In fact, it’s funny. Great interview! Courtesy of your calculators and some others from JLcollins/MMM I estimate we are between 5-6 years away from FI so that is exciting!!!. I got a lot of local folks. Did you end up in this realm of working more and more with retirees because you were the guy that put this retirement research out there? And that didn’t appeal to me. I think Monte Carlo started hitting the financial advisor world in the late 1990s when Hopewell did an article in the “Journal of Financial Planning” and kind of put it on the roadmap when we started seeing it get added to planning software a couple of years later. I still remember working on it where like, “Alright! How would you get to the individual client’s adjustments? The P/E of 70 from ten years ago was a very misleading number (I think Kitces mentioned that). Great podcast as always. /sites/all/themes/penton_subtheme_wealthmanagement/images/logos/footer.png Let’s lessen our allocation. So I use that as a basis and I have a schedule of the allocation in stocks against, let’s say, a particular Shiller CAPE level. It’s a thrill. And perhaps setting the groundwork for that before you retire. Bill: No, but once you get into preserving the capital, when you retire, you’ve got that chunk of money, you want to preserve it; you don’t want it to get diminished by any substantial amount because it may not come back. And how were you going about that? Now, if you truly want to say like, “No, no. And so, that for me was at least the starting point of starting to gobble up some of the safe withdrawal rate research as well as spending a lot of time looking at the Monte Carlo Analysis Tool. I’m not really planning for 30 years right now. Bill: Yes, that’s right. Too much happy energy to avoid. It’s more than the money. Michael Kitces – The 4% Rule and Financial Planning for Early Retirement. We own more than it – lower than two-asset class portfolio, large cap U.S. stocks, intermediate U.S. government bonds, and nothing else. And how did that play out in practice with clients? Are you are you buying real estate to generate cash flows? Bill: And it could have a significant effect. Speaking of simple here’s my FI withdrawal strategy: 1. But I attempted to go out on my own, hang up my shingle individually, and actually operated my practice out of an office attached to my home with a private entrance, which is something I considered ideal. And our focus is just straight, independent fee per service advice, pay on an ongoing subscription to work with an advisor in an ongoing relationship. But I’m still comfortable and committed to this path.”. Our November CE Quizzes are now available in the Members Section. I looked at the Alaska Airlines info you have (because that’s the card I’m most familiar with), and it doesn’t match what they have on their site. If $50 a week for lawn work is a problem (because you think of the yearly cost which may be 20-30 weeks in most areas of the US or $1000-$1500/yr) then perhaps that daily starbucks is just as large as having someone mow your lawn (220 typical workdays a year or $1100 on coffee assuming you only get one, most people I know who are coffee drinkers are likely to enjoy 2 or more cups of coffee). So NAPFA was the fee-only network in a world where, particularly then, almost all the industry was brokerage then? So was it really starting for you directly as, “I just want to learn about financial planning because I want to do it for myself,” and the decision to become an advisor came later? But $20,000 or $30,000 a year is more than enough to supplement that early retirement goal”—you could do anything on the planet you wanted that would pay you $20,000 or $30,000. And I attended a NAPFA meeting in 1989 and people were so nice and I felt so comfortable. Of course, that’s changed. And so, if we look at just the earnings of a company relative to the price, we can get an understanding of its yield or what kinds of earning power it’s generating. So I didn’t know if I could do it. Michael Kitces – The 4% Rule and Financial Planning for Early Retirement. We’re falling behind. So, to find this correlation of 0.74 between valuation levels and 30-year safe withdrawal rates that no one had ever written about before, I got pretty excited at the time. Yes, at some point, in the 2040’s, I think Medicare will be available for you (unless we change it sometime the next 30 years), but we need a plan between now and then. And that’s really the primary focal points. Michael: This is an industry related or this is novel, like fiction novel? We’ll make sure you get a link to the original report that we actually did which was all the way back in May 2008. And that should increase as you age. Just also missed the really sharp, the off bottom, you could have gotten much lower, pulling the trigger earlier in 2009. I second this! I haven’t been able to develop scenarios myself in our low inflation environment where it goes below 4.5%. And how do you think about the balance between… what strikes me is there’s really two levers to this. Sometimes I hope someone will come out of nowhere with a well-have-you-thought-about-this comment that trumps the short wait for the huge benefit – but I’m sure that’s wishful thinking… :). I think it’s just too complex. We want to crave to have something that gives us a feeling like we’re having an impact. It’s great doing these projects with no worry for whether it’s going to have a monetary reward, but most of these things do. 