7 ms·

I always get a kick out of people who think they’re financially independent with such a small stash. Outside some regions with relatively extreme living conditi

by sidlls 6y ago

I always get a kick out of people who think they’re financially independent with such a small stash. Outside some regions with relatively extreme living conditions (e.g. undeveloped and underdeveloped countries), the amount he retired with was never going to be enough to sustain even minor shocks and last the rest of his life. He had a minor shock (breakup) and a major shock (health condition) and realized this error early enough to have time to correct. Not everyone who follows the “leanFIRE” approach is they fortunate.

jacquesm 6y ago
Especially not in the USA when the least of a health issue can eat up your savings in a couple of short months unless you have extremely good health coverage, which only the rich (who don't actually need it ...) have.
- mypalmike 6y ago
  It's not perfect, but maximum annual out-of-pocket for an individual ACA plan is $8550, plus premiums. If that's your entire savings, you were certainly not FI.
  - leetcrew 6y ago
    I think the author is going to require expensive care on a yearly basis for the rest of their life. if you can't absorb $8550 one time, yeah you're definitely not FI. but if you end up maxing out your out-of-pocket every year until you die, that is really going to mess with a $30k/yr spending target.
    - kelnos 6y ago
      Right; an extra $8550 per year might not be hard to absorb if your budget (supported by a larger nest egg) is already $150k per year, but when it's $30k per year, that's a good 30% increase. Not small.
- jdavis703 6y ago
  Not sure what the definition of rich here is, but people in the 10% of income earners most definitely still need health insurance and suffer from illness. For example, my psych meds would be $1500 a month without insurance. Even on a software engineer salary, that’s quite a hit.
  - TuringNYC 6y ago
    >> ...still need health insurance...without insurance.. I think the point is that even with health insurance you can be wiped out. I dont think any reasonable definition of FI/RE would suggest being without health insurance. The thing is that in a small % of cases, even with health insurance, you get one bad examiner, one by-the-books administrator who denies coverage for something, and you're done for.
    - abraxas 6y ago
      Some of those dudes (eg MMM) do go without health insurance. Personally I think they are nuts unless they are OK to pack it in the moment their appendix bursts.
      - sidlls 6y ago
        MMM is almost certainly wealthier than he lets on, started from a position of wealth more than he lets on, and derived substantial income in his “retirement” from his work on his site.
    - jdavis703 6y ago
      This is one of the advantages of an HMO. In an HMO it’s medical staff making these calls, not random administrators second guessing medical professionals.
- UncleOxidant 6y ago
  Yes, healthcare in the US is a major concern. Hopefully we'll see the ACA get shored up here with a much more favorable administration - it certainly won't get any worse for the next ~4 years anyway. A couple that's withdrawing $40K/year from their retirement accounts is still going to get a pretty good subsidy on their premiums through the ACA which makes FIRE possible if you keep your income (and thus your expenses) down.
hogFeast 6y ago
I used to work in financial services. I wasn't client-facing but because I had experience with financial modelling so I got roped into these discussions...in my experience, everyone gets this wrong. Advisers get it less wrong but I have still seen comical errors from people who should know better. But most people significantly overstate future returns (particularly now), they significantly understate the effect that volatility can have on strategies with withdrawal rates (any strategy involving withdrawals has to optimise for returns AND volatility...this is counter to the "time in the market" logic that most people read so can end up going very wrong), and they model for average final period wealth rather than 5th percentile (generally speaking, this happens everywhere in finance...modelling percentile outcomes is tricky...so most people just don't do it). I am not in the US but health costs seem to be an issue, inflation is another "black swan" that tends to go unconsidered. In my experience, the FIRE group are the most difficult to convince because the whole concept is a lifestyle or way of thinking not an actual strategy. I also don't understand what is so appealing about doing nothing...but that is maybe just me (I have had times in my life when I was doing nothing, those weren't choices and they weren't fun).
- klipklop 6y ago
  I feel it is more about escaping the corporate machine than "doing nothing." For many the modern office workplace is insufferable. You could argue they should go into business for themselves and some appear to do so.
- sokoloff 6y ago
  Tools like cFireSim get this much more correct than what you describe above and takes literally just a few minutes to do basic modeling. They're still limited by historical returns, which is both good and bad, but certainly model very prominently the risk-of-ruin. https://www.cfiresim.com/ https://www.cfiresim.com/ (no connection, other than very occasional user)
  - hogFeast 6y ago
    From what I can see, that doesn't look too good. There are likely issues with the data, which is not easily solvable given that complete databases are expensive. And there are likely issues with the modelling, it looks like the model is just scenario analysis. This is better than a misspecified parametric model (most advisers don't do scenario analysis either, so it is definitely valuable...although requires market knowledge to parse fully) but relies on good data...the data is not good. The correct way to do it is a Monte Carlo simulation using either: a good parametric model (this is very tricky, something like a T distribution is least worst...but is still bad, the ideal is some kind of regime model, proper volatility modelling, and something that models expectation accurately between regimes...tricky), or using block bootstrap on good historical data (more robust quantitatively...but again, good long-term data costs $100k+). So...it is straightforward if you have good data and understand how to build a proper event-based backtesting system (or code something good enough)...but, as said, 99.99% of advisers do not have the resources for this. In most cases, they are unable to buy software implementing this or even know they need it (I have seen this software but it is usually at advisers that require liquid wealth of $10m+...it isn't only the cost of the software but most advisers below this level have no quantitative skills/staff so don't understand why it is necessary). Again, I would be cautious about any numbers that come out, and focus on the 5th percentile (and understand that it is a wild over-estimate if the data isn't good).
