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Move over, coronavirus. After dominating the news for 2 years straight, the buzzword that has now taken over the financial media is no longer the dreaded C-word, but the dreaded I-word: Inflation.
Inflation used to be something we read about in the history books. Well, not anymore. With inflation hitting 20-year highs all around the world and everything from a tank of gas to a package of hot dogs becoming more expensive that it was even a few months ago, all of a sudden inflation is the issue that everyone’s talking about.
So let’s talk about it here.
Over the next few weeks we’ll be doing a series of articles about the impact of inflation on the FIRE community. While FIRECracker combs through her spreadsheets to measure how inflation has (or hasn’t) impacted our personal spending levels, she suggested I do, in her words, “one of my nerdy dorkmeister articles.”
So I thought I’d try to answer a question that people have been sending me, in my trademark “nerdy dorkmeister” way. Namely, with the value of money eroding and everything getting more expensive, does the math behind FIRE still work?
It’s a question that many of you have been wondering, and with good reason. Millennials have never dealt with high inflation before, or rising interest rates. And as recent stock market volatility has shown, we have reacted the same way humans have reacted to things they’ve never seen before for eons: by freaking the fuck out.
What happens if you retire in a year with high inflation? Does that screw over your FIRE plan? Do you run out of money and are forced to live in an alley somewhere eating cat food?
*shrug* I don’t know!
But let’s find out, shall we?
The Gold Standard, or why Everything was different before 1973
As I started my research for this article, my original idea was to comb through the stock market data going all the way back to 1900 and identifying the periods where inflation was the highest. As I started playing around with the data, though, I realized that the story of inflation (and the techniques used to fight it) has evolved over the last century. At the beginning of the 20th century, politicians and economists really didn’t know what to do with inflation, and as a result made some decisions that, while they seemed like they made sense at the time, actually made the problem worse.
For example, during the Great Depression that started in 1929, the Hoover administration responded to a contracting economy by adopting protectionist trade policies to keep jobs in the US, as well as cutting government spending. This made the Great Depression worse, causing it to last a brutal decade, only ending at the beginning of WWII.
It took the US government many decades (and a few more wars) to figure out how to combat recessions, namely by counter-intuitively lowering taxes and going into deficit spending in order to stimulate the economy.
Something similar happened to inflation. Inflation, in the best of times, is a confusing topic to grasp for any economist, but in the early 20th century the people running things were really just trying random things to see what worked and what didn’t, with varying degrees of success.
Collectively, we seem to have figured out the trick to corralling inflation around 1973, because that’s when the President Nixon took the US off the gold standard.
You’ve probably heard your parents or grand-parents wax nostalgic about the gold standard, because it supposedly made money “more real,” but I’m honestly not sure why it was so great. In a nutshell, the gold standard made each dollar exchangeable for physical gold at a fixed price. The point of this was to limit the amount of dollars in circulation since the money supply was limited to how much gold the US had in its possession. This would theoretically prevent inflation from ever happening, but the gold standard failed miserably in this regard as inflation managed to rear its ugly head anyway in 1941, 1946, and 1950. And because the gold standard didn’t allow the government to adjust the supply of money, there wasn’t an easy way to get inflation under control when it happened.
By the 60’s, economists had figured out that interest rates were the key to corralling inflation. When inflation is high, raising interest rates would counteract it, and vice versa.
In 1973, Nixon officially abolished the gold standard, giving central banks the ability to set interest rates to fight inflation. After that, periods of high inflation still existed, but they could be controlled.
For that reason, the most relevant period of time we’re going to look at when examining periods of high inflation are 1973 to the present. You can agree or disagree with Nixon’s decision to abandon the gold standard, but regardless of your personal view today’s economy is fundamentally different from pre-1973, and I would argue not comparable.
Historical Performance During High Inflation Periods
So the first thing we want to do in our investigation is to look at historical inflation trends in the US from 1973 to today.
