Month: May 2022

I hate to even take up the space to define this, I suspect you know the drill as well as I do. Numerous studies (Trinity, Bengen, etc.) determined that if you take the invested assets in a diversified portfolio you can withdraw 4% of the total value your first year of retirement. Each year after that you can withdraw the same amount plus any extra needed to offset inflation. It makes it easy to determine what you need to have invested to pull the trigger on retirement. You need 1/(4%) or 25 times your annual expenses.
Now there have been all kinds of recent reviews of this concept by Vanguard, Fidelity, Schwab and even Bengen himself as to whether 4% is a little too high or a little too low or even way too high. It all depends on your assumptions about the future. What will inflation look like, it’s pretty high right now. What about the performance of stocks, that’s pretty dismal this year so far. And how about that old standby bonds, not looking too great if you ask me. I have that classic diversified portfolio, nearly exactly like the one in the original studies and it’s been quite battered.

Since you are reading this I’m going to make the intuitive leap that you want to know what my opinion is regarding the 4% rule. And I will tell you, but first I need to give you some back story. I’m a chemical engineer and was always on the technical side of my profession. A lot of engineers get into management or sales and don’t do a lot of heavy lifting when it comes to computer modeling of complex processes, but I did exactly that. I was using artificial intelligence software to model chemical plant reactions back when nobody had heard of it. This is like thirty-five years ago, long before iPhones and self driving cars.

My task was to model a complex reactor system that produced a high octane gasoline component that was used for aviation gasoline and high performance car engines. A chemical additive had been created that the manufacturer claimed would improve the yield and quality of our gasoline significantly. If we purchased this chemical for a few thousand dollars a week we’d see a million dollar improvement over the course of a year. But there was a problem. While a million dollars sounds like a big improvement it was actually only a fraction of an octane number and maybe 0.1% of an increase in production. And our product octane varied by a full number every day and production varied by several percent due to constant unpredictable variations in feed stocks amount and quality. In short the very improvements claimed by the additive manufacturer were hidden by the “noise” of the natural variations in our reactors performance.

So what to do? I needed to be able to come up with a model so accurate that it could tell me what the octane and production should be based on feed quality and amount. Then I could look at the actual performance versus the model and any differences would be due to the additive. I tried a whole lot of conventional computer modeling methods, none came close to working. Then I came across something brand new and exotic. It was called artificial intelligence modeling software. I could feed it enormous amounts of past data and it would “learn” what impact things like reactor temperature, feed quality, amount of production and a hundred other data points had on the variables I was trying to predict. And it was great at predicting the past. I could feed it the data from any past date and I’d get results that matched up with what really happened. So problem solved, right? I wish.

There was a huge problem, in that we live in a dynamic changing world. Our facility was constantly being expanded to meet market demand and so each year we ran more feedstock with different components in it than at any time in the past. And my model that was so talented at predicting anything that was within its past experience, lost its mind when it encountered a future that was outside the range of what it had learned from in the past. I suppose it was like a self driving car finding a charging elephant in its path, it’s going to be quite confused and it might not do the right thing, if there even is a right thing.

So what does that have to do with the 4% rule. Everything, in my opinion. The 4% rule applied today is going to base its assumptions on what the next thirty years look like, based on the past. And the past it knows about started in 1925 and ended in 1995 in the original studies. The next thirty years for you and me will be comprised of 2022 through 2052. It’s kind of obvious isn’t it? Does anyone really think that the 2052 economy can be accurately represented by the economy of 1925? We do not have a clue where the next thirty years will take us, but assuming it will be just like some thirty year past set of years is quite a stretch, in my opinion. If we knew, if we could see into the future, we might find the 4% rule should really be the 14% rule, or maybe the 0.4% rule. I’ll let you know in thirty years, if I’m still around.

I hate to attack a sacred cow, because I have used this rule to comfort myself since my withdrawal rate is very low. I tell myself that being well under 4% is surely safe. But then I think back on how poorly my history based artificial intelligence models did when applied to the future and it gives me pause. I realize I do not have any reliable basis for feeling like 4% will mean much of anything heading toward 2052.

So what to do? Are we helplessly adrift with no reliable guides to the future? Should we just make do with 4% because it’s all we have?

Do you have faith in a 4% initial withdrawal rate? If you do, why?

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My wife and I were married 44 years ago today. She is just as amazing and patient today as she was when we were dating in college. Neither of us had any money when we graduated. I was debt free, except for my car loan on a very used oil drinking Toyota Celica. She had twelve hundred dollars of student loan debt, that was still less than $4,000 in today’s dollars, so not much at all.

