After my post, The Proper Withdrawal Rate: 4 Percent Rule Is Outdated, ruffled some feathers, I began to wonder why people argue so much on the internet. Arguing is exhausting and pointless. There's no need to win a financial argument. Just get rich instead.
The last time I got into a financial argument must have been when I was in my early 30s. I thought I knew so much after only 10 years of working in finance. I was willing to battle with people who saw the world differently. How naive.
But as I've gotten older, I now just shrug my mental shoulders when there's a financial disagreement. I do try my best to understand the person's point of view. Goodness knows I have many blind spots. However, if I still disagree, then I move on. No big deal.
In the professional investment world, we are taught to always entertain the possibilities. As soon as you ossify your way of thinking, you expose yourself to tremendous potential loss. That, or you miss out on multi-bagger opportunities. To get rich, you must try and see opportunity before others.
In personal finance land, the main thing you must focus on is whether your views and actions are making you richer or poorer. If you disagree with someone's financial point of view, yet are getting poorer or are not keeping up with everybody else, then you should consider changing your ways.
Be flexible in thought. Otherwise, you're just going to get angry as the world passes you by.
Financial Argument: Low Interest Rates For Life
A big part of my Financial Samurai safe withdrawal thesis (80% X the 10-year bond yield) was that interest rates will stay low for a very long time.
Given risk asset returns are intertwined with risk-free rates of return, it would be wise to increase your net worth target, lower your safe withdrawal rate, and earn supplemental retirement income. My mistake was assuming people understood the relationship with the risk-free rate of return and risk asset returns.
On Thursday, August 27, 2020, nine days after my “Proper Safe Withdrawal Rate” post was published, the Federal Reserve announced a major policy shift. Fed Chair Jerome Powell said the Fed is now willing to allow inflation to run hotter than normal in order to support the labor market and broader economy.
In other words, the Federal Reserve will keep its Fed Funds rate at or near zero percent for a long time. In the past, to ward off inflation down the road, the Federal Reserve would consider raising interest rates whenever the unemployment rate fell below the natural rate of unemployment (NARU). The implications of this policy shift are big.
It seems as if Jerome Powell had read Financial Samurai's “Proper Safe Withdrawal Rate” post days earlier.
He must have realized, Oh crap! The secret is out. The public is getting smart about our intentions for keeping interest rates low. We need the public to work longer to eventually pay back all the debt we created. Let's come clean and make an announcement!
It is too soon to tell whether risk assets like stocks, bonds, and real estate will see lower returns in the future. Right now, we are witnessing a pile on into stocks and real estate given the opportunity cost to hold a risk-free asset is so low and the Fed stimulus is so great. Investors are searching for yield.
However, as we saw in the stock market performance by President post, there have been two lost decades in history: the 70s and the 2000s. Therefore, please prepare for a scenario where stocks or real estate don't always go up. In such a scenario, even withdrawing 0.5% doesn't feel good when your investments are losing money.
Everything Is Rational In Finance
The financial arguments against my FS Safe Withdrawal Rate guide are as follows:
- I don't have children
- I don't have a desire to give to charity after I'm gone
- I'll never retire if I follow your 0.5% Rule
- I want to spend all my money before I die
- The 0.5% Rule is too demoralizing so I'm not willing to do more reading
- Inflation will take care of everything
- I'm not willing to earn supplemental income in retirement, unlike William Bengen, the creator of the 4% Rule, who mentioned in the comments section he is making supplemental retirement income writing books and consulting
- I'll be relocating to a lower cost area in retirement
- I'd rather listen to an old rule popularized by working professors than someone who has been living the early retirement lifestyle since 2012
- Stocks only go up
- I'll easily be able to shift from aggressively saving for decades to withdrawing
- I'm not willing to adjust to the changing times
All these arguments are absolutely fine. All of us are rational. We keep doing things to our benefit and stop doing things to our detriment.
Only a fool would keep doing something that continues to harm their finances. And in this world, there are no fools. Only ignorant people.
The key is to generate supplemental retirement income from something you enjoy doing. Once you do, you can more comfortably live off the Financial Samurai Safe Withdrawal Rate guide.
Examples Of Everything Is Rational
If you don't believe everything is rational in finance, let me profile several stories of people I've encountered who made rational changes to improve their financial lives. Having a financial argument about these things is a waste of time.