For the purposes of this study, I will define a “High Inflation Period,” or HIP, as any year in which inflation is above 5%, and from the above chart, we can identify 3 periods in which inflation spikes above this threshold: 1973-1976, 1977-1983, and 1990.
During these periods, let’s pretend that our unlucky retiree handed in their notice at the start of these 3 HIPs, and let’s model what happens for a 30 year retirement.
First, let’s look at 1973 to 2003. In this scenario, our retiree starts right after the gold standard ends, and one year before the Watergate scandal. So, plenty of political turmoil and uncertainty is on deck for our unfortunate investor.
We start our retiree with a $1,000,000 portfolio and have them begin withdrawing $40,000. We make sure that our retiree increases their spending by each year’s inflation number so that it keeps their buying power constant. And we set our retiree up with a 60/40 portfolio.
By plugging all these inputs into PortfolioVisualizer’s portfolio backtest tool, we get the following.
As you can see, we do have an extended period where the portfolio is just barely able to keep up with withdrawals. Almost immediately, our retiree’s portfolio dips below their initial starting value and doesn’t get back there until 1982, so we can see that a “lost decade” does happen due to inflation and stock market weakness. But, eventually the compounding effect of time takes over and the portfolio romps higher, eventually ending their 30-year retirement period at about $2,000,000.
Our next HIP is 1977 to 2007. Being only a few years off, you’d think that the chart would look more or less the same as the last one. You would be wrong.
Yowza. What a difference 4 years makes.
Instead of the portfolio ending up at “only” $2M and a paltry 2.56% Compound Annual Growth Rate (or CAGR) as in the 1973-2003 analysis, the 1977-2007 retirement ends up at nearly $10M, with a CAGR of 7.63%!
Why is this?
Despite inflation actually being worse at the start of 1977 versus 1973, 1977 corresponds to a period of economic expansion from 1977 to about 1980, while 1973 started during a period of economic contraction. As we know, sequence of return risk is highest when you retire right as stock markets are tanking because it forces you to sell into a downward market, so by retiring during a booming stock market our 1977 retiree ends up doing way better than the 1973 retiree, despite going into a period of extremely high inflation that eventually peaks at a nosebleed 13.55% in 1980.
Finally, let’s look at our last HIP.
The 1990’s is probably the period most similar to today, because while inflation was relatively high, unemployment was not. In the 1990’s, then-federal chairman Alan Greenspan was able to engineer a soft landing by raising interest rates gradually without causing a recession, and we can see that in the final results of a retiree starting their withdrawals during this period. Our retiree ended this period with a final balance of about $7.5M, with a CAGR or 6.68%.
So what happened here? Interestingly, none of the FIRE simulations starting in years of high inflation since 1973 actually failed. We have two major reasons here to thank for this.
Reason #1: Equities are a Natural Inflation Hedge
Every single FIRE blog out there advocates for holding a portfolio that contains mostly equities. The main reason for this is that people who retire early tend to have very long investment horizons, typically 30+ years. And with investment periods that long, nothing beats equities in terms of raw performance.
An added bonus of this is that equities naturally hedge against inflation.
Think about it. Every time you fill up your tank or buy groceries and curse at how much money you’re now paying versus just a few months ago, the company you’re buying from is making more money. Sure, stock markets are behaving crazy right now, but long term, a well-managed company will be able to translate those higher incomes into higher profits, as we’re now seeing with energy companies who are able to benefit from these crazy oil prices caused by the war in Ukraine.
This effect does not translate to other asset classes. In fact, if our imaginary retiree had reacted to the increased stock market volatility by running into bonds, according to the same simulation tool that generated those pretty graphs, their retirement would have failed big time.
The lesson is clear. If you don’t want to get creamed by inflation, keep at least 60% of your portfolio invested in equities.
