Today we’re going to be talking about safe withdrawal rates. And you people said I’m not fun at parties.
Most people don’t spend much time on safe withdrawal rates. They go to work until they think they can retire. And then they hope like hell their nest egg lasts them long enough. This seems like a bad strategy, but most of the time it works. People are remarkable creatures sometimes.
Early retirees are obsessed with safe withdrawal rates. Some people might even mock them for this obsession, but I never would. After all, they were kind enough to not make fun of me that time I had a very visible booger in my nose for four years. Yeah, that happened. I prefer not to talk about it.
Many U.S.-based bloggers have done a ton of work on safe withdrawal rates, which I’ll sum up in about a sentence and a half. You can safely withdraw 4% of your portfolio each year and not run out of money, at least historically. If you’re looking for a bit more of a cushion, then only withdraw 3-3.5% of your assets each year.
So if you plan to spend $30,000 a year, then feel free to call it quits after amassing $1 million. If you’re feeling frisky, you could wrap it up after coming up with $750,000. Many of these folks do exactly that, successfully supplementing their income with part-time work or small online businesses.
These numbers have been proven to work for U.S. investors. But will they work for Canadians? Let’s find out
Safe withdrawal rates Canada
Oh, Canada. You crazy place. With all the poutine and socialized medicine and whatnot. Will you ever learn?
Are you talking to Canada like it’s your cat after it has been mischievous?
You bet your ass, Italics Man.
Personally, I both love and hate the Canadian stock market. On the one hand, we have a number of sectors that are pretty much guaranteed to provide great returns going forward, at least in my humble opinion. Our banks have been historically stellar investments. Our pipelines have also been fantastic places to park money. It’s also been pretty hard to lose investing in the telecoms.
The bad part of our stock market is the amount of oil and resource companies. These are mostly trash and can easily be avoided, freeing up your mental energy to analyze companies that don’t suck. Unfortunately, this means I’m not a fan of most Canadian market ETFs. I just won’t tolerate 20% of my portfolio in terrible sectors.
I’m convinced a portfolio stuffed with Canada’s best dividend payers will allow investors to spend the dividends without having to worry about the principal. Easy, peasy. But we’re not talking about that, so let’s take a closer look at investors who just buy the Canadian indexes and call it a day.
Sorry, you’re not hitting 4%
Unfortunately, there’s no Trinity Study for safe Canadian withdrawal rates. We’re going to get a little less scientific here.
A firm by the name of Resolve Asset Management specializes in putting investors into these types of portfolios. They caution against using one firm number for a safe withdrawal rate, since there are a number of factors that could matter. Say you retire when stocks are in a bubble. That would reduce equity returns going forward, which means your withdrawals would be limited.
Resolve Asset Management believes a safe withdrawal rate for Canadian investors is somewhere between 3.23% and 3.87%. Personally, I don’t think two decimal places is precise enough. Three or you’re not trying.
Wade Pfau, who writes over at Retirement Researcher, studied whether a 4% withdrawal rate would have worked around the world.
His findings were a little bleak. The 4% rule would have failed surprisingly often in many countries over the years, including Japan, Germany, and France. The good news is according to Pfau’s research, a safe withdrawal rate in Canada would be slightly higher than in the United States. The bad news is he’s not convinced a 4% safe withdrawal rate is safe.
Still, he found the safe withdrawal rate for a 50/50 stock/bond allocated portfolio in Canada would be 3.96%, slightly higher than the U.S., which has a 3.94% safe withdrawal rate. Japan’s safe withdrawal rate would be 0.2%. No, that’s not a typo. No wonder the Japanese are so weird.
Morningstar also tackled this problem back in 2017. They found that low fixed income returns would push down the likelihood of a 50/50 portfolio lasting much longer than 25 years being withdrawn at 4% annually. They figure investors who invest in 100% equities could survive even a 40 year withdrawal period, but introduce greater variance by going about it this way.
Let me summarize the various Canadian safe withdrawal rate studies out there.
Low interest rates have made the 4% withdrawal rule difficult, especially for those folks who want the added stability of bonds in their portfolios. Rates have crept up lately, which is good news. Five-year GICs now regularly pay out more than 3%.
If I was looking at retiring today — which would mean a 50 year retirement, give or take — I wouldn’t withdraw any more than 3% of my assets. I’d likely bump that down to 2.5%, just to be sure. Which means if I wanted to spend $35,000 a year, which is approximately what my wife and I spend annually, I’d want $1.4 million in the bank.
Maybe I’m overly cautious, but I wouldn’t feel comfortable basing my early retirement on the 4% rule. I’d have to have some sort of backup plan, like earning a little extra income or having a spouse who continues to work.