After the stock market sell-off in 4Q2018, Bob realized his $3.5 million net worth was not enough to provide for a comfortable lifestyle in a big city like San Francisco. Bob had retired from his job at 46 a year earlier. As a result, Bob, his wife, and his daughter moved to a much lower cost part of the country.
Bob realized what I've been trying to say to many, that going from saving and investing to withdrawing is extremely difficult. Old habits die hard.
Bob could not bear to withdraw more than 2% of his portfolio to live. Therefore, he relocated. Not only that, he decided to make some supplemental income online.
Below is not a chart of Tesla stock. It is a chart that shows how much more capital we quickly now need since 2019 thanks to the rapid decline in interest rates. Pay attention. Hold onto your cash cows for dear life!
Jennifer got her Masters of Arts degree in Broadcast Journalism from an expensive private school. She began covering money topics for some major financial publications.
Over time, she became very dissatisfied because while she was making a healthy $90,000 a year, the successful entrepreneurs and executives who she constantly covered were making millions. She wanted more.
Instead of using her journalism expertise as a substitute for her lack of financial expertise, Jennifer decided to get an MBA to bolster her financial knowledge. Once she graduated, she decided to go out on her own and be a personal finance consultant and speaker about money.
Although she still sometimes feels like an impostor because she is not financially independent, she nevertheless feels like she has much more credibility after getting her MBA. Further, by starting a business, she's finally doing instead of just covering.
Get Ahead Joe
Joe used to get angry at his peers who got paid and promoted faster than he. He would always talk bad behind their backs. Eventually, his boss caught wind of his negativity and pulled him into his office to have a chat.
His boss told Joe that he could either work harder and build a strong network of supporters to help him get promoted or leave in six months. Joe was nervous because this was the first time he had received a work ultimatum.
Because he wanted to propose to his girlfriend and to buy a house, Joe decided to stop bad-mouthing his peers. He also decided to build strategic relationships with three senior colleagues.
After six months, Joe not only landed more business for his firm, he was promoted to VP. His disdain for other VP promotees immediately went away.
Pete retired from his $250,000 tech sales job at the age of 32. He was burned out and hated corporate politics. People said he should have sucked it up for several more years, but Pete refused.
Although Pete proudly proclaimed he was an early retiree, deep down he was nervous about his financial situation. He retired a year before the pandemic hit and realized his backup plan of going back to work was no longer there. His old employer was downsizing.
Therefore, Pete decided to drive 20 hours a week for Uber to supplement his $10,000 a year in dividend income until rides started to disappear. Then he decided to focus all his attention on delivering groceries.
Pete became frustrated at anybody who generated enough passive income to not have to work. He was risking his health during a pandemic for close to minimum wage pay.
Then one day, a competitor of his old employer shot him an e-mail and asked if he wanted a job. Pete immediately said yes, even though the offer was for $100,000, or 60% less than he used to make. Better to make $100,000 safely from home. Finally, Pete felt more confident about his finances.
Carlton retired and promised that if all went well, within two years, his wife could also join him in retirement. Six years have gone by and his wife has still not retired because Carlton is not confident enough in his finances.
Due to ego, instead of saying he is a stay at home dad, he tells his friends he is retired. In actuality, he is WiFi, or Wife Financial Independence. WiFi is gaining steam as more women become breadwinners.
Due to Carlton's financial worries, he's figured out a way to keep encouraging his wife to work longer to help provide for their family. Carlton gives her regular pep talks once a month and highlights other women who are doing well in their careers.
What do these five people have in common? They used to all argue incessantly with people over financial matters. Once they “got rich” by fixing what was going on with themselves, they no longer felt the need to impose their will on others. No need for a financial argument!
The one great thing about critical feedback is that you might learn something about yourself too. What I realized from all the pushback against the FSSWR guide is that many people don't have thee default assumption of leaving a legacy for children or organizations.
Instead of adopting my legacy retirement philosophy, there's a lot more YOLO retirement philosophy going on in America. As someone who grew up in Asian for 13 years and spent 13 years working in Asian equities, my cultural views on money and life are different from western culture. Having a financial argument with me about my culture won't get you anywhere.
Try And Find Balance In Your Financial Views
In addition to the Federal Reserve finally coming clean about keeping interest rates lower for longer, I'm pleased to report at least one reader has found more balance in his viewpoints.
Here is his comment.
I’m the Dan that previously stated your article was a “bit of clickbait”.
Maybe slap in the face would be a better way to put it, as in you were looking to make sure the message got out there by invoking a provocative title.