Reason #2: We’re Getting Better at Fighting Inflation
The other reason has less to do with math and more to do with human behaviour. We, as a species, are not the best at anticipating and avoiding bad things before they happen, but we are pretty good at learning once that bad thing smacks us in the face.
Every time governments deal with a period of high inflation, they tend to try a bunch of random, well-meaning ideas. Some ideas work great. Other ideas fail spectacularly.
Over time, as a species we gain a kind of institutional knowledge. We learn to build on ideas that work while discarding ideas that don’t. Dramatically increase interest rates like in the 1980’s? Good idea. Raise tariffs and choke off international trade? Bad idea. Start a war with a random country? Extremely bad idea.
Over time, governments all around the world have figured out that if you encounter high inflation, you increase interest rates and reduce the money supply. That’s what we’re currently doing in the US and Canada, and despite the wailing and whining of over-indebted homeowners, the government is not going to stop because they know that’s how you eventually defeat inflation.
The elimination of the gold standard was actually a big part of this evolution, as it freed up the US government from pinning their money supply to a physical asset, and instead allowed them to adjust it as economic conditions saw fit. That’s why the last recession caused by the pandemic was the shortest one on record.
The 4% rule that the FIRE community bases its entire existence on states that if you spend no more that 4% of your initial retirement portfolio, adjusted to inflation, you will not run out of money in a 30-year retirement period 95% of the time.
That “95% of the time” number comes from analyzing historical performance for 30-year periods using stock and bond market performance dating back to the beginning of the 1900s. And according to the personal blog of the Trinity Study’s author, Wade Pfau himself, the 5% of the time his simulations failed all occurred before 1973.
That’s right. Since the gold standard was abolished, and central banks became free to set their interest rates at whatever level they thought best to combat inflation, the principles of FIRE have NEVER failed.
To be honest, when FIRECracker challenged me to write a “nerdy dorkmeister” article about inflation at the beginning of this week, I didn’t know where my research would lead me. Maybe I would discover that inflation was toxic to early retirees and I’d have to abandon this article and start over.
But as it turns out, I discovered the opposite.
The principles of FIRE have never been stronger, or more relevant.
Don’t mindlessly spend all your money. Because then you are at the mercy of your employer.
Don’t go into debt to buy a house. Because that puts you at the mercy of central banks.
But if you invest your money into equities, shares of companies that make money no matter what happens, then according to the data and the math, you’re going to be just fine.
What do you think? Is FIRE screwed in this period of high inflation? Or are we going to be just fine? Let’s hear it in the comments below!
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66 thoughts on “Does High Inflation Destroy the 4% Rule?”
Interesting that you used a realistic 60/40 portfolio. If you had used 100% equites I’d be here complaining…
Interesting results as well. Inflation is a plague that this government is only making worse by enticing this war w/ Russia. Biden and democrats are warmongers just like Putin.
Only one of them invaded Ukraine, and only one can stop the war by leaving the country they invaded. So no Biden and the Democrats are not “just like” Putin.
I’d recommend you put yourself in Ukraine’s shoes and consider what you’d or want done do if your country was invaded.
I do find it odd that so many people believe this is really creating high oil prices, though. It’s an excuse for high profits but not, I think, a reason for high prices.
First of all, Ukraine shouldn’t have been allowed to be a country. Putin is right. NATO has no business in eastern europe. The war was absolutely necessary, if you think just a little bit outside the american box.
What a distasteful and an unrelated take on the FIRE site.
I wouldn’t want to put myself in the blood-soaked shoes of the Ukrainians, stauined with the blood of Russians they were killing in the Donbass region before Russia invaded,
Jill, why don’t you for a moment think for yourself and put yourself in the shoes of the Russians, and even more importantly, of our children. For the Russians will remember for a very long time just how many of their boys we helped kill. They will get their revenge.
Rutroh … this site is being infiltrated by the Russian trolls!!
Whatever Ginni Thomas.
Rotroh. This discussion is being highjacked by the Russian trolls!
