Low probability of FIRE

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[KenM]
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Low probability of FIRE

Post by [KenM] »

I've told my daughters I expect to live to a ripe old age so if they want to achieve FIRE they had better do it themselves rather than wait to inherit all my money :D. Problem is, in talking to them about achieving FI, I can't talk to them on the basis of long term average returns etc because I've always taught them that averages are dangerous - I've found that it is very rare to actually achieve or experience the "average" in anything.

So assuming that FIRE means a 20 year savings/investment timespan I looked at 20 year returns (finally learnt how to post images :)).
(from http://www.martincapital.com/longterm.htm)

Rolling 20 Year Holding Periods: 1926 - 2001 Inflation Adjusted Returns


Actual 20 year returns for
100% stocks Highest 1200% Lowest 10% Average 400%
75% stocks/25% bonds Highest 880% Lowest -3% Average 260%

which indicates that averages are OK but there have probably been many 20 year periods when saving/investing for FIRE would not have realistically achieved the objective as shown in the scatter diagram of 20 year returns.



So aiming for 20 year FIRE in the 50's and 60's was OK. The 70's and 80's was not very good but the 90's was OK again. (Is interest in FIRE now a sign of "recency"?)

I looked at it in another way in very round figures using one of Gummy's calcs.
20 years to save the magical $1m for FIRE ($1.8m in 20 years time at assumed 3% inflation)
starting salary $50,000 increasing at 4% a year.

Assuming low average annual return of 5% requires saving 78% of salary for 20 years.
At, say, average average annual return of 10% requires saving 48%
and at high average annual return of 15% requires saving 28%.

My conclusion is that unless aiming to save at least 50% of salary for 20 years then there is a low probability of achieving a successful FIRE. Therefore it's not worthwhile trying to point out the benefits of saving for FIRE to my daughters. They might be starting out with savings and salaries a bit higher than my assumptions and they thankfully have a good appreciation of the value of money but to expect them to save about 50% of salary for 20 years is unrealistic.

However my explanation is probably garbled, I'm no mathematician and I always round-off figures (possibly excessively). I would appreciate critical comments on my analysis.
KenM
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BenSolar
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Re: Low probability of FIRE

Post by BenSolar »

Greetings, Ken :D

Great post! I have just a couple of thoughts.

First, if your daughters are still in their 20s or less, then a 30 year horizon would still get them FIREd, maybe not really young, but financial independence in your 50s is something most people only dream about. And with medical advances, some luck, and attention to personal health they might still have 30 or more great years ahead of them.

Second, the directly held real estate option can boost returns quite a bit, given a decent environment to invest in, a modest amount of work, and use of moderately high leverage. I don't know what real estate looks like in your area, but in mine it is not too bubbly. A bit more risky, I guess. Due diligence definitely required.

Ben
"Do not spoil what you have by desiring what you have not; remember that what you now have was once among the things only hoped for." - Epicurus
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Post by JWR1945 »

I keep thinking about the standard answers that people have recently ignored.

1) Notice that the bad dates ended around 1974 through 1994. They began in 1954 through 1974. Expect stocks to do poorly for two decades out of three.
2) Dollar cost averaging mitigates much of the damage. Your daughters will not be investing a lump sum in a single year. (I exclude large insurance policies and untimely deaths from this analysis.)
3) A thirty year time frame plus dollar cost averaging overcomes almost all of the bad outcomes.
4) The historical record tells us that we will be surprised. Always. Prepare to be blindsided. For those who lived through the depression, bonds became certificates of confiscation via inflation. They were blindsided. More recently, stocks were always considered best regardless of valuations. Many are still refusing to face the dangers involved with such an assumption. (This assumption is often expressed as no one can time the market successfully with a cavalier disregard for any subtleties buried deep inside of definitions.)
5) It is a great idea to extend diversification beyond the limits of the S&P 500 stocks and treasury bonds. REITS and stock market index funds other than the S&P 500 have attractive features. Still you must not ignore valuations.
6) For those so inclined, real estate offers many attractive possibilities with relatively low risk (downward volatility). Valuations are critical. Some choices require obtaining specialized knowledge (e.g., 1HappyFool's timber sales).

Have fun.

John R.
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ataloss
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Post by ataloss »

Therefore it's not worthwhile trying to point out the benefits of saving for FIRE to my daughters.