neogodless 6y ago
Even with the minor and major shocks in his life, he ended up with 20% more money than he started with. The main reason he wants more money now is that he wants to share it with his new partner, and enjoy some lifestyle inflation. So I don't think it makes sense to extrapolate "leanFIRE cannot sustain minor shocks" from his circumstances." It certainly cannot sustain a certain level of lifestyle inflation, or (more generically) big enough changes to your expense sheet.
- sidlls 6y ago
  He barely kept up with historical inflation rates (3%/year). Given the free availability of money in the last 2-3 years, it's hard to say a 20% appreciation on his capital is a success. In terms of real dollar value, he likely is losing year-over-year.
  - neogodless 6y ago
    Are you accounting for his spend or only looking at beginning and ending balances? When you retire early, you don't assume you'll beat inflation while also spending some of your principal.
  - kelnos 6y ago
    No, he says he has 20% more after adjusting for inflation. He has gained 20% in real dollar value. Even if that's only ~3% per year, that's fantastic on no (traditional) income, after accounting for expenses. Regardless, even if he was break-even or negative, that might be ok; most people don't expect their retirement savings to last forever, just until they die.
- sfblah 6y ago
  The 20% gain is 100% a consequence of the Fed and the market mania. This experiment attempted in another 5-year span would have worked out totally differently.
  - kelnos 6y ago
    OP addresses this. He points out that when he retired, one of his fears was that his nest egg was propped up by market mania. But since then his nest egg has increased. Sure, you can say it might have worked out differently in different time periods, but that's not necessarily a problem. The point of making these models before retiring is to also take into account the pessimistic conditions, and it appears he did so, and judged it all still possible.
xwdv 6y ago
950k isn’t a bad stash but he’s a fool limiting himself to 4% withdrawals and a paltry $30k a year. He should build an aggressive stock portfolio of growth companies with about 60% IV each while he’s still young and going back to work is a good emergency fallback, but for primary income he could just sell OTM options against his stocks and be making about $2k to $3k a week fairly conservatively with little risk of assignment at low deltas.
- cashewchoo 6y ago
  OTM options is one of those things where it works great until it doesn't and then when it doesn't it REALLY doesn't. This is almost literally how we ended up with the inverse volatility trade collapse in 2018. Look up "XIV blow up". Betting against volatility will *never* not be "picking up pennies in front of a steamroller". Retail investors should not touch options under any circumstances, anyway. They're hedging tools for institutions and cannon fodder for day traders. EDIT: I missed that the OP was saying to sell options for stocks already in your portfolio. I'll address that now: I feel like this makes it even less worthwhile? Remember, black swan events happen once a month in trading. I think people would be really surprised at how far OTM they need to go to truly get to a "minimal" risk of their options being assigned. At which point the premiums are going to truly be pennies. If you're making any interesting amount of money off of a covered trade like this, it's because you're taking on an interesting amount of risk.
  - sokoloff 6y ago
    Selling OTM covered calls is not a trade that's going to blow up your account. The worst case is that you suffer a drawdown in your account (which is a risk of all investing). The second worst case is that you miss a massive, short-term rally.
    - TuringNYC 6y ago
      >> Selling OTM covered calls is not a trade that's going to blow up your account. The worst case is that you suffer a drawdown in your account (which is a risk of all investing). The second worst case is that you miss a massive, short-term rally. Depends on whether youre fully cash secured or not. If you are fully cash secured, you barely make $. If you're not, now you're leveraged and a steep draw-down can wipe you out.
afterwalk 6y ago
What interests me most about the FI community on reddit is how they split into two very different subgroups(leanfire and fatfire). Part of it is a difference in frugality, but part of it is is a fundamental difference in modeling risk.
- samvher 6y ago
  Do you mean that fatfire folks calculate a greater margin to handle risk or the other way around?
  - ghaff 6y ago
    Well, fatfire just has a larger bucket. If you've calculated a budget down to the penny (or even have a budget outside of in a generalized way), it's a lot harder to absorb unmodeled risks.
nly 6y ago
30K/year on a 950K stash is only a 3% draw-down, which is considered pretty reasonable.
- Voloskaya 6y ago
  It's assuming you will be fine with 30K/year over the next 40 years that is not reasonable. So many things can change or go wrong and you end up needing more than that (exactly what happened here). If this happens relatively early and you are in an in demand job market, then it's not too bad. But if you haven't been working for the last 10 years and you are in a not super in demand market, you are in for a pretty bad time.
cheradenine_uk 6y ago
We live in the UK, in an "expensive" region (south-east). Our average expenditure, excluding mortgage payments, over the last 10 years has been, roughly, £25K p/a. We're hardly living a bread and water lifestyle. When we hit 67, the state pension alone will give us > £18k. You just need enough to bridge the gap. The truth is - most probably don't need anything like what they think they need to retire early. The system just wants them continually on the hamster wheel.
blobbers 6y ago
If he had emigrated to Canada, he gets a 30% boost in currency and his medical bills drop to closer to $0. 1.2M is more than most people earn in a lifetime, so seems he should be set up for leanFIRE. That said, the article seemed pretty hilarious. I think this guy might be a little bit unobservant. The cracks form early but he insists that he's blissfully happy. It seems like he didn't really know his partner that well to begin with.
- smnrchrds 6y ago
  You cannot immigrate to Canada if you have a medical condition that is deemed expensive. Also, even without health issues, immigrating to Canada is far from trivial and not something many can do.