Who would have thought that Russian trolls would reach out all the way to this site? Dosvedanya, Comrade.
Very interesting article! I wonder what would have happened to a 100% equity portfolio? Would the performance be even better?
Thanks for doing the math for us!
You can try it and see.
The link was provided right above the first graph and it already goes to the page with the parameters filled in.
Just change the numbers for the portfolio composition to whatever you want to see.
Got it! Thanks for pointing that out. So interesting! I can’t stop playing with it now 🙂
Yes please show what happens with an 100% equity portfolio!! *cough its extremely interesting for me to see that data.
You can click through into the tool itself under each image, but when I looked at it, going to 100% equities didn’t always help. Depending on the time period we’re looking at, sometimes a 100% equity portfolio ended up slightly lower, but in no cases did it cause the retirement to fail.
There’s still always going to be risk however, as the current financial system and norms haven’t been around very long in the grand scheme of things. In particular, the US Dollar is the reserve currency of the global economic system, affording the USA cheaper money than would otherwise be the case, fueling the US stock market, etc. One of the many reasons why ‘past performance is no guarantee of future results’.
In addition to mulling over the 4% Rule, FI folks would do well to focus on the flexibility and habits that lead to accumulation of assets and how to use those skills when things change… I know your blog and others have talked about that before, but it’s worth repeating.
The analysis here seems to report nominal returns, not actual returns. A retiree starting in 1973 with a 60/40 portfolio withdrawing 4% by 2004 would have 500k, not 2 million, and would today be broke.
Correct, these are nominal performance. On the chart, if you click “inflation adjusted” you can see the results adjusted for inflation, and the ending balance would be $500k, but that’s in 1973 dollars. The portfolio still doesn’t fail in this scenario though.
I’d pause to consider if the government’s inflation %’s are accurate.
If you read John Williams (shadowstats.com) he documents how more than once the government has changed how they measure inflation. He also provides what inflation would be if measured consistently. It’s always higher, probably to shape our perceptions.
How would this change these scenarios?
oh no..not again! government’s inflation %’s are accurate? this is a never ending discussing we all thought we’re over it now
Casual dismissal without addressing the important facts. Not helpful, Dani.
I read this blog and we haven’t discarded these points, nor has the community resolved them. The rate of inflation seriously impacts how the scenarios would evolve.
Agreed, the principles of financial independence, combined with geo-arbitrage, remain strong during times like this. Currently briefly visiting the U.S. in between Mexico and Malaysia. $15 for a bowl of ramen???? Bruh?!?! The sticker shock is real. I think I first heard this phrase here: “If the shit hits the fan, we are going to Thailand.” Now I’m going with… “You don’t want inflation to phase ya, head to Malaysia.” 😂
Ooooooh I love it!
How about “to beat inflation, change the nation”? 😉
But in all seriousness, I’ve realized that the best thing I can do for my neighbours who may be struggling financially is to actually spend less, and not buy into the new high prices whenever possible. Think about it: if Sobeys raises their prices and I accept those prices, then those high prices will become the norm and lower income people will also have to accept those prices, which will hurt their bottom line even more. If I take a stand and only buy what I need, looking for deals at other retailers where possible then Sobeys will have to lower their prices because they no longer have my guaranteed business and fewer people are buying their high-priced items. Then lower income people can also shop the lower prices and hopefully their bottom lines won’t hurt as much. This frugal mentality is helping me to save my own money, be grateful for what I have when things are so difficult for so many, and if enough of us resist inflation it will hopefully lead to lower prices for everyone eventually. So, think twice before you spend frivolously!
Interesting that you only tested your portfolios for 30 years – many of us early retirees will need portfolios to last 40, 50, or even 60 years.
