool still uses it. Am I too scared to adjust and see the impact.

    2- I like the graph that shows when most bloggers start to document. I have no crystal ball and do not pray for a crash. yet, it will happen. it is likely to happen before we hit FI. thus, I look at that as a great learning opportunity.

    • I think that’s smart to use 3.5% instead of 4%, even if your projections are based on 4%. That’s a good safety margin built in right at the outset. And yeah, I think it’s important to remember that FIRE blogs exist at this point in time when we’re on a historically long positive market run — the fact that we’ve seen no failures cannot be disaggregated from that fact, and we’re fools if we don’t see the bias that creates! ;-)

      • Like with a black swan: the absence of proof is not the proof of absence… The 4 pct rule is not fail proof, so margin and flexibility are needed.

      • Perfect analogy! The absence of failed ER bloggers is not proof that ER bloggers cannot fail! ;-)

  41. I appreciate the crystal ball you provide as someone who aspires for FIRE in 10 years. It would be really hard to be at the finish line right now without a huge buffer built in.

    I hope (selfishly, though it’s inevitable), for the big dip ASAP to get money in now and have years to grow it – and to have SOME sort of answers on health insurance in 10 years time.

    • A lot can happen in 10 years. ;-) I’m sure you’ll get plenty of opportunity to buy shares on sale in that time frame. But glad the post was helpful to you!

  42. Didn’t see anyone mention yet that if you’re going to be basing assumptions about the stock market rising too quickly as of late on a stock chart, you should really be looking at a logarithmic chart rather than a linear one, since logarithmic representations more accurately portray compound growth.

    Look at that same chart in Google Finance, but in settings change it to “logarithmic” and you’ll see that the recent bull market doesn’t look terribly anomalous at all.

    • That’s a great point, Ken. Probably worth its own post! I tend to use the charts that folks are used to looking at, but it’s a good topic for more discussion.

  43. I thought I’d share this. Mr Greaney ERd in 1996… Here is the link to his blog. Its very old school but I find to be an absolute gem. He used 4-5% based on what charitable foundations spend from their endowments. It worked for him and he has very interesting look back posts every year for various portfolios. I think the Trinity study came later.

    • I was also going to point out that Ms. ONL missed John Greaney’s excellent page. He admittedly retired in a very good year (1994), but he also catalogs how various portfolios have fared using the 4% SWR for retirees who retired in bad year (sequence of returns-wise), the year 2000:

      He concludes: “But even someone with a fairly pedestrian 60% S&P500/40% fixed income portfolio, who retired in 2000 at the market top, still has more than 85% of his starting value after 16 years of inflation-adjusted withdrawals, the bursting of the stock market and housing bubbles, and the economic collapse in the waning days of the Bush Administration. Pretty amazing.”

      I was also going to point out Nords (Doug Nordman), but I see he handled that himself!

      Not quibbling with your conservative approach, because I do think there’s something to the forecasted lower returns line of thought, and risk tolerance is very personal. I would also point out though, that Greaney’s chart above shows how very different the 75/25 portfolio has fared vis-à-vis the 60/40 portfolio in the bad sequence of returns scenario — the 60/40 has done exactly what’s expected of it; it’s protected the investor during bad times. And it has even kept pace in the good sequence of returns scenario. So I think two things are apparent here: first, it’s far too early to sound the death knell of the 4% SWR, and second, the 60/40 allocation is still a very viable one for most investors.

      • What’s important is that you feel comfortable with your plan, not that you follow ours. ;-) Ultimately, there’s risk in both directions: If you take a more bullish approach to your projections and withdrawals, you risk running out of money. If you take a more conservative approach, you risk ending up with too much. We’d ALWAYS rather end up with too much money than risk running out, and that’s what guides our thinking on this stuff. :-)

  44. I’m with you and have a 3-phase plan:
    Phase I: 59-64 <2.5% SWR (receiving some deferred salary spread over 5 yrs, withdrawals all from taxable accounts)
    Phase II: 65-70 <3.50% SWR (deferred income ends, start minimal 401k/IRA withdrawals)
    Phase II: 70+ <2.25% SWR (taxable accounts mostly depleted, soc sec starts at 70 to max it out)

    I make it to 100 with 0% net real return.

    Mortgage paid off, have a pension and partially subsidized health insurance. Set aside 2-3 yrs cash/short term bonds to mitigate early sequence risk.

