What is Enough?

Even this doesn't come along for the last ride.

Even this doesn’t come along for the last ride.

Even an eye-less needle doesn’t come with you on your last journey”  says an old proverb.  A sewing needle is a trivial item anyone can afford and its essential part is the hole or the ‘eye’ where you pass the sewing thread. If that is broken, the sewing needle is useless. You cannot carry even such a useless item on your final journey, leave alone the nice things and the people you love.  This is the inner meaning of that proverb.  It may be depressing but that’s the stark truth. 

We are all on a journey in this blue planet pursuing our own dreams and searching our own meaning of life. Many seek meaning in love, many in money and its comforts, some through their children,  some in compassion (like charity and nonprofit work) and some via self-expression (like arts, crafts, business, and of course, blogging).  And we also seek many of these things in different phases of our life, whatever we think supports our pursuit of happiness at that time.  Seeking Financial Independence and Early Retirement (FIRE) is also part of this larger search for meaning in our lives.

While our paths vary, the final end is the same. We all have to leave this world one day – there is no other end possible. As much as we’d like to believe otherwise, hardly anyone will remember us. That is a depressing truth that few want to recognize.  Our own family, after grieving, will move on to chase their own goals and dreams.  What we leave behind for them is only meant to ease their life journey. Or put differently, their inheritance will make their own seeking journey (whatever it may be) a bit more comfortable. That’s what all your residual net worth (your assets remaining net of any debts on the last day of your life) does.  You see, it’s only a matter of perspective – inheritance for them and residual net worth for you.  

Those with sizable residual net worth may have schools, scholarships or even hospitals and charitable trusts named after them but neither the institution nor the beneficiary will remember us after the money is spent.   Our money and name become just book-keeping entries in their records and nothing more.  Gratitude is a rare emotion even among the living, forget after death.  The faint prospect of someone fondly remembering us while enjoying our estate cannot drive our optimal spending rate from our hard-earned assets during our lifetime!

With that larger picture in mind, let us look at what we are all up to in the FIRE community.

Considering the above inevitable truth about posthumous reality, I wonder about myself and other FIRE aspirants getting carried away in safe withdrawal rate (SWR) optimization or the ‘probability of success’ calculations in Monte Carlo simulations. The fear of running out of money, understandably, paralyzes many people but is also a principal driver for all those seeking FIRE.  We should recognize that it can also drive us to the extreme on the other side.   The 4% SWR rule can work very well provided you remain flexible to adjust your spending to the prevailing economic scenario. Beyond that, it only gets fancy….and this fanciness is a narcotic for your certainty-seeking brain but offers little meaning in real life.

We read about 95% or 99% or even 100% probability of success that some seek in retirement planning. Your attitude towards risk defines the certainty you seek. Stated differently, it defines the uncertainty you can handle. Can you imagine what 99% probability of FIRE success even means? It means that if at all your early retirement fails, it won’t be due to your planned spending but because of some other event that you could not model.   What does 99% mean if you or your loved one is suddenly faced with a debilitating chronic illness that drains all your money? Or how about an acute illness or accident that kills a planner well ahead of their FIRE-modeled life span? Or simply a divorce (probability is nearly 50% in U.S. and other developed countries, fast rising in developing countries as well) that puts a spanner in the financial model?

The probability of a catastrophic event or a personal disaster in real life is far higher than what you demand from a financial plan. Don’t believe me? Think about an earthquake, flood, life-altering disease or epidemic, war, traffic accident, home accident, workout or bike injury or even the largely American phenomenon of random shooting? What is the probability of you escaping all of these – do you think it is greater than the same 99% that you are seeking from retirement planning? The probability of having a catastrophic car accident alone is dis-comfortingly high (see data below).  

Since my website gets visitors from around the world, I have used global data (useful guide for travelers) from the Association of Safe International Road Travel.

  • Nearly 1.3 million people die in road crashes each year, on average 3,287 deaths a day.
  • An additional 20-50 million are injured or disabled.
  • More than half of all road traffic deaths occur among young adults ages 15-44.
  • Road traffic crashes rank as the 9th leading cause of death and account for 2.2% of all deaths globally.
  • Road crashes are the leading cause of death among young people ages 15-29, and the second leading cause of death worldwide among young people ages 5-14.
  • Each year nearly 400,000 people under 25 die on the world’s roads, on average over 1,000 a day.
  • In the U.S. alone, over 37,000 people die in road crashes each year and additional 2.35 million are injured or disabled.
Texting and Driving..guess he wants to increase the odds to match his poor FIRE readiness?