I graduated a semester before her, and she wouldn’t get married until she got her degree because one of her sisters had done that and never finished college. She had promised her parents she would wait until she had the degree which meant we would be apart the last few months of our engagement. This was back when unmarried people living together was very rare, and we were even more straight laced than most. I took a job clear across our state from her and for a semester we were engaged while five hours away from each other by car. When she would come to see me she stayed with the plant nurse who had “adopted” us and who made sure we behaved. When I went to see her at college her two roommates performed the same function. We are all still good friends these many decades later.

After that last semester she graduated, we married and moved into an apartment and then a trailer for the first year and a half. I was making great money at the time, $18,000 a year. Sounds ridiculous now but in today’s dollars that is equivalent to an $80,000 starting salary. She picked up a job at the county extension office and then later became a junior high school teacher. Our starting combined income was over $100K in today’s dollars which would be outstanding, even today. And this was in a small Arkansas town where rent was maybe $150-$200 for a decent apartment. We decided after renting for awhile to buy a used mobile home/trailer until we saved up a down payment and then we’d sell it and get back all our “rent”. I received a small inheritance from my grandmother and we found a small house just outside of the city limits mostly in the woods. We bought it with a 5% down payment and an 8.75% thirty year mortgage. We qualified for a government subsidized loan, a normal mortgage had a ten percent interest rate back in those days of high inflation! How high was inflation? CD’s were paying double digit interest rates. What we are seeing right now would have been considered moderate at the most.

The house was a four bedroom two bathroom 1,440 square foot single story on one acre. Our house payments with taxes and insurance included were $300. Later when we doubled the size of the house to get some space for three kids we refinanced to a ten year loan at the unbelievably low interest rate of 6%. I think our payment jumped to maybe $600? In any event we paid that off in maybe four or five years and never had a single debt after that. Other than that first wreck of a car I bought we paid cash for all our vehicles and everything else we purchased. We never ran a balance on a credit card, except I think there was one time when a statement got lost in the mail, so technically I guess we did that one time. I maxed out every single retirement savings vehicle at work or offered outside of work. There were no IRA’s or 401K’s for the first ten years of our careers. She had a teacher pension program and I had this crazy good company savings plan where you could invest up to twelve percent of your pre tax pay and the company matched it 100%. You could also withdraw it after you were vested with no penalties except you had to pay the taxes. It was a big amount of free money and I’ll never forget shaking my head in wonder at one of my fellow engineers who said he “couldn’t afford” to contribute, and then went out and bought an expensive sports car.

We started having kids and my wife elected to become a stay at home parent. My next raise was equivalent to her entire paycheck so we never felt the loss of income. She was and is the consummate domestic engineer and manager and I believe she worked much harder than I did with a focus on raising our children and managing our budget. We were a great team and each contributed to the others success in life. I am certain her skillful parenting was the main reason we never had to spend any money on our kids’ college. Even though we were in the two comma club by then our three kids each obtained free rides through scholarships to the state U. Two became engineering graduates and one obtained a business degree. They all went on to pay for their own graduate degrees.

My career went well as I rose from an entry level position to running the company. I had bosses but I was the highest level corporate officer in my state and was not closely supervised. It was a lot of fun, I always felt over paid and highly appreciated. Our company changed hands twice going from being owned by a Fortune 500 publicly traded corporation to being owned by a wealthy family back to another set of publicly traded megacorp overlords. I thrived in both worlds and found things to appreciate in both. Eventually I retired, six years ago. My wife never rejoined the work force so we are both retired going on seven years now. We have a lot of active hobbies including running, tennis, pickleball, fishing, hiking, off roading, skiing and travel. Our kids are scattered so some of our travel is to meet them at vacation spots. We used to have outdoor pets but did not replace the last three when they passed on. We just prefer to be able to travel on no notice and don’t feel the rewards of pet ownership offsets the hassles.

I know all these details about our lives are probably of minor interest to you, but that’s OK. This blog has no ads, no affiliate marketing, no SEO and purely amateur content because it’s just for me to express my thoughts. I guess it’s my form of journaling. Plus I do believe my spouse and I have done a lot of things right over the course of our marriage. We stayed out of debt. Lived well below our means. Yet we still lived rich lives centered around family and friends and active recreational hobbies. This is a much different world than the one we navigated, yet some things don’t change a lot over time. If you choose the right person to partner with, make growing that relationship a priority, determine to serve them above being served by them, spend less than you make, make more income each year, develop some side hustles to take into retirement, well, all those things still make sense I think.