The other night I took my wife out for a little Chinese food, because if we like to do anything it’s appropriate other cultures. You laugh but in like five years it’s going to be illegal for white people to eat ethnic foods. It’s okay though. If the Chinese food is good enough I will risk going to jail for it.
The restaurant had a giant TV going, and naturally I watched it instead of paying attention to my wife. The program was some generic HGTV show about some house that was being remodeled. The couple living there was at their wit’s end. The property was one of many similar houses in one of those cookie-cutter neighborhoods. There was nothing unique about it. The design allowed for a small patio in the front of the house, but it wasn’t big enough. It was the same with the floor plan. It was open, but not open enough. The kitchen was worse than crap on a cracker. And so on. These people needed a renovation and were willing to shell out $90,000 to do so.
As the contractors started to tear out the whole kitchen (don’t worry, the barely used appliances were donated to a local charity), a feeling of rage swept over me. This kitchen was nice. Yeah, it wasn’t nice, but it was still a very functional place that had clearly been renovated in the past 10 years. It had plenty of counter space. The ample cupboards were stylish. The floor was spotless. Nothing was even remotely close to worn out.
And yet it was being discarded with glee. These people couldn’t wait to be rid of their horrible space and the designer kept reminding them how much better life would be with a new kitchen and slightly bigger patio.
HGTV makes us spend money
All my best thoughts make it onto Twitter months before they make it here. My thoughts about home renovations are no exception.
12 likes? That’s probably my 3rd best tweet ever. You lazy SOBs should start liking more of my tweets.
Here’s what happens, even to the best money managers out there. We start watching HGTV at some point. Naturally, the best of us don’t have cable, so maybe it’s at a friend’s house or at a hotel. Hot damn I love me some HGTV watching at a hotel. The wife and I can watch hours of people choosing between three different houses. Then you get home and start looking around your shitbox house and decide it’s time for an upgrade. $50,000 later you’re significantly poorer and only slightly happier.
Some people believe you need to spend 1% of you home’s value annually on maintenance. Others believe you should be setting aside anywhere from 3% to 5% of its value. I question both figures, to be honest, just based on my experience owning rental properties. All I know is basing it on a percentage is silly.
Think about it this way. Somebody who owns a million dollar house still has the same basic home maintenance issues as someone who bought a cheap place for $100,000. They both have to replace appliances every decade or so. The roof will last 20-25 years. Same with the furnace and hot water heater. These main expenses will be about the same no matter what the place cost in the first place.
Where the costs really start ballooning out of control is when we start replacing perfectly good flooring and kitchens. A $100,000 house can get away with a dated bathroom or faded carpets. A million dollar place can’t, at least when you’re trying to sell it. Therefore we keep these places up to selling condition, just in case. Or at least that’s the lie we tell ourselves.
Just don’t renovate
Renters already have this figured out. If they want a much nicer kitchen or more spacious bedrooms, they just move. Home owners have to worry about renovating an existing property or selling that property and then upgrading to another. It’s a much longer process.
Both groups will end up saving buckets of money if they do without some things. Moving is expensive, even for renters. By staying put in a reasonable place for a decade or two, both stand to save a lot of money.
HGTV has the exact opposite attitude. To be truly happy all you need to do is call some contractors and in a few weeks all your non-sexual dreams will come true. Reality is much different, of course. Many contractors will rip you off as often as they can. Hidden surprises often mean your project will cost much more than estimated. And once you have a shiny new bathroom the rest of your house will look like puke in comparison.
There’s an easy solution to all this. Just don’t bother. Gain happiness from the fact you’ll be putting away cash for a rainy day.
Poll all your friends. I bet almost all of them want to do renovations to their house. They just can’t afford it. This is what I like to call HGTV Syndrome. Avoid contact with it at all costs.
The internet is filled with responsible advice on what to do if you’ve won the lottery. People say good stuff like don’t spend it all on stickers, stupid, and invest it for the long-term in a balanced basket of stocks, bonds, real estate, preferred shares, and other conservative investments. They advocate hiring smart people to help you out, especially if you’ve gone from rags to riches.
All of that is good, solid advice. Naturally we’re going to ignore all of it.
[Aside: people will tell you not to cash in the winning lottery ticket. They are morons.]
No, not really. But with the ol’ Powerball recently hitting $1.5 billion, I thought it might be fun to talk about the dumb stuff we’d all buy if we became billionaires.
But first let me crack out this picture, which is right up there next to the Mona Lisa as the greatest of all-time.
Y’know technically he’s not wrong.
Sure, we’d be responsible with our winnings. This would last about 14 seconds until we realized that $500 million invested at 4% gives us $54,794 to spend every single day. If I’m making a decent middle class salary every day you’re damned right I’m going to own 5,000 Playstation games. I’m doing my part to keep the economy rolling.
