The Sunday Best (10/7/2018)
The Sunday Best is a collection of articles I’ve curated for your reading pleasure.
Presenting, this week’s Sunday Best:
Grownups say the darndest things, particularly when meeting an early-retired person. Mr. Firestation shares some oddball reactions from the people he’s met since saying goodbye to his 9 to 5. Funniest FIRE Reactions.
Those reactions are nothing compared to that of Suze Orman when asked about the FIRE movement. The battleaxe rants for the better part of an hour at our friend Paula Pant from Afford Anything. #153: Why I Hate the FIRE Movement, says Suze Orman.
I’ll share my thoughts on Suze Orman’s rant later in today’s post, but first I’ll give you those of the Early Retirement Dude. Suze Orman is the New Avocado Toast. You Can’t Afford to Buy Her.
Mr. Money Mustache doesn’t post all that often anymore, but he felt compelled to weigh in on this latest “controversy,” which is really an amalgam of misunderstandings that seemed to come to a head this week. What Everybody Is Getting Wrong About FIRE.
It may be that Suze Orman is just fighting back in response to slights against her, however well justified. In 2012, she referred to FinCon founder Philip Taylor as an idiot when justifying her prepaid debit cards. Earlier this year, PT’s buddy Jeff Rose of Good Financial Cents revisited that unpleasantness while listing 14 Reasons to Not Listen to Suze Orman.
The Financial Wellness DVM, a Doctor of Veterinary Medicine for those of you not into the whole brevity thing, explains how and why she began pursuing financial independence. Interestingly, it has less to do with her career than that of her husband’s (he’s a surgeon). What is Lighting Your FIRE?
“None of this is about retiring, though people confuse retirement with financial independence. It’s about having choices, and being able to deepen your self-knowledge while aligning how you spend your time with what you care about most. It feels amazing to live life this way.” – Vicki Robin. As an appropriate complement to my recent Retired Not Retired article, the Your Money or Your Life co-author gives her unique perspective on Financial Independence — What’s the Point?
With another FinCon in the books, some of my favorite bloggers got together on Florida’s gulf coast and pondered money and life questions, partaking in a fun exercise answering the titular question in four ways with different stipulations. From J.D. Roth of Get Rich Slowly, How Would You Spend $100,000?
We’ll close with an article on how a few people spend the money they earn. I don’t love the slideshow format, but one of the featured spenders is me, so I’ll give this one a pass. From Cameron Huddleston, writing for Go Banking Rates, What It’s Really Like to Live on $50K, $300K and $1M.
The Time I Asked Suze Orman a Question and She Answered.
I was curious as to how the self-proclaimed “matriarch of money” felt about the 4% rule (of thumb) as a safe withdrawal rate, so I asked. And she answered! In video, no less. This was several weeks ago, before the brouhaha over her hatred of the FIRE movement.
To see the 12-minute video, you must first join Elizabeth O’Brien’s Retire With Money Facebook group — you’ll then have access to the video where she answers my question (at about the 3-minute mark) and a handful of other questions.
I’ve taken the time to transcribe her answer here. First, I’ll say that I appreciate her taking the time to do a Facebook live with a small group of about 1,500 members, and particularly for fielding my question. I’ll also say that I don’t always do a great job of answering questions on the spot, but she does have a couple decades’ of experience doing exactly that.
Does Suze Orman Agree with the 4% Rule?
Here’s what she said when asked if she agrees with the four-percent rule when presented with the question by my Facebook alter-ego Milo Andersson:
“No, I actually don’t. Because… if you withdraw 4… let’s just go back a little, back to 2007. Let’s go back to 2008. Now, let’s say Milo’s in retirement now, and let’s say it’s lasted a long time. Now, I get the stock market turned around in 2009, but it still took a long year, many years to come back to where it is now.
Now let’s say Milo was taking out 4% and now his money has just crashed and it’s down there and now he’s eaten up because there’s not a lot. He can’t live on 4% of $10,000. Maybe he was living on 4% of $200,000, but he can’t live on 4% of a reduced amount of money.
So now what’s he gonna do? Now he’s not going to take out 4%. He’s gonna have to take out 50% and 100%, so do you understand, Milo, it isn’t across the board that you’re going to be able to take out 4% of your retirement for the rest of your life because things fluctuate.
Now, with that said, if your money is in dividend-paying stocks, and it’s yielding you 5% a year, and those dividends are solid and you’re just taking out 4%, then OK, ’cause then we don’t care what happens with the fluctuation of your money. But not many people are 100% invested in dividend-paying stocks. Are you, Milo?”
To answer the question, no, I’m not invested in 100% dividend paying stocks. In fact, I’m not a big fan of dividends. I’m more interested in the total return and having better control over the tax implications of receiving money from my investments.
Does Suze Orman Understand the 4% Rule?
Just after deriding the 4% rule as leaving you destined for ruin, she wholeheartedly greenlights Dave’s inquiry as to whether or not he can retire in his fifties with 27x expenses saved up. “You’re approved. Go for it, boyfriend.”