I think that the odds of retiring at 38 after a few years of 50% of net savings are low. Intercst was at the right place at the right time (and he made some good stock picks) Still, regardless of economic conditions I think those who save more will be able to retire sooner.
Have fun.

Ataloss
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Post by bpp »

I would flip it around and say that if one is facing an unfortunate period economically, then saving becomes even more important.

Cheers,
Bpp
[KenM]
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Post by [KenM] »

I was hoping somebody was going to tell me my calculations were wrong. Otherwise the situation looks depressing to me if the standard equity/bond savings route to FIRE is used. I have re-done the calcs.

Assume:-
At 25 salary is now $50,000
At 55 salary will be $100,000 in present day prices (i.e. increases 2.5% above inflation for next 30 years).
If inflation is 3% then magical $1million for FIRE will need to be $2.4million in 30 years.
Annual return on investments will be about 8% to 10%.

Then to have a reasonable chance to obtain FIRE in 30 years it would be necessary to save and invest 20% of each years pretax salary every year for the next 30 years.

Although very rough, the assumptions would probably cover benefits of DCAing, use of REITS, index funds etc.

My conclusions - I admire anybody who could consciously save like this but I couldn't do it. I achieved FIRE through a combination of high expat income in low tax areas, assorted exceptional bonuses and timing long term real estate investment at market bottoms. Sounds good in hindsight, but as I've said before, not at all a well planned strategy - it just turned out that way. (However if I was going to save in this manner then after looking at the scatter diagram in my first post I would take the higher risk and invest 100% in stocks in order to try and maximise returns.)

My advice to my daughters - thankfully they are sensible, dislike debt and conspicuous consumption and have a good sense of value-for-money - therefore I'm going to have to say that in their mid 20's life is for living, not cramping their lifestyle and restricting their opportunities for experiencing new things just because they're saving 20 % of their salary for FIRE in 30 years time. I didn't do that and after these calcs I can't advise them to do what I didn't do. Better to look for work that they'll find satisfying for the next 40 years (even at a lower salary) rather than stay in a high paying job and hate it for 30 years while saving for early retirement.

My daughters are amused that I should suddenly start advising them on retirement just because I'm going through the process myself. Response from one daughter was - "Ha! Ha! Ha! I'm a dollar millionaire already". However these are only Taiwan dollars (about US$30,000) she's saved from an 18 month contract she's just finished there - so she's still got a long way to go to FI.
KenM
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Post by wanderer »

cramping their lifestyle and restricting their opportunities for experiencing new things just because they're saving 20 % of their salary for FIRE in 30 years time

this is an illusion, kenm. maybe i'm just a "nutty" "40 year old" (:wink: :wink:), but I find virtually NO relation between spending money and enjoyment/happiness level (beyond minimal amounts). In fact, I mostly find the relation inverse. I consider that one of the most significant conclusions in my life. Just about completely freeing me from the need to work.

but, i agree, if that's their view, they will feel like they're "dieting" (pointlessly self-denying). Maybe they should do what I did to lose 20 ugly kilos: make a compounding chart showing what a dollar deferred will buy them. Be sure not to leave out the intangibles - they are the most valuable (e.g. ability to slough off a radical change in the US tax code as "irrelevant": priceless.)

imo.
regards,

wanderer

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[KenM]
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Post by [KenM] »

if that's their view

Ah, but wanderer, you misunderstand me - that's my view, not that of my conservative daughters. I'm a child of the 60's 8)- to me my daughters views seem to have been middle-aged since they were 18. What is modern youth coming to :shock:

I also tend to wonder what your reaction would have been in your mid 20's if some old guy like me had recommended to you that if you scrimped and saved obsessively for 30 years you could finally stop work in 2033 :?:

Surprisingly for expat kids, my daughters have always had a good appreciation of the value of money and the benefits of saving/investing (as I say middle-aged at 18 ). What I have been trying to look at is the probabilities of successfully doing an "intercst" who apparently decided at 25 to scrimp/save/invest in a very disciplined way and managed to accumulate enough funds in 13 years to stop work at 38. My conclusions are the same as ataloss
I think that the odds of retiring at 38 after a few years of 50% of net savings are low. Intercst was at the right place at the right time

Therefore my advice to my daughters that it would not be worthwhile deliberately choosing the "intercst" route because the probabilities of success are low.
KenM
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ben
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Post by ben »

As both Ken and Wanderer points out; expat work/life/income can actually give the best of both worlds: high standard of living AND (in my case) more than 50% of salary as savings. I still target the magic mill at 38-40 being 4-6 years from now. Inch Allah.