by sidlls 6y ago

jacquesm 6y ago

Especially not in the USA when the least of a health issue can eat up your savings in a couple of short months unless you have extremely good health coverage, which only the rich (who don't actually need it ...) have.

mypalmike 6y ago
It's not perfect, but maximum annual out-of-pocket for an individual ACA plan is $8550, plus premiums. If that's your entire savings, you were certainly not FI.
- leetcrew 6y ago
  I think the author is going to require expensive care on a yearly basis for the rest of their life. if you can't absorb $8550 one time, yeah you're definitely not FI. but if you end up maxing out your out-of-pocket every year until you die, that is really going to mess with a $30k/yr spending target.
  - kelnos 6y ago
    Right; an extra $8550 per year might not be hard to absorb if your budget (supported by a larger nest egg) is already $150k per year, but when it's $30k per year, that's a good 30% increase. Not small.
jdavis703 6y ago
Not sure what the definition of rich here is, but people in the 10% of income earners most definitely still need health insurance and suffer from illness. For example, my psych meds would be $1500 a month without insurance. Even on a software engineer salary, that’s quite a hit.
- TuringNYC 6y ago
  >> ...still need health insurance...without insurance.. I think the point is that even with health insurance you can be wiped out. I dont think any reasonable definition of FI/RE would suggest being without health insurance. The thing is that in a small % of cases, even with health insurance, you get one bad examiner, one by-the-books administrator who denies coverage for something, and you're done for.
  - abraxas 6y ago
    Some of those dudes (eg MMM) do go without health insurance. Personally I think they are nuts unless they are OK to pack it in the moment their appendix bursts.
    - sidlls 6y ago
      MMM is almost certainly wealthier than he lets on, started from a position of wealth more than he lets on, and derived substantial income in his “retirement” from his work on his site.
  - jdavis703 6y ago
    This is one of the advantages of an HMO. In an HMO it’s medical staff making these calls, not random administrators second guessing medical professionals.
UncleOxidant 6y ago
Yes, healthcare in the US is a major concern. Hopefully we'll see the ACA get shored up here with a much more favorable administration - it certainly won't get any worse for the next ~4 years anyway. A couple that's withdrawing $40K/year from their retirement accounts is still going to get a pretty good subsidy on their premiums through the ACA which makes FIRE possible if you keep your income (and thus your expenses) down.