I wouldn’t just indulge in video games. Here are a few more things I’d buy.
Oh wow. Such a baller.
Oh no, Italics Man. I wouldn’t just buy new socks once. I’d buy a year’s supply and crack out a new pair every morning. There is nothing that beats pulling on a new pair of socks for the first time. After my 12 hours of use I’d throw them at some hobo with dirty feet. Cover that up, man! Nobody wants to see stinky hobo feet.
Notice how underpants aren’t on the list. This is because they always take a few wears to get just right. That’s how the bastards at Fruit of the Loom get you.
Golf is so god dammed expensive I feel like I can’t responsibly partake in it without being at least a deca-millionaire. It’s like $100 to do 18 holes on a half decent course. $25 an hour is too expensive for entertainment. You can get the cost down if you join a course and buy a membership, but even that comes to like $3,000 a year on the low end. Screw that.
Maybe I’d build my own course if I was worth $500 million. It couldn’t take much more than $10 million to get it off the ground and another $500k annually to keep up. I have no idea. I’m just pulling these numbers out of my ass. Then I could invite all my readers to my personal course just to kick them out five minutes later for no reason. Fun!
Golf is the only rich guy sport I’d do. Polo is dumb and if I’m going onto a ship somebody else is driving it. I guess I could invite Prince Charles over and we could hunt some foxes. That’s a rich guy sport, right? We’d laugh and say “indubitably” a lot. Then I’d crack jokes about his hot daughters-in-law and it would be awkward.
Every year I’d set aside a few hundred thou to get petty revenge on people who wronged me. Sorry for all the dog shit on your lawn, guy who once mocked me in high school. Sucks to be you, guy who once cut me off and now has his tires slashed. And so on.
Naturally, I’d hire someone to do the dirty work. It would all be so petty the cops wouldn’t stop me.
Five Guys everyday
I’d weigh 800 pounds and die at 50, but it would be worth it.
What outrageous shit would you guys do if money was no object? Tell me. I need to know. It consumes me.
Back in the day, I read the Early Retirement Extreme book, which mostly is just a testament of how smart the author thinks he is. I suppose there are some tips in there, too.
Aside: the favorite part of the book was when the guy hinted for about 200 pages on how good his investing acumen was and then he just glossed over it by saying “investing is so easy for me I don’t even have to explain it.” OH BABY THAT’S GOOD BULLSHITTIN’.
Anyhoo, one of the suggestions from that book was to work on limiting yourself the basic necessities we’ve all decided are needed. For instance, you should turn your heat way down and then sleep in a tent in the living room. The tent keeps heat in, see, which frees you from heating the rest of the house you don’t use.
I swear this was an actual suggestion! Made with a straight face and everything!
Another suggestion was the one we’re going to focus on today. Everyone should take cold showers. Not just for the savings, though. But mostly so they can push their bodies and prove they’re no match for the MAN who’s constantly trying to keep us down. And too warm.
Yes, really. We’re going to be talking about cold showers. And not the kind I have to take after a Taylor Swift music video, either.
The FIRE crowd strikes again
Look, I’d love to stop ragging on the FIRE crowd. I really would. And in their defense, most of them are perfectly nice people who would laugh in your face if you ever suggested they start taking cold showers to save money. But there’s a persistent small minority that insist on doing this kind of dumb stuff to retire 14 minutes earlier.
(Italics man is telling me it would be a bad idea to show the exact tweet that motivated this. Jerk.)
One of the big knocks against the FIRE crowd is when they start making huge sacrifices in order to achieve this dream The Early Retirement Extreme guy and his sleeping in a tent is just one example. A certain facial hair blogger rides his bike everywhere all while mocking people who drive. Then he goes and buys an electric car, apparently without irony. Cold showers are another.
Then, one member of the group gets their story picked up on a major media outlet. The commenters on that piece focus on whatever outrageous thing is being done to save money. This is by design, of course, and everyone’s in on it. Then they retreat to their own blogs and complain about how the haters “don’t get it” and are “jealous.”
Let me set the record straight. You don’t have to take cold showers to retire early. Why? Because they don’t matter.
The number one thing you can do to make all of your financial dreams come true is earn more money. Increasing your top line is, in theory anyway, limitless. Most of us don’t want to work 16 hours a day, so we find the highest paying job we can and turn to passive income to make us money while we sleep.
Next, you need to cut expenses. You might move to a small community like we did. Or you can live in a place much smaller than average. Moving close enough to work to walk will usually end up saving you a bunch of money, too. And for a lot of people (myself included), renting likely ends up cheaper than buying. Combine a bunch of these big picture things and you end up saving a lot of money. Potentially a thousand dollars a month. Or even more.