As discussed before; expat life/work is not for everyone - but Ken's daughters seem to fit in well with their back ground.
Normal; to put on clothes bought for work, go to work in car bought to get to work needed to pay for the clothes, the car and the home left empty all day in order to afford to live in it...
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Post by wanderer »

Ah, but wanderer, you misunderstand me - that's my view, not that of my conservative daughters. I'm a child of the 60's - to me my daughters views seem to have been middle-aged since they were 18. What is modern youth coming to

Me confused, kenm. :(I recall you making a case a while back, in a back and forth with mark, re: how much fun/liveability you experienced in rather modest circumstances in Hong Kong Phooey. Now you sound like you would prefer to indulge your expensive hedonism. Maybe I misinterpreted.

But I un derstand, there are some young fogeys, like your daughters and probably a bit like me (at least now).

I also tend to wonder what your reaction would have been in your mid 20's if some old guy like me had recommended to you that if you scrimped and saved obsessively for 30 years you could finally stop work in 2033

I probably would have had the same attitude they probably have. But it may not be fair because I had some particularly unusual impediments to rational thinking in my youth (i.e. it was adaptive not to think rationally). But a fair statement anyway - most 20 year olds think they'll own the world and live forever.

Surprisingly for expat kids, my daughters have always had a good appreciation of the value of money and the benefits of saving/investing (as I say middle-aged at 18 ). What I have been trying to look at is the probabilities of successfully doing an "intercst" who apparently decided at 25 to scrimp/save/invest in a very disciplined way and managed to accumulate enough funds in 13 years to stop work at 38. My conclusions are the same as ataloss

i see. And I agree, the future looks rainier to me. it's a good point.
regards,

wanderer

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Post by wanderer »

expat work/life/income can actually give the best of both worlds: high standard of living AND (in my case) more than 50% of salary as savings. I still target the magic mill at 38-40 being 4-6 years from now. Inch Allah.

ben makes a heckuva lotta sense to me. pre stateside incorporation, we saved in the low 80%s of our salaries/consulting income. now that we have to pay ssi our rate is lower (low 70%s) but taxes are partially offset by the net rental income/cash flow.

As discussed before; expat life/work is not for everyone - but Ken's daughters seem to fit in well with their back ground.

like real estate, different strokes.

we were talking at a party (end of academic year) last night. We all agreed it's gonna be hard getting used to paying taxes again, not paying for utilities, having to scold the kids for not turning off the lights...

:shock:

what i said in an earlier post is not braggadocio - tax laws or no, I really have no desire to return to the states/canada - except for aging parents, chill periodically, etc.

"give me land lotsa land under starry skies above..." :wink:
regards,

wanderer

The field has eyes / the wood has ears / I will see / be silent and hear
bpp
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Post by bpp »

we saved in the low 80%s of our salaries/consulting income. now that we have to pay ssi our rate is lower (low 70%s)


70-80%?? Wow.

The only reason we can save anything at all is because we both work. If we were a single-income family (as is still more the rule than the exception here in Japan), I don't even know how we would manage. Many folks do, of course, so it must be possible. But if the tax burden rose on top of that... don't even want to think about it.

Cheers,
Bpp
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Post by wanderer »

Is interest in FIRE now a sign of "recency"?

kenm - I meant to say -

Absolutely! Note the appearance of such boards at the height of the craze. FI is still a very good idea pioneered long ago by the likes of Joe Dominguez and Amy Dacszyczyn (sp?).

The late nineties were a real disservice to the novices - money so easy, 15% p.a. a birthright, etc.

Lots of folks are learning the virtues of "swabbing decks" (taking work that was formerly beneath them in lieu of remaining unemployed). Others are taking this as an opportunity to retool and develop softer, but financially, lucrative skills.
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wanderer

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[KenM]
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Post by [KenM] »