Using your pre-filled information in your source links, I extended the 1973 simulation to 2022, 49 years. At that timescale, this portfolio has technically not failed yet but is gasping for air and is down to ~$400k. Even adjusting the asset allocation to 80/20, my preferred allocation, by 2022 it is only at $800k. Keep in mind, the annual drawdown is something like $200k/yr after inflation ($40k in 1973 dollars adjusted to today).
Just as Wander said depending on what year you took retirement it really impacted the numbers. I also used the pre-filled information and changed it to 1974 instead of 1973 the chart ended like the 1977-2007 show in the post.
So if the person retired in 1973 and did not take out any withdrawals and instead used the money saved to for black swan event, this person would have an 100% safe portfolio now. Firecracker and Wanderer’s method of withdrawal for black swan event would work in this case you can tell by the numbers.
30 years is what the 4% rule authors defined as their retirement period, so I was testing that.
Did you remember to include the addition of social security income after age 66 1/2 years?
Nope, I intentionally did not include social security income (or its equivalent since I’m in Canada). Neither did Wanderer in his initial calculations. But personally I’m not banking on CPP/social security anyways – I’m just considering that an extra safety margin.
Ok, now run your portfolio simulation through a real FIRE Crusher inflation period – the Weimar Germany inflation – and see what happen to your simulation portfolio.
The question is not whether a scenario like this will happen or not, but how will your portfolio will fare during a time like this ?
As for myself, to combat high inflation, I have no bonds and a leveraged equity portfolio, currently at 120% allocation (20% leverage). Interest rates on my debt is fixed for as long as I can – to avoid surprise increases in variable rates from central banks.
Inside my portfolio allocation, I have increased my allocation to commodities. Mainly, oil (20%) and gold (6.5%).
It’s working well so far. Since 2020 (when the crazy money printing started), my portfolio returns have been : 18.8.% (2020), 25.8% (2021) and 2.2% (YTD 2022), before considering leverage and borrowing costs.
That might be the best way to combat a period of high inflation.
The other question would be : will we continue to have high inflation or the inflation will naturally fall to a more normal level (ex: 2-3%). In this case, it would make sense to reduce leverage and add some bonds to my portfolio. To be honest, I have no idea what will happen. So, for the moment, I won’t do any change to my portfolio.
Yikes, that is certainly an interesting strategy. Glad it worked out for you :0
With respect, your view that in the long run things work out doesn’t align with your nimble and reactionary approach that jumps at different issues as and when they arise. Whether it’s tweaking the portfolio for inflation, wars, covid, zero interest rates or quantitative tapering etc. You can’t just “deal with” each issue when it finally emerges as an issue as it means there’s no way you can stick to a 30 year plan, let alone a 30 month one.
Just a few years ago, people were even worried about DEFLATION as a justification for sustained low rates.
Case in point too is that when inflation was often raised as a potential wrench in the plans of a lot of the reader case projections, but those concerns at the time were just dismissed by you guys as accounted for or priced in. In hindsight, that’s convenient to do when inflation wasn’t a concern. Now that it is, you have questions of whether FIRE can be completely derailed from it.
Point being, it’s one thing to say a long term plan works. But if your perspective is to whipsaw back and forth with every new issue that rears it’s ugly head only as it emerges, then you won’t have the wherewithal to stay the course anyway. Just some food for thought.
I have no concern about inflation. Have a balanced and diversified investment portfolio while ensuring you’ve saved enough to withdraw 4% or so to cover expected annual expenses.
Pfau was not an author of the Trinity Study! Ouch.
Hmmm… having $1M saved in 1973 would be the equivalent of having about $6.5M in today’s dollars. I doubt many folks have that as their FIRE target! You would have to start with only $160k for it to be equivalent to having $1M saved today. Of course, $40k back in 1973 dollars would only be a $6K starting withdrawal. Using $160k and $6k, you would only have $545k left by 2003… and have $912k now. So not bad, but not the bonanza indicated above. (Unfortunately, if you start with the actual 4% amount of $6400, then you only have 67k now, yikes!)
