Vanguard opining on the FIRE fun

Earlier this month, Vanguard published this report on FIRE and set some anti-FIRE cats amongst the proverbial pigeons. You know, pigeons like us who have bought into the “idealogy” that you really can’t afford to be chained to a job for a paycheck for decades and decades. You need to get out of the rat race as soon as you can, as if your life depended on it.

The article, bullet-wise (as all good articles should have), talks about:

  • the dangers of blindly following the 4% withdrawal rate (given how the market is expected to perform poorly over the next decade),
  • using appropriate retirement horizons,
  • the effect of the cost to invest,
  • the importance of having a diversified portfolio, and lastly,
  • the need to have a dynamic spending strategy

All true. And most rational people pursuing/in FIRE would say so. These factors are nothing new. The 4% SWR is not gospel, the recent returns of stocks is the outlier than the norm, investing costs are to be merciless slashes, diversifying, and having a spending strategy – and even an earning strategy in FIRE – that is flexible, are all built into the plan!

Here is the real, inflation adjusted, historical return YoY (CAGR) of the stock market since 1871. Yes, over 150 years worth of data. It stands at 7.06%, adjusting for inflation and reinvesting dividends, for over a century and half. You can select the time period you want – MoneyChimp Market CAGR.

Here are two simulator applications, that runs multiple iterations (hundreds) of how a portfolio performs over extended draw down periods. I’ve run 3 simulations on each. (there are some underlying assumptions, such as stock/bonds allocation, expected inflation, etc. I encourage you to explore and play with the tools):

  1. Portfolio of $1.5M, expected spending of $50k/year, inflation adjusted, to last for 50 years, withdrawal rate of 3.33%
  2. Portfolio of $1.36M, expected spending of $50k/year, inflation adjusted, to last for 50 years, withdrawal rate of 3.67%
  3. Portfolio of $1.25M, expected spending of $50k/year, inflation adjusted, to last for 50 years, withdrawal rate of 4%

cFIREsim

Scenario 1 – Success rate of 99%

Scenario 2 – Success rate of 93%

Scenario 3 – Success rate of 84%

firecalc (running the same 3 scenarios)

Scenario 1 – Success rate of 96%

Scenario 2 – Success rate of 91%

Scenario 3 – Success rate of 77%


If someone told me that I’d have between 77% and 84% success rate of an endeavor that I was about to embark on, I’d take those risks. But we are almost hard wired to be extra cautious about money. Especially our own money. So I understand if the 4% rule is bent into the 3.33% rule to get into the the 90% certainty range.

And, Vanguard keep those costs low. We’re all good here.

4 thoughts on “Vanguard opining on the FIRE fun

  1. The anti-FIRE folks always stand at the ready! Ultimately, the math is pretty simple. I’m more in pursuit of FI than the RE, at least for now, so hope to have a nice cushion whenever that decision point does come around.

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    1. Yeah, that math is always shockingly simple, isn’t it? 🙂

      I think, I might be one of the very few who opted for RE than the FI part. FI will come, but the years lost in the grind – I wasn’t going to give those up anymore.

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  2. The first non-net worth post in a while! Interesting comparison. I think it might be surprising to some that a 4% SWR could result in a success rate less than 80%. Of course, a time horizon of 50 years will incur more risk than a 30 year horizon, which I think the original study used. Anyhow, I agree with you. If I can get an initial success rate around 80%, I’m probably willing to take the risk. The thing that people don’t factor in is that you can re-evaluate whenever it’s warranted. People think that once they FIRE, they’re doomed to sitting on the sidelines and watching it play out for decades. In reality, most of us would reconsider work, at least part-time, if things suddenly looked dour. Factor that into your FIRE sim!

    Liked by 1 person

    1. I deliberately chose 50 years as that was the argument in the piece that as FIRE-es people will be drawing down for more years than the 30 years that was in the original projection.

      And yes about having a post not on NW! Way due.

      Liked by 1 person

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