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Comment by JKCalhoun | Hacker News Reader

Didn't buy his responses to "What About Volatility?" and "What About Crashes?"

He talked about averages of historical data that include crashes. Sure.

But consider the window within the throes of a crash. Someone who always has and continues to spend a fixed amount every year will greatly diminish their capital during those lean years of the market.

An exaggerated hypothetical to make the point:

If they have $500K @ 5% and take out $32K a year, they can go over 30 years on their nest egg.

If their nest egg falls to $100K due to a market crash, they have three years of their nest egg left.

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Historically, over any 30 year span, has there been an 80% drop in market value, or a huge drop that was not preceded by a bull market? What exact sequence would have to occur for this hypothetical to have lost 80% in market value and be stuck in a market that doesn't recover quickly?

By most historical averages, after 20 years the hypothetical portfolio has grown to $2 million inflation-adjusted, which means a drop to $100k or $250k would be a whopping 87.5%+ crash.

On the flip side, a prolonged bear market in the first few years are the worst case scenario, though for most early retirees, the choices are to ignore the "fixed 5%" and/or seek additional income, if the sequence of returns really are dire enough.

It doesn't matter whether the market stays up over 30 years. If it crashes at the wrong time (especially if that's after you've retired) and you have 100K left, you have only 3 years to recover, not 30.

And even if the market recovers in 3 years, by then you're left with a fraction of your capital.

Yet worse outcome is when you actually need the money (say, medical emergency or required big purchase) and you don't have it because market is lean or illiquid. And if you're old and retired, you will likely not get the needed loan. At the same moment, you don't have a job and if the emergency is big enough, you might not be able to get one. Even if you keep yourself updated to meet the needs of the market (which does cost money) others may not believe you.

Face it, it's temporal gambling also known as a martingale. One with ok odds but still gambling.

There are classes of assets that are less vulnerable to such downturns, but they have their own risks. (Mostly properties you live in and transportation you use.)

At the "wrong time" meaning you're at end of life, yah? By that time you're collecting SSI and have medicare. When you're really old you have less of a reason to spend, so even with a nice house that is paid off it becomes easy to not dip into retirement funds if needed.

Btw, 5% is not a safe withdrawal percent unless you're really old. Most do 4% and aim to not diminish but increase their savings in the long run while retired.

Bad hypothetical situations are bad. But have you looked at the data?

Historically, you're much more likely to have your money grow over time, such that it's much higher before a big crash, and you have ample capital to wait out a bear market.

Again, the only scenarios that resulted in running out of capital in a 4% withdrawal rate happened in the very first few years, retiring right before a very bad series of years.

If early retirement is your goal, and especially if you're a competent software developer, if the market is that bad early on (which is very rare) then you just have to change course and go back to work.

Which, other than not electing a GOP president and Congress, can't be predicted beyond rough cycles. It's scary, it's hypothetical, and combined with basic social safety nets in place today are unlikely to sink a FIRE plan that is robust.

That isn't a political statement about the GOP, it's close to fact. When did we last not enter a recession, or the possibilities of one, after the GOP held Congress and the White House? Trump, Bush, Bush Sr/Reagan. Its like part of the plan is to drive the nation broke after concentrating wealth with donors and friends/family.

Well, it stands to reason if you make the rich wealthier and everyone else poorer, there is no one to buy goods and stimulate the economy.

The response to "what about volatility" is not really right. Volatility makes a much bigger difference than the article admits - the reason FIRE proponents come up with a similar number is because they started with a much higher number. They are using US-only historical returns, which average around 7% (inflation-adjusted), not 5%, and the safe withdrawal rate is typically quoted as 3.5%-4%. So in order to be safe, you have to cut the return rate in half or so.

There's probably an argument to be made that this is still too aggressive, because US historical returns feels like cherrypicking - they're much better than international returns, and there doesn't seem to be a good argument for expecting that to continue.

That said - how many 80% drops are there? If your criteria for safety is "will have enough money to last forever even if the great depression hits the second I retire", you might be a bit too conservative - it's hard to imagine another great depression at all, given the Fed's recent history of propping up the market in crashes, let alone at the worst possible time. You'll never be able to take chances on anything with requirements like that.