Texting and Driving?  Guess he likes playing with the odds.

The probability of dying by a fatal road accident alone is 2.2% among all other causes of death.  Accident, by definition, has no time target to match our retirement horizon!  So, your ‘confidence level’ of a planning horizon lasting till age 90 has declined already to under 98% by this one factor alone.  If you also consider accident-caused disability as equally terrible from a quality-of-life perspective, the probability to consider is 50 million among an estimated 4 billion people on motorable roads worldwide.   So, we can guess the probability of being seriously injured or disabled is 1.25%.  

Note that the data above separates both death and disability/injury, so the final probability in this case is additive.   We are still only on road accidents, and if you add other negative events mentioned above, the probability of at least one of the negative events occurring in a typical life span is uncomfortably high!  Do you think they will add upto only 1%, the same maximum uncertainty you are willing to tolerate in financial models?   In reality, they all add up to at least 10% (I stopped counting after exhaustion from research of all causes of death, disability or any other major event causing ‘death-blow’ to finances).

Beautiful sunrise on the East, one the few certainties of life.

 A beautiful sunrise on the East, one of the few certainties of life.

The world doesn’t offer 99+% certainty in anything (other than physical science phenomena – yeah, the sun will always rise in the east, air will always be lighter than water and falling objects will always face gravity).  Isn’t it crazy we try to model this level of certainty in financial planning spanning three, four or even five decades?

This post is not an excuse to stop planning but to understand the limitations of any plan and the silliness of our maniacal pursuit of modeled certainty amidst real uncertainty. As it is said, planning is valuable but plans are not.  The process of planning disciplines and focuses your mind and drives you to take positive action.  That’s the advantage of planning but it is important to allow for the fact that plans can and do change depending on situations.  We need to remain flexible.

I often tell people that when a simulation-based financial plan probability crosses 80%, you are practically OK from a financial perspective. Beyond that, you are only building so-called ‘safety margin’ but that is a misnomer because it doesn’t actually guarantee your retirement safety.  What it does is something else.   A financial model’s high safety margin (say, 99% success probability) increases the relative probability of another surprise event outside your planning parameters. In other words, you cannot plan for all of life’s uncertainties. Going overboard in covering for one dimensional variable (spending/assets ratio) increases the likelihood of another dimensional variable wrecking your plans.

Instead, it is much better to improve the probabilities in all of life’s dimensions.  If your family doesn’t have a great health history, how about eating well and exercising to reduce the odds of a chronic disease? If cancer has killed many in the family early, then why worry to get the financial success probability to >95% (or) why use a force-fit planning horizon of 85-90 age? Or why work yourself till you become so unhealthy that the money is spent on first regaining some of the lost health? Simply, how about taking public transportation as much as possible?  Not only good for the environment but also reduces the probability of accident by a large amount.

Retirement calculators and tools like Personal Capital, while they are helpful, are still one-dimensional in calculating success probabilities.  They cannot substitute for our own thinking with respect to the reality we face. Once your retirement success probability crosses 80%, focus on other things in life to make your life balanced.   In number terms, this means if 4% SWR at $30K annual spend implies a net worth target of $750K, think what are you truly gaining by going after another $250K (33% more) to bring the SWR down to 3%.  How many years will it take for you to get there?  You may have increased the financial model probability from say, 90% success to >99% in doing so.   But does that cover for every other probable risk out there?  

How do you define enough? Share your views in comments.

I realize this post has been rather grim, but I don’t believe in sugar-coating facts.  To end on a nicer note, I am adding these two pictures.   Journey safely, my 10! friends.

Think of children when you get into the car....

Think of the children when you get into the car….

...if you do, you will get to the end with a smile on your face.

…so that you get to the end with a graceful smile on your face.

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14 thoughts on “What is Enough?

  1. Matt @ Optimize Your Life

    This is a really interesting take and one that makes a lot of sense. It doesn’t do us any good to get a 100% chance of our money making it to 90-years old if we don’t actually get to 90-years old. In the personal finance space we can get obsessively focused on the money aspect of life and not give enough attention to the other areas.

    Thanks for the thoughtful post.

