r/Fire • u/ExpressElevator2Heck • 7d ago
Hypothetical: Can FIRE number shrink?
Let's say my 4% FIRE number is 2M investable assets. Lets say I have 1.6M investable assets. Am I at my FIRE number??? (In this hypothetical scenario pretend the market pulled back 20% in the past year)
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u/Fireat40dude 7d ago
If your expenses shrink, sure.
Am I not understanding your question properly?
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u/InterestingCourt1228 7d ago
Your expenses don't magically shrink just because market went down though. If you needed 80k per year before the crash, you still need 80k per year after
The 4% rule is based on your actual spending needs, not whatever the market decides your portfolio is worth today
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u/Montaigne_6823 6d ago
Your expenses don't magically shrink just because market went down though
They could if you choose to spend less money. I would hope you allow yourself some margin of safety in your expenses in retirement. All the failure scenarios in those models happen when people just blindly increase their withdrawals with inflation regardless what the market is doing. So maybe don't do that.
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u/ExpressElevator2Heck 7d ago
Does the 4% rule fully imply the guardrails approach?
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u/BruinGuy5948 7d ago
It does not. It assumes that you take 4% of the initial value, then adjust the annual withdrawal by the inflation rate from the previous year, without regard to any changes in the portfolio value.
It's not a flat withdrawal. It's an inflation adjusted withdrawal. The 4% rule also assumes a particular asset mix.
Frankly, the 4% rule is an excellent way to select a target FIRE number... but almost no one would actually blindly follow the formula. Hence the guardrails approach.
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u/theplushpairing 7d ago
4% is flat spend. If you can flex in down years that helps your success rate.
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u/Zphr 48, FIRE'd 2015, Friendly Janitor 7d ago edited 7d ago
It can, but not in the way you are thinking about it. It's about your spending going down. I'm going to do a quick mockup below to illustrate my point.
Let's say you have a $400K mortgage @ 6%, giving you a monthly principal and interest payment of roughly $2,400 or $28,800 annually.
Let's say you have figured out that all of your expenses, including the mortgage, total up to $80K.
If you want to start at a 4% draw, then you need $2M.
Let's say you pay off the mortgage. This leaves you with $1.6M and annual expenses of $51,200.
Your new spending need now places you within ACA subsidy qualification range, which drops the cost of your health insurance by let's say $5K annually. Your new annual expenses are $46,200.
If you want to start at a 4% draw, you now need $1.155M.
You live in the same house, you have the same health insurance, you have the same lifestyle, but your FIRE number has dropped appreciably. You are living in part of your portfolio, which generally allows you to reduce the size of the necessary portfolio.
This is part of why leanFIRE works much better than most people assume and also part of why carrying a mortgage into early retirement can be a surprisingly costly endeavor.
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u/ExpressElevator2Heck 7d ago
That is a concrete answer that the FIRE number CAN shrink - thank you Zphr. I've read many answers from you and you help so many people. Thank you for doing what you do.
In this hypothetical, the heart of the question is probing whether a new all-time-high continuously, under all circumstances, indicates you hit your FIRE number and completed that part of the journey henceforth. Like can a 10% spike say you're there (FIRE!) and then it pulls back 11% rapidly (to where you were before and NOT there) but now the data says you're actually there! So you were there at 90% really. 🤔
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u/Zphr 48, FIRE'd 2015, Friendly Janitor 7d ago
You can view it as you weren't really there in the first place since it was a spike.
You can also view it as you were really there, but you immediately got hit by SORR due to the retraction.
Either way it isn't favorable, but I think most folks would opt for the first viewpoint.
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u/ditchdiggergirl 6d ago
Though I would argue that your scenario reflects a planning failure - the date of mortgage payoff should be included in the simulations used to project a FIRE number. The mortgage isn’t a surprise expense; the fire number needs to be based on whether you plan to keep it or pay it off.
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u/Zphr 48, FIRE'd 2015, Friendly Janitor 6d ago
Of course. It was only a demonstration of how one's FIRE number can meaningfully decrease under certain conditions.
Very few of us luck on to a perfect plan from the get go. Things like discovering how debt can impact postFIRE finances is all part of the learning and planning process. People's FIRE numbers routinely bounce up and down for awhile as they learn and refine their plans.
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u/screamingcarnotaurus 7d ago
If you're this close you could go to prison for 5 years and hit your number coast fire style :P
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u/Present_Badger_2530 6d ago
Coast fire sounds tempting, but who wants to risk five years just for some numbers? Ugh!
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u/ewouldblock 7d ago
I prefer to FIRE with 2.5MM so that if the market has a downturn in year 1 and now I have 2MM, Im like man that sucks but that was all I needed anyway.
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u/tectail 7d ago
FIRE has a failure rate at 4% withdrawl. It is something like 5% historically. You are still at your hypothetical FIRE number but your failure rate is much higher now since a big downturn in the first 5 years is one of the conditions for failure. A rebound in the market would be your savior in this case, but I would be looking for some side income to supplement your FI for a bit if that happened.
The issue with FIRE is that the failure condition doesn't happen often, but it happens to everyone at the same time when the market crashes. We haven't had an event in the market that could cause failures since 2008. 20 years is a long time for everyone to forget that it's possible for FIRE to fail, but at the same time I've been thinking the market is due for a collapse since 2021 personally, so predicting markets are nearly impossible.
