Yesterday's inStream webinar on "Understanding and Explaining Monte Carlo Simulations" ran into a couple of technical difficulties. The sound was cut off for a couple minutes near the start, and there was supposed to be a 250 person capacity, but people were being locked out after the first 100 arrived. So we are going to have a repeat of the same webinar next Wednesday, November 5, from 2pm to 3pm eastern time. This is the sign-up link. This webinar will be recorded and posted on the inStream page if you are unable to attend. Though technically meant for financial advisors, anyone is welcome to join.
Next, a couple weeks back, Nobel laureate William Sharpe had a great interview with Bob Huebscher at Advisor Perspectives, mostly about issues related to retirement income. The interview transcript is well worth reading.
And now, today's topic. I received the following question at an old blog post:
I enjoy your blog. Thanks for all the great posts.
I enjoy Mr. Money Mustache's blog as well; I find it very interesting that you do. Given your academic training and professional experience in the field, I think it would be very illuminating if you commented on some of his advice (where you agree or not, and why). The intent is not to create some kind of MMM vs. Wade Pfau battle but to gain some interesting perspectives on retirement (particularly of the early variety) from two different angles.
There's no rivalry. I think I can guess why some readers might think there is a rivalry, and I'll comment on that. But then I'll explain why it's not an issue in this case.
I really enjoy Mr. Money Mustache's blog. His blog introduced me to Republic Wireless and FreedomPop, and those two services alone are saving me a couple hundred dollars a month on cell and internet bills. As well, his recent post about credit card churning gave me the push toward finally doing that in a more organized and systematic fashion than I had been in the past. Though I'm not as frugal as he is, and I'm not so handy around the house such that I can't build my own showers and things, I do definitely identify with his anti-consumerism views. I do enjoy my job and so I'm not in as big of rush to gain financial independence as some of the extreme early retirees, but I am definitely working toward achieving financial independence at a relatively young age.
I guess the reason why readers might think there is a rivalry is a result of the concerns I have about the 4% rule for retirement income. Mr. Money Mustache wrote about the 4% rule, linking to a post I had made which describes the rule's origins. I had meant that as an introductory post to explain where the rule came from, and I followed it with a series of posts about real-world concerns over whether retiree's should be relying on the safety of this strategy. In particular, the 4% rule is calibrated to a 30-year retirement, and that is too short of a time horizon for early retirees.
That being said, Mr. Money Mustache is able to approach the matter of sustainable spending with a Position of Strength, to use his term. This also relates to what Nassim Nicholas Taleb calls Antifragility. Basically, Mr. Money Mustache has a lot of flexibility. He could cut his spending in half and not experience a significant impact on his standard of living. In fact, he might feel good about that, because it will be a good chance to flex those frugality muscles. If we experience the type of market crash that could derail the traditional 4% rule, Mr. Money Mustache will tighten his belt, rebalance his portfolio, and come out stronger on the other side. He has risk capacity. He can be more aggressive with his spending and investments, as at this point it's all about the upside for charitable spending, etc. He doesn't have to worry about the downside, because his standard of living is immune to the value of his financial portfolio.
And that's why there's no battle here. I'd be the last person to tell Mr. Money Mustache that 4% is too aggressive given his personal circumstances.
That doesn't mean I think the 4% rule is safe. But in the end, it's all about flexibility, and Mr. Money Mustache has loads of flexibility.
MMM gets a chunk of his income from rentals and carpentry. So he's really a small businessman who is also drawing down his portfolio to supplement his income. Despite what he says about the "internet retirement police," this really isn't retirement by any normal definition, it's simply a change from a corporate job to an independent business. If he called this financial independence and left off the "retirement" claims, it would be far less misleading to the average reader.
ReplyDeleteScone, it's a fair point. Especially for many early retirees, "retirement" may not be the appropriate word. Once one's net worth (with projected conservative future investment growth), is sufficient to cover lifetime spending goals, folks have more flexibility about if any when they do any work. They might switch to a completely different work track which pays less, because they enjoy the work more and don't need the money anyway. Many older retirees may also work part-time, some because they have a financial need and others because they are looking for a way to fill all the hours in a day. I think our society is still working out just what it means to retire or achieve financial independence, as they do not mean the same thing, but they are often assumed to be usable interchangeably.
Deletescone - it's only misleading if your idea of retirement involves doing nothing. He is financially independent, which means he can live at his current level of spending by solely drawing interest from his investments. That is retired. He chooses, because he finds it fun to do so, to continue earning money, but it doesn't make him any less retired. You bring up the "internet retirement police", and your post is a textbook case of it.
DeleteScone, you are part of the IRP. I think that the biggest chunk of his active income is via the blog. I consider landlording to be sufficiently passive to qualify as living on income from your portfolio.
ReplyDeleteIf it makes you happier to think of MMM being financially independent, then go for it. Just be aware that people also consider leaving their parents' house and getting their first job being "financially independent." If he labeled the blog, "the journey towards financial independence", people might believe that he's an 18 year old getting his first checking account and still living off of his parents. So there are challenges.
That's an interesting point. I've been focused on retirement so long that I've forgotten about that other way to define financial independence.
DeleteThe whole notion of operating from a Position of Strength or Antifragility – what I prefer to simply call “resilience” – is much under-researched and under-appreciated in the retirement finance world. If you look at studies of what really makes people happy – and Mr. Mustache has done that well – it often comes down to quality relationships and relatively simple pleasures that don’t have to cost a lot. Most people have far more resilience than they’re given credit for and this goes far beyond being willing to implement guard rails such as Guyton’s when market downturns occur. I would surmise that most 30+ year retirement windows will not proceed in some orderly, linear way where expenses increase some set percentage per year, as is often assumed in the 4% rule; Blanchett’s “smile” curve attests to that. In my own retirement, I’m spending significantly less than planned and each year I become more efficient with my spending, with increases below the inflation rate. This isn’t a matter of penny-pinching or downgrading lifestyle, but rather having more time/space to weigh options and make quality decisions about purchases, investments, and the things that really matter most. I greatly admire Mr. Money Mustache for living a life guided by his deepest values.
ReplyDeleteI think of my (4) rentals as a bridge to Security -- specifically, Social Security. I'm retiring next month at 57 after 30 years with public utility. My income next year will be 56% pension, 27% rentals, and 17% investments (4% withdrawal). That makes us flush with my income at least which will be fine. I've managed and remodeled the rentals myself (and have hated it at times), and will turn my attentions to remodeling our too big home. Then downsize à la MMM and sell the rentals. Yes, those construction skills are the gift that keeps on giving. 'Making' and 'Fixing' are the first lessons in Resourcefulness.
ReplyDeleteGood post. I agree, as long as a retiree has the potential to ride out a market downturn, I think the 4% rule works well.
ReplyDeleteAnother simple rule that needs further explanation is the split between stock and bond investments. This is almost always stated as percentage. Personally, as long as an investor has the flexibility to ride out a down market, I believe a fairly high investment percentage can be invested in stocks. Again, a retiree with no debt, low fixed costs can be fairly aggressive.
Never been a fan of simple rules. Again, I find your blog very insightful.