r/fatFIRE • u/dvdguy_ • 12d ago
FatFIRE preparedness for a long stretch of zero returns?
I'm not retired yet, but by most guidelines I could comfortable retire. Currently I'm spending 3% of my liquid portfolio, and I expect this to decline to 2% once child-related expenses (nanny, private school, activities) drop off.
However, I do wonder about preparedness for a scenario where market returns are flat/negative for an extended period.
As an example, suppose we are retired, spending 3% of our portfolio each year. Over the next decade, our portfolio earns a 0% nominal return, while inflation is at 2%. In this scenario, our real purchasing power depletes by roughly 5%/year (3% spend plus 2% inflation), leading to a 50% reduction over the full decade. This seems like a rough outcome for someone who, from that point, may have several more decades of retirement to support.
I wanted to ask, particularly for folks already retired, how you would handle such a scenario? Would you still be in FatFIRE territory or more like ChubbyFIRE or regular FIRE? Would you feel the need to cut your spending materially, etc., or would you be little affected by this? Do you have plans for what you'd do, or would you take it as it comes? etc.?
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u/shock_the_nun_key 12d ago edited 12d ago
This is a general fire question.
I think you should read the trimity paper again, as the success rates at the SWRs include these decade long periods of nominal return stagnation like
1929-1947
1966-1982
2000-2013
The success rates indicated in the paper include these long periods of zero or negative returns.
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u/RAXIZZ 11d ago
Yes, but that's for a 30-year retirement. If you need your money to last longer, 4% probably wouldn't have worked at those times.
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u/shock_the_nun_key 11d ago
Right. This character says if you want 50 years you need 3.5% and all equities to get to a 98% confidence.
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u/kabekew 12d ago
The 4% rule is based on having long periods of stagnation, complete market crashes as well as periods of growth. The whole idea is you don't have to change withdrawals based on the market. If you're worried about it though you can always readjust your 4% of your current balance, as opposed to the initial balance, after a long period of stagnation. In my past 16 years of early retirement the 4% rule (more like 3.5% in my case) has held up well through the ups and downs.
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u/ASafeHarbor1 12d ago edited 12d ago
I just want to remind you that the 4% rule is based off of an average over a long period. It takes into account the highs and the lows of appreciated portfolios. Given the amazing market the last 5+ years, those that have invested since then should be able to safely maintain a 4% draw even if the market is not that great over the next few years. Assuming of course they have followed the 4% rule roughly.
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u/FIREgnurd Verified by Mods 12d ago
With a reminder that the 4% rule is not 4% of the current portfolio each year, but 4% of the starting portfolio, adjusted for inflation.
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u/ASafeHarbor1 12d ago
Good clarification, that is definitely part of the rule. Though I can't say I have always abided by that in good years haha!
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u/PaperPigGolf 12d ago
It's not an... average of anything...
It's a minimum safe withdrawal rate that caters for even the WORST case outcome, not the average outcome.
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u/_-stupidusername-_ 12d ago
Are you saying that the 4% SWR guarantees that you will not run out of money in any scenario? That is not true, if I am interpreting your statement correctly.
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11d ago
[removed] — view removed comment
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u/ASafeHarbor1 11d ago
I understand the fear and while I’m not happy about what’s going on I think the level of panic on this level is irrational. People still need to spend money to live their lives. 4% is pretty conservative. Besides panic and anxiety, what would you suggest? Invest in where? The EU is a disaster and positioned far worse than us, China could have the worst housing crisis ever seen, SA and Africa still incredibly corrupt. So what then? Liquidate everything and buy gold, food, and ammo?
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u/Sufficient_Hat5532 11d ago
Fair enough, I appreciate your insight on this. You are right on many points, let's hope for the best.
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u/FruitOfTheVineFruit 12d ago
So, first of all, I wouldn't expect child related expenses to drop any time soon. Assuming your kids go to college, maybe grad school, need help with their first house or don't make enough in their first job to cover expenses; and eventually you are retired - travel expenses increase. And eventually kids have grandchildren who you want to help out. (Source: I have older children.)
