Retirement and FIRE: Assessing the Likelihood of Financial Setbacks (Sequence Risk, Diversification, and Withdrawal Rate)

This article looks at how likely you are to go broke as retired or FIRE. Low interest rates make many pensioners and those who retire early (FIRE) allocate more and more capital to risky stocks. Many tend to forget that a bear market can last for a decade – even longer. What happens to the value of your portfolio if you are “unlucky” with the sequence of returns and/or the withdrawal rate? When do you run out of money?

You are very likely to go broke as retired or FIRE if you don’t have a huge margin of safety. If you are unlucky with the sequence of returns, you might be in big trouble right off the bat. Or if your withdrawal rate is too high, you risk bleeding to death. Furthermore, if you are poorly diversified you might be liable to Black Swans. Put short, being dependent on capital for “income” involves many “ifs”.

In this article, we provide examples of how bad it can get if you are not focusing on survival or have a low margin of safety.

What is FIRE?

Let’s start by explaining that FIRE is an abbreviation for Financial Independent Retire Early. This is an acronym that pops up frequently – especially after a series of good returns in stocks or any other assets (crypto, for example). Investors tend to get optimistic and exuberant, and see no skies on the horizon. This is human nature and most people are pretty optimistic – and that’s perhaps a good thing.

Let’s move on with an example of an unlucky FIRE (it could, of course, be a retired person or couple):

An example of an unlucky FIRE (or pensioner)

It’s January 2000 and you’ve had a terrific decade. You’ve worked your way up the corporate ladder after graduation in 1982, and your two daughters have just left for greener pastures.

You and your wife’s modest monthly savings into mutual funds and a few internet stocks have reached an all-time high of one million USD, recently fueled by five years in a row with 20% or more annual returns.

Things are good, except you are not happy in your job, neither is your wife. Long hours, commuting, city life, and expensive living are all taking their toll on you. The dream of a small farm in the countryside has been in the back of your head for years.

The thought of breaking up, selling the apartment, and moving to somewhere bigger (but cheaper), is an idea that becomes more and more appealing by the day. Who doesn’t want to be a FIRE and do exactly what you want, travel when you can,