Are We Stuck in the Accumulation Phase?
Are We Stuck in the Accumulation Phase?
According to traditional thinking, the arc of our wealth should be in a Bell shaped curve. At the lowly beginnings, money is but a far off dream, a goal. Rocketed by a strong W2, luck, and a good investing plan, the graph of our accounts begins to trend upward. Somewhere in mid to late life (for the traditional retiree) or earlier (for the FIRE enthusiast), the apex is reached. In other words, our fortunes should level out well before death. If only to avoid being the richest remains in the cemetery, we should slide down the decumulation portion of the curve. While this path is quite common for your average retiree, it seems like this concept is somewhat lost in our early retirement cohort. Although we talk the talk, do we walk the walk? Are we stuck in the accumulation phase?
First some definitions from investopedia
Accumulation Phase: The period of time when an investor builds up the value of their investment through savings.
Decumulation Phase: also referred to as de-accumulation, is the process of deploying your savings to fund your lifestyle in retirement. It’s essentially the opposite of accumulation or the process of building wealth during your working years.
Hedging Bets
Some would say that early retirement is a risky gamble. They point to sequence of returns risk, a bloated market, and uncertainties in healthcare funding. These naysayers say that the future is unknowable and giving up a sole source of income, at any age, is pure folly. It takes a certain amount of bravado to take this uncertain leap.
Interestingly, it would be a stretch to characterize FIRE enthusiasts, as a group, as risk tolerant. When it comes to economics, most of us are fairly conservative. We save a boatload. We generally pick and choose carefully where we park our money. The amount of spreadsheeting that takes place in this community is so great that it can be described as nothing short of laughable.
In fact, financial independence as a theory is a rather risk averse idea. It’s not the daring, bold action of the adventurous. It’s the humdrum, meticulous plotting of the account manager.
Watching our finances fall down the bell curve may be both rational and a well thought out proposition in the decumulation stage. It’s no surprise that careful people like us, very aware of the unknown nature of the future, however, don’t like it one bit. So why not hedge our bets?
Why not get stuck in the accumulation phase?
This Is How We Do it
I don’t think any of us plan to get stuck in the accumulation phase. We just naturally end up covering our losses.
Look no further than the blogosphere. Can anyone name a single FIRE enthusiast who posts financial reports and year after year shows a decrease in net worth?
I’m not judging here. I include myself also. Whether it is blog income, a passion project, or an occasional consulting gig, somehow, net worth only goes up.
I fully realize that the stock market is playing a major role. But let’s explore a simple question. If the market crashes, how many W2 independent folks will somehow find a way to cover their costs and withdraw a minimum from savings?
I know that looking at financial bloggers is a small subsection of retired people, but almost every FIRE person I know outside of the internet is much the same.
We just don’t like being on the other side of the Bell curve.
Judge Not Lest Ye Be Judged
Whether right or wrong, this is where we are as a community. I personally imagine that I will have a side hustle, real estate holding, or consulting job for as long as I am able. I will be the first to admit that I plan to never fall off the curve.
Why?
It’s not because I want to leave a big inheritance. I highly doubt I will ever need to use all the money building up in my bank account. It basically comes down to a few reasons:
- I enjoy working
- I enjoy making money
- My fear of running out is more bothersome than the work it takes to generate a bit of revenue
- I like interacting with other people, and work is an easy way to socialize
So yes, I am stuck in the accumulation phase.
And I expect to be here for awhile.
I know some say that the accumulation phase is easier than decumulation. It probably is a hard transition from being a saver to that of a spender especially in the FIRE group. You are right we are a very conservative bunch. Because of that I bet many people will die with net worths higher than they started out with in retirement.
I think this phenomena, the wealthiest person in the cemetery, will be common in our group.
Interesting. I was thinking about this yesterday. For those that reach FI with more durable forms of wealth (e.g. dividend stocks, real estate etc…) there is a chance that they have created dynastic wealth within their families that can be passed from generation to generation. So what was traditionally a ‘rich person’s problem’ may, in time, be faced by those that have reached FI.
Separately, on this part of your blog “Look no further than the blogosphere. Can anyone name a single FIRE enthusiast who posts financial reports and year after year shows a decrease in net worth?”. In a long bull market in virtually all asset classes the number of people whose net worth is nosediving ought to be low. Also, to your point that nearly everyone who you know who is FI is in a state of what I’ll call ‘perpetual accumulation’. Like yourself, they probably enjoy (and are good at) making money so their circumstances haven’t necessitated de-accumulation. If de-accumulation is to occur I’d have thought it would be much later on in life when one’s ability to work and earn money has been compromised, there may be expensive medical bills to pay and one may want to donate / give away / direct how their assets will be used whilst they are still alive.