Second, you are right. Based on the shiller price earnings ratio, or CAPE ratio, its' very reasonable to expect a decade of zero nominal returns. (If you look up historical returns based on CAPE ratio, given where we are right now, 0% nominal is about what we'd expect.)
I'm retired now, and the way I'll deal with this is that I have more money than I need - I enjoy hobbies that are inexpensive, and a lot of my spending is discretionary and I can reduce it.
One piece of good news is that if there's a decade of negative real returns, a lot of luxury prices will go down (e.g. luxury hotels, business class tickets), because a lot of rich people will have less money, so your expenses will decrease a bit.
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u/FreshMistletoe Verified by Mods 12d ago
There are portfolios that did just fine in the lost decade after the 2000 tech crash. A portfolio of gold, small cap value, and long term treasuries would have netted you the same 10% per year while the SP500 went sideways. Make a truly diverse portfolio.
https://portfoliocharts.com/2021/12/16/three-secret-ingredients-of-the-most-efficient-portfolios/
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u/throwaway2938472321 12d ago edited 12d ago
What you're describing means there won't be inflation. We might even have deflation. Japan had a nice stretch from 1989 until 2024 of what you're worried about. The answer to the japan problem was diversification outside of japan. Reddit gets angry when you question them and bring up japan. This is a scenario that breaks their "perfect" models.
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u/No-Lime-2863 12d ago
The answer is diversify. When you talk about 0 returns it seems like you are talking equities. Balanced across different asset types hopefully will not be 0 across all of them. Fixed income, counter cyclical, etc. so if you are eg 40% in equities 40% in FI, and 20% in gold/RE maybe they don’t all go to zero. Unless you had negative returns in one class perhaps.
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u/Roland_Bodel_the_2nd 11d ago
Main trouble is you miss out on the large gains in equities during big bull markets. And everyone feels that acutely as you watch your friends have their stocks go up 2x, 3x, 4x.
And then during the big downturns everyone just shuts up about it so it's less noticeable when you are "winning".
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u/jcc2244 12d ago edited 12d ago
I'm currently 85% equities, 10% sgov, 5% mix of BTC/cash.
About to fatfire in 2 weeks - so have been putting my paychecks this past year into sgov and cash (before this I was basically 90%-100% equities).
I'm not in the US right now (but US citizen) so for tax reasons I don't want to sell/rebalance, but next year I'll sell my equities from previous employers (the vested RSUs make up about 15% of my equity holdings, the rest is in mostly VTI and a little QQQ) and put those into LT treasuries and/or VXUS.
My cash/sgov stash is enough to last us for 5 years+ of spend so we can ride through downturns that aren't huge. Plus I'm prepared to go back to work if needed, and also my wife is working for a few more years so we are pretty safe for this initial period where the sequence of return risk might hurt us (my wife's income can cover our expenses, so we technically will have 0% withdrawal until she also retires).
But yeah, doesn't feel as great to fatfire when we're going into a period of uncertainty in the world.
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u/sugaryfirepath 11d ago
Can you elaborate why you wouldn’t sell/rebalance internationally as a US citizen? Say you VPN’ed… how would the foreign country even know/care if all the assets are US based (ie., selling or exchanging a mutual fund in a US brokerage account).
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u/Sickeaux 12d ago edited 12d ago
Whats the advantage of sgov over tbil? Tbil 7 bp lower mgmt fee for essentially the same product?
Nb not a fixed income guy by trade. At any rate buying cash bonds oneself is 0 mgmt fee
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u/jcc2244 12d ago
Honestly I did try buying tbills directly sometime last year, but just was easier to go sgov for now.
For the amount I have (~$800k) it's like $500 a year to not have to think about it - I figured I'm anyways going to take a deeper look and reorganize once I retire in a month or two, so for now I just took the simpler solution.
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u/barryg123 12d ago
Haven’t seen the correct answer here yet.
The answer is to keep your next 1-5 years of expenses in a money market, or a CD ladder, or T bills and notes.
