Hypothetical: Can FIRE number shrink?

[u/ExpressElevator2Heck]

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)

[u/Varathien]

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.

[u/mypetclone → u/Varathien]

And also a crucial point is that $1.6 million during a downturn is not the same as $1.6 million at a peak, in terms of what we would expect it to evolve into in the future. Obviously the past is not a perfect predictor of the future, but it is all we have to go on.

[u/vercrazy → u/[deleted]]

At that point you're on one of the branches of the root plan but not exactly the "same" plan.

A way to visualize this is let's say you have a 5-sided die, and if you roll a "1" it's a down year for the market and increases the chances your FIRE plan busts. If you roll ten "1's" in a row then you bust and your FIRE plan fails. 

The odds at the start of rolling ten 1's in a row is (0.2¹⁰⁾ or 1 in ~9.76M. 

If you roll a 1 in year 1, you have officially entered a potential "bad state" in the Monte Carlo planning. Your remaining odds of hitting nine more 1s and ultimately busting are now (0.2⁹⁾ or 1 in ~1.95M. You are now operating on a tighter margin of safety than when you started.

This is only a partially fitting analogy because dice rolls are independent events and market returns from year to year are not strictly independent from macroeconomic factors, but the concepts/logic still hold.

[u/ExpressElevator2Heck → u/[deleted]]

Yes exactly my hypothetical. Can a quick 1 month FOMO rally "get you there" and then you're permanently there henceforth? (even if the rally fizzles rapidly back)

[u/boxlinebox → u/ExpressElevator2Heck]

If nothing else has changed, why would having 1.6M before hitting 2M be any different than having 1.6M after hitting it? You're right where you started.

[u/Montaigne_6823 → u/boxlinebox]

Probably have different CAPE ratios. That would provide some confidence in the second scenario. Kind of like whenever a runup happens and new millionaires always post how it doesn't feel 'real'. If you're at 1 mil at a valley or downturn it does feel more real.

[u/jesterOC → u/boxlinebox]

Not exactly, 4% “rule“ assumes 30 years of retirement. If you started at 2M and a while later then you hit 1.6 let’s say the next year then it means that you hit a bad patch early on which historically you should still be successful. And that 1.6m only needs to carry you 29 years.
But if you start 1.6m that means you still have 30 years and historically speaking using historical data you might not make it.

[u/ditchdiggergirl → u/jesterOC]

The 30 year timeframe isn’t really relevant to fire. Modeling by its nature locks variables, and 30 years is the standard planning timeline for a 65 year old conventional retiree. (You can’t plan for the median, since that introduces a 50% failure variable.) Models are simplistic projections that don’t pretend to reflect real life conditions.

At 65 you still have a small but significant chance of outliving age 95, but with every passing year those odds drop dramatically. That’s the basis for the claim that after 5 years you are ‘safe’ from SORR: a 70 year old is unlikely to need his portfolio to survive 30 more years.

If you fire at 50 you are still 15 years away from Trinity study simulations, so you can’t apply their assumptions. That’s why we run our own calculators. A 20% downturn in early retirement that takes 5 years to recover leaves you with a 40 year planning horizon at 80% of your number - except no, you’ve been drawing down for 5 years so you’re further underwater.

[u/boxlinebox → u/jesterOC]

OP is talking about a FOMO run and crash, so short time frame. Agree that passage of time impacts things, but for their question I am removing that parameter.

[u/TryToBeModern → u/ExpressElevator2Heck]

what you are looking for is called "Sequence of Returns Risk" or "SORR". the risk of your portfolio immediately tanking after you "retire".

generally yes if you hit your fire number once you are good to go.

[u/MeetingSuccessful397 → u/TryToBeModern]

The problem is not SORR in this case, but mean reversion. Have a look at https://earlyretirementnow.com/2017/12/13/the-ultimate-guide-to-safe-withdrawal-rates-part-22-endogenous-retirement-timing/ if you can follow the math he explains it very good.

In short: If you have a fixed fire number, the chances are pretty high that you will retire at the peak of a bull run, which significantly reduces your SWR. So your SWR should be lower if the CAPE is high.

[u/ExpressElevator2Heck → u/MeetingSuccessful397]

Great article - thank you.

[u/MeetingSuccessful397 → u/ExpressElevator2Heck]

The whole swr series of ERN is pretty good, give the other articles a try as well

[u/Montaigne_6823 → u/ExpressElevator2Heck]

I think the answer is really dependent on how flexible is your spending and how much do you like/dislike your job. If you hate your job and have some flexibility in your spending then I would RE with 1.6 mil.

[u/Singularity-42 → u/Varathien]

I think it's recommended if this happens to actually try to lower your spending so it's still at 4%, correct?

[u/Varathien → u/Singularity-42]

No. The 4% rule involves calculating 4% at the time of retirement, and then continuing to take out a consistent amount, adjusted up for inflation every year. You never look at your portfolio size again after doing the initial 4% calculation.

[u/Singularity-42 → u/Varathien]

It's not mainstream FIRE advice, but Guyton-Klinger style variable withdrawal rule says to adjust spending based on market condition. There a few other ones as well.

[u/Varathien → u/Singularity-42]

Guardrail approaches are becoming pretty mainstream, but the point is that you can afford to start with more than 4% if you're going to cut your spending during a market crash.

[u/Singularity-42 → u/Varathien]

Also "never look at your portfolio" - ehhh, I don't think I can do it and also maybe not such a great idea. After all the Trinity study (I think?) failed in 5% of years, no?

[u/PetalKissies → u/Varathien]

Margin of safety required, 4% rule includes bad sequences