One of the internet’s most-respected retirement researchers and financial planners, Michael Kitces, joins me for an episode of the Financial Independence Podcast! Tech stocks have crashed. Michael: Interesting. It’s kinda easy to do since he has so much authoritative material to reference. I only applied to one college, MIT, when I applied for college. So I just thought the risk was so great at that point. Bill: That’s exactly the process I took. Michael Kitces: Yeah, yeah. But I did, and I learned a lot. When Michael was talking about how health care is one of the biggest questions, it got me thinking that it’d be awesome if the MadFientist creates one of his ultra-thorough articles (or infographic) on the subject and how to handle health care costs for early retirees. Again, we’re simply a support network for them. Were you just reading consumer information in general and trying to educate yourself in the finance area? A $5 coffee at Starbucks (clearly a sugar laden drink with other health related costs, as their coffee is much less) isn’t a “one-off” and does become one of those “recurring costs”. So again, head over to MadFientist.com/cards. So, this goes all over the map. Bill: Yes, I did that because I thought that the things that created my problems were artificial things like the involvement of the central banks around the world, which hadn’t been in place in earlier years, the ’30s, ’40s, ’50s, ’60s, ’70s, ’80s. I think, as you said, the RIA fee-only world in the first place – because particularly in the early 1990s when you were starting your firm, that was not common. So you read about NAPFA in “Money” magazine and said, “Hey, this sounds neat. It’s really complicated to figure out which cards actually would earn you the most points for a particular program. Michael: Interesting. When you want to set everything from a reasonable allocation for a retirement portfolio to just figuring out what you can spend, knowing that stuff has really lousy yields matters, and knowing that stuff is really good yields matters. And so they don’t really have many working options left. And that should increase as you age. Mad Fientist: Absolutely! :P. Also, podcast marketing totally works – I’m off to check out your travel cards section so I can top-off my travel miles/points before I go FI. Stocks look very feeble. The Trinity study at 4% does have failure modes and from what we gather those failure modes exist because people retired right before a big market correction. And the next morning, I walked into my dad’s office. Not only did it not get a lot of adoption in the early years. All these studies are great, but they focus on a 30-year time horizon. Two years later, he’s a really successful bartender. It’s the thing that worked in the worst scenario, not the thing that worked in the average scenario. It was a wonderful experience because I learned about the business. I can so relate to the discussion starting around 40 minutes about working until you hit your FI number vs reducing hours, doing something fun, etc. On the 4% rule and CAPE shilling, I understand the benefit of the 10 year average which smooths out years like 2008 when the earnings portion is non-existent. Michael: And so, how did you get to those adjustments of, “Hey, because your pensions are missing inflation adjusting, you probably should be at three instead of four.”? Michael: So talk to us now about the evolution of the 4% rule research that you did. Michael: Would you change the view around recommendations to clients or anticipating that? However you prefer to engage advisers, to each their own. I’m just going to go more passive, more buy and hold, I don’t want the stress or the burden of doing that.” And then others seem to go in the direction that you went, that said, “Well, I’m going to improve my process and we’ll make a better call next time. But I’m going to test it out here. Mad Fientist: Cool! For us, it’s fine. I’m only 30, and I’m hopefully going to live another 60 years. I’m putting in five days a week of writing. So, for people who maybe are in their car right now and aren’t able to google Schiller CAPE 10, can you just give a little description about it, and talk about why it is so predictive in this case? It was well-rounded and took into consideration the human behavior aspect of investing and retirement, which is critical to “make it all work”. So, it’s kind of this tie-in valuation, inflation, more diversification, different asset classes, and some kind of system about how you actually mix all of those together in practice to come up with particular client recommendations? Mad Fientist: And I think a lot of people who are thinking about early retirement, they want to be super conservative. And they’re all in kind of my age group and they’re just starting to think seriously about retirement, and they were concerned in the early ’90s. But just, if you’re used to a certain dollar amount flowing out, and that’s comfortable, we find a way to use it or to consume it or give one away or do something with