What if Financial Independence Goes Wrong?
Financial independence and its partner early retirement have a lot of appeal. Who doesn’t love the idea of being in your 30’s, 40’s, or 50’s and avoiding all of the headaches of work (like the commutes, SMART goals, micromanagers, gossipy coworkers). On top of that, early retirees have the freedom to slow travel, attend all of their children’s school performances at 10:30 on a random Tuesday, or hit the gym at a time when it’s completely dead because everyone else has clocked in. In fact, it might be everyone’s dream life. And as humans, we tend to have a bit of a jealous streak. So when someone who has achieved early retirement starts to talk about the virtues of financial independence, you can bet the internet is going to manifest their jealousy by coming up with a million reasons why it wouldn’t work.
The risk here is: my portfolio is enough to sustain me for the rest of my life, unless my investments deliver negative returns for the first few years. If that happens, theoretically, then I will end up withdrawing money from a portfolio already low in value. That has a domino effect through the years.
~Darcy, WeWantGuac
Darcy of WeWantGuac recently hit her early retirement numbers and has been doing a slow-travel road trip across the United States. In her latest post (from Tula Oklahoma on her way to Arkansas) she addresses some of the biggest hate she’s gotten, which essentially boils down to “what if the stock market tanks and you’ll never be able to find work ever again and you’ve made a bad decision”. Darcy explains that this really boils down to one concern- sequence of returns risk. In other words, the riskiest time for retirees (including early retirees) are bad market returns in the first few years of early retirement. If you have average returns for the first couple of years after retirement, your portfolio has grown so much that your withdrawals are much smaller than your calculated safe-withdrawal rate and your odds of surviving a market crash are much better. While Darcy’s withdrawal rate is conservative, she’s come up with additional rules of how she will manage her portfolio in case of a downturn. In these cases, she will dial back her spending to a “spending floor” until the market recovers. Using this strategy, there is a 0% chance she’ll run out of money in the next 50 years, compared to a 24% chance she will be dead and a 58% chance her portfolio will double or more (in real dollars). While sequence of return risk is a real concern for early retirees, Darcy shows that it shouldn’t be a dealbreaker that stops you from pursuing early retirement.
Is Social Security a Ponzi Scheme?
It’s a safe assumption that most Americans are vaguely aware that Social Security is not fully funded and will reach a point in the next decade where it won’t be able to pay out its promised benefits. When we reach this point, Congress will have to make some sort of decision- people may receive less benefits or pay more into the system… or both. Or maybe neither if they come up with some radical change to the program. Since most Social Security benefits are paid for from payroll taxes on the working public, it’s common for people to slam it as a “Ponzi scheme” when they want to make a controversial soundbite. However, how accurate are these soundbites. This article by Big Ern of Early Retirement Now is an incredibly detailed and interesting comparison between Social Security and Ponzi schemes.
However, by keeping the system alive for many more, even infinitely many generations, we spread the cost of the free gift to the initial generation over sufficiently many other people. Spreading the cost wide enough can make the loss small enough that each future generation may not even notice.
~Big Ern, Early Retirement Now
Big Ern of Early Retirement Now used to work as an economist at the Federal Reserve. So it’s not surprising that this analysis is incredibly detailed and thought provoking. In fact, it’s much too deep to handle in a one paragraph summary. However, in the article Big Ern builds an economic/game theory model of social security where there is a generation of people receiving benefits and other generations pay these benefits. He then discusses how spreading the payment over multiple generations affects the expected return on investment, accounting for growth in wages over time. Finally, he compares these results against stock market returns for different individuals with different work histories and life expectancies. Unsurprisingly, personal circumstances make a huge difference in the expected returns on social security. The article is definitely worth a read; we all pay into social security, so it’s valuable to think deeply about how it actually works.
The Property-Tax Deferral Quietly Offered in Oregon and Minnesota
t’s been said that the only guarantees in life are death and taxes. And while no one thinks you can avoid these entirely forever, life choices can affect when you face these eventualities. Property taxes are often a big expense for homeowners. Since property taxes are based upon the assessed value of the home, these taxes can continue to climb each year. While these increases can be handled easily by many employed individuals, retirees on a fixed income can struggle to pay property taxes as these taxes slowly creep up over a lifetime. For some seniors, property taxes can create serious financial stress forcing difficult trade-offs between paying their taxes or buying food or medicine. Luckily some states have programs to help seniors in these situations.
While deferred taxes must eventually be repaid, the immediate cash-flow benefits can be substantial for those on fixed incomes.
~ Drew Blankenship SavingAdvice.com
This article highlights programs in the states of Oregon and Minnesota to help seniors facing financial difficulties address property tax bills. Both states allow some seniors to skip paying property taxes… with a catch. In these states, seniors can defer paying property taxes until they die or sell the house. These programs work by placing a lien against the house for the amount of the property tax bill. The state reimburses the municipality for the amount of the property tax bill and the state reclaims the money they paid when the estate is settled or the homeowner sells their house. The net effect is that seniors can pay their property taxes with equity in their home instead of it coming out of their savings or fixed income. While these programs aren’t direct tax relief, they can take some stress out of seniors lives. If you’re helping a loved one manage bills in these states, it might be worth looking into this article.