HH
True, but technically decumulation should start the minute you FIRE. Depending on market returns, the nest egg should slowly get smaller.
Guilty as charged, and largely for the same reasons, I would modify #1 to read, “I enjoy some parts of working, mostly intereacting with people and helping patients and colleagues.”
Great minds think/act alike!
I think this is why many of us are more interested in the FI than the RE. I actually enjoy working and interacting with patients and colleagues. I like watching the curve climb. Once you excel at something, you want to keep doing it. And once you Excel something you want to keep spreadsheeting.
I wonder if, as physicians, we are more prone to stay at work compared to engineering or coding.
I’m a retired electronics design engineer. It is common to see a 60 year old doctor. It is very rare to see a 50 year old electronics design engineer. The level of detail necessary to put together several billion transistors in a way that maximizes circuit speed and functional performance, minimizes design area, operating power, and time to market, all while implementing all desired functions without a single error, takes its toll. I left the field in my late 30s and it was already taking me significantly longer to debug problems than in my late 20s and early 30s. I was one of the oldest dudes when I left my job. I think the expectations to be perfect is what is most grinding, you have to come up with endless corner cases and error situations over and over again to make sure you didn’t miss something.
I think software is not as grinding because you can mostly fix mistakes on the fly. Make a mistake in hardware, and you have set back the whole company by half a year and wasted millions of dollars in design fabrication costs. However, usually no lives are at stake, so it’s more tedious rather than stressful. Hard to keep the mind hyperfocused all day long every day.
Yeah. If I made a mistake someone could die. Doctors just learn to accept this burden.
I’m so totally with you, At 44 my mind takes much longer to do what it could do in my 20’s.
As an early career physician, all I know is “reverse accumulation” (imo, accumulating student loan debt can’t be really called decumulation because I am not withdrawing what I accumulated) and “rapid accumulation”.
Once I climbed out of the mountain of student loan debt, I’m finding the accumulation phase so much fun and rewarding. While I am comfortable with slowing down and having “enough” accumulation, I do dread the “decumulation phase”. I imagine it to be not quite as fun and rewarding. 🙂
Do you think you will work as long as you can or retire early?
Good question. My plan is to work as long as I would like (and not as much as I can).
As long as nothing drastic changes and I still enjoy going to work, I imagine myself retiring “early” 23 years from now at 58. By that time, I envision all of my children (maybe 2 or 3) will be out of high school. I personally don’t see a point to retiring while my kids in school. Plus I’d like to accumulate enough to provide them a decent financial foundation. How much is enough is TBD. Another factor is that I am vested in a company defined benefit pension plan in which the financial rewards increase significantly if I stay till 58.
I think we, as physicians, are definitely accumulation prone.
I find it hard to spend the money after so many years of saving money. I have the money. My net worth continues to climb even though I quit my $200k+ job. But it is still hard to pull the trigger and spend more. It’s like I’ve been conditioned to be frugal all these years and that system worked well. So who says I need to change now? If I am happy at this level of spending, maybe I don’t need to spend more, just because I can. Maybe being stuck in the accumulation phase is not so bad after all.
Dr. Cory S. Fawcett
Prescription for Financial Success
It’s not just spending more…it’s also making less. Sell off some property? Sell less books?
Every year, though my net worth is going up, I find myself less and less willing to spend! Granted the things we do spend on tend to be expensive single purchases lately like a new roof! So money wise, I am probably spending similarly over all, it’s just concentrated in bigger more important purchases instead of “frivolous” ones. Maybe that’s what’s happening with you too. Hopefully I’ll be willing to spend on trave etc and feel no need to ever increase my other types of spending.
“In fact, financial independence as a theory is a rather risk averse idea. It’s not the daring, bold action of the adventurous.” Really? And from you, who define your blog as “diverse” FI? Hmmm. At FI180, he has a post called “Oops, I quit” for example. I just found a blog called 43BlueDoors that is a couple traveling the world, and their first annual budget was $5000 each person. Come on…there’s all sorts of folks out there. You know that!
You have a point there. But the financial calculations (ie $5000/person) tend to be conservative.
Interesting. I’ve thought about this too. My “discomfort” at the thought of having any potential for money to run out is much higher currently than my discomfort at the thought of working indefinitely (in some way). I still have a traditional job, and am nowhere near where I need to be to RE.
But, knowing that I plan to keep working for a good long while, I’m not working full time+ all the time either. I plan to kind of ease in to early retirement.