it, which just means those outflows are sustained even if it’s not purely personal household spending. That blows up not only early retirements, but entire family financial situations and individual financial situations. That would have been my signal. It’s volunteer. Later, I could roll the Roth 401k over to a Roth IRA, and it would not be considered a conversion, but a in-kind rollover, and I would be able to use the money as it was converted to Roth IRA previously. It wasn’t until later that I thought to myself, “Hey, you idiot, you have your own podcast, and you haven’t even tested it out there. So yeah, just dialing it back or switching careers into something that you actually enjoy is an excellent idea, definitely. Does Monte Carlo Analysis Actually Overstate Tail Risk In Retirement Projections? We just don’t. Kitces is the man! Now just check your email and start tracking! Some people have said they’re trying to wait until they could only withdraw less than 3%. Great interview and very informative. Michael: Were there other times, and I guess in the almost 15-plus years where you had done the research and were working with clients before that, where you had so reined client risk exposure back? And if you do that, you’ll usually find you’re done by 50—sometimes, much, much earlier. I’ve got my writing, my research, which is part of the reason I retired. Twenty would be awesome, thanks!”. But in the last year, I’ve done some research, which, you know, is based upon research you did back in 2008 where you found there was a correlation between stock market valuation and the withdrawal rates. We made a very quick… And we’ve done – Cookie and I, my wife – we make these big decisions usually very quickly because we both know what we want. Thank you! But a lot of them are like, “Hey, you want to manage your own portfolio assets, but you just want some ongoing advice about things to navigate,” great! I was doing a lot of reading at the time, seeing that housing is in huge trouble and the banking system is in huge trouble. Let’s lessen our allocation. Great guest. How did you start going out there as a financial advisor and getting clients starting from scratch with no history in the business? Michael Kitces – The 4… Eventually, of course, the money came back, or a lot of it. It was incredibly helpful for me. You have mentioned it a few times here; you have called it the 4.5% rule. If it hadn’t had that QE, the market never would have recovered, I don’t think, that quickly. My first novel, my coach said it’s too long. So, economically, the way I’d put it is when we work with older retirees who tap out when they’re 60 or 70-something, there’s not a lot of working options left for them. And more importantly, particularly in the context where people are doing extreme early retirement scenarios, the fact that you can turn the human capital back on means you ultimately always have another fallback if things are going really badly for your financial capital, which is you just find a little bit of work to supplement it. What are you thinking?”. Now just check your email to confirm! Some have good years, some have bad years. He used 4.5% instead. They’re like, “I don’t even need to be done. So I’m trying to figure out what 4% rule Kitces is using that is slightly different from what is standard understood 4% rule that did fail. What did the 4% rule or 4.5% rule look like for you as a practitioner with clients? The past is not predictive of future results. Just an idea! And you know you have the technical skills and the support systems to do whatever they need to get done. I had trouble with the publisher the first time I came through. There are weekends that are workdays. So really excited to have you on the podcast and talk about this retirement research journey that you’ve been on. Depending upon the inflation level and the level of the market, I might be up to 13%, which historically, there were periods of time when you could take withdrawals that high. Brilliant ! And so, I publish a lot of research both in some of the journal publications for financial advisors as well as a lot of research that we just publish directly on my own site of all the stuff that we’re studying and analyzing about how to do retirement and make it work better. the 4 percent rule is a good one but wondered how it is applied as in, is it applied to the net earnings per year so that is after tax is taken out or gross earnings, or is it just applied to 4 percent of the total amount invested. And the reason, in large part, is markets on average go up way more than 4%. And yeah, that seems pretty standard. It was all good. Things don’t look good. Yet another valuable MadFientist podcast. I don’t think that applies to investing. That’s what we call financial independence, “I don’t need to work to get paid anymore.” But it’s still your choice about whether or not to harvest your human capital and turn it into additional dollars—and you can. All we can do is stay the course! 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