Flexible Spending and Early Retirement: A Perfect Match or Just a Myth?

Can one retire early if they have the ability to significantly cut back on discretionary spending during retirement if they must? A recent article on the MadFientist blog claims that following a Discretionary Spending Rule in retirement can significantly increase a retirees Safe Withdrawal Rate. And with a higher SWR, one can retire early.

Karsten Jeske (Big ERN) of Early Retirement Now responded with his own article. He called flexibility in retirement a myth, and detailed why he thinks the Discretionary Spending Rule won't work.

In this video I give my take on both articles. We also look at a free Safe Withdrawal Calculator you can use to model your own retirement plan.

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#earlyretirement #4percentrule #robberger

ABOUT ME

While still working as a trial attorney in the securities field, I started writing about personal finance and investing In 2007. In 2013 I started the Doughroller Money Podcast, which has been downloaded millions of times. Today I'm the Deputy Editor of Forbes Advisor, managing a growing team of editors and writers that produce content to help readers make the most of their money.

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DISCLAIMER: I am not a financial adviser. These videos are for educational purposes only. Investing of any kind involves risk. Your investment and other financial decisions are solely your responsibility. It is imperative that you conduct your own research and seek professional advice as necessary. I am merely sharing my opinions.

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[jeske]

Thanks for the mention and your kind words, Rob. I must have been offline during my summer travel schedule and only found this today. Sorry for the delayed response:
1: You make a great point that this new flexible rule doesn't really allow you to retire earlier than under the 4% Rule. For example, folks with $40k who would have targeted a $1m portfolio before should probably not lower the portfolio target to $40k/0.055=$727k unless they have the flexibility to spend only $20k for extended periods. I added a note in my Conclusions section and credited you with that 100% valid insight.
2: You're correct, I should rephrase the sentence at the beginning: "Thus, you will still fail *in some of the worst-case scenarios.* It's a mathematical certainty - no simulations necessary." By adding the qualifier ("in some of the worst-case scenarios"), we want to convey that the failure refers to the worst-case cohorts only, not *all* cohorts.
3: About the CAPE: most folks in the FIRE community have some combination of SP500 or a US Total Market index fund (ITOT, VTI, etc.), so for them, it is indeed relevant. I also often hear from folks who aggressively invest in non-US stocks, often EM, who claim they don’t have to worry about Sequence Risk because their CAPE is so low. I beg to differ. If we repeat the GFC or Great Depression or the 1970s, all correlations will go to 1.0 again, and all markets will fall. We shouldn’t compare an EM index fund with a CAPE=15 today with the S&P 500 at 15 when trying to gauge the Sequence Risk susceptibility.
4: I never ascertained whether the other authors used small-cap value in their simulations. I doubt it because the 1929 and 1960s cohorts would have looked much better. That said, I suspect that SCV will not continue to fetch a reliable ~1.8% extra return in the future. That historical “alpha” has been arbitraged away now. If anything, SCV underperformed recently.

[Farmwald]

Retirees who struggle to meet their basic needs are the ones who could not accumulate enough money during their active years to meet their needs. Retirement choices determine a lot of things. My Husband and I both spent same number of years in the civil service, she invested through a wealth manager and myself through the 401k. We both still earning after our retirement.

[mrallan]

If you don't have any flexibility in spending, you aren't ready to retire early.

[EJJ-EvArms]

Rob, after watching many of your vids, I enjoy how you can dig deep into minutae and small details, while also being able to see the big picture, and the forest through the trees.

I don't always agree with you (though I usually do), but I've learned much from you, and I greatly respect your approach.

Kudos & thanks.

[mlhundt]

No one has a crystal ball. Most retirees have an income and expenses just like when you were working. If you want to spend more than your income you have to dip into savings just like when you were working. Unless you are trying to work down to zero, your discretionary spending should still be looked at as when you were working. Just because you are retired does not mean you don't keep a comfortable cushion. Only certainty is prices will always go up regardless of who's in the White House.

[shaynebowen]

Incisive, clear, thoughtful, I love your analysis week after week. You bring a great deal to the table. Context, alternative ways of looking at papers, tools to use, just fantastic work!! BRAVO BRAVO!!!

[Bluponi]

Great video... I actually like the Guyton -- Klinger guardrails, only withdraw 4% when we are in a bear market, and in good times, you can withdraw 6 %... When Social Security kicks in at 65, you can supplement your income and cut your withdraw percent down to 2%... You don't have to make your income last for 30 years, social security provides a nice margin, especially if you retire overseas in the Philippines, or Vietnam, where the cost of living is 50% of that in the United States

[TwoSidesOfFI]

Great analysis as always, Rob. Thanks for the shout out!

[jshoe]

Another excellent analysis and comparison of current thinking, with clearly labelled opinions and extensive context clarity. Well done, Mr. Berger, well done. This kind of content is why I subscribe to your newsletter and your YouTube channel. Thanks.

[larssmith]

Great video. As someone who follows both ERN and Mad FI this is some of your best work.

[Raymondjohn]

High prices for everything have severely affected my plan. I'm concerned if people who went through the 2008 financial crisis had an easier time than I am having now. The stock market is worrying me as my income has decreased, and I fear I won't have enough savings for retirement since I can't contribute as much as before.

[joekuhnlovesretirement]

Hard rules break down in reality….. example: what if your portfolio was up 50% last year and down 20% this year. Portfolio still up. So decrease spending in your young and able. Mistake.

Great content Rob.

[Mike-]

The falling bridge in that photo is actually a classic. It's referred to as Galloping Gertie. I remember it from my engineering intro class in college. I'm not a civil or mechanical engineer, but I did joke with one about it years later, and he said "yeah" that's a classic example that all construction-oriented engineers have all heard about (and he knew much more of the history behind it than I did).

[EBsDenStudio]

I agree with Rob's point of view, I saw the reference to these articles on his newsletter, read them, and also thought both articles had some aspects to consider, but not blindly, some personal analysis is always a good/necessary thing.
Rob, Thanks for sharing!
PS: About the “absolutes”, using a Star Wars reference "Only a Sith deals in absolutes" 🤓🤣

[paulbiel]

Great analysis Rob--you're my favorite speaker on retirement issues as you get to the point, provide factual data and analysis, have nothing to sell, and offer thought-provoking insights. Based on your reading--I'm curious about your thoughts on asset allocation. Based on your own investments and the 3-fund portfolio, it doesn't seem like you think it needs to be very much. Your own stock investments seem to be just in a handful of stocks you are interested in, an all stock index fund, small cap index fund, and international index fund. No REITS or commodities and very small exposure to a dividend focused index fund.

[royprovins]

This is why I bought a QLAC that kicks in at 80 with a small portion of my retirement money. I want a zero percent fail rate

[brianjp]

I would love for you to make a video on big ERN’s spreadsheet to review any potential flaws in using it as well as explaining some of the more detailed parts of the spreadsheet!

[rickwalker]

I retired early and plan to withdraw over 10% annually until the mortgage is paid off and SS kicks in. By embracing flexibility and dynamically adjusting withdrawals when necessary I've also made the plan fail proof (0% failure rate). My portfolio will last no matter how long I live (I'm not a fan of scheduling my own demise). I won't be leaving a ton of money to anyone else--my wife and I will be spending most of it and enjoying retirement to its fullest while we are able. Like Rob said, flexibility makes a huge difference.

[canyonoverlook]

I would have liked this compared to the Wellington fund. That goes back to 1929. I would also like to see Wellesley used in this. Wellesley started in 1970.

[williamfusselman]

Big Ern's use of CAPE adjusted withdrawal rates has a certain mathematical elegance.