Dave’s relying on a 3.7% initial withdrawal rate. I guess that extra 2 years of expsenses (the 4% rule implies having 25x expenses saved) makes all the difference in the world. Like many in the FIRE community, he’s accounted for health care and has a paid off house.
How does one reconcile having no faith in the 4% rule while thinking someone with just a little bit more is A-OK? To be honest, I don’t think Ms. Orman has a firm grasp of what the 4% rule entails. I doubt she’s read the work of William Bengen, the Trinity Study, or more recent safe withdrawal rate research from Wade Pfau, Michael Kitces, or ERN.
None of these authors say the 4% rule is foolproof and the “rule” doesn’t imply that you withdraw 4% of your portfolio each and every year.
What the studies do suggest, based on the last 90-plus years’ returns, is that if you withdraw 4% of your initial portfolio in the first year of retirement and increase that amount with an inflation adjustment annually, your portfolio has a better than 95% chance of lasting at least 30 years, and a decent chance of leaving you with more nominal dollars than you started with.
In Ms. Orman’s response, we go from living on 4% of $200,000 (living on $8,000 a year — maybe she meant to say $2 Milliion?) to not being able to live on 4% of $10,000, or $400 a year.
I realize these numbers were thrown out off-the-cuff, but they represent living far below the poverty line and a sudden 95% drop in portfolio value. I don’t have confidence that Suze Orman can relate to her target audience any easier than we can relate to her life of flying a private jet to her private island, her reality which she boasted of numerous times in the now-infamous podcast interview on Afford Anything.
In her hypothetical, “Milo” has been retired a long time and things have been going well. If that’s the case, Milo isn’t drawing down 4% of his portfolio at this point. After a couple good decades, if he’s following the 4% rule blindly, he’s probably now drawing less than 2% of his portfolio. If the market drops by 50%, he might be back to actually drawing 4% to meet his standard of living, but not 50% or 100%.
Suze Orman wants to take Milo back to 2007 or 2008. Well, my friend “Big ERN” has taken us back to an even worse time in history — the year 2000. The 2000 retiree has been through two of the worst three market drops in the last century.
“Big ERN” has looked in detail at the 2000 retiree with $1 Million following the 4% rule without variation despite the two market disasters that befell her. Guess what? Despite making no adjustments whatsoever, this person is back to a portfolio of about $1 Million.
Due to inflation, today’s $1 Million doesn’t have the same purchasing power, but it’s only about 30% off what it was 18 years ago. With some adjustments along the way (spending a bit less or earning a little money along the way), earning power could have been preserved.
We recognize that the 4% rule isn’t a be-all-end-all. It’s a starting point. It’s best to be flexible and willing to spend less money, earn some money, and respond to market conditions as needed. Most of us won’t have to do that, though — the 4% rule (and most of us retiring early use a smaller number of 3.5% or less) accounts for a nearly-worst-case scenario. If we were aiming for a 50% success rate, we’d use a 6% or 8% rule.
You may think we shouldn’t care what Suze Orman says, but she has tremendous influence, and millions of people will accept what she says as gospel. If we don’t refute her poorly-conceived notions about what is and isn’t acceptable as a retirement goal or plan, how are people to know they don’t actually need $5 Million or $10 Million to retire?
Why should people be scared into working until age 70 when they could take a calculated risk and pivot to a more meaninful life (that may or may not include some form of work) a decade or three earlier?
Just as I did when reading all those negative comments on Doximity, I felt a need to respond. The level of ignorance out there proves we still have a lot of work to do.
A $500 Cash Welcome Offer on No-Annual Fee Chase Business Credit Cards
These are pretty great offers. Chase has two business cards with no annual fee ever that currently offer $500 back after spending $3,000 in the first three months.
The Chase Ink Business Cash card gives you the aforementioned $500 welcome bonus, plus 1% cash back on most purchases, and 2% to 5% back on specific, rotating categories.
The Chase Ink Business Unlimited card does away with the categories and gives you 1.5% cash back on every purchase (plus the $500 welcome offer).
Finally, if you don’t mind a reasonable annual fee, the Chase Ink Business Preferred card offers 80,000 Ultimate Reward points, which can be used to fund travel worth $1,200 or more after spending $5,000 in your first three months as a cardholder. The annual fee is $95.
Not a business owner? Check out the current top offers for personal cards from CardRatings. As always, don’t even consider applying for a credit card if you have consumer debt or can’t afford to pay a card in full every single month.
One More Thing
Like Suze Orman, I earn money writing and talking about money. I didn’t earn a dime speaking at FinCon, but I’ve found a number of other ways to earn money online. You see those ads and cards up there? And down below?
Another quarter has come and gone, and I’ll be sending out my quarterly progress note tomorrow with interesting statistics, including this site’s revenue — numbers that I share only with e-mail subscribers. If you’d like my newsletter to land in your inbox, please subscribe below. You’ll have the option to unsubscribe or switch to a weekly newsletter anytime.
Have an outstanding week!
-Physician on FIRE