    Wild card on the risk side is we have 2 young kids, but have $250k in 529s and 8 yrs until first one starts college.

    Worrys: (1) early sequence return risk, (2) is included 15% contingency enough

    Plan B: I can consult part-time, spouse can work part-time

    • You know I love detailed, phased plans like yours! I think that looks pretty darn rock solid. I know pensions are tricky these days, and Social Security could change, but you have plenty of contingency built in, you could both work as you said, your kids could get scholarships, etc. The closer we get to ER, the more we realize we’re going to earn some money in the future, and that fact helps me sleep so much better at night, especially with regard to sequence risk!

  45. You are exactly right in your 3% withdrawal rate wisdom. You know, I’ve been discussing that with my friend and my wife for a few years now and this is the first article I’ve seen that outlines my exact same reasoning. Thank you!

    • Hi Greg — Glad you found us! We sure hope we’re wrong on this stuff and will end up with more money than we need, but we’d sure rather that than not have enough!

  46. I feel most comfortable at 3.5% SWR. I’m overly pessimistic, but I also know what I need to be able to sleep at night. That is an important factor for me.

  47. what happens in the event of a global catastrophe causing the complete and utter dysfunction of the functions of Global Capitalism.

    are your plans factoring in a Venezuelan-level societal meltdown in the United States as potentially precipitated by the complete breakdown of race and income relations?

    what if Europe doesn’t pan out?

    I guess my biggest point to make here is. are there plans for hedging against the failure of the current market as a whole? investing in alternate forms of economy (i.e. bitcoins, block-chain technology, informal economies (dark web and black market), etc.)

    • Totally fair question, but I would say we are NOT planning for the total collapse of capitalism. ;-) We are assuming that SOME of our assets remain worth something, and if not, then at least we have a house we own, I guess! (And I will say, we are pretty into disaster preparedness, and as outdoors-focused people, we’re pretty good on the survival stuff.)

      • Living in the Pacific North West I would say that the risk of our house being flattened by the upcoming big Earthquake is far more likely than the collapse of the US economy. Although, if its as bad as they say it might be (taking out Seattle, Tacoma, Portland etc) then the economy might suffer a 10 year set back. Either way rebuilding our house is something we could afford and the longer it take for this even to happen the less impactful it will be, assuming the stock market continues to grow and we are not buried in the rubble!

  48. Hey ONL!

    I recently found your blog and want to say thanks for sharing your journey! I also admire that you do this without really monetizing your blog.

    What has prompted me to finally post was the excel model you posted a picture of here. I’ve created my own model, which I feel is a bit basic. I can’t shrug the feeling that I’m overlooking something or making some false assumption; I worry that what I made isa subpar way to plan and assess for the future. As such, I was wondering if you have posted the file for the model (naturally without your personal data). If not, would you be willing to share it?

  49. I almost hang my head in shame. Our “Planned” WR number is 0.5%.. In reality the money does seem to being spent faster this year than I expected but we won’t go through the pain of adding up the actual spend till the end of the year. Just seeing how fast it seems to be disappearing I guess we are running at about 1.0 to 1.5%.

    Honestly I did NOT plan this. I added up our networth for the first time in 2013 after just having found Mr Money Mustache. It turns out we were already FI and the 80 mile one way drive to work was a ludicrous risk to be taking. I retired in 2014 (at 52) but still did a couple of contract gigs part time.

    Since then our NW has come close to doubling through nothing more than being invested in the markets and throwing whatever extra $$ we had into the investments.

    I am naturally VERY cautious. I remember when I was 12 years old my Dad’s union went on strike and we essentially got a free apartment (flat in the UK) with my Dad’s job. I had never seen my Dad scared before, but the realisation that no job = nowhere to live scared me so much that it forever changed my relationship with money.

    We could roughly double my worse case spend number and we’d be at about 4%. 1.5% * 2 does not equal 4 of course. The reason the numbers don’t work is we have some rental income that will be replaced with a company pension from the UK in 3 years time.. I can’t wait to NOT be a landlord anymore..:)..

    But anyway, If I were planning this all over I’d probably be aiming for a 3% WR, even though I am almost 57 years old.

  50. Yes, I totally agree with what you said. Cutting down expenses will be very helpful in times that we are paying off house or any property that we bught. Thanks for sharing this article.