The starting dollar amount is irrelevant, you only care about the shape of the chart. $1M was just a nice round number to use.
One of the reasons we like this blog is because you guys say it like it is and don’t “hand-wave” your way out of tough answers.
Above you were asked about the 30 years horizon and answered that you used it because that’s what the Trinity study used. Fair answer. You also said you are working on a more detailed series of articles and I’m waiting to read those. But in the meantime you can address those comments without “hand waving”.
Both life expectancy (higher) and retirement age (for FIRE people, lower) have changed from the Trinity study assumptions. So we can take their methodologies and concepts and use them with different starting assumptions. A 30 years horizon was fine then, but I sure hope both you and Firecracker enjoy a much longer retirement! Hopefully a 60 years plus one!
I haven’t had time yet to play with the scenarios, so I take the other readers numbers as they are.
But if, as EfficiencyNerd suggested, you are faced with a 49 years back-test that places you at 400K portfolio today, you can’t just ignore this and say “well, I only tested 30 years, so it’s all good”.
Same for Marions concern and your reply. If you were a young, 30 years old engineer who retired in 1973 with 160K portfolio, and used 4% of it each year, today you are a 79 years old retiree with a 67K portfolio.
Saying “the dollar amount is irrelevant, it is the shape” won’t really put you at much ease today.
I know I can go and play with the numbers and reach my own conclusion, which is what the engaged readers are doing. But we also like to hear what you think of the specifics of our concerns/thoughts.
Your post was trying to do a good analysis of whether or not FIRE people should be worried about current inflation trends. You did an excellent job (as always, really) of explaining your analysis and conclusions, and in the true fashion of openness that we love about this blog, shared the links and welcomed others to play with the numbers. This openness is the top reason that this is the number one blog I recommend to people. It breeds trust. I trust what you say because you show me the proof.
A couple of readers found some flaws. You are a trusted writer by all of us and I would be really interested in seeing what you think would have happened to a 30 years old retirees couple who retired in 1973 with a 160K portfolio and who are today approaching age 80. If their portfolio is indeed (and I haven’t checked it myself) 67K in today dollars, are you comfortable with that?
Would you suggest they did something different?
Would you play with their allocation? Their spending?
Looking forward to reading the future series and I hope you will tackle those issues.
I’d be very interested in the results for a 100% equities portfolio too. That’s what I have, although it’s still tiny…pesky inflation is definitely having an effect on all my bills. I’m in the UK and my gas and electricity bill has doubled this year and my grocery shop involves a lot of gruelling optimising.
Many of us are still in the accumulation phase.
How does inflation affect the time to FiRe is also important.
Since saving rate is critical, and inflation demolishes our saving rates, our time to retire might easily gain a decade or two…
That’s why we all really need the central banks to get this inflation under control quickly. If it persists for years on end, we’re all in trouble.
FDR first took the US off a gold standard in 1931 by restricting gold ownership and redeemability amongst US citizens. Nixon put the final nail in the coffin by extending that to foreign governments in 1971. So, when you say the gold standard failed miserably because of inflationary periods in the 40s and 1950 it’s not quite accurate.
@Wanderer, can you address the comments by Marion and
I am on a 100% Equity portfolio with a large chunk in Canadian Equity Index.
I got rid of all my Bonds in March 2020 in order to buy Stocks when they were on sale.
I am glad I did so and I am not planning on getting Bonds anytime soon.
So far I would say that my portfolio was not that badly impacted in 2022 (it is down obviously but I am not losing sleep over it). Also having a large chunk of Canadian Equities did help (as the Canadian market is doing better than US and International Equities).
I don’t really feel the effects of Inflation either (I do not own a car).
I agree that human beings learn from their mistakes (most of the time anyway) and we seem better prepared to fight inflation.
Living a frugal (but rich) life is a plus in these uncertain times!
