But once the good returns show up, if the good returns show up (and they’re not just good, but they’re great), you’re still going to end up getting ahead at some point. And I’m lucky I got out of MIT in one piece, quite frankly. Of course, that’s changed. If I could earn their trust.” But you did take the leap. I think it’s just too complex. I really appreciate it again. Michael: Like what’s the focus for you on the research end? But clients were coming to me and they were asking, “I want to save for retirement. As a business owner, I can take that 3% and keep it and re-invest in my company, I can take that 3% and pay it out to the shareholders as a dividend. Michael: So what was the low point for you on the journey? You know what? Mad Fientist: My audience is all early retirees or people that are hoping to retire early. There were two problems I encountered. So, how did you start looking into that? That’s the nature of this threshold style approach of safe withdrawal rates. Bill: I still think it’s a wonderful field. We called it the Kitces Report. So when we hire housekeepers and landscapers and people to mow the lawn, and we buy new cars, and we buy new houses, those are the things that become lifestyle expenses that are hard to go back on. And I went to a number of interviews with firms. Bill: No, I did that in 2002. It means, bad news, the market went down; the good news, you don’t need as much for your portfolio anyways because everything got cheaper (because that’s what happens with deflation, the stock gets cheaper). We’re not into toys. [16:24] How Michael got the confidence to negotiate higher rates for his speaking engagements – and how he … Michael Kitces: And despite that, or even through all of that, what we find is this 4% initial withdrawal rate adjusting for inflation works. And maybe that phenomenon is what accounts for the very dire forecasts some give. It’s refreshing to hear two people who have gone deep on a topic like early retirement withdrawal rates just have a conversation. I’m in my second year of “early” retirement and found this very relevant to my situation. And then, in Alabama, I sold what was left. That’s about ’93. The Affordable Care Act to me was an unbelievable blessing for early retirees because it gives you a path to guaranteed access to health insurance without being employed. For us, it’s fine. Michael: So talk to us now about the evolution of the 4% rule research that you did. And no great surprise, even then, people responded to him like, “Hey, neat study. Michael Kitces: Yeah! Bill: Sure. I’ve heard about this 4 percent rule! And generally, it would exceed them because of bull markets, you know. Now, with businesses, it’s a little bit more complex because I actually get a choice. We did it in the first decade of the 1900s, we did it in the 1930s, we did it in the 1970s. And do we have a plan about how we’re going to get the dollars you need to spend given practical rules like IRA’s, have early withdrawal penalties before age 59 ½, which we can work around with what are called the substantial equal payment rules, but that limits how much money we can get out. I don’t need that anymore. I’ve got my writing, my research, which is part of the reason I retired. It’s very difficult to do that with the constant pressure of what their neighbors are doing. You don’t have to spend any of them showing up for a job anymore. Michael Kitces: Much appreciated! They are relatively minor players. We just find markets are way too efficient to really be able to add a lot of value there. Giving it a listen now! So a lot of questions that I get are: “Well, yeah. So you got up to about 80 clients and kept it there. Awesome podcast and perfect timing for me! But I think it’s time to sell; time to fold them.” And I sat down and went over with him how far the company had fallen behind the competition. Too much happy energy to avoid. Michael: So, really, two questions. If the job market really sucks pack ‘er up and move to a lower cost of living location, either US or international. Particularly because, as you said, you are a conservative investor by nature, so it strikes me that’s a fairly aggressive thing to do for someone that takes conservative positions? It stays pretty stable around the globe with kind of the small historical asterisk that, if you’re a retiree in a country that loses a global war, it doesn’t go well for you. It’s that predictive. I want to make sure there are no changes. Hard to understand people support the movement to repeal it. And also, if you have family members and you want to give them money, that should be built into the plan. And I guess it’s no great surprise, or as we know from modern portfolio theory, in theory, if we have more diversified portfolios, we can get better risk-adjusted returns. Amazing. Bill: Well, I guess, experiment with portfolios of different allocations and just took the withdrawal rate down until I got one that lasted, a portfolio that lasted 30 years. They pay a pretty good dollar amount per client at the end of the day. It was the research, white papers, that I was publishing at the time—and still do. I’m not sure when or how, but yeah, I’ve been a reader of your blog for many years. And earnings yields is really just P/E ratios and valuation flipped upside-down. Recently I had a client come into my office who was concerned about his and wife’s and his retirement. She’s going to retire, but he’s going to keep going—or maybe vice versa. Skip Schweiss played mediator after latest Kitces-FPA spat got nasty; Kitces used the word 'fraud' (albeit not alleged) in regard to what turned out to be a simple accounting change that outsiders couldn't see. Required fields are marked *. Bill: It’s probably over a period of a couple of months. As a blogger, there’s nothing more exciting like, “Oh, my God! So, I’d actually like to talk to you about that research you did into safe withdrawal rates, if you don’t mind. So I spent several