The late nineties were a real disservice to the novices

wanderer (why do I always want to type in "wandered" ?), that's also one of my conclusions from my analysis. I think that there are probably only very limited periods of time (such as the 90's) when the "conservative" approach of scrimping/saving and investing in a LTBH balanced equity/bond portfolio would successfully lead to FI in 15 to 20 years. I achieved FI in less than 20 years (but have kept on working for another 10) from being in the right place at the right time on several occasions. I suggest that anyone who wants to aim for early FI has to take higher risks, for example, 100% stocks - no bonds, making judgements on selective asset classes to suit market conditions (currently SCv, REITS etc ?), trading real estate, changing to high paid/high risk jobs, working as an expat and just trying to find opportunities to be in the right place at the right time. Maybe it fails but, imo, it at least makes life interesting. I'm not so sure about swabbing decks, though :shock:.
KenM
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Post by [KenM] »

Me confused, kenm. I recall you making a case a while back, in a back and forth with mark, re: how much fun/liveability you experienced in rather modest circumstances in Hong Kong Phooey. Now you sound like you would prefer to indulge your expensive hedonism. Maybe I misinterpreted

I think I was saying that I could live reasonably comfortably in HK on US$40,000 - and I still hold that view - I don't like a champagne lifestyle, I'm happy with beer - inexpensive hedonism is fine by me 8). But that's a bit different to advising my daughters that they should save half their income or whatever and live on a budget of $20,000 for the next 20 years in the vague hope that they may be able to stop work in their 40's. As might have been said in old pop songs, in your 20's life is for living, invest in life-not in stocks. Which is not to say buy designer clothes but, for example save money for a couple of years, then take a year off and travel or whatever.

I admit to being irresponsible in my 20's (and my daughters know that so they don't listen to me anyway if I try to give them some old fogey advice) but I've been an upright, very serious citizen for the last 30 years. When I retire I expect to have a relapse into a mild (but hopefully dignified) amount of irresponsibility and hedonism is certainly on the to-do list :D
KenM
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Post by wanderer »

kenm -

I admit to being irresponsible in my 20's (and my daughters know that so they don't listen to me anyway if I try to give them some old fogey advice) but I've been an upright, very serious citizen for the last 30 years. When I retire I expect to have a relapse into a mild (but hopefully dignified) amount of irresponsibility and hedonism is certainly on the to-do list

ah so. party on!
regards,

wanderer

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Post by therealchips »

Wanderer said: I see. And I agree, the future looks rainier to me.


Haven't you been in the desert long enough to know that a rainy future is wonderful? :lol: How about the future looks parched to me?
Actually, without predicting the future, I'm betting on an average, long-term, real return of 4% on my retirement assets, mostly VFINX, VFIAX, VTSMX, SNXSX, SNXFX, and such. That seems modest enough as bets go, somewhere between drought and drowning.
He who has lived obscurely and quietly has lived well. [Latin: Bene qui latuit, bene vixit.]

Chips
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Post by eridanus »

KenM wrote:
But that's a bit different to advising my daughters that they should save half their income or whatever and live on a budget of $20,000 for the next 20 years in the vague hope that they may be able to stop work in their 40's. As might have been said in old pop songs, in your 20's life is for living, invest in life-not in stocks.


I'm with ya. I'm still not completely sure what happened to the money I made in my first few years out of school (early dot com era). I did travel a lot -- road trips, backpacking, Eurail, etc. -- but as my income increased, my lifestyle expenses increased less, and so my savings percentage climbed and climbed (well, it was climbing before I went half-time :D). I think it works out that way as one realizes that simple pleasures are often more enjoyable and that work only interferes with enjoying more of those simple pleasures.
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Post by ben »

I also had a hard time saving in my first "good" earning years... :oops:
But admittingly had a cool sports car and still have my cool B&O stereo with all the bells and whistles 8)

Since then I have however learned, as eridanus, that material goods is not really what makes ME happy, and that LBYM (he said with his big company paid house and car... :shock:) has it's own rewards - one of them being able to FIRE, but another simply to live a simpler, less cluttered life. The more stuff we have, the more problems we get it seems be it maintenance, repairs, organising it all, bills to pay Etc.

Anybody wanna buy a cool B&O stereo? :D
Normal; to put on clothes bought for work, go to work in car bought to get to work needed to pay for the clothes, the car and the home left empty all day in order to afford to live in it...
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Post by WiseNLucky »

I also had a hard time saving in my first "good" earning years...


So did I. And, unfortunately, I do not have anything to really show for the money spent. Not even memories.

I stick with my belief that spending less and saving more then would have significantly increased my options now. I am now saving big-time, and do not feel a sense of missing anything in the comparatively small amount we are currently living on.

Paying back debt for stuff we no longer had was NOT fun.

WiseNLucky
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