Starting balance $160,000, $6000 inflation-adjusted withdrawal rate:
1972 to 2022, 100/0 portfolio: final balance $3.2 million
1972 to 2022, 60/40 portfolio: final balance $1.5 million
My question is what’s a good “10-year Treasury” ETF?
Does Vanguard have one?
Back then, they didn’t have ETFs so I couldn’t use a total bond index in the simulation. These days, go with BND or something similar.
It’s hard to destroy something that never really existed. The 4% rule is a backwards looking tool. It tells you the odds, that if you had lived in the past, of the success rate of a 4% initial withdrawal rate. It in no way sheds any light on what future withdrawal rates are safe for someone retiring in the future. It can’t. The future hasn’t happened and so backward looking models are essentially invalid, except as a placebo to comfort ourselves with. I have a 1% withdrawal rate so the 4% rule makes me feel safe. But that’s a total illusion. I mean really, do I really believe that the world of 2052 is in any way going to resemble 2022 or 1973? Unless you think it will then the 4% rule is pretty much fantasy. It might be a 9% rule or a 0.1% rule, we won’t know for another thirty years. But it does seem to make me feel good, until I really think about where it came from.
Hey, historical analysis isn’t perfect, but it’s all we have. Nobody has a crystal ball.
“Don’t go into debt to buy a house. Because that puts you at the mercy of central banks.”
TBF, with the benefit of hindsight, I wish we’d gone MORE into debt in 2015 when we refinanced into a 15-year loan at 2.65%. We’ll hit five figures on the balance later this year, which is great, but it’d be even greater to be deeper in debt at that rate having dumped a ton into VTSAX at $48.57/share (currently $101.30). At least we’ve locked in another eight years of fixed home payments using 2015 dollars.
Yes, we’ve had to paint the place and put a new roof on and experience many other joys of owning a 1921 bungalow. But we’re also at nobody’s mercy when it comes to raising the rent or kicking us out. As long as you’re buying significantly below your means, homeownership doesn’t entirely suck.
Well, if you could foresee stuff like that, you’d be a Wall St bajillionaire by now.
There is that. I need to get better at my clairvoyance.
Great article. I think most of us in the FIRE community are fairly comfortable with financial risk management through various scenarios, but for those (few) Chicken Littles out there, hopefully this provided them with some “financial Zen”. As for me, I plan on staying the course. #KeepCalmAndCarryOn
Yes, keep calm indeed. We’re all gonna be fine 🙂
A good article about inflation and portfolio :
your analysis is a bit flawed.
In 1973 the Shiller PE was 18.7, today it’s around 30 meaning equities are severely overvalued.
In 1973 the 10 year was yielding 6-7% with inflation at around the same resulting in a real yield of around 0%. Today we have inflation at 8.5% and the 10 year at 2.8% yielding a real yield of NEGATIVE 5.7%
In 1973 the debt to GDP was 32%, today it’s touching 130%
In 1973 we had a tax base that was growing due to population trends, today we are seeing an erosion in the tax base due to demographics
In 1973 the Fed’s balance sheet was 6% of GDP, today it is touching 20% of GDP
In 1973 the US Government was running an annual budget deficit of 1% of GDP, today we are running a shocking 13% and climbing because government wants to spend more and more to appease the voter base with little regard for our current fiscal situation.
We are in radically different times than the 70s, we simply can’t extrapolate that time period to the current. What we have now is a confluence of factors that have never occurred in history.
These are huge headwinds for the economy and will certainly be a challenge for equities as well.
