The original F.I.(ish) P.E.E. post was too short to explore all of the subtle nuances of F.I.(ish) P.E.E. theory. So here are some more ramblings.
On the spectrum
For each of the major components of a retirement plan you need to be comfortable with the level of risk you are taking. If you have no appetite for risk in a certain category you will need to compensate for that by using worst case math. Categories include longevity risk, sequence of returns risk, volatility risk, etc. For instance, the 4% rule was built on a worst case scenario to hedge against exceptional sequence of returns risk. If you retired just before the crash of 1929 and continued to withdraw the same inflation adjusted amount every year, then a 4% initial withdrawal rate is safe for 30 years. If you don’t have any appetite for sequence of returns risk then you have to assume that any year you retire might be another 1929. If you can stomach some risk because you have confidence in your resourcefulness in the event of a worst case scenario, then you can increase your withdrawal rate to 5 or 6%. Incidentally, recent research points to the first ten years being the critical time for success or failure of a retirement portfolio. The good news is that for a ten year horizon, the Schiller P/E10 can give you a pretty good prediction of how those first ten years will go.
Social Security is an asset
Most simple FIRE plans assume you need 25 times your expenses before you can safely retire. They treat SSA as a nice bonus that they are not counting on. I won’t tell you that the SSA.gov payout calculation is never going to change. It will obviously need to be adjusted to avoid bankruptcy, but it won’t be going away. So why discount to zero an asset that is likely equal to half your expenses starting at age 67? If you are highly risk averse then do a present value calculation, and discount by half. For my calculations I am discounting by maybe 20% what I expect my social security to be. Once you add social security into the mix then you can add some planned draw down to your FI number. You can safely draw your nest egg down as long as you land at a 4% withdrawal rate once social security kicks in. Social Security could decrease your required nest egg in the latter years of your retirement by $500,000.00 or more. For early retirees it is important to remember that the estimated benefit listed on SSA.gov assumes that you will work till full retirement age or at earliest retire at 62. If you stop working in your 40’s you will need to become familiar with the actual benefit calculation and work it out for yourself. Then discount a bit if you are uneasy about how social security will be structured in the future.
Even small income sources can make a big difference
I also happen to have a small pension from my time teaching. Seven years as a teacher earned me about $500.00 per month. Using the 4% rule this pension is worth $150,000.00 in 401K contributions. It won’t start paying out till I’m 65, so I still need to be able to bridge that gap, but I can use that as another safety net if I draw down more than expected.
Optimism helps
Truthfully I don’t actually expect to draw down my savings. My wife may be starting her third career in health care after leaving the teaching profession to raise our children. So that by itself would halt the draw down and likely allow new savings to be added to the nest egg rather than withdrawing. I also expect one or more of my post-pivot projects to begin to earn more significant money while I’m part time. So even if my wife decides not to pursue another career I think I’ll be in better shape than my calculations show.
Pivot to passion
Once you are half way to financial independence, you have a lot of options. You could go to part time status at your current profession. Do that for ten years or so and you are probably FI just from returns on your portfolio, even if you can’t contribute any more on half salary. You could take a one or two year sabbatical to test the waters on your more speculative pivot projects like blogging, business ideas, writing, etc. You could pivot to a series of low paying jobs that you want to try out just for fun. Any pivot should work as long as it pays for about half of your expenses after you hit roughly half your FI target. 50% FI is a good time to reassess your current trajectory.