>it's hard to imagine another great depression at all, given the Fed's recent history of propping up the market in crashes

I think the counter-argument (not that I know enough one way or the other) is that the Fed’s recent addiction to low interest rates removes one of its most important tools for propping up the economy if the existing approach is found insufficient

The strategy this spring of just buying up bonds en masse worked pretty well, and seems fairly unlimited as long as they're willing to print money with which to buy stuff. They have a lot more levers than just interest rates.

What types of bonds are you referring to? Treasury bonds aren’t exactly going gang busters. Or maybe we’re talking about different periods?

The point I was trying to make (maybe unclearly) is that one of the main bullets to assist the broad economy may have already been fired. To your point, there will always be segments of the economy that perform well, but that’s not equivalent to the broad economy performing well

Corporate bonds. Look at $BND, for example. It crashed 8.5% March 9-12. The flattening and then quick rebound are generally credited to the rumors and then announcement of the Fed's bond buying program.

The health of the _broad economy_ isn't what's relevant to this, though, only the bond and stock markets (or whatever else you're invested in, but mainly it's those two). The Fed has the ability, and apparently the willingness, to prop those up in times of stress.

Fair enough, maybe I was reading too far between the lines that the parent commenter was referencing the market as a proxy for the economy (which I don't agree with, but it's a common assumption).

I agree the Fed has the ability (to a certain extent) and the willingness to prop them up. The point I may not be getting across is that they only have so many tools available (the biggest lever being interest rates, but as you mention they have other options like buying bonds). Once those tools are in play (e.g., interest rates hovering near zero) they have less leverage to impact the economy if a severe downturn happens. That's not to say they are out of options, just that they have less options at their disposal. That's why I referenced interest rates as one of its most important tools, with the implication they had other (perhaps less broadly impactful) ways to spur the economy

Interest rates have historically been their biggest tool, but the buyer-of-last-resort things seems both better at propping up the market (probably worse at spurring the actual economy, but again, all we're talking about here are investment returns!) and unlimited in power in a way that interest rates are not. Interest rates are bounded at 0, or at least start behaving oddly beyond that, while just buying stuff is bounded at having all of the stuff, and if the Fed has all the stuff you no longer care what prices the stuff has because you don't have any of it.

While I now understand your first comment was about returns exclusively, where I disagree is that’s protecting returns is not the Feds primary goal. Their mission is to help stabilize prices and employment to cultivate a stable macroeconomic system. So I think their actions are more appropriately viewed throw that broader economic lens than simply assessing whether stock returns are going up

What people typically do is if they retire and then a recession hits, they go back to work for 1 to 3 years, then retire. If you look at the numbers there is a surge of retirees a couple of years after the bottom of a recession.

Yes, I picked a wild drop — I guess to exxagerate the diminished capital to the point the problem becomes obvious.

There's a famous study called the Trinity Study, wherein the authors posit that based on all historical evidence, for a 30 year withdrawal, 4% is a safe number to be able to continuing withdrawals for the whole 30 years. Extending it to 60 years requires dropping down to 3.5%. However, if one is content "leaning down" the fun spending in lean years, those percentages can go up a little bit on average. See the literature about VPW for more info: https://www.bogleheads.org/wiki/Variable_percentage_withdraw...

Bogleheads (flashes the secret handsign) ... I'm in.

You increase your defensive assets (bonds, term deposits, annuities etc.) as you become more risk adverse (closer to retirement or other change in circumstances). So when a 90% crash occurs that takes 10 years to recover you’re either still earning, or you can draw down on your defensive assets, letting your stocks recover

Have you even seen the returns on bonds and cash equivalents lately?

Defensive assets such as fully owning a place to live and means to travel, you mean? Or perhaps tools of the trade?

Bonds are not defensive enough. The about only way to lose a place to live you actually own is to live in a warzone or get very deep in debt...

The old adage is to not gamble your life on being able to pay a debt. This is rather hard in the USA due to completely broken economics of medicine, education and real estate, but in other places, much more available.

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