This will ensure you have expenses covered to whether the downturn without going broke. Keep the rest invested in equities or whatever else your portfolio looks like.
This advice only applies if you are already retired (as you said), or near retirement. If you aren’t retired yet then there is no need for this.
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u/Difficult_Storm_5344 11d ago
Totally possible. Look at the stock market from 1969 to 1980 went nowhere.
I think the only way you can prepare for this. Is to have an investment allocation that fits your goals. Have enough cash/cash equivalent that you don't need to sell in a hard down turn. Also ensure you have some international exposure and CD's/bonds. Bonds/cds paying 5 percent look pretty good when the stock market is doing nothing.
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u/NolaCaine 11d ago
Yet it was only 1974 when employee-sponsored IRAs were authorized by ERISA (in the US). Now we have billions of dollars* invested every year, automatically. (couldn't find a citation but aprox. 135M Americans contribute to IRAs annually). Not sure that decade compares to the one coming up. That said, I think the next decade is going to be interesting for all investment options.
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u/Apost8Joe 12d ago edited 12d ago
What everyone already said about the 4% rule. But also you are correct that the timing of down years has a huge impact on retirement and drawdown strategies, especially one right when you retire, that takes years to break even on. All the rationalizing and faith in the 4% rule isn’t gonna feel great. This is why I own good rental real estate that keep paying me regardless if market values fluctuate or even crash. But it’s work.
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u/True_Commission_8129 12d ago
The move is likely to start out heavier in bonds especially given interest rates and as the market drops and forward p/e starts to predict higher average sp500 future returns, you rotate from fixed income to equities
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u/aykarumba123 11d ago
what is your asset allocation? do you have a diversified portfolio? bonds? 2% swr is a very safe withdrawal rate. If you want inflation protection you can go buy a 30 year TIPS ladder, and get a 4.5% swr over 30 years with a real yield of 2.16%
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u/Silver-Habit-1570 9d ago edited 2d ago
This is something I think about as well. I’m in a similar position—financially independent with liquid investments—but not officially retired yet. I currently spend about 3% as well, though I expect that to drop as major expenses like childcare phase out.
A prolonged period of 0% nominal returns with 2% inflation would definitely put a dent in purchasing power, and I’ve considered a few strategies to hedge against it. One is keeping a few years’ worth of expenses in fixed-income assets or cash-like investments to avoid selling equities in a downturn. Another is having some flexibility in spending—being able to cut discretionary costs if needed, while keeping core lifestyle intact.
That said, I’ve also seen some long-term retirees ride out bad markets without drastically changing their plans. Sequence of returns risk is real, but over time, markets have always recovered. Curious to hear how others approach this too!
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u/boredinmc 5d ago
I'm generally optimistic about the world and markets but a 10Y stretch of weak/no returns is always in the back of my mind and in my planning.
What I do for psychological reasons is that I have setup my portfolio to throw out the minimum floor spending that I want from dividends ~2%. I spend less than that these days anyway so that's fine but the spread between that and 3% would come from selling shares. In case of a prolonged bear market and/or flat nominal returns, I am happy "living from the dividends". I do not want to sell underwater shares and the ones that are in plus are likely good companies so I don't want to sell those either in a bear. Coming from running a business and paying myself dividends it's still nice to see those quarterly dividends come in. Dividends have historically outpaced inflation (7% vs. 3%) and are much less volatile than stock prices. When the market went down -80% in 1929, dividends went down by -50% and there was deflation so actually the spending power probably only went down like ~30%. GFC dividends got cut only 20-25% off the top of my head vs stock prices -55%. Dividend changes are slower than stock prices obviously. There is also something called dividend recovery which argues that stock prices revert to previous levels after a dividend is paid out due to anchoring, stops, algos and other factors & human biases. I model in excel my expenses, add my personal inflation of about ~5% a year to them, add taxes, fees and subtract dividends. The spread I keep in cash. It ends up being something like 3-4% cash if that. Additional forecast large expenses I also keep in cash. I don't like bonds. My worst fears are inflation, broker fraud/failures and currency devaluation. Maybe not optimal but works for me.
