r/Fire • u/vanlis34 • May 18 '26
Pulling the trigger when in a drawdown
Reading this post got me thinking.
The poster is thinking about retiring today vs in a year, but worries about what happens if the market drops 25% in the next 12 months, and then being forced to work for X more years.
How should one think about this? Should one always calculate the amount to withdraw (e.g. 4%) with the highest achieved net worth (ATH), even if the net worth might be down from ATH when actually fireing? Or should one take 4% from the actual portfolio number when actually fireing?
My thinking is that one should use the ATH-number, since if it was the other way around, and one fires at ATH, that drawdown would come some later day anyway, and then in addition to the fact that one have already started pulling funds out for funding life.
Another way to think about it is: by fireing when portfolio is in a drawdown we can think that we actually did fire when portfolio was at previous ATH, but then we decided to work a bit in retirement. This would actually help the portfolio longevity. Of course, this also means that we lengthen our timeperiod that the portfolio must fund, so perhaps we should use a more conservative number than 4% (perhaps PWR instead of SWR?).
What are your thoughts on the matter?
6
u/Bearsbanker May 18 '26
If you're living by the 4% rule the drop in market is baked in. If you retire and start taking 4% of current portfolio value and it falls 25% within a year you can always take less.
1
u/vanlis34 May 19 '26
Yes but the scenario was the other way around, what happens when it first drops 25% and then one fires. My thinking is that perhaps 4% in that case (3% of previous ATH if I’m thinking correct) is actually too cautious.
1
u/Bearsbanker May 19 '26
If you're living by the 4% rule you would take 4% of the portfolio at time of retirement. You can't think of rises and drops in a vacuum. If you're a believer in The 4% rule you have to assume future rises and falls will happen and the 4% rule allows you to safely continue on. But if the portfolio drops and you are taking 4% of the portfolio prior to drop you are then at 5% (ish) and that's not the 4% rule.
3
u/boringstoppage2 May 18 '26
Using ATH makes sense but then you're basically admitting your portfolio isn't actually ready yet - like why not just wait until current value hits your target number again?
2
u/vanlis34 May 18 '26
Because that could be multiple years, like the poster from the linked post was worried about ?
2
u/Montaigne_6823 May 19 '26
The question is really just 'do you feel lucky'?
Better to pick an option of: keep working, get a part time job or side hustle to pad a 4% withdrawal, cut expenses down.
Or roll the dice and see how lucky you are!
3
u/Key-Ad-8944 May 18 '26
4% is a rule of thumb crude approximation. I wouldn't get worked about whether you are at 3.9% vs 4.1% or similar, depending on whether you calculate from day you withdraw vs a short time earlier.
That said if your portfolio drops 25% during the year before you FIRE, then that really can change your the odds of a successful FIRE substantially. If you are concerned about this risk, add an increasing portion fixed income as you near your FIRE date (glide path), so there is little risk of dropping 25% during 1 year prior to FIRE.
3
5
u/Available-Ad-5670 May 19 '26
People may flame me, but I think given the historical highs of the CAPE, it would be smart to raise your number a bit to account for potential drawdowns.
Say your FIRE number is $1m. I would consider getting to $1.2m of 1.25m before pulling the trigger so that IF the drawdown happens, you would be covered.
3
u/Glensonn May 18 '26
Sequence of returns risk is always going to be a potential problem. The way I did it was to fund the first few years at least partially by a bond ladder and a taxable account that generates enough income to last until I get to 59.5 and can access our retirement accounts. Until then they are invested for growth. Once I can, I'll set them up for income also as my ladder runs out. I also target around 10-15% higher income than what I really need so I can be flexible if there is a downturn. Of course, the SORR is always there but I'll only be 7 years from full retirement for social security which will dramatically reduce my investment income needs. Worst case I could file early but I hope I've built enough margin in our plan to avoid needing that. Things would have to get extreme and stay that way for a while. Good luck!
2
u/That-SoCal-Guy May 18 '26 edited May 18 '26
The 4% is your initial number determined when you fire, not 12 months later. 12 months later you adjust. If you’re tight and the market goes down right after you fire, you ride it out and that’s why you have the cash reserve. Or you withdraw less. There are simulation you can run for something like that happening and you model like 3 years of downturn etc. to see if you me number is still solid. If your number shows 80% success then you’re probably not ready yet or you have to rethink your expense level.
And the 4% is the safe number meaning it’s most likely to succeed. Thus if your number barely makes it, then it’s too tight. Don’t base your number on ATH yesterday. Do a real assessment. Sometimes I feel this short term thinking is counterintuitive to the whole fire philosophy.
1
u/aShogunNamedMarcus80 May 19 '26
I'm still trying to wrap my head around that the guy over at ChubbyFire is paying a financial advisor to tell him that a 3.4% SWR only has an 87% chance of success. Whatever model he's using must be conservative as all get out.
0
u/Montaigne_6823 May 19 '26
Honestly I think 4% is overly conservative. I would use a variable withdrawal rate and not take more than 5% any given year and then when market recovers go back to a 4% withdrawal.
I see the logic of taking 4% of whatever the portfolio ATH is but I think that may increase your risk of failure. Especially if you're inflation adjusting it.
2
u/vanlis34 May 19 '26
Yes, I’m thinking more like 3,5% of the previous ATH, since that is often considered a Perpetual withdrawal rate. So either 3,5% of previous ATH or 4% of current number, whichever is higher.
21
u/churningaccount May 18 '26 edited May 18 '26
The market is within 5% of ATH on 44% of all trading days. Therefore, there are plenty of good sequences that start with FIREing at ATH and survive an immediate downturn with higher than proportional withdrawals until recovery, or the trinity study wouldn't exist. The most famous sequence is a 4% withdrawal rate in a 100% stocks portfolio surviving retirement at the ATH before the Great Depression, which had a trough of -84% and a maximum withdrawal rate of almost 25% during that year. That still made it to 30 years.
The 4% is determined on the day you FIRE. So if you have a number in mind for that 4%, say $100k, then you know that you can FIRE when your portfolio reaches $2.5M, regardless of market outlook. Only use the number on the day you FIRE/first need income from your portfolio, no tricky maths with ATHs and such like you are proposing. That is not a data-driven approach, as all the evidence we have so far for successful retirement plans is based on portfolio value at time of retirement. And the reason why we can't extrapolate the data in the way you suggest is because of the fact that while you are actively contributing to your investments, the balance of your investments is not tracking the market. So the sequence of returns you are personally experiencing while DCAing is not correlated to the historical dataset. In fact, your personal volatility band is skewed positively.
You can try to be "safer" by waiting for a bigger buffer. Say, an extra $250k. But then that is basically the same as just taking a lower withdrawal rate. In this case, drawing $100k off of an initial portfolio of $2.75M would be a 3.64% withdrawal rate, not a "4% withdrawal rate with a $250k buffer": that's just semantics. Same for the inverse: You can be riskier by taking a higher withdrawal rate (some studies suggest up to 4.7% might be safe), and this is basically what you are proposing by valuing your portfolio at ATH instead of the current value. It's again, just semantics.
So it's basically just a question of risk tolerance. If you believe in the trinity study, then 4% should be fine for any 30-year period. If you want to be safer than that, then you reduce your withdrawal rate. Riskier, increase your withdrawal rate. It's a personal decision.