hogFeast 6y ago

I used to work in financial services. I wasn't client-facing but because I had experience with financial modelling so I got roped into these discussions...in my experience, everyone gets this wrong. Advisers get it less wrong but I have still seen comical errors from people who should know better. But most people significantly overstate future returns (particularly now), they significantly understate the effect that volatility can have on strategies with withdrawal rates (any strategy involving withdrawals has to optimise for returns AND volatility...this is counter to the "time in the market" logic that most people read so can end up going very wrong), and they model for average final period wealth rather than 5th percentile (generally speaking, this happens everywhere in finance...modelling percentile outcomes is tricky...so most people just don't do it). I am not in the US but health costs seem to be an issue, inflation is another "black swan" that tends to go unconsidered. In my experience, the FIRE group are the most difficult to convince because the whole concept is a lifestyle or way of thinking not an actual strategy. I also don't understand what is so appealing about doing nothing...but that is maybe just me (I have had times in my life when I was doing nothing, those weren't choices and they weren't fun).

klipklop 6y ago
I feel it is more about escaping the corporate machine than "doing nothing." For many the modern office workplace is insufferable. You could argue they should go into business for themselves and some appear to do so.
sokoloff 6y ago
Tools like cFireSim get this much more correct than what you describe above and takes literally just a few minutes to do basic modeling. They're still limited by historical returns, which is both good and bad, but certainly model very prominently the risk-of-ruin. https://www.cfiresim.com/ https://www.cfiresim.com/ (no connection, other than very occasional user)
- hogFeast 6y ago
  From what I can see, that doesn't look too good. There are likely issues with the data, which is not easily solvable given that complete databases are expensive. And there are likely issues with the modelling, it looks like the model is just scenario analysis. This is better than a misspecified parametric model (most advisers don't do scenario analysis either, so it is definitely valuable...although requires market knowledge to parse fully) but relies on good data...the data is not good. The correct way to do it is a Monte Carlo simulation using either: a good parametric model (this is very tricky, something like a T distribution is least worst...but is still bad, the ideal is some kind of regime model, proper volatility modelling, and something that models expectation accurately between regimes...tricky), or using block bootstrap on good historical data (more robust quantitatively...but again, good long-term data costs $100k+). So...it is straightforward if you have good data and understand how to build a proper event-based backtesting system (or code something good enough)...but, as said, 99.99% of advisers do not have the resources for this. In most cases, they are unable to buy software implementing this or even know they need it (I have seen this software but it is usually at advisers that require liquid wealth of $10m+...it isn't only the cost of the software but most advisers below this level have no quantitative skills/staff so don't understand why it is necessary). Again, I would be cautious about any numbers that come out, and focus on the 5th percentile (and understand that it is a wild over-estimate if the data isn't good).

neogodless 6y ago

Even with the minor and major shocks in his life, he ended up with 20% more money than he started with. The main reason he wants more money now is that he wants to share it with his new partner, and enjoy some lifestyle inflation. So I don't think it makes sense to extrapolate "leanFIRE cannot sustain minor shocks" from his circumstances." It certainly cannot sustain a certain level of lifestyle inflation, or (more generically) big enough changes to your expense sheet.

sidlls 6y ago
He barely kept up with historical inflation rates (3%/year). Given the free availability of money in the last 2-3 years, it's hard to say a 20% appreciation on his capital is a success. In terms of real dollar value, he likely is losing year-over-year.
- neogodless 6y ago
  Are you accounting for his spend or only looking at beginning and ending balances? When you retire early, you don't assume you'll beat inflation while also spending some of your principal.
- kelnos 6y ago
  No, he says he has 20% more after adjusting for inflation. He has gained 20% in real dollar value. Even if that's only ~3% per year, that's fantastic on no (traditional) income, after accounting for expenses. Regardless, even if he was break-even or negative, that might be ok; most people don't expect their retirement savings to last forever, just until they die.
sfblah 6y ago
The 20% gain is 100% a consequence of the Fed and the market mania. This experiment attempted in another 5-year span would have worked out totally differently.
- kelnos 6y ago
  OP addresses this. He points out that when he retired, one of his fears was that his nest egg was propped up by market mania. But since then his nest egg has increased. Sure, you can say it might have worked out differently in different time periods, but that's not necessarily a problem. The point of making these models before retiring is to also take into account the pessimistic conditions, and it appears he did so, and judged it all still possible.