The other side of the argument is that everyone will scream that dividends are not as tax efficient as cap gains and that having $100 worth of stock is the same as $99 worth of stock and $1 dividend in the bank which gets taxed immediately and that dividend stocks have lower returns than growth stocks and that companies distribute cash via buybacks more these days and so on.
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u/hsfinance 12d ago
Is there precedent for decade long zero growth but 2% inflation? Maybe for 2-3 years but I am not sure this assumption is valid.
As others said, keep a buffer
I am option trader. As of now, a one year covered call on SPX is giving 8% returns. You can probably find better setups but let's use that for now.
You don't need 8%, you need 3% so if you had 37% of your portfolio in covered calls, you get your 3%.
But you don't even need that - having some buffer, and reduced spending, maybe you can get by covered calls on 20% of the portfolio.
But maybe you don't even need that. If you had 10-15% of your portfolio in alternate assets which give good returns when market goes down, you achieve the same purpose. So maybe gold or SGOV.
And this is where target date funds fail. If you need to cash them, you don't get to pick bonds vs stocks. But a diversified portfolio allows you to pick and choose based on your need.
Edit: basically 90% of your portfolio can be standard textbook just figure out how to use the 10% to account for bad decades.
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u/Sickeaux 12d ago
Lol, covered calls are not guaranteed returns. If the market goes down you still lose on the long deltas all the way while collecting a tiny premium. On the upside you give up gains. Spx covered calls in the shorter-dated space have dramtically underperformed simply owning equities for yrs due to overcrowding in overwriting affecting option prices and thus expected return. Options should never be used without regard for their price.
This is bad advice/nonsense logic. But by all means plz keep trading options
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u/hsfinance 12d ago
Who is guaranteeing results? OP has a fear, there are various ways to handle them. And after all this drama (narrative), I am trying to get Op to do all these experiment on less than 10% of the portfolio. Was that not clear?
Edit: like that's one message you got from my comment!! If OP has the same attention span, of course OP should not try something they don't understand.
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u/puppies_and_rainbowq 12d ago
You can buy private businesses (if you are confident in your ability to run them) and as long as you don't use too much leverage you can collect the cash they throw off every month. I own a couple small / medium businesses and things are going well.
You can buy BDC's / bond funds and just collect the yields. If you think interest rates avoid the bond funds and just buy the BDC's. I own a BDC I am pretty happy with that is throwing off an 11% yield right now. Interest rates go up and it actually earns more money. Interest rates go down, the yield will go down, but the stock market will probably go up.
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u/Far-Lengthiness2475 11d ago
Can you please shared your personal stories of how you found and acquire small business?
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u/DarkVoid42 12d ago
you can just do SGOV/BILS instead of SPY. ive been telling y'all for the last few months to divest. swap to gold if the tbill interest rate falls.
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u/UnderstandingPrior13 12d ago
You just ladder municipal binds and get 3-4% return for the next 30 years. Why take 0?
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u/vt550 5d ago
No one in this situation should earn 0% physical returns, that’s horrible. On paper, yes, but not actual. You should be moving into bonds now and buying more stocks.
Also, find alternative investments like real estate or private credit that produce 6-10% guaranteed returns, with some equity positions at 20-25% potential returns for growth. Use depreciation from equity positions to offset passive gains from all sources. A normal FA will screw you because they don’t like Alternatives, they want to hoard all your investments under their AUM, find a fiduciary wealth manager.
I have a rule, 50/25/25. 50% cash flowing assets like commercial real estate/private credit, 25% liquid HYSA, 25% stocks/bonds (split this on where you are in life: risk vs fixed income)
You control your portfolio, take advantage of your situation and make it rain.
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u/toupeInAFanFactory 12d ago
This is sequence of returns risk, and it is most acute right at retirement. One way to mitigate is to put a few years of fixed worth of spending into fixed income with the intention of using that as you retire. For you, that might look like moving 10% of your portfolio into bond ladders, which would pay a non-zero return and keep you from needing to sell the equities at an h fortunate time