You have found perhaps the best argument for finding meaning in work and delaying retirement. We can’t predict the future and your impressive data analysis makes our current national situation look far from optimal (stocks, bonds, crypto, gold, real estate?). While it is certainly possible that “old rules don’t apply”, it is more likely that those who choose to ignore them will be sorry that they did. I hope my pessimism about a lost decade of investing is unfounded. It is, however, difficult to ignore the tidal wave of poor elderly that await us in the next few decades as the pension generation dies off and the underfunded 401k generation discovers the 4% rule, even with an unexpected golden decade of investing. I am having difficulty wrapping my mind around what that is going to look like as that happens and social security starts feeling demographic pains. It is my sincerest hope that having a 7 figure nest egg will look like the above graphs but I worry that it won’t, and worry for my kids. Perhaps we should have done better on our watch.
Spot on analysis, I had the same hunch without doing all the calculation. As long as we own certain percentage of public company, inflation is bake in. Corporation going to pass on increase cost to the consumer (they are not going to take less profit), employer will give employee minor raises so there’s no mutiny, and things progress as usual. There period of high inflation in the past, while it was noise during that time, long term it total affect is nil.
Great article. It would be nice to see what happens with portfolio if it was divided equally 20(American), 20(Canadian),(20 international)
You should totally add a disclaimer to this article – “Past performance is not a guarantee of future returns”.
Even though it played out decently well for the people who retired with $1M in 73, 77 and 90, there is no guarantee that it would play out the well for people retiring in the current high inflationary environment. Ultimately, we don’t know what we don’t know.
Came here for the nerdy dorkmeister articles. Was not disappointed! 😃
I think there is more to removing ourselves from a gold standard than being able to change interest rates. I think it was France who first started demanding gold instead of dollars after our government started devaluing the dollar. Only a sucker would hold dollars in that scenario. I enjoyed the article but it may be a bit simplistic. I’ve adopted and enjoy many aspects of FIRE. Im typically not a worrier. But I am starting to be concerned that we are in trouble
LOVE your geek articles. AMAZING. I assume these results only get better when you have a higher percentage of stocks? Why so conservative at 60/40? Surely mathmatically a higher percentage of stocks would have led to a better result? Thank you and I LOVE your geeky articles
When you say “adjusted for inflation” does that mean if inflation was 7% you withdrew 4+7 = 11% of your portfolio that year in your calculations ?
The only point I have a quibble with is “despite the wailing and whining of over-indebted homeowners” (and “Don’t go into debt to buy a house.”) I’m about to retire, and just took out a 30-year mortgage at a fixed 2.9% rate. That means that the principal & interest I pay will never go up. 20 years from now, I’ll still be making the same payment I am today (but even in periods of low inflation, in 20 years those dollars will be worth less than they are today). So instead of tying up a large amount of cash that is difficult to access in one large asset (a house), I can invest that money in the market and let it grow over the next 20 years. That gives me two inflation hedges (the growth of the market, and the fixed payment on the mortgage).
FIRE bugs will soon learn that life comes down to effort and work. Unless they enjoy living in a RV parked in the middle of a dump for the rest of their life.
“Over time, governments all around the world have figured out that if you encounter high inflation, you increase interest rates and reduce the money supply. That’s what we’re currently doing in the US…”
Uhh no we’re not. In the past two years the US has increased the M2 money supply by approximately $6.8 trillion. This past month was the first reduction in that time frame. How is this not acknowledged as a driver of inflation?
The whole Ukraine War contributing factor to inflation is smoke and mirrors. The war began in Feb 2022. Inflation was already roughly 7% (depending on your source) in Nov 2021 so I call BS on that notion.
Finally not sure where your allegiances lay when it comes to Central banks. In one instance you seemingly praise them for their ability to rescue us from inflation and in another instance you forewarn us against being at their mercy. Even with all their control, CB’s defense against a critical recession, ie. 2007-2008 is not promised.
Thanks for this guys! Have seen several similar articles published in the past. Would love to see the dying 60/40 port modeled with a small dose of Bitcoin, say 5%. Very likely to outperform everything again over the next decade or two, maybe longer. Perhaps model it as a super conservative ( for BTC ) 25% CAGR. So, let’s call that a 60/35/5 Port and see where that goes….😎 Cheers!