years getting that and got my CFP certification. University of Southern Maine, Kansas State University - School of Family Studies and Human Services, Oklahoma State University, The Kitces Report & Nerd's Eye View and West Texas A&M University Downloads 84 (305,708) It doesn’t seem like there’s any very unique challenges facing early retirees than someone retiring in their 50’s or 60’s. In 2010, Michael was recognized with one of the FPA’s “Heart of Financial Planning” awards for his dedication and work in advancing the profession. They have no predictive value whatsoever because the future can be completely different from what we’ve experienced. There’s a lot of common sense spoken here that is, as they say, “not so common”. You know, as bad as it can get when you get these bad sequences, what we still ultimately found is it still doesn’t seem to get any worse than about 4%. And now you’ve got financial capital. Bill: No, I was happy financially with the income I was deriving from the practice. Isn’t this way simpler than trying to figure out P/E or E/P (now I have to pee) ratios? But the truth is, FIRE people are not going to watch their portfolio crash to zero. It’s your second career after the first. Buy and hold is what I used in my analysis, my 4% rule. The Financial Advisor Success podcast brings you real success stories and insights from the most successful financial advisors, and leading industry consultants, about how to take your advisory business to the next level. You remember, originally, I was just working with two asset classes. Just also missed the really sharp, the off bottom, you could have gotten much lower, pulling the trigger earlier in 2009. I felt like my most important responsibility was one at the end where I handed my clients off to somebody who would treat them as well, I felt, as I was treating them. I’ve never made a lot of money out of the 4% rule. One of the internet’s most-respected retirement researchers and financial planners, Michael Kitces, joins me for an episode of the Financial Independence Podcast! Great interview. And I expect that gives meaning and structure to my life. The second rule is don’t forget the first rule. Nice, even when you “lose” you still win. Once we add something to our lifestyle, it’s really, really unpleasant to subtract it even though we went for years and years without ever having it in the first place. I got my clients completely out of the market in late 2008. And work has an economic value attached to it. Which, as I look back, is a pretty stupid approach to a college application. You, I know, lived your own career as a financial advisor doing this live with clients, and have since retired and sold your practice. Great show gentlemen. Not 25%. It took them a couple years to recover. Michael Kitces – The 4% Rule and Financial Planning for Early Retirement. But people have to keep in mind that inflation is equally important as returns in this analysis. Michael: I’m really looking forward to the podcast today and having you on as a guest. Now, I don’t have to work anymore,” I’m like, “Cool, dude! So we’re depending upon the largesse of the government to preserve your capital, that’s a thin thread. The point of the Roth conversion ladder is to NOT convert from traditional->roth until you’re in retirement, so that you’re paying taxes on that money only when you’re in the lower tax brackets. A lot of folks do it every year. I’m going to go check this out.” And here are all these people that are saying, “You can totally run a financial planning business all by yourself, charge fees. Quite frankly, I had concerns about the market, investing. I’m just going to, finally, for once in my life, just relax with money and just go nuts,” it felt like I went nuts. They decided to take out 6% when they were advised 5% and market circumstances didn’t favor their decision. I think I would say to get your education and try to get an internship and follow a path into a larger firm where you have support systems about you. Michael: And all driven by this combination of low yields, which will drive you towards more stocks but low inflation, which actually gives you comfort that we don’t need to be hanging out down like 2% or 3% withdrawal rates, high 4% is enough, 5% is still reasonable because at the end of the day, when inflation is this low and you’re only spending a few percent, you actually don’t need a huge amount of growth in your portfolio. Michael: Yes. Please try again. But I didn’t have the process in place at that time to get back into the market. Unfortunate you ran out of time to ask the remaining questions for Michael. However you prefer to engage advisers, to each their own. I don’t feel like it’s expensive, but it’s not cheap either. I had clients coming to me asking me to invest in certain stocks and telling me about offers they had from the guy down the street who was starting up a tech business and who was going to go to the moon. But the whole financial planning profession is built around buy-and-hold philosophy, I understand that. I eventually sold my practice to them. And what’s your vision of how this is going to go for the next couple of years? One, why did you land in this? The 4% rule is popular but may be too rigid. As much as we sometimes talk about the worries of what happens if the future is worse than the past, with Monte Carlo, if you don’t otherwise adjust it for most planning software, you can have two years in a row where the market crashes 25%. Michael Kitces: Just cut back 50%. Mad Fientist: That’s amazing! Bill: Less often. We were a couple years out of the financial crisis, the Fed was doing its thing, and just feeling like, “I don’t know that I want to keep playing this game with the uncertainty we’ve got in the current environment.”. So why would you pay money to put an ad on somebody else’s podcast when you don’t even know if podcast advertising works.”. 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