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%


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.

No, we don’t

Having been a reader of personal finance and financial independence for a long time, much longer than this blog has been in existence, I’ve come across various beliefs that masquerade as self-evident truths, when in reality they couldn’t be farther from the truth.

This post is a list of those postulates.


No, we don’t: Confuse Assets and Investments

The terms Assets and Investments are often used interchangeably, but there are distinct distinctions between them.

An asset is an item of value, that

a) a large section of the population agree holds its value, over time

b) a smaller sub-section of the population hopes increases in value, over time

An asset has no intrinsic value, other than what you paid for it, and what someone will pay for it when you sell it.

An investment, on the other hand, has some intrinsic, underlying value.

When you make an investment in stocks, you are essentially giving the firm capital to use in some endeavors that will potentially generate more value than the capital itself. They could be using that capital for R&D to make a new product; they could be using the capital to build more plants to produce more goods; they could be using the capital to hire and train more professionals to tackle a complex problem. You, the investor, gains when the firm does well, in terms of stock appreciation and/or dividends.

There is something called the Discounted Cash Flow (DCF) analysis to determine the Enterprise Value (EV) of the company. From the EV if you take away the debt owed and the cash in hand, you arrive at the equity value of the company. This equity value of the company divided by the number of outstanding shares, leads to the “correct” stock price. Check out this video by Aswath Damodaran, professor at NYU Stern, one of the foremost minds on Valuation.

Similarly you could be investing in rental properties. These will generate cash flows from the rent you receive. You will invest money (capital investment) when you buy the properties and then when have to replace the big ticket appliances. Over time, the steady cash flows will far out score the investments you made and you pocket nice profits.

Keep in mind the fluctuations of the markets and the seasonal changes in renting units are temporary. If you have a simple, robust, and well thought out investment plan or  business plan, over the long run you will succeed.

At least theoretically. There’s a saying that the markets can remain irrational longer than you can remain solvent!

Now contrast that with buying an asset such as gold. The value of gold depends on supply and demand. Gold, in and of itself, is not adding value to the money you spent in buying the bullion.

So, gold is not an investment. It is an asset.

Similarly, the home that you live in is not an investment. It is an asset, probably the biggest asset you own. You hope the price of your home goes up. In most of modern US history, the values of homes have gone up. Supply, demand, the condition of your immediate neighborhood, the broader national economy, demographic changes – all play a part in determining the value at any given time. Your home is not adding value by itself. If anything, you are spending more money to beautify your home by a kitchen remodel or by sprucing up the backyard!

No, we don’t: Call our personal vehicles Assets

Personal vehicle don’t count as Assets. The reason for this is simple. A car depreciates over time, that is, lose value as time passes. This defies the first tenet we’ve talked about Assets above. Now, not everything that depreciates over time can have the label asset removed from them. If vehicles are used for business purposes they fall under assets. They can be depreciated on the useful life value. In business accounting there is something called PPE – Plant, Property, Equipment, and they are treated as Assets. Here we are talking about personal assets.

No, we don’t: Strategize to beat the market

We are happy to get the return of the overall market. There could potentially be an investment that will generate a return greater than the market, but to correctly 1) Identify them, 2) Time the entry, 3) Time the exit – all these 3 events happening successfully on a regular basis ….well, that’s more along the lines of speculation for us. We follow the simple and sage advice of investing in broad market based, passive funds.

We actually do own some shares for a few individual stocks. First, they constitute about 2% of our overall investment portfolio, and second, we acknowledge them as speculative bets.


Readers: Any other BS that pass off as sage advice we might have missed?


Sports and the FIRE movement

In the FIRE community – and by FIRE we include fat, lean, medium, or any-other-category-that-will-crop-up-next – there seems to be a curious case of antipathy to organized team sports. Maybe antipathy is a strong word. Apathy perhaps paints a better picture.

The chosen form of exercise in the FIRE community seems to be going to the gym, running, walking, cycling, and skiing.

Notice a common them among these pursuits of physical exertion?

They are mostly done alone. Sometimes with a trainer or a friend or two.

Here is one such example, from the master, MMM himself.

Here is another example, from one of my favorite blogger, Mr. Cubert.

These are all great avenues to enjoy the outdoors, burn calories, stay in shape, experience positive effects of endorphins being released.

Teams sports are conspicuous by their absence.

What about the almost-40-year old who still wants to compete?