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. And also, as the complexity of the business grew, you needed expertise in more and more areas. It’s non-profit. Medical costs and insurance coverage is pretty much the only area that I feel vulnerable with regard to FI. Success! So in the middle of that environment, you said, “Let’s look at all the historical data.” We get this number 4.15%. But I knew that a very heavy stock allocation was bad and a very low stock allocation was bad. Bill: I have a strict test based on valuation. So when did you move from 4% to 4.15% to 4.5%? And when you consider the prospect that a mere $1,000 worth of income per month could reduce your nest egg by $300K, this could be a very effective element to mix into your strategy. Quite frankly, I had concerns about the market, investing. It was an obvious bubble, you know, tech stocks. And you that I live in a standalone house, and I’m raising a family, there is no way I could go back to an apartment and split it with two buddies at this point. I don’t need that anymore. And again, I know even just from the flipside, having been through this with lots of clients over the years, the number of people who insisted on getting to their pure, standalone financial independence number because they never ever, ever, ever wanted to have to work again, within three years were working again. I had trouble with the publisher the first time I came through. But if you’re in your 20’s and early 30’s, you’ve still got a lot of raises likely ahead of you as you continue to grow your career and your income and your earning power. You were still actually getting it cheaper than when you got out. And on the one hand, to me, that sort of makes sense. However, that small stuff here and there quickly adds up on a recurring basis and quickly devours any savings in modest housing vs more expensive housing. So, your financial independence’ nest egg is maybe not quite as big as you thought it was when you consider that Uncle Sam is going to lay claim to a portion of that. There’s just too many dimensions to the problem to have a one-number solution. But what we find is this 4% number just seems to work. It was a good idea at the time. So they were happy to have somebody in the neighborhood who wasn’t selling them an insurance policy, who was going to give them financial advice. Michael E. Kitces, MSFS, MTAX, CFP®, CLU, ChFC, RHU, REBC, CASL, is a partner and the Director of Research for Pinnacle Advisory Group, a private wealth management firm located in Columbia, Maryland that oversees approximately $1.3 billion of client assets. Thanks to QE. You can decide to consider to work or even make it part of your plan. Michael: Right. So if the really bad 10 years hits, there’s so many things that you could do rather than work an extra 10 years so that you can only withdraw 3%. I had a hard time sleeping last night until I got up at 4am to go work a 12 hour shift today. Do you need to move to a different state that has better insurance coverage that you can buy as an uninsured individual? I mean, heck, even six or seven probably sounded conservative because the S&P was doing double-digit returns for more than a decade at that point with just a small fast recovery blip in 1987. Michael: And so, how long did you continue to run the practice? Are we going to set a path where we go through COBRA Continuation Coverage from your former employer, and then exhaust that. So I just basically reviewed with my clients every year indicated…I compared the balance that they had in their account with the balance we thought they should have based on the 4.5% rule. Michael: So what advice would you give for younger and newer advisors coming into becoming a financial planner today? Just an idea! Michael Kitces uploaded a video 4 months ago 19:40 FPA Selects Representative Of Its Largest Corporate Sponsor As First Ever Vendor To Become National - Duration: 19 minutes. Michael: So as you were going through that, where you…and I recognize financial planning software looked different at that time than it does today. Therefore the earnings part be negatively impacted by that, so even if S&P price and earnings growth stay flat for the next few years the CAPE Shilling ratio will fall anyway