xwdv 6y ago

950k isn’t a bad stash but he’s a fool limiting himself to 4% withdrawals and a paltry $30k a year. He should build an aggressive stock portfolio of growth companies with about 60% IV each while he’s still young and going back to work is a good emergency fallback, but for primary income he could just sell OTM options against his stocks and be making about $2k to $3k a week fairly conservatively with little risk of assignment at low deltas.

cashewchoo 6y ago
OTM options is one of those things where it works great until it doesn't and then when it doesn't it REALLY doesn't. This is almost literally how we ended up with the inverse volatility trade collapse in 2018. Look up "XIV blow up". Betting against volatility will *never* not be "picking up pennies in front of a steamroller". Retail investors should not touch options under any circumstances, anyway. They're hedging tools for institutions and cannon fodder for day traders. EDIT: I missed that the OP was saying to sell options for stocks already in your portfolio. I'll address that now: I feel like this makes it even less worthwhile? Remember, black swan events happen once a month in trading. I think people would be really surprised at how far OTM they need to go to truly get to a "minimal" risk of their options being assigned. At which point the premiums are going to truly be pennies. If you're making any interesting amount of money off of a covered trade like this, it's because you're taking on an interesting amount of risk.
- sokoloff 6y ago
  Selling OTM covered calls is not a trade that's going to blow up your account. The worst case is that you suffer a drawdown in your account (which is a risk of all investing). The second worst case is that you miss a massive, short-term rally.
  - TuringNYC 6y ago
    >> Selling OTM covered calls is not a trade that's going to blow up your account. The worst case is that you suffer a drawdown in your account (which is a risk of all investing). The second worst case is that you miss a massive, short-term rally. Depends on whether youre fully cash secured or not. If you are fully cash secured, you barely make $. If you're not, now you're leveraged and a steep draw-down can wipe you out.

afterwalk 6y ago

What interests me most about the FI community on reddit is how they split into two very different subgroups(leanfire and fatfire). Part of it is a difference in frugality, but part of it is is a fundamental difference in modeling risk.

samvher 6y ago
Do you mean that fatfire folks calculate a greater margin to handle risk or the other way around?
- ghaff 6y ago
  Well, fatfire just has a larger bucket. If you've calculated a budget down to the penny (or even have a budget outside of in a generalized way), it's a lot harder to absorb unmodeled risks.

nly 6y ago

30K/year on a 950K stash is only a 3% draw-down, which is considered pretty reasonable.

Voloskaya 6y ago
It's assuming you will be fine with 30K/year over the next 40 years that is not reasonable. So many things can change or go wrong and you end up needing more than that (exactly what happened here). If this happens relatively early and you are in an in demand job market, then it's not too bad. But if you haven't been working for the last 10 years and you are in a not super in demand market, you are in for a pretty bad time.

cheradenine_uk 6y ago

We live in the UK, in an "expensive" region (south-east). Our average expenditure, excluding mortgage payments, over the last 10 years has been, roughly, £25K p/a. We're hardly living a bread and water lifestyle. When we hit 67, the state pension alone will give us > £18k. You just need enough to bridge the gap. The truth is - most probably don't need anything like what they think they need to retire early. The system just wants them continually on the hamster wheel.

blobbers 6y ago

If he had emigrated to Canada, he gets a 30% boost in currency and his medical bills drop to closer to $0. 1.2M is more than most people earn in a lifetime, so seems he should be set up for leanFIRE. That said, the article seemed pretty hilarious. I think this guy might be a little bit unobservant. The cracks form early but he insists that he's blissfully happy. It seems like he didn't really know his partner that well to begin with.

smnrchrds 6y ago
You cannot immigrate to Canada if you have a medical condition that is deemed expensive. Also, even without health issues, immigrating to Canada is far from trivial and not something many can do.