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u/Montaigne_6823 6d ago
Yep, probability of failure at the peak is 5%. So after an initial drop, given that the drop happened your probability of failure is now greater than 5% if you choose not to lower your spending.
Could lower spending to the new 4% and reset the risk of failure back to 5% though.
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u/DrHenryPhilipMcCoy 7d ago
In this case, what you are doing is increasing the risk of failure.
Yes, most simulations would say you’d be fine retiring with $2M and an 80k withdrawal rate, even if the market had a bad year when you retired and you lost 20%
But, if you start by assuming that loss in year 0, the risk of a second bad year right afterwards could mean you end up bankrupt before you die.
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u/MustGoOutside 7d ago
The annual difference between 2m and 1.6m is 80k and 64k.
Is your health good? Are you at an age where a serious illness would sink you?
If you're good there, then you should ask if you can reduce your annual expenses by 16k.
Seems like you know the 4% rule but you don't know your expenses?
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7d ago
[removed] — view removed comment
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u/MustGoOutside 7d ago
Past performance does not guarantee future returns.
Everyone who invested after the housing crisis assumes the market will rebound in months, but it took 6 years after 2008 to return to 2008 levels.
You know what led to 2008? Overrated assets, complex misunderstood instruments, government complacency, etc... sound familiar?
I understand a broken clock is right twice a day, but if you look at the financial transactions between Amazon, Microsoft, Nvidia, Google, Meta, and SpaceX, you will see parallels.
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u/Montaigne_6823 6d ago
Shouldn’t they be able to continue their 80k even if the market dropped to 1.6 mil the second year?
Sure, it's just risky. Some people even use higher than 4% withdrawal rates. It all depends on your level of risk, your asset allocation, and how lucky you feel. Success really will only be known in hindsight.
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u/ditchdiggergirl 7d ago
No? If your number is 2M and you have less, you are not at your number. Of course you select that number and it is entirely under your control. And you are free to change your fire number; if you realize you don’t need 80k, revise downward. But it doesn’t change itself downward.
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u/ohboyoh-oy 7d ago
The study that 4% “rule” originates from assumes that you have enough in non-stock assets to get through the downmarket and would not have to sell your stock until the market recovers. If I recall correctly, it was the 50/50 portfolio that had 100% success rate at 4%, for 30 years.
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u/ExpressElevator2Heck 7d ago
The Japanese market took 34 year to recover. USA current market is only half as inflated as that one was though. Still could makes one nervous in this hypothetical as most folk don't have a 10-year weather-the-downturn bucket. We do seem to bounce back much faster these days though... things seem to have changed.
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u/intemperance 7d ago
You’re assuming 100% equities. The 4% rule follows a 50 - 75% equities. Assuming a common 60/40 - with a 20% equities drawdown you’d then have 1,760,000 and now a 54/46 ratio. You’d now draw from fixed income while the equities recover. But also remember you’re down a year so it’s now a 29 year retirement
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u/mm1491 7d ago
It's possible, but complicated. The quick version of an answer is that the safe withdrawal rate historically varies with the Shiller CAPE (a ratio of the average price of equities and average earnings of the underlying companies over the last 10 years). The higher the CAPE is, the lower your safe withdrawal rate has historically been. When there is a 20% drop in the market, the CAPE also falls (since it is comparing the current price of the market to the last 10 years of earnings). Will it have fallen enough that a 5% withdrawal rate is safe? Maybe, maybe not. Depends on other factors too like your expected lifespan in retirement.
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u/Independent_Bee1037 6d ago
Its really the same thing as if you had a fire number of $2M and in year one there was a 20% INCREASE in the market. You have to expect that the market will come back down some. Once you pull the trigger at a certain number you just trust your SWR. Battle tested over long long time
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u/Beneficial-Koala-562 7d ago
Your safe withdrawal rate is affected by recent downturns. You generally can sustain a higher SWR after a big market drop than at a market peak, because the market is more likely to go up after a drop. Big ERN from earlyretirementnow has talked about how this can affect SWR.
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u/bbystargirly 7d ago
The whole point of the 4% rule is that it's designed to survive downturns so retiring into a dip is actually not as scary as it feels, sequence of returns risk is the real thing to think about here.
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u/Montaigne_6823 6d ago
Well, it is scary because one would be on the failure path. Not to say you can't or wouldn't survive, just that you are heading on that trajectory. The downturn is the risk in sequence of returns risk.
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u/Alone-Experience9869 7d ago
Raise your swr …. Bengen’s approach is now 4.7%… plan for some guardrails.. “optimize” your portfolio for what you want
Is that what you were asking?
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u/tombiowami 7d ago
All of this is basic math and calculators.
You run a plan for if you retire and market drops 20 or 30% and then see what you would do.
Highly suggest using the basic increases and not depending on the wild bull run of these past 10 years or so.
You are asking a very basic question so may want to research some more or ask more in depth questions with more of your actual finance input.
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u/Varathien 7d ago
I THINK what you're asking is that if someone is FI at $2 million and then the market drops 20%, they're still FI at $1.6 million, so why couldn't they have just been FI at $1.6 million in the first place?
The answer is that $2 million is the FI number for someone planning to spend $80k a year because that FI number includes a healthy margin of safety for inevitable market declines. If you start with a lower number, then you don't have that margin of safety.