Depending on your withdrawal rate and mix of assets chances are pretty good that at some point after retiring you’re going to be worth less in real terms than what you started with. It’s not going to be a smooth path after hitting your FIRE number. There are lots more where you would have ended up with less than expected based on an average rate of return over that period. There are plenty of historical scenarios where you ended up with less money invested after 10 years of regular contributions than what you’d put in. It’s not going to be a smooth path up to your FIRE number. Pull the pin in 1969 and you’d have run out of money in 1996. Retire in 1968 with a million dollars (inflation adjusted) all in Aussie equities and you’re up to nearly 5 million as of 2016. If you’re already retired then you want the good returns at the start of your retirement period to help boost the amount you have invested and the bad ones at the end when you’ve got plenty of money already.Įven starting retirement just one year apart can make a massive difference. I showed in this post that depending on the sequence of returns you could end up with double the amount of money in one scenario vs another based on investing $50,000 a year for a period of time. If on the other hand you get the good returns when you first start saving and the bad ones when you’ve got a lot of money already invested, then that’s going to delay FIRE for you because the losses on your portfolio are likely to be more than what you’re putting back into it. If you get the bad returns when you start saving and you don’t have much invested and then the good ones when you have more money saved that’s fine. The reason for this is however shockingly simple, it’s that the market doesn’t give you smooth steady returns and instead gives you different returns every year, some good and some bad. Here’s another great post from Fat Tailed and Happy on the same subject.īut what it all boils down to is that early retirement is not simple, let alone shockingly simple. Michael Batnick at The Irrelevant Investor has talked about it and called it the hardest problem in finance.
#The shockingly simple math behind early retirement series
Big ERN at Early Retirement Now has a 28 post series on the subject for the US. If you want to read other Aussie bloggers on the subject then Dan at Ordinary Dollar has done some fantastic work on similar subjects. I’ve written about not being able to know when we’re going to hit FIRE, or how long it will take. I’ve written fairly extensively about the problem of sequencing risk, both in accumulation phase as well as withdrawal phase. Unfortunately however life is not so simple and is instead pretty complex. This is an extremely simple and appealing idea for everyone right? You come up with 3 figures and badda bing badda boom, you get to find out that you can retire in 9.513 years or whatever your magic number is.
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