Financial Independence Failures
Financial Independence Failures
I think the biggest problem facing the financial independence/retire early community is lack of proof of concept. There are many people out there talking about early retirement, but very few who have the longevity to prove that their calculations are correct. Sure there are the Johnny come latelys that are celebrating their financial freedom online. But how many of them have been through decades of market turmoil and come out the other side ok? It’s one thing to intellectually know that the math works, and yet another to see success over and over again. The only stories more rare than long-term FI success are financial independence failures.
Almost everyone one knows at least one person who has retired early and made a good show of it. How many of you can point to the opposite? A case in which the 4% rule went horribly wrong.
There are probably some good reasons for this.
Four Percent Dreams
I have long felt that we are kidding ourselves with the 4% safe withdrawal rate. Why? Because almost none of the examples we have in our community have stopped making money. Although they might have started planning on withdrawing 4%, some blog income, consulting gig, or appearance fee almost always comes along. In fact many FIRE proponents are making better money than when they worked a W2.
I see nothing wrong with this. Freed from the humdrum life of W2 indentured servitude, creativity eventually turns to money. This unexpected windfall is well deserved and should be celebrated, not shamed.
But financial independence failures are few and far between when income brings your actual withdrawal rate below 2%. Even in my half retirement, I am expecting not to need to touch any of my investment equities. My income should suffice.
Rising Markets
OK. Just about everyone looks like a genius in this market. As long as you left your money invested over the last decade, you would be doing fine. With returns like we have had over the last few years, even overspending would probably not touch overall net worth.
It is easy to believe that financial independence failures no longer exist in a steady bull market.
The expected turbulence in the near future may shake things up. It will certainly be a stress test for many FIRE enthusiasts
Conservative Risk Tolerance
Although from the outside, early retirement appears a risky proposition. I would actually argue that those who are really into the FIRE movement tend to be fairly conservative. Although the 4% safe withdrawal rate is well argued and proven, most shoot for 3.5% or lower.
As mentioned before, many early retirees also have alternate revenue streams they build in retirement including blogging, real estate income, book writing, etc.
Furthermore, many spend a lot less than budgeted. Between geoarbitrage, frugal living, and travel hacking, monthly expenses keep going down.
Final Thoughts
The biggest financial independence failures seem to be related to not spending enough and saving too much. This might be because we are caught in the midst of a wonderful bull market. Or it may be that most early retirees actually continue to earn money and thus drive their actual withdrawal rate down to minuscule percentages.
It might also be that we as a community have a fairly low risk tolerance. The minute we sniff the winds of change, we tighten our belts, move out of country, or pick up a side gig or two.
The fact that there is not a huge list of financial independence failures is both unique and strikingly positive.
Sorta makes you wonder if we’re over thinking this whole thing just a little.
No?
Well said. I think the RE should be removed from the equation. I’ve always struggled with this term. And the whole anti-9-5 aversion bothers me too. I know far more people who like and appreciate their jobs than not. If FIRE proponents have such a hard time with their jobs, perhaps they should have planned better in the first place.
I’m a Boomer. And as much as I love the FI part of the equation, I struggle with how harsh some in the community are towards those who choose to work and gain their FI over longer periods of time. Whey do we have to put those folks down? It’s the part of the community I’ll likely never be comfortable with. By all means, pursue the dream of FI. Leave room for those who don’t feel that way.
I appreciate that you’re not one of that group. Your views are balanced and thoughtful. Keep up the good work.
Thanks Fred. not all FI paths have to be the same. In some ways, if you enjoy work and you are healthy, you are FI regardless of your money situation. You are getting paid to do what you love.
I think every person reading FIRE blogs has a very conservative outlook. We plan and plan and plan and prepare for contingencies that are unlikely to happen but just to be safe throw that into the mix as well.
I think the 4% rule is still likely to work but like you I shoot for a lower % annual withdrawal when I pull the plug. The closer I can get to 3% the better. Also developing passive income streams creates a nice safety buffer in case all hell breaks loose. As long as basic needs can be provided with passive income streams anything above that is gravy.
There is absolutely nothing wrong with making money when you have supposedly FIREd. You don’t have to make everyone happy that you are not exactly following the rules. As FIRE people we tend to buck conventional rules anyway.
And we tend to succeed. So we must be doing something right.
Real estate doesn’t belong on your alternative revenue streams. It belongs in your retirement plan. It’s not a side gig, it’s and investment for return in your retirement years just like stocks, bonds and index mutual funds. I know people who used real estate instead of the stock market for their retirement plan savings because they had more faith in the real estate market than they did in the stock market. Just because you have the choice to make real estate active or passive, doesn’t take it out of your retirement investment plan. Yes it does alter your need for taking 4% out of your 401(k), so does social security payments, military retirement payments, pensions and every other source of retirement income. You factor those in before calculating what you need to take out of your 401(k), which should stay below a 4% withdrawal.
Dr. Cory S. Fawcett
Prescription for Financial Success
Your points are well taken. real estate seems to fit nicely into many different asset class categories. Many reach four percent and then still have real estate income on top of it. We are careful by nature.
