Some days ago I stumbled on this post, enticed by its title. Finding the maximum rate at which you can withdraw from your savings without going broke is the Holy Grail of retirement planning: once you cracked that, and you know your target monthly expenditure, you can set a precise figure as total saving amount to retire. No more wondering under the shower if you will need a million, two or even four. No more doubts. You know your goal and now it is only a matter of going and getting it.
The tool is great and the idea of sharing it is…greater. Unfortunately, if you grew up in the ’90s like me, you know that Reality Bites. There is this strange thing going in finance that when things are simple there is an urge to make them complex and when complex, to make them simple. A lot of simple investment strategies work and yet hedge funds that sell strategies that no one understand thrive.
The retirement puzzle is very, very complex and trying to make it simple may cause more harm than good, because gives a level of comfort that is not real and makes choices more straight-forward than they are.
The investment universe is only US based.
First issue is that the model is based on the best performing market of the last 100 years. There is no assurance the you from the past would have chosen that market to invest into nor that US will still be the best performing market in the future. I am not talking about home country bias, which still exist. As Fintwit says: “now show me Japan”. To make the analysis more realistic at least a world cap index should be used, to mimic a weighted average of possible outcomes. I am not saying that for sure the US will underperform in the future century, what I am saying is that is possible and you have to consider that volatility of possible outcomes in your analysis. Reality bites.
Life is a journey, not a destination
The calculator shows you point A, the beginning, and point B, the end. In the meantime you spent those 40 – 50 years on the Moon, in a dark room with no interaction with the outside world, always sticking to your plan. Reality bites. If you run the 100% stock model from 2000 to today you will see a nice annual X% gain (do not have Bloomberg at hand now to say the correct figure). The piece of info the calculator is hiding from you are those two nasty more-than-40% corrections that market had in that period of time. Would you have stayed on course while bombarded with news screaming the world as we know it is ending, friends losing their jobs and rampant fear everywhere? I had a small personal portfolio during the dot.com crash and by the time Lehman collapsed I was managing a nine figure portfolio (no, not my money). Well I did not have Kerr on my side on those moments, do you?
The calculator assumes by default you have Steph confidence, that you will try that 60 footer when you are 2 – 11…but would you? They say the worst drawdown for a strategy is that one that did not happen yet. If you want to do this analysis, you have to consider at least the max historical drawdown and you have to be confident you will have the guts to endure it.
If you want to understand how complex is retirement planning and the pitfalls of trying it make it simple, I invite you to read Corey Hoffstein blog. It is the omega to your F.I.R.E. calculator alpha. You will be disoriented and found it too hard to follow…because that is the reality. At least now you know it.
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