  2. earlyretirementnow

    Great point. Reminds me of Stats 101, type 1 and type 2 errors. If you try to minimize the type 1 error you get more of type 2 errors. Try to minimize the chance of running out of money and you increase the chance of running out of “life.” There are many examples of people who wanted to acquire more and never got to enjoy their riches.
    So, it’s funny how there is a risk of becoming a procrastinator in the opposite way we are used to it: People who have enough by all standards already but keep delaying the retirement decision. I’ll keep that in mind and set a retirement date in early 2018! No matter what!

  3. The Money Commando

    10! – I think your point is a bit misleading. You assert that reducing one kind of risk results in the relative increase in other risks. That is, if you are equally likely to die of a car crash, cancer, or a heart attack, and you stop driving, the chances of dying from cancer increased from 33% to 50%. However, you’ve still reduced your risk of dying in any given year, as you’ve removed the risk of dying in a car crash. You’re still going to die eventually, and you know it will be from either a heart attack or cancer, but you’ve obviously improved your situation.

    Reducing the risk of running out of money in retirement by adopting a lower withdrawal rate can only be a positive UNLESS by doing so you’re actually INCREASING the other risks or affecting your enjoyment of life. If you reduce your withdrawal rate and that results in you only being able to eat rice every day you’re increasing your risks of various health issues that would result from such a limited diet. If you reduce your withdrawal rate to such a point that you can’t afford to do anything or buy anything then what’s the point of being retired, right?

    In your example you suggest worrying less about increasing your financial chances of success to 95%+ and instead concentrate on improving your health (assuming your family has a history of poor health). I’m not sure why there has to be a choice between them. I’m also unclear how there is any disadvantage to working to get your odds of financial success as high as possible.

    The problem with a failure in a retirement plan is that by the time you know it’s failing it’s too late to do anything about it. I’m working on a blog post about this very topic now…

    1. TFR

      Thanks for your detailed comment TMC. I understand where you are coming from but my article makes it clear, in bold letters in fact, that only the relative probabilities of other adverse events go higher. Their absolute probability, of course, does not change but their relative importance goes up when a financial risk probability (from a planned spending perspective) goes down.

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  5. Spoonman

    Nice post. One of the issues i found with cFiresim is that it assumes that the historical path of asset returns will repeat in the future. for this reason, i opted for a monte carlo simulator. unfortuneately, the australian dataset isnt as large as the US so i had to make do.

    by bootstrapping the historical returns to randomly select from the sample to generate a more “random” asset return paths, i was able to get a better sense of my “more” comfortable portfolio level. i’m currently re-running the model as the first run didn’t randomize the correlation risk, given the increased stock and bond correlations since the GFC. my other reasons for this exercise (aside from being an excel geek), is to determine the optimal portfolio weights. finally, i also wanted simulate sequence of risk events. so, part of my modelling includes a 50% drawdown in year 0, a 50% drawdown in year 25 and other similar scenarios. i hope that these would cover “unexpected events” such as illness etc.

    your post does highlight the importance of having enough. though currently i’ve reached financial freedom at 4% SWR, i also intend to live off dividends and not touch the principal, so i’m targetting 3% SWR, which is more in line with the 20x Average Salary stated on Financial Samurai. my numbers for both seem to line up nicely. furthermore, my initial simulations suggest that my required portfolio size is about the same, to have a high probability of financial longevity with all the usual standard disclaimers.

    at the moment, i’m still a few years away from “enough,” given a bad bonus year and currency movements. fortuneately, i still enjoy the opportunities (challenges) work provides, though they may be the last since fintech is taking over everything. hence, i may as well milk it for everything thats left before my job disappears.

    keep up the great work! love the name 10!

    1. TFRadmin

      Spoonman from Down Under, Welcome! Glad to have an excellent first comment from you. The point about Monte Carlo vs. back tested worse case is detailed out in my other article and also in that article’s comments section, which you may like. While I understand your limitations on Australian data set, in the US, we fortunately have rich historical data set that captures just about every sequence of return risk, momentum effects and other real life behavior to actual economic events. While the future will not be the same as the past, the underlying human psychology doesn’t change so it is likely to mirror similar broad patterns to external economic events. Sure, the numbers and returns will differ but investor reactions, which drive stock prices, does not. I find Monte Carlo, though statistically rigorous, to be artificial from a usability standpoint (the above article and my comments therein explain this in detail). Thanks again for stopping by and for your excellent comment!

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