This is one of the big questions, once we start out on this journey how long will it take to actually being able to declare financial independence and never work again? We’ve all had a play around with spreadsheets, whether it’s our own or one of the various ones you can find on the internet. There are varying degrees of sophistication and all sort of assumptions (or not) about taxes, rates of return, savings rate, withdrawal rates etc but once you plug in all the numbers you get a result that says you can retire in 18.274 years or whatever the figure is.
But what does the data look like historically? I’ve talked plenty of times previously about sequencing risk (believe it or not this blog isn’t just about sequencing risk, I do occasionally talk about other stuff!) and how it affects the accumulation phase of FIRE, the withdrawal phase etc. So how would the actual sequences of returns which we’ve seen historically affect how long it would take us to retire?
I’ve used the same assumptions for this post as I did in my last one about Can we control when we hit FIRE, so if you’re interested go back there to take a look. Otherwise read on to see at how it would have played out historically!
I’ve run the scenarios from 1959 through till 1993 which is the last year all scenarios would have now achieved their FIRE goal. There are actually some scenarios which would have hit FIRE from 1993 and beyond but not that many so I didn’t include them, this is of course due to the impact of the GFC in 2008.
One of the things that stands out here is that saving a bigger portion of your target amount each year does help out, but not necessarily as much as you might think and it’s definitely not a linear relationship.
The 30k savings rate with a goal of $1.25m is a bit of an outlier because the savings rate is only 2.4% of the total vs between 3% and 4% for all other scenarios and you can see this in that the time taken to hit FIRE is almost always a lot longer than for the other scenarios.
This graph shows the number of years required to hit FIRE for the two $30k scenarios. Most of the time there wasn’t a huge difference between the two but there were still a number of occasions where it was 5 or 6 years, and it’s as much as 7 or 8 for the early 90s.
The below graph shows that for most starting years there was only a year or two of difference if any when saving $40k and aiming for either $1m or $1.25m, although occasionally it was as much as 7 years to get that extra quarter mill. That’s a long time to be waiting!
The $50k scenarios below were very similar to the $40k ones. Most of the time the amount of time taken was pretty similar, but there were exceptions with 7 years difference for that additional $250k.
The reason for this as per my previous post is that the year when you hit FIRE is almost certainly a positive year for the market, and likely a very positive year with at least a double digit gain.
So you get a bunch of scenarios from different years and with differing amounts all hitting FIRE at the same time because the returns in that one or two year period are so strong and anything even remotely close gets across the line. A rising tide lifts all boats as they say.
The graph below is from my previous post on this subject and as they say a picture tells a thousand words.
The scenarios starting from 1959 for the next few years mostly hit FIRE in 1979 or 1980 although there were some that made it way back in 1972. The next sequence of returns to hit FIRE starts in the mid 1960s and continues on for another eight years or so (it differs by scenario) where there is a downward slope in the number of years it takes to reach their goals. If you started your journey anywhere between roughly 1963 and 1976 you were pretty likely to all achieve FIRE together in 1985 or 1986.
And if you started in the mid to late 70s you likely pulled the pin on work in 1992 or 1993 where there was a group of people all hitting FIRE at once due to great equity market returns. Since then we haven’t seen as much clustering though, it’s been a case of people hitting FIRE most years rather than it all building up.
The average time to hit FIRE across all the different scenarios was just under 16 years. If I remove the outlier of the 30k savings amount with a target of $1.25M then it goes down slightly to about 15.5 years which is still probably a lot longer than most people are aiming for.
Just under two thirds of the time across all scenarios you would have hit FIRE within 16 years with about half hitting it within 15, but the outliers where it took a lot longer push the average up. You can see that in this chart here which shows how many scenarios hit FIRE for each number of years.
Last but not least, I thought it would be interesting to have a look and see what this would have meant historically for my current personal situation using all the scenarios in which I would have now hit FIRE. The good news is, if I were to start in the right year currently I’d be only 5 years away from theoretical FIRE. The middling news is, it could also have been as much as 15. The bad news is, there is no scenario from 2004 onwards in which I would have already achieved FIRE.
All of this is purely hypothetical in any case, but it’s fun to look at. And in case you’re interested, according to my own personal spreadsheet which I made a while back before I started looking at sequencing risk, I should in theory be about 11 years or so away from retirement. Having run all of these scenarios though, I now know that in reality it could be vastly different number.
So what all of this really shows is that as I said in my last post we don’t actually have total control over when we will achieve FIRE. We can be doing all the right things with saving and investing money, but at the end of the day the returns of whatever we are invested in will determine when we achieve FIRE.
What are your thoughts? If you enjoyed this post and would like to read more like it then please subscribe!
Interesting read – thanks for sharing! I’ve never really cared about how long it would take too much (because it is a long slog at the end of the day), but it’s good to have a ballpark idea!
I think I might become a bit more excited if I was closer to reaching FIRE, but honestly I’ve just started out so that’s probably why I’m not looking at it in that much detail.