I probably won’t feel comfortable actually drawing down without having a viable work back up until I reach traditional retirement age due to my perceived risk of possible failure.
For as “bold” as this early retirement crowd is, I’d never thought about how much we really are not! Good point!
I think we are more bold in our thinking but careful in our actions. This suits me fine.
I call “de-accumulation”, deflation. The curve is not a bell curve unless you strictly use a formula like 4% x25. The curve is asymmetric, at least mine is. I accumulated much faster than I intend to deflate. I was watching a movie last night and playing with EXEL on tablet. I wrote a sheet and found out I could remove money at my expected age 70 deflation rate (aka wr) at 0% above inflation for 45 years and still have $2M in the bank. My accumulation averaged 8%, aka asymmetric. Build aggressively towards an end of long gentle sloping deflation. The second thing is to understand post retirement taxes and cash flow. If you have a big honkin RMD because you followed the boilerplate “max out your preatx accounts..” rule you’re going to have a large tax bill despite the boilerplate “take it out at a lower rate” The rate may be a tiny bit lower but not as low as you hope, especially by age 80. Around 80 the govt really starts eating your lunch. Another problem is when a spouse dies. Your tax bite essentially doubles while Medicare probably reduces maybe significantly. All
of this is manageable as long as you have at least a decade to plan for it. If you ignore it all I can say is have a nice day. If you want an asymmetrical deflation then pay attention.
I came up with 2 methods to pretty much eliminate the worry of dying poor I wrote an article which will be appearing on XRAYVSN’s site on what I call “portfolio insurance”. If you look at FIREcalc’s home page you will see a graph of 3 retirements one starting 1973, one starting 1974. one starting 1975. Same portfolio same WR, yet 1973 goes into thew ground, 1974 drops 50% and 1975 rises 233%. Which ride do you want? Suppose you could re-index the 1973 portfolio into a 1975 portfolio? You pretty much can. The method is to save 2 WR of money into a risk free asset. You need a trigger, either violation of a guard rail or a 30% drop or something. At that trigger point close the portfolio, and start spending the 2 WR cash. If you want to be conservative tighten the belt to 75% of a wr. Spend down all of the insurance. This closes the portfolio to further SORR from WR, and allows you to position yourself for recovery. If you stashed 200K (100K wr) you would spend 75K, 65K, 50K and at the end of the 50K open the portfolio and remove 25K. Depending on the economy you can continue at 75K or glide back to 100K. I did extensive testing and this works quite well. I did the analysis with the recession in the first year and in the 6th year. The other thing that is necessary is once you retire you MUST be meticulous about re-balancing. If controls your risk. It forces you to sell high buy low in a good market and buy low in a bad market. Buying low in a bad market supercharges your recovery. A closed portfolio means you don’t sell shares to buy hamburgers in the bad time, you sell your insurance to buy your hamburgers. That’s it. If you’re a x33 saver become a x35 saver for retirement. It works also because the risk of the insurance is completely different than the risk of the portfolio. This is essentially the maneuver the Fed used to get us out of the financial crisis. They put the banks on idle (closed their portfolios) took the bad debt off books for 10 years until those loans matured and now is selling off the matured debt with is much closer to the expected value. This maneuver effectively re-indexes the SORR to a less onerous SORR
Another more robust insurance policy is to build yourself a second portfolio. If you save 8K per year in a seperate 60/40 account, in 20 years you’ll have 300K. So at age 30 save 8k per year. Age 50 300K. I call this the life boat. Your investment in your life boat is only about 80K. Let’s say you retire at 50 with a 3 million portfolio in addition to the life boat. You start withdrawing from the main portfolio and the market craps. You continue to withdraw from the main because that the source of your hamburgers. The market burbles and your main makes it only 25 years. In 25 years your lifeboat which was never opened to SORR is worth 1.2M. Happy days are here again! For a 80K investment your bacon is saved! Or you can do a combo of the 2 techniques. Belt and suspender style. These plans need to be addressed early as well since the compounding does the trick. I’ve also done a similar technique for Roth conversion. My Roth conversion is going to cost $560K I saved up in a post tax stock account . Bought low, let it compound, and when I pulled the trigger I sold high and mixed the money with some tax loss harvest accumulated over the decades. My tax bill on the 560K was 0 dollars. My Roth conversion started at 65 and will be complete by 70 when I will begin taking SS. The tax saving of Roth converting is substantial but you have to wait 20 years for it to pay off. The tax saving for a widow however is huge because of what the government does to a single payer. Sorry for the length, but I’m an a crusade.
You certainly have done deep thinking about the deflation scheme. I like the dual portfolio idea.
