Note: This post has been updated to include our episode with our follow-up conversation, in which we we review our take-homes from that conversation, and react to comments and feedback we received about the episode with Karsten.
What would you do if you ran out of money in retirement? It’s hard to imagine a scarier outcome, and yet many on the FIRE path may be at risk for this if they get their portfolio withdrawal rate wrong. In this episode, Eric + Jason talk with Karsten Jeske, the creator of the Early Retirement Now blog. Known by many as “Big ERN”, he is an economist who is well known to the FIRE community for his extensive work in characterizing safe withdrawal rates (SWR). In this episode, we dig into Karsten’s free, powerful SWR Toolbox, and discuss topics including the downsides of FIRE calculators, 100% stock portfolios, the bucket strategy, why dividend investors are wrong, and his own post-FIRE life. If you’re interested in FIRE, you can’t afford to miss this information-packed episode!
Show notes may be found below the videos
Note: This content does not constitute investment advice and is being presented for informational and educational purposes only.
Conversation with Karsten:
Follow-up episode:
Show Notes
Essential Background
One of the key dangers underpinning the importance of safe withdrawal is Sequence Risk (sometimes called Sequence of Returns Risk). Sequence risk is “the danger that the timing of withdrawals from a retirement account will have a negative impact on the overall rate of return available to the investor” – for example, starting withdrawals in a period with several years of severe market underperformance. This is a topic we’ve discussed before but for those new to the topic, check out this post from Investopedia.
Key Early Retirement Now Content
We referenced a number of Karsten’s blog posts from Early Retirement Now in this episode. Below you’ll find links to that content, along with the main landing page for his SWR series. You’ve got enough reading to keep you busy!
But first a little guidance: given Karsten’s extensive knowledge and expertise on these topic areas, his approach employs analysis which some may find unwieldy or even a little overwhelming. Don’t panic! Skim the math and stick with the text, and you’ll find that it’s not essential to fully comprehend all the analyses to understand the messages being delivered.
The SWR Toolbox: This is the free, downloadable tool that Karsten developed and which we discussed in this episode. Part 28 is the post where the revisions to the original calculator are described and the latest tool is linked. To see the history of this tool, you’ll need to go back to Part 7 of the series.
- Safe Withdrawal Rate series: This is the landing page for the SWR series for which Karsten is best known. However, it’s also a 53-part series (now; it will surely grow). So we recommend following the guidance he provides about how to get started. You might begin with a topic of interest found below or listed at this landing page rather than diving into the whole series – though it’s a great read if you have interest in going through the whole thing!
- Equity Glidepaths are a type of dynamic asset allocation plan often discussed in retirement planning. In Karsten’s words, “if we start with a relatively low equity weight and then move up the equity allocation over time we effectively take our withdrawals mostly out of the bond portion of the portfolio during the first few years. If the equity market were to go down during this time, we’d avoid selling our equities at rock bottom prices. That should help with Sequence of Return Risk!”. He covers glidepaths in Part 19 and Part 20.
- Dividend stock strategies are commonly touted in the investment community, yet are seemingly poorly understood. We talked about this idea in our episode, and Karsten has written several great articles on the topic: Part 29, Part 30, and Part 31.
- How often should we rebalance our portfolio? This key topic is addressed in Part 39 of the SWR series. Rebalancing isn’t a panacea for sequence risk, but it’s certainly an important element to consider. As we’ve discussed previously, being consistent + avoiding market timing is essential.
- Is it crazy to hold 100% equities until retirement? Eric asked this question in response to his portfolio moves earlier this year to change his allocation to include 30% fixed income (Two Sides of FI episodes: Part 1 and Part 2). See Part 43 of Karsten’s series for further detail on his position, expanding on what he said in this episode.
- Bucket Strategies is a topic we’ve addressed before on the show, including our conversation with Fritz Gilbert (The Retirement Manifesto). In Part 48, Karsten tackles this topic as well. In the episode, Jason also mentioned an article by Michael Kitces on this.
- Inflation is certainly a topic on everyone’s mind at the time this episode was recorded. In one of his more recent posts (Part 51) Karsten digs deep on this topic. Is what’s currently predicted for the inflation path within historical norms – and is our withdrawal rate modeling at risk? Read on to find out…
- The Retirement Income Style Awareness (RISA) assessment was discussed in our follow-up episode. This tool, by Wade Pfau and the team at Retirement Researcher, came from research performed on individual styles, risk tolerance, and other factors, and is aimed at deriving a personal retirement income strategy. Fritz Gilbert at Retirement Manifesto posted a nice write up on this last year, which we’d recommend. If you’re interested in learning more about this assessment, check out Wade’s book: “Retirement Planning Guidebook: Navigating the Important Decisions for Retirement Success”.
- Bonus: If you haven’t had enough yet, we’d recommend Part 26: “Ten things the ‘Makers’ of the 4% Rule Don’t Want You to Know”. It’s written rather tongue-in-cheek, while still being packed with the insight we’ve grown to expect from Karsten’s style of writing. We touched on some of these points in the episode but there are a bunch more not covered that are very much worth reading.
You can find information on the tools we mention in each episode along with additional information in the Resources section of this site.
- Jason’s FI Blog
- Eric’s business: 30X40 Design Workshop
- Eric’s YouTube Channel
- Our podcast