I think it’s nice to have a rough idea of how long it will take, but if you’re assuming it will be exactly 12.694 years then yeah you’re likely in for some disappointment unfortunately. I’m not that close to FIRE either but I’m assuming that as you get closer to it you also feel a lot more secure in your life and may have less desire to retire as a result. Working becomes a choice rather than a necessity. It’ll be nice to hopefully find out at some point!
Fantastic research AHF, thank you. My take from this is that one needs to be doing the right thing (saving) all the time because when the boom happens you need to be ready to ride it. If you don’t have as much as you could saved it could in reality cost you a decade. Again, great article.
Hi Rob, glad you enjoyed it! You’ve definitely got to be putting in the hard work with saving so that you can let the market do the work for you!
I think the Retire Early is the main problem. Once you have a large stash invested over a number of years and have got your expenses under control earning some sort of income helps remove a lot of the stress about sequencing. Whether it’s a part time job in a new area that you have a passion. If both partner’s in a relationship got part time hours in a enjoyable job this reduces the amount you need to tap into investments further.
Hey Mr FMT! I think it depends on what your plans are for the RE part as to whether you want to do some part time work or casual work, or just pull the pin entirely and never work again. I’m very much hoping for the latter but I’ll see what it’s like as I get closer and I’m certainly not averse to working another year or two if it’ll give me more of a safety net.
Hey AHF, have you considered comparing this set of results with you other post on sequencing risk.
i.e. the failure probability of a particular SWR and allocation might only be 3% of all total start months/years. However it may be that it is a whopping 20% of early retirement portfolios (because of the tendency for early retirement portfolios to hit their target during raging bull markets).
The discussion on my blog the other day has really sparked thoughts about the best way to reduce sequenc risk, time to retirement etc. It has also sparked the thought that very few (or no-one as far as I can tell) considers risk holistically through accumulation and retirement phases, the analysis is always performed in silos, (one set of posts about SWRs, another set about accumulation) leading to the disagreement about allocations during accumulation the other day.
I am sure plenty would be interested in the results. Perhaps we can delegate this task to the math genius in our community aswell 😏.
Hi Pat! I’ve probably got a couple of posts left in the sequencing risk series which may include a full post on what happened in withdrawal phase to all the portfolios that hit FIRE. A similar question came up on Reddit the other day and this was my response.
“Anyone who hit FIRE based off a 100% equities allocation during both accumulation and drawdown phase and withdrew at a rate of 3-4% and has had at least 30 subsequent years has made it through fine. The only scenarios that covers though are ones from 1972 to 1986. This is all based on my earlier work which used a mill as the FIRE target.
There would have been some very nervous moments along the way for the 1972 cohort which dropped to a value of less than $400k twice, but they’ve got about 3 mill as of now with a 4% withdrawal rate and 7 mill for a 3% withdrawal rate. The 1979 and 1980 scenarios are all now worth minimum 8 digits now, same with 1983 and 1985. 1986 scenarios are either side of 7 mill depending on a 3 or 4% withdrawal rate.
Of the scenarios that would have hit FIRE but haven’t had 30 years, all scenarios up to and including 2005 have more in there than they started with. As you’d expect the older the scenario generally the more money they have as compounding has had more time to boost the portfolio. From 1998 onwards they all still have less than 2 mill in there in today’s dollars.
Hope that helps?”
Great discussion in your comments the other day (link here for those who don’t already follow Pat’s excellent blog https://lifelongshuffle.com/2018/12/16/not-so-super-retirement-savings-part-1/) which was quite thought provoking.
And yep you’re right no one has posted about the best way to get through accumulation and then withdrawal so far. I’m hoping that I have a bit of time over the next week or two to have a look at it, or more accurately figure out if I can actually write a spreadsheet to try and calculate it! Even if I do manage this I think it’ll likely come up with a bunch of tradeoffs though. It might be that 80% of the time all equities is fastest in accumulation phase, but the times when it’s not it is far slower than say a 75/25 equity/bond split. So you might get an average of 16 years to hit FIRE for all equities vs 18 for 75/25, but a range of 11-25 for all equities vs 14-22 for that 75/25 split. I dunno, I am literally making some of these numbers up right now but you get the idea I’m sure.
Anyway as I said I’m going to have a crack at it, but if I’m lucky Dan at https://ordinarydollar.com/ will do the work for us in advance and we can all just piggyback off him! For those who are enjoying my work on sequencing risk you’ll almost certainly enjoy Dan’s work on the closely related topic of safe withdrawal rates. Please go check him out!
If you are looking at FI as hitting a certain portfolio value that you can then pull 4% from, then yes sequencing risk and reaching FI during booms is a thing.
If you ignore your portfolio value and just look at portfolio income then perhaps less of an issue, as dividends normally don’t reduce as much (or at all) if the market drops.
In theory at least the share price should reflect future income so there should be some sort of relationship between portfolio value and income. As you say dividends don’t tend to drop by the same percentage as share prices for a whole bunch of reasons so it’s obviously not a perfect relationship. In general I would expect a pretty minimal drop if any in dividends for falls of up to 10% in share prices, for bigger drops though I would expect ot see dividend cuts. I talked a bit about what happened to STW back in the GFC in this post here. So yes in general I agree but there are definitely exceptions to the rule.