If you are like me, you sometimes see articles in the personal finance press about people who are very young – in their 30s and 40s – who have quit their jobs and declared themselves FIRE’d (financially independent & retired early).
Recently, ABC’s Good Morning America ran this piece on a couple who retired very young and the ‘secret strategies’ they want to share with others. Inevitably, in stories like these, the Trinity Study framework is recommended by the young(ish) couple, who have based their FIRE escape on a 4% withdrawal rate. They recommend people save 25x their expected annual savings for retirement and then pull the plug. Simple, right?
Maybe not. These articles always get me nervous, because my understanding of William Bengen’s influential 1988 study is based on it employing a 30-year investment horizon. That is, a 60 year old that lives to be 90. Not a couple in their 30s or 40s that would need to plan for a lengthy 50 year retirement horizon. It seems to me that saving up for a retirement of a half-century in length would require more than just a 25x spending multiplier.
I decided to put the basic numbers of the ABC couple’s plan into FIREcalc to see how the Trinity Study parameters worked over the longer time horizon. I put in a $2M nest egg, $80K annual spending (4%), and a 50 year duration. It was able to quickly plot 99 periods of stock market history and the inputs held up about 78% of the time, with only 21 historical trends failing. That is, only about 20% of the time did the model show it likely that the couple would run out of money before age 90.
Going in, I would have thought the inputs would crash half the time or more. I was really surprised. Now I’m thinking that maybe the longer retirement horizon allows your investments to have more time to recover from the occasional economic recessions/depressions they are likely to encounter. Even if they are subjected to more challenges over the 50 years, they have more runway/opportunity to get back on track.
Of course, each person needs to determine at what percent of a Monte Carlo simulation they feel comfortable with. I usually think 85% is a good mark, but I can see many people being quite comfortable with 78%.
There is also the challenge that FIREcalc is only based on past performance. Our financial planner has a Monte Carlo tool that differs from FIREcalc in that it projects likelihood’s based on their estimate of future market dynamics. Those inputs tend to be a bit more conservative.
Still, I remain surprised that maybe these younger FIRE aficionados have figured out something that I missed at their age!
What do you think of their aggressiveness?
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