Compete with others, as opposed to oneself, which these individual sportsmen such as a cyclist or a runner does.  To “prove” they they still got it while scoring a goal or hauling in a TD catch. The adrenaline rush of going for a 50-50 puck and beating the other skater. The camaraderie of a bunch of like minded people playing for a common purpose – some similar age, some older, others younger. The backslapping and high fives after a win. The drowning of collective misery in beer after a sound thrashing at the hands of a team featuring 20-somethings. The “glory” of being crowned *Champions* (of a recreational league, which one one but your team cares about!)

These are noble intentions to aspire for!

Could it be a financial choice? It could be. If you think about the equipment costs for football or hockey, that could be prohibitive. The question then arises, what about sports such as soccer and basketball. You only need a pair of shoes/cleats, a ball, and a field/court. Less expensive than biking or skiing.

Could it be a factor of age? Certainly. But only if you’re edging closer to 40. Age can very well determine if you’re up for that stinging spike you were known for in high school.  There are tons of bloggers in the 20- and 30-year old range.

Could the stage of your life be playing a role? Absolutely. A thriving career, family with kids, and blogging as a side hustle, can handily take care of the 24 hours in a day, 7 days a week. But if you’re able to take time off to go for a run, you should be able to go a game of touch football.

That got me thinking. Are people who actively seek out a course different from the mainstream in terms of finance, and lifestyle made by those financial choices, inherently a bit reclusive in real life.

Pedaling away miles after miles, the wind swishing by the ears, whispering ideas about composing the next 3,000 word epic on the travesty of not taking advantage of geographical arbitrage …

Conquering the powder of the black diamond with a laser focus, the focus only matched by the resolve to eliminate all extraneous costs from the monthly budget …

I know, I know. The online community is thriving. I’ve made many an e-friend. Though I’m yet to meet a fellow blogger in person, I’m fairly certain they would be great people to hang out with. I’m thinking if in real life a lot of the bloggers are introverts.

Personally, I love team sports. I play them, watch them, follow them. I got introduced to soccer when I was very young. The love for the game has only grown as I’ve grown older. I try to play at least one game during the week, every week, throughout the year. I coach kids in the local soccer club. I have held elected office in the soccer club of the last city we lived in. I follow international clubs and the national teams of powerhouse countries. I cannot imagine a life where I’m not involved with soccer.

Readers: Would love to know what you think about the idea that most bloggers in the FIRE space are not interested in playing team sports? What about you, do you play team sport?

The CFI …falacy?

Mr. Cubert at Abandoned Cubicle, who is a very talented, determined, and resourceful fellow (and a fellow Midwesterner!), has this strange article out there, extolling the virtues of Cash Flow Indexing. In a nutshell, CFI determines which loans to pay off first, freeing up, well, you guessed it: Cash Flows. It does not take into account the interest rates or the term of the loan. Mr. Cubert does a great job explaining why this works for him. I’d suggest you read his article first. This post, if not a refutation, is certainly an addendum to his!

One thing that is ignored in the CFI method is how not paying down your highest rate loans first, makes you pay MORE INTERST, in the long run and the short run. There’s no going around this fact. You are freeing up CFs at the expense of paying more in interest.

Here is a Google doc (which you can download and play around) I created, a pretty simple one at that, which shows the affect of paying more – extra towards the principal – on 2 hypothetical loans: a 15-year $150k mortgage at 4%, and a 5-year $20k car loan at 0.9%. To make for an easier comparison, we’ll assume both of these loans are taken out at the same

The CFI of the mortgage is 135, while the car loan is 59. According to CFI principle, the car loan is an “inefficient” loan and should be paid off early.

An extra payment of $1,333.79 every month will wipe off the car loan in one year, saving interest payments to the tune of $66.19. Whereas the same extra payment when applied to the mortgage would save interest payment of $296.72 over one year. The CFI method would certainly free up the monthly payments that was going towards the car in year. That is indisputable. What is also indisputable is that you are paying more by following CFI.

One thing that I still agree with Mr. Cubert is here: technically smarter move would be to put any extra income towards higher yielding investments, as opposed to paying off the mortgage. But this is a long-term cash flow play for us. At early retirement, we plan to avoid as many recurring monthly payments as possible. Which is cash flow smart.” We hope (and planning) to be mortgage free in the next 4 years.

I should stress another point here. I will take a 0% loan any day, even if I had the money to pay it in full and not take out the loan. Heck, we have checking accounts paying 1.55% now! With inflation, which is around the 2.5% mark now, any loan below that mark is essentially lending you money and paying you interest on that loan!!

In the first worksheet I’ve provided the year 1 numbers. The second worksheet has the whole life amortization schedule for the mortgage. You can plug in your own monthly extra payments to see how soon you can pay off your loan and how much interest you save.