as these “recession years” roll off? So as we wrap up, this is a podcast around success and one of the themes that always comes up is even though the word success often means different things to different people, and so, you know, you’ve had this run of contributing research to the advisor role, built a successful advisory practice and sold it with and of itself. If your client base keeps getting broader and more complex, there are more areas of expertise you need if you don’t pick something to specialize in and focus on that and just get reputable expertise in one area. This makes it difficult to go FI at Lean-FI, since FI & Fat-FI aren’t far away. I’m so financially independent that I can take a zero on that work income for the rest of my life,” then okay, you’ve got to hit your whole FI number. A follow up with Mr. Kitces, perhaps with some submitted questions, would be an interesting listen. That would have been my signal. Schwab had only just created a service where you could even manage assets for clients on an RIA platform. I just go buy the coffee. If all I’ve got to do is earn $20,000 or $30,000, yeah, I can find some stuff to do that would be a lot more fun and a lot more enjoyable, that I might actually enjoy my day, and I wouldn’t even have to work as many hours. 8. 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. And I think now we have all of those. Well, I agree kinda sorta except he kind of mixed things a bit. So, as long as one of them is working, they’re going to get health insurance through their employer. And this kind of balanced portfolio in the middle really was working best. And this, a little out of risk in an approach like that. And if that’s the case, you’ll be thankful that you were at a low number. That’s the biggest stage when our income grows. So people did seek me out. But whether you’re really not going to work anymore, let’s talk about that because I’m slightly questioning it just having seen a lot of people go through this.”. But this is been fantastic. So we are targeting a 2.5% withdrawal which equals out to the yield of our index fund portfolio. We lived purely in spreadsheet software. Bill: They were true believers then. And I have clients who were down at 3% because they had a pension plan that had no inflation adjustment. Thank you. And it wasn’t that long thereafter, I know, that the first paper came out, as memory serves, your first paper on what we now call 4% rule was 1993 or ’94 in the “Journal of Financial Planning.”, Michael: So talk to us about, I guess, where that research came from? In any case, “don’t worry, be happy”. There are three books. 2008, the whole S&P and the aggregate lost money because the financials lost as much money as the rest of the economy put together or as the rest of the S&P stocks put together. But the truth is, FIRE people are not going to watch their portfolio crash to zero. I was doing a lot of reading at the time, seeing that housing is in huge trouble and the banking system is in huge trouble. Okay? And so, if you spend time thinking about being cognizant of those permanent lifestyle additions that you make, even things down to like—boy, I’ll tell you. I’m wondering where 25% comes from. Depending upon the inflation level and the level of the market, I might be up to 13%, which historically, there were periods of time when you could take withdrawals that high. I want to upgrade my book, revise it from 2006. Bill: Yes, some of the earlier financial planning software was based on spreadsheets, as you know. Mad Fientist: Awesome! You’re not moving away from your work life. You mentioned briefly that you were in a bottling business. And frankly, there’s a wide range there. And was that because you felt like the business was less complex back then to have to deal with or there just weren’t a lot of choices? So my grandson, my wife, and my kids are still very important to me. Is there anything you know now that you wish you could go tell you from the early 1990s as you were getting ready to launch the firm and become a financial advisor? But that is just a matter of time. And then in 2005, while I was working on my book, I introduced small cap stocks, U.S. small cap stocks, which really juiced everything. Bill: I use about a 4.2% number to start. Bill: Yeah, my halo was gone. Not all of them work with people that are doing early retirement/financial independence. Mad Fientist: And that’s the best place to reach you? You add a few clients back in and just for you and your wife helping you in the practice that was the comfortable level of, “I can serve these clients, the income is good. But I’m doing something that I don’t think is practical for a person who manages money professionally. Yes. You’re working to a whole new scheme of life. No one had any definitive analysis that I could find. 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