Meanwhile, how much is taking a cold shower going to save you? We’re talking about $10 a month, tops.
I can’t believe I’m saying this, but let’s think about showers for a second here. Is it really the hot water that costs the money? Or is it taking a 10 minute shower because the water feels good? If it’s the latter, good news! I have a solution that doesn’t involve freezing your balls off to save literally a few bucks.
God let’s wrap this thing up
The important lesson here is you only have to sacrifice a certain amount to make your financial dreams a reality. If you’re really considering taking cold showers to save $100 a year, find a way to earn $200 more instead. You’ll be happier in the long run.
You probably already heard about this, but let me clue you in if you aren’t aware of the latest drama in the ol’ PF-o-sphere.
Suze Orman (you might remember her from that time I was on her CNBC show) came out of retirement with a bang by appearing on the Afford Anything Podcast. Suze’s appearance was supposed to be used promote her latest book, but America’s favorite lesbian financial guru went off the rails and bashed the living crap out of the financial independence/retire early movement (FIRE).
Some choice quotes are as follows:
“If you only have a few hundred thousand, or a million, or two million dollars, I’m here to tell you … if a catastrophe happens, if something happens, what are you going to do? You are going to burn up alive.”
“Two million dollars is nothing. It’s nothing. It’s pennies in today’s world, to tell you the truth.”
“You can do it if you want to. I personally think it is the biggest mistake, financially speaking, you will ever, ever make in your lifetime.”
Basically, Orman’s argument boils down to this. Having a mil or two in the bank doesn’t provide nearly enough of a safety net. Early retirees have the 4% rule and whatnot behind them, but they forget about very real risks like having to care for a disabled family member, having an expensive major illness, or needing long-term care themselves. In any of those scenarios, the early retiree quickly runs out of money.
Naturally, the FIRE community defended themselves with all the might of a certain Supreme Court Justice (TOPICAL!).
They pointed out that if anyone is prepared for such outcomes, it’s the folks who found a way to save up seven figures in a short amount of time. Sure, running out of money is always a possibility, but if that ever became a risk they’d simply go back to work. And so on. To be honest, the rebuttals were pretty boring. Suze brought up the same points everyone else has and they were easily rebuked.
Where the FIRE community failed
Long-time readers know I’m not really on the ol’ FIRE bandwagon. I lurve the idea of financial independence, even though I’m living proof it’ll mess you up. Your patience for crap will go down once you hit whatever your magic number is. Trust me.
I just hate the retire early part. Many early retirees keep busy by blogging, which is just swapping one career for another. There’s nothing wrong with that. Hell, I was a professional blogger for years. But let’s not piss in each other’s ears and say it’s raining. Even part-time bloggers aren’t retired. They’re simply free to pursue whatever they want. That’s great, but it’s not retired.
But here’s the deal, at least from my perspective. Suze brought a bunch of great points to the attention of a much larger community. And instead of acknowledging her legitimate points, they attacked her personally.
Go ahead, read the comments on that post I linked to earlier. They’re amazing. Many of them accuse Suze of not understanding the FIRE movement or the math behind it. Those especially made me laugh. The guy who pointed out the math behind all this titled his article “The Shockingly Simple Math Behind Early Retirement.” And Suze Orman, one of America’s best financial minds doesn’t understand it? Really? It’s not that hard of a concept, guys.
We also have a bunch of FIRE bloggers who have seen their index funds do nothing but go up and to the right for the better part of a decade. These people had barely graduated university the last time the market hit the shitter. Many of these guys are going to capitulate during the next 25%+ downturn. Some are even going to go back to work. Mark my words.
Speaking of going back to work, do these people realize how hard it is getting a good job at 45 with a decade-long gap on their resume? Talk to some stay-at-home moms sometime, guys. It’s not as easy as showing up the day the nuclear plant opens.
Let’s wrap this up
Ultimately, Suze’s point about early retirement was “shit will happen. Get a helmet.”
Early retirees say they’ve already planned for this. Some have, but many haven’t. It’s going to be interesting to see what happens to these folks as they try to “retire” for four or five decades. I believe most will end up just fine, but mostly because they operate small businesses that generate additional income (i.e. blogs).
But at the end of the day, here’s the lesson you should take away from this. Everybody is talking about Suze Orman right now. She took something that she’s never covered before and made it all about her. I didn’t care about Suze’s early retirement opinions two weeks ago. Nobody did. And now I’m writing a post about it. Amazing.
She successfully trolled the whole FIRE community. Suze Orman is a g.d. genius. I couldn’t be happier.