In a small corner of the internet, my recent article about sequence of returns risk generated some heated debate. Keep calm – no punches were thrown and in fact the civilized disagreement was modest by the standards of polarity we’ve come to expect from public life in recent months. As a side-note, if you’re going into a real fight its probably best not to have the actuary in your corner, but if you want a good-natured reasoned debate then Team Actuary might have your back.
There is no doubt that reasonable people can come to perfectly reasonable and different conclusions. But there is a serious point here.
If you are among the current batch of early retirees, you are doing something that has never been done in the history of humanity, and nobody knows definitively how best to approach this.
You are the first generation of 401k accumulators crossing the threshold to spendown phase. In addition you have a good chance of being a centenarian, and so are planning financial solvency on an extreme timescale. To give you a comparison, one of the longest financial planning horizons is a Nuclear Decommissioning Trust, setup to cover the costs of dismantling a power plant at the end of its life. Even this fund might “only” be investing for around 40 years.
This is therefore a big deal. This is your moon shot. It’s cracking the DNA code. it’s your Manhattan Project. You have to get this right, and there is no margin for error. We need the best and brightest working from all angles, crossing all the i’s and dotting all the t’s. We need peer review, cross-checking and re-calculation.
Above all, we need to Think the Unthinkable
I can help you with the known unknowns. I can help you ride out another global financial crisis. I can help you with inflation, longevity risk and currency devaluations. These are easy; I know what these scenarios look like and can provide the most effective mitigating actions.
But I can’t help you with the unknown unknowns.
The future will be stranger than we can possibly imagine and this applies to financial markets. History has taught us repeatedly that some paradigms we hold as axioms are not always what we expect.
For example over most of the last century and before, investors thought the dividend yield on stocks could not fall below interest rates. This was a truism held as self-evident with any contrary view ridiculed. But in the 1950’s these rates flipped over and stayed stable until the current time where they have flipped again. Similarly, when I took my finance exams I was taught that swaps could not yield less than Government bonds. I was told there was no way a rational market would ever permit that kind of crazy behavior. Guess what? Swaps have traded lower than Treasuries consistently since the global financial crisis and that does not look like it will change any time soon.
After the event we can explain this behavior and rationalize what we previously thought impossible, but in advance we are blinkered to the possibilities.
So I’m not particularly interested in the status quo or mainstream thinking. I’ll acknowledge it has value and I’m reading all I can on topics relevant to early retirement to aid my knowledge. But show me the wacky. Show me the edge of the cliff, break away from the herd and tell me what I’ve never heard before.
I work in the investment industry and I can tell you there is little incentive to be different or radical. You want enough difference to be distinguishable from the next guy, but the money does not follow wacky. You may therefore not get the best advice from institutions.
This therefore makes your job extremely hard. You are sifting through an avalanche of information, trying to establish the veracity and credibility of potentially conflicting advice. You may be getting advice from a hired adviser, receiving some education from your employer, talking to friends and colleagues, or reading strange stuff by an actuary online. Some of it may be good advice but some might be mis-guided. Some of it may be relevant to your situation, but some of it might not be.
However, I can tell you that if anyone tells you they have the solution then walk away.
12 thoughts on “Thinking the Unthinkable for Early Retirement”
Go Team Actuary!
Right on! I like the way you highlight that we as a group are collectively thinking on the longest timeframes out of any entities in existence. It certainly changes your incentives.
One idea that I have been investigating is the perceived wisdom around how much risk to take. For example, I’m in my 30s. It should take me between 5-10 years to reach FI assuming our current state of earning/saving and I assume at best I’m going to live to 100. Since I don’t need/want to stop work immediately I have a base level of cashflow. Here is where my thinking gets ‘wacky’ and I’m after the peer review side of things. The sooner I start taking a series (100s) of what are conventionally seen as big risks (starting a business, building up large positions in a several individual companies, using leverage, using derivatives etc) and manage my risk of ruin then there is a high chance that at some point in time some combination will work extremely well for long enough that I can shift gears and de-risk to lock in FI. The downside is volatility but the frugal lifestyle buys you a lot of buffer and a singleminded focus on the big picture goal will help one stay the course (at least in this world I’m investigating…)
Once the base of FI is reached, you’re in a position to continue taking even bigger risks without sacrificing FI assuming you continue to manage risk and adapt to the changing environment appropriately. If we optimize for contributions to the world in the areas that We care about then the viewpoint is entirely different and I SHOULD take on such risks to seek advancement of the causes as fast as possible. The keys here are an understanding of the law of large numbers (applied to risk with a small chance of a very large payoff but positive expectancy as a set of risks), a huge tolerance for volatility, hyper-rational risk management (to keep risk of ruin within an acceptable range), a focus on the long term and extreme flexibility to change course immediately when things change around you.