I also essentially have a dual portfolio. A large enough cash (mmf) to outlast a bear.
The woman comes armed to the teeth!
Sounds like that is what makes you comfortable. Since I am still accumulating, I keep relatively little cash.
If I were you and you’re anywhere noodling retiring, Since the markets have done fabulous I would take out 2 WR and put that into an account. Sell high. I would also fund the lifeboat at whatever level you are at so if your 40 you missed 10 years so start at the 10 year mark. I Would also consider how you’re going to fund Roth conversion. My analysis is Roth conversion is best done so the last day of conversion just predates RMD. The reason is to convert with max efficiency you need to be making no income and have the conversion pile set aside. The conversion pile can still be in equities but you just need it to be set aside from th If you have those expenses planned for and set aside from the portfolio. When you retire therefore your portfolio will not experience a SORR from funding the insurance and conversion. I found 65 or 66 to be ab ideal conversion age because the living expense is only over 4 years as opposed to a age 60 conversion which has a living expense over 10 years. So if age 60 and wr =100,000 conversion expense = 1,000,000 but you do save on a lower tax bite each year. If 66 conversion expense is 400K plus the taxes.
Your tax bite essentially doubles while Medicare probably reduces maybe significantly should read Your tax bite essentially doubles while SS probably reduces maybe significantly
I haven’t seen a FIRE blogger who’s FIRE’d and had a net worth that’s declined, but then again we’ve had an 8 year raging bull. And there weren’t hardly any bloggers before then, and fewer still that had already FIRE’d. Early Retirement Extreme, and Nords from the Military Guide come to mind. JL Collins may have been FIRE by then but he jumped in and out of work. But still a good point nonetheless.
I’m not saying there is anything wrong with this. It’s just most people have some type of retirement side hustle that they use to keep from going negative.
Yes! Let the cash pile on! Yeah, i completely get what you mean, even though we do not want to be the riches person in the grave, most of us do not want to see our net worth go down, even though theoretically that’s what it’s supposed to do. We have a plan B for our plan B… Gotta love FIRE enthusiasts!
I will probably be stuck in the accumulation phase because i want to build wealth greater than what me or my family will need. I hope to have an impact in the lives of others. Great post Doc!
Is your goal multigenerational wealth? I’m not sure how I feel about this. Set the kids up or let them fend for themselves?
Really good post DocG. I keep putting off deaccumulating.
I figure I will do the same. I would hate to be the richest man in the cemetery though.
My plan is to put off withdrawal until at least 55. For now, we’ll hustle and do whatever it takes to pay the bills. This is the hold steady phase. The phase between accumulation and withdrawal. It’s the flat part at the top of the hill and we’ll stretch it out a bit. It doesn’t have to look like a perfect bell. Spending more time at the top of the hill is a good move.
https://retireby40.org/unusual-early-retirement-withdrawal-strategy/
Hopefully, I can make the mental switch to the withdrawal phase when I’m 55. Or else, it’ll have to be put off until 62… 🙂
The interesting question, Joe, is if your blog is making six figures a year at that point, will you stop writing, or will you keep on plugging along?
This is something I struggle with as well.
As you mention, the FIRE community is highly conservative. Plenty of talk of 3% withdrawal rates (or lower), strategies to reduce spending in a bear market, side hustles, and one-more-year syndrome.
I confess that I’m the same, thinking about reasons why I’ll need to be more conservative than what history would indicate. Chances are that most of us will end up with way more money than what we had at the start of retirement.
While this isn’t a bad thing, what concerns me is grinding it out for more years than I need to. Will I regret working 5 more years in a field that I don’t love, just to add extra padding that I don’t need? For me, the answer is yes.
So, I’m working on the courage to let go.
My next post will talk about this a little bit. I think we need to find ways to both meet our needs of stability, but also slow down and enjoy more.
Cheers. Looking forward to it.
I think like you except I’m three years into slightly early retirement. But I like work and like to earn and I like rubbing shoulders with people so my two day a week six figure consulting side gigs have my withdrawal rates at zero so far. I suspect my wife and I will have a lot to hand down to our three established and functional kids some day but by then they won’t need it anymore than I needed the inheritance my dad gave me. I could spend two or three times what we do now but why in the world would we try to do that? We are happy with our current spending levels and life feels very luxurious to us. Great post and very accurate I think. The kind of people that can pull off an early retirement are the very last people on earth that are going to slide into the morgue dead broke!
Early retirement people are just the type that won’t retire early. Ironic!
Money is both freedom and the trap. I hope someday I can think I have enough.
The question is, when us enough enough?