I’m commenting again because I agree with your assessment. Maybe not to the degree, but certainly in the current environment it’s prudent to be more conservative with one's Safe Withdrawal Rate.
Powell’s speech yesterday should be a further wake-up call that long term interest rates will be lower for longer. It's time to accept we will be more like Japan and EU than the USA circa 1998.
A more pragmatic approach is to save FU money and then design a lifestyle that includes a lower income job that offers more flexibility and time to do other things. This will hedge against lower returns while still allowing one to realize the benefits of FI.
Thanks for throwing a little cold water at us…
No problem Dan. However, I don't believe the U.S. will get stuck in the muck like Japan or the EU. We're too hard-working and capitalistic not to innovate our way through difficult times.
Old things, like malls, will be repurposed into new things, like distribution centers for Amazon. I just have my doubts that continuing to model a 10% annual return for stocks is a good idea.
When you reach your financial destination, it is also better to have a little too much money than too little.
Taking Feedback In And Adjusting
I'm not sure if commenter Dan knows what “clickbait” means. Having a title that starts with “Proper Safe Withdrawal Rate” is the most non-clickbait, descriptive title you can find. If there was such a thing as Clickbait University, I would flunk out.
A clickbait title would be something like:
“Why You'll End Up Broke And Alone Following The 4 Percent Rule”
“A Retiree Mistakenly Followed The 4 Percent Rule, You Won't Believe What Happens Next!” BuzzFeed style
“The 4 Percent Rule Caused Me To Get A Divorce And Something Even Worse…”
Other dissenters of the 0.5% Rule also mentioned the post had a clickbait title. Therefore, as a rational writer, if people think my boring titles are clickbait, then I might as well start spicing them up!
I should even host a competition to see who can come up with the most clickbait titles for my boring titles. It'll be fun!
Embrace Criticism To The Max
Some good can come out of a financial argument. Embracing your critics is a great strategy for personal and professional growth.
For example, after I announced that I was going to focus more on entrepreneurship and less on retirement in 2018, a number of people said I was an early retirement failure.
One of the main reasons why I decided to focus on entrepreneurship is because I received poor feedback on a personal milestone article. I figured, what's the point of sharing personal thoughts with no feedback when I could just follow most of my peers and publish money making articles with no feedback?
Instead of being disappointed that I was called an early retirement failure, I decided to embrace my failure and write, Why I Failed At Early Retirement: A Love Story. The article turned out to be incredibly popular.
Using criticism helped me take Financial Samurai in a new direction with a plethora of new topics to explore. Further, if someone in the media is looking to highlight an early retirement failure, who better to come to than the biggest failure of them all?
But most importantly, I've used the criticism to build more passive income in order to take care of my family.
My number one goal as a father of two young children is to ensure my wife and two kids are taken care of. My second goal is to spend as much time with my family as possible. Finally, a big continuous goal is to enable my wife to be a stay at home mom for however long she wants.
Stop Arguing, Get Rich Instead
If you're trying to change someone's mind about a financial belief, chances are high you're wasting your time. You can certainly have a rational discussion. However, if you find yourself calling people names and getting emotional, you should take a step back and look within at what's going on.
The one barometer you should follow is your net worth. You will find that the more your net worth grows or outperforms, the less you will find a need to argue with anybody about a financial topic.
Therefore, in a very real way, money does buy happiness. The more satisfied you are with your finances, the less things that go counter to your beliefs will upset you.
Get rich. It's the best way to cure your propensity to get into financial arguments. If you can't get rich, then at least learn how to feel rich.
Keep Track Of Your Finances
Stay on top of your Roth IRA and overall finances by signing up with Personal Capital. PC is a free online tool I've used since 2012 to help build wealth. Before Personal Capital, I had to log into eight different systems to track 35 different accounts. Now I can just log into Personal Capital to see how my stock accounts are doing. I can easily track my net worth and spending as well.
Personal Capital's 401(k) Fee Analyzer tool is saving me over $1,700 a year in fees. Finally, there is a fantastic Retirement Planning Calculator to help you manage your financial future.
I've been using Personal Capital since 2012 to manage my finances. Since that time, my net worth has skyrocketed partially thanks to better financial optimization.
Readers, do you believe everything is rational in finance? If not, why would someone keep on doing something that is harmful to their finances? What type of financial argument have you gotten into? Did you win the financial argument? What is the point of trying so hard to change someone's way of life?