As someone who is intimately involved with characterizing and helping people to manage risk I would be interested to know your thoughts. It seems to all boil down to what we’re optimizing for: fastest time to FI, smoothest ride to FI, advancing causes that you care about by the largest amount over the longest time starting asap etc
(A little longer than I was expecting but I’m fine with that!)
Mofi’s there’s a lot there to unpick! Feels like it needs a whole post on its own. In broad strokes my views:
– Early on in your journey your contributions and savings rate is more important, and the market less important. So you should take no risks that impact your ability to save a ton, but perhaps you have more tolerance to experiment on different investment strategies.
– Later on things are reversed. So later you could take more risks with your career and ability to save (such as taking mini-retirements) but are more sensitive to market losses.
– Later in your journey it sounds like you are thinking of compartmentalizing your assets into a pool that is large enough to enjoy FI and excess on that. It sounds like you envisage taking risks on the excess portion. Sounds sensible to me!
Good luck, and I look forward to hearing more of your thoughts, either here, or on your own blog.
Thanks very much for your helpful responses there. I’m currently clarifying my thoughts on this topic and am keen to explore them on my blog! Fun times ahead!
I think this “hit a few home run among many strikeouts” is the investment philosophy of Bill O’Neil who started Investors Business Daily. He has a lot of books on this and even a “system”. I think he made his money selling books and newspaper and being a broker. I tried it 20 years ago and found it was a fail, but YMMV
I super enjoyed the SORR post. It was my first exposure to that concept. I have a question on that, can you reduce SORR by taking longer withdrawals? In other words taking a bigger withdrawal to live on every 5 years or something and then leaving the remainder in the “portfolio” to cook unmolested? If you live 30 years that would amount to 6 SORR periods instead of 30. Since recessions typically don’t last 5 years your chance of having to withdraw in a downturn should be reduced, or did I miss the point?
What you wrote in this post is what scares me. If the things you have been taught are no longer “knowns”, how can historical analysis be of any use? There are a lot of ppl who whip out their 4% rule or 3% rule or FIREcalc their butts off and feel somehow secure, but are the antecedents still relevant in a Gig based economy (no pension virtually no 401K, no healthcare, no security) where robots are taking over and schools are teaching for technically obsolete no longer relevant jobs? Peer into that future for a while and tell me what you see. I’m not being flip about this. I just did some reading on Leila Janah. Her creative destruction is to provide means through distribution channels for the impoverished in Bangladesh compete. When she was a HS senior she won a scholarship to go teach english to blind kids in Ghana. It turns out the blind kids knew English better than she did from listening to VOA and BBC and they were used to living on $2 a day. Getting paid $8 would be a bonanza. How do you figure that into a 50 year projection? Better have some deflation protection built in.
Can longer withdrawals mitigate SORR? What a great question! Man, I need to crank up the model and figure that one out. I have no idea, but thanks for the idea for a new blog post! I’ll get back to you…
I like the story about Leila Janah. The future is undoubtedly scary for sure. But the stock market has lasted for 2 centuries in the US so I am optimistic, and I’m not a doom merchant.
I’m sure I saw something on Kitces, it may have been him on a podcast on Mad Fientist, where there is reference to withdrawal rates dropping to a point (as term lengthens) but then being quite stable after that since once you get through one market cycle things have (historically) been OK.
Maybe it was the statement that sequence of returns has a big impact early on in your retirement but less so towards the end? And the inverse is that withdrawal rates are not too important at the start, where you have a huge pot, but more important later on when your pot is getting smaller.
Thanks for the comment David.
The stock market doesn’t scare me, tax law scares me. If the robots and globalists take over what is the source of income for 300M unemployed ppl competing against someone who’s delighted to live on $8 a day? I’m optimistic too BUT I see a tax proposal is to limit 401K to $2K per year contribution. They want their tax money NOW NOW NOW not then.
I hate to disagree but people have been retiring in their twenties and thirties for hundreds of years. In fact almost every professional sports star that doesn’t blow their money does that. I’m a boomer and I did it as did my brother. You’re special, but you aren’t that special. While your odds of hitting one hundred are better than mine some people have also been living that long for decades. It is a new thing to have so many but the real pioneers have already left you the trail.
Steveark – dissent is welcome here – thanks for taking the time to disagree! In terms of your points I would say:
– I think retirement is a modern concept, relatively speaking. Pensions have only been around since late 19th century and social security since 1935. Before that people didn’t retire as such, they either relied on charity (workhouse) or relied on family and kids to support them.
– 401k’s have only been around since 1978, so you’re right there could easily be some people early retiring on just savings. But in my experience most baby-boomers have defined benefit pensions and social security bolstering their income in retirement. It sounds like you are a real unusual trail-blazer.
– Mega-paid professional sports stars are a relatively modern phenomenon. I don’t think you need to go too far back to see professional sportsmen/women very modestly paid. And in any event they aren’t my target audience!
– I was taking some literary license. I don’t mean literally that readers are the very first to do this, but they are among the first cohort to do this.
Many thanks for stopping by.
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