If you’ve read this far, wow, you are a focused individual, and maybe as patient and long-suffering as my wife!

What about you, do you think marriage for decades is still a reasonable prospect or is marriage even relevant in today’s world?

Do you think today’s world is harder to succeed in than my Boomer past life was?

Are single earner families even possible in today’s economy with housing costs and inflation so high?

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The company I spent nearly 40 years working for is having their 100th anniversary party this month. Five different entities have owned the corporation over the years, alternating between private ownership and Fortune 500 companies, and I was privileged to work for three of those during my tenure. I started as a summer intern and ended up running the company. I had bosses higher up in the corporate structure but I was the top corporate officer on site responsible for, basically, everything going on in the billion dollar facility. Although that entailed being on call every minute of every day, including holidays and vacations, somehow it was still a very enjoyable job. I rarely met anyone who loved what they did as much as me.

But having said that, the last six years of retirement have been even better. I’ve had to weather some health crises but I ended up sailing through those with best case outcomes. Maybe I should have retired earlier, but I don’t think so. I like having the financial lagniappe those last few years of Fortune 500 stock and bonus rewards added to our portfolio. Plus it was kind of a fun challenge to make the transition from a paternal family owned organization to a high growth hard charging corporate environment.

Companies rarely last 100 years. In fact the percentage of companies currently qualifying for that is only 0.009%. There are 540 such companies out of universe of over six million total corporations. Its kind of cool to have been a part of one of those unicorn companies for well over a third of its entire history. We all spend most of our time with our radar switched to the lowest range possible because the threats and opportunities of most concern are literally right around the corner in life. What happens in five years or in twenty is fairly abstract and subject to infinite permutations. However, there are occasions when life forces you to look at time differently. Certainly loss of a loved one does that, it confronts you with your own mortality even though it may be decades away. And this centennial celebration has confronted me in a similar way.

The year was 1922. The United Soviet Socialist Republic was founded. And we are now in a proxy war 100 years later with its remnants on both sides of the conflict. World War One, the war to end all wars, had only ended four years previously. It was a recent memory, leaving hundreds of thousands mentally and physically scarred. The Lincoln memorial was dedicated that year as well. And now we struggle as a society with which, if any, of our great historical figures had feet of clay. Wimbledon Center Court was constructed in London. The Irish civil war began. Gandhi was imprisoned by the British government. The first successful use of insulin occurred in Canada. King Tut’s tomb was discovered in Egypt. Mussolini came to power in Italy. Judy Garland was born. My late father turned three years old. And the facility where I spent most of my life working was constructed and started up.

In the next 100 years a lot more has happened, including every day of your life and every day of mine. None of us were around when my company was born, we all showed up somewhere between then and now. I got here before most of you but we are all present and accounted for today. Its fairly safe to say few of us will be around when the next 100 year anniversary of my company arrives. Maybe medical research will preserve the youngest of you, but I wouldn’t bet on it. I wouldn’t even bet on my company being in the next 0.009% of centennial survivors, those are staggering odds. So this will be the only 100th anniversary party I’ll be attending.

And I’m kind of excited. I left the company on good terms and still do some consulting for them. I’ll get to see a lot of former employees, some who have been retired for as much as thirty years. It will be fun to see many of my former coworkers and catch up with what’s going on in their lives. It will be a little sad as well, as I’ve lost a number of old friends I used to work with who have died since I retired. Maybe someone who used to work for me will take the opportunity to vent about some perceived wrongdoing on my part, but I doubt it. I was a fair and perhaps overly tolerant boss and did not have any enemies at work that I’m aware of.

I’ve read that having purpose is a key to being happy. Also that having purpose entails feeling like you are a part of something bigger, something with duration, that isn’t fleeting. I felt that way during my working years. My company had been providing an income to tens of thousands of people over a century of history. How many kids had we made college possible for? How many lives had our health insurance saved? How many happy retirements had we helped build? At every retirement party I attended, and there were many, my retiring employees almost always told me how lucky they felt to have worked for our company. We had very little turnover because we paid high wages and treated people fairly. All of that feels bigger than me, makes me feel like I was part of something worthwhile. And I still feel that way. And I’m grateful that a simple thing like an anniversary party caused me to stop and realize how blessed I am to have had a good job.

What about you? Do you share any of those feelings about your career if you are retired?

Or did you not particularly enjoy the work environment you were in and are very happy to have escaped it?

Or are you in the middle of the spectrum, like most people, recognizing that work is a mixed bag of good, bad and mediocre. But its something you gotta do until you can afford not to?

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