The problem with the 4% rule is it was developed looking into the rear view mirror. It looked at SORR from the past. Financially in the aggregate the present is nothing like the past. What’s the correspondent SORR to a national fleet of trucks being driven by robots? Permanent recession?
In this paper:
https://xrayvsn.com/2018/06/14/guest-post-gasem-a-quantitative-method-to-look-at-retirement-portfolio-risk/
I look at withdrawal rate with respect to SORR and asset efficiency using forward statistical methods. 4% WR on a 30 year retirement in a bad SORR scenario with a portfolio ON the efficient frontier had a an 84% success rate. 15% of the time you ran out of money. On a 50 year horizon a 4% WR in bad SORR ran out of money 49% of the time. If you move to a non efficient portfolio (bogelhead 3) a bad SORR 4% 50 year portfolio succeeded only 14% of the time! It had a 86% failure rate.
In a 2018 article the so called average market gain (for all you indexers out there) has only been 3.4% since 2002
https://seekingalpha.com/article/4137982-s-and-p-500-gained-3_4-percent-per-year-since-2000
So if you retired Dec 31, 1999 you’ve only made an average of 3.4% over the past 18 years. 18 years is over half of a 30 year retirement. 3.4% is less than 4% meaning on the average for that cohort they may very well NOT have any money at 30 years. I knew some who retired early in the dot com era and they virtually ALL returned to work. Even if you had the so called SUPERSAFE 3% WR you would have made only 0.4% on your money before inflation.
What happens when your portfolio fails? You go back to work and suffer your arrogance. Hopefully you still have a skillset that is marketable. Truck drivers may not have such a skillset. The one guy I saw make it in that period had 3 incomes, a portfolio income of 300K/yr, a W2 income of 300K/yr, and a RE income of 300K/yr. He lived on $150k per year. He drove his $5000 truck to the hospital with a lawn mower in the back Every day after work he went out to his various properties and mowed the lawn. After he retired at 55 I would see him at Lowes buying plumbing parts. Eventually he sold the empire when he was about 65 and banked that money and moved out of town. It wasn’t till 65 he was retired. You think some half assed blog is going to save you?
Are there a lot of failure stories out there. Why don’t people write about the 4% failures?
I worry more about unexpected expenses, than I do about inadequate investment returns. Health issues, kids not launching, parents going bust, inflation surprises, natural disaster, prolonged recession, rising tax rates on the nest egg, etc.
The future is unknowable. on the other hand, at some point we need to decide what is enough. Right? Or is there no end point?
The further you push out the end point, the less future there is to worry about.
It’s no coincidence that early retirement talk has blossomed during the longest bull market of all time. The next recession will be gut wrenching BUT also fascinating from a blogging perspective.
I really hope there are bloggers who continue to write in retirement and fill us in on the gory details of watching their nest egg evaporate. I don’t want anyone to fail – I just think the real interesting reading with occur when the blood is running in the streets.
“Everyone has a plan until they get punched in the mouth”
I agree about blogging. It will be interesting what people say if/when things go sour.
I have personally known FI failures. During the dotcom, there were a handful of docs who thought they had made enough and retired or changed professions. I do not know of anyone who was able to pull it off. The guys who tried to sell their clinic to us both quietly went back to practicing Medicine. These physicians sort of quietly glide away and then their referrals start popping up again on the radar.
These guys are still practicing in spite of saying they would retire in 2000. I think once you experience something like that, you do tend to be more careful. And of course, it is often the usual story. One guy thought he would be a bachelor, then got married, had plenty of kids and sent them all to private school. That guy is also still working in spite of making a killing in the markets back in the day…
Life just happens. Like all the time. I plan regularly but unless it is guaranteed money, I am aware that it is a mere mirage.
Technically if you invest correctly, have a good yield shield, and are careful you should do fine in a downturn.
I guess there are folks who have failed at FI who want to keep it quiet that they’ve had to go back to work, although it would make interesting reading. It’s easier writing about success than failure.
Very true. i would like to see more of these stories.
I don’t like the word failure, a mistake is a lot more positive. I have made massive investing mistakes in my long investing life through two of the biggest stock market crashes in history. First I lost heavily, but the second in 2008, I was fine. Why? Every one of my mistakes was a powerful learning experience and wrote two free books about those mistakes, and what I have painfully learned through those unpredictable stock and bond market moves.
I think all of the mistakes and failures are already posted somewhere in the gazillion blogs, books, podcasts, TV and Radio money related shows. But it is one thing reading about other people’s mistake and taking precautions with your own money, but it is quite another directly experience a mistake. The later cannot be avoided especially after a long bull market from 2009 through 2017 when people think, as I did, that all the market does is go up. I suspect when the market crashes, and it will, we just don’t know when some people will lose a lot of their money. But if you do, it’s a learning experience about risk tolerance. In the end, you will be fine because you are in the game, and if you are like me, you straighten yourself out and become FI a few years later, not a big deal.
I like the idea of failing forward.
I thoroughly enjoyed your article and the comments.
I don’t think the failures are failing due to financial issues. Here’s a recent one:
https://livingafi.com/2021/03/17/the-2021-early-retirement-update/
Health issues, relationship issues, purpose issues, with a little financial issues due to losing half the assets in the relationship issue