035 | Sequence of Return Risk | Early Retirement Now

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In today’s conversation with Big Ern from Early Retirement Now we discuss safe withdrawal rates, sequence of returns risk and much more.


Podcast Episode Summary

  • A wide ranging discussion with Big ERN from Early Retirement Now on sequence of return risk and safe withdrawal rates
  • This is Big Ern’s first podcast! And a thank you to him for helping with Paul’s case study
  • Ern’s thoughts on social security
  • Ern’s origin story and his thoughts on early retirement
  • He had a student loan that he invested since he went to college for free. So he ended up with a positive net worth after graduation
  • Why do we need to be concerned with sequence of return risk?
  • Ern says that sequence of returns risk is the “reason why people run out of money in retirement” from getting unlucky with low returns in the first 5-10 years
  • What are “real returns”? Adjusted for inflation
  • The years to worry about having poor returns are the first 5 to 10 years and it has to be prolonged and significant
  • Hypothetical example of the 4% rule and what Ern thinks about it
  • Resources to game out your chances of success
  • Example of sequence of returns risk for an early retiree who is withdrawing money from the portfolio
  • How sequence of return risk impacts the saver and buy-and-hold investor
  • If you’re a saver during downturns, you benefit significantly
  • Buy and hold investors should not be impacted as long as they didn’t sell during the downturn
  • Talking through the ‘stubborn’ 4% withdrawals and the impact on success of early retirement.
  • Ern’s look at the real-world ramifications of a market drop and withdrawals
  • ‘If you’re unlucky, you can get screwed twice by sequence of return risk’ example
  • How to alleviate sequence of return risk
  • Mortgaging your future contributions by buying on margin and front-loading
  • Spreading out your contributions to the equities market over years lowers your sequence of returns risk
  • Ern’s thoughts on front-loading and a description of his investments
  • Thoughts on Bogle’s prediction that 4% returns can be expected in the near future
  • The “4% rule of thumb”
  • What worries Ern about someone retiring early in the next 10 years?
  • What do you do if you inherit $100,000?
  • Ern’s thoughts on 30x expenses saved up and what his safest safe withdrawal rate would be
  • Hot Seat Questions
  • Benefits of geographic arbitrage
  • Ern feels he was complacent with his savings rate earlier in life
  • Becoming wealthy is a long-term process of small, regular investments and staying the course when the equity market is down

Links from the show:

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Choose FI has partnered with CardRatings for our coverage of credit card products. Choose FI and CardRatings may receive a commission from card issuers. Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities. Disclosures.
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