Here’s how to fail with FIRE: Path of Returns Matter

blue and yellow graph on stock market monitor
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Key Takeaways:

  • The path of returns matters.  Experiencing a major downturn at the beginning of retirement can have permanent negative implications to retirement savings.
  • In a multi-year downturn, a 4% withdrawal rate permanently lowers the balance invested and never allows for a recovery on those assets. Future stock market recovery is therefore limited.
  • A simple spreadsheet showing 4% growth year in year out can mislead FIRE’ees into a false sense of long-term security.


Any FIRE analysis has to make assumptions about future returns. The better ones use  reasonably conservative assumptions on future returns for the stock market. A recent Mr. Money Mustache post used 4% real returns for his analysis and this seems reasonable considering long-term inflation of 3.0% to 3.5%.  This translates to total long term nominal (before inflation) equity returns of 7.0% – 7.5% – before factoring in our own power to combat inflation by adjusting our spending. We are not just buying an index basket of goods – we can swap out and adjust our purchases and so we should be able to spend at a slower inflationary growth rate.

But historical real returns were not a flat 4% each year naturally. This analysis works because if it is the compound annual growth rate (CAGR) of historical returns.

However, we are not robots and humans are affected by psychological issues that will affect each person’s retirement differently. Meaning, some will not be able to stand years of declines and will sell at the bottom – only to miss a strong recovery. Therefore, the path of returns actually does matter for most people. Life is not a simple spreadsheet.

Others will be simply affected by a steady withdrawal rate eating away at their nest egg in multi-year downturns, as discussed further below.

Path of Returns

The volatility by year is staggering and the path of returns is important.  The below table shows the minimum and maximum annual return including dividends of the S&P 500 since 1871. Also shown below is since 1980 for a more modern day dataset.

S&P 500 Total Returns (including dividends)

Since 1871

Highest Return (1933) 56.8%
Lowest Return (1931) -44.2%
Simple Average 10.8%


S&P 500 Total Returns (including dividends)

Since 1980

Highest Return (1995) 38.0%
Lowest Return (2008) -37.2%
Simple Average 13.2%

Data Source:, Robert Schiller, Yahoo! Finance

A Brutal Decline and a Strong Rebound

Let’s assume someone hit the retirement switch on December 31, 1999 with $1 million, feeling great about their situation. The next three years were brutal.  The account value would decline 38% and the value, even assuming no withdrawals, would decline to about $620,000. Would this retiree really be comfortable with their situation? Suddenly almost 40% below their retirement nest egg? For most, probably a resounding no.

Date S&P Return Account Value $
12/31/1999 1,000,000
12/31/2000 -9.1% 908,900
12/31/2001 -12.0% 800,014
12/31/2002 -22.3% 621,851


But, if the investor held on, the next five years would be strong, returning the account value to $1 million and above by 2007 on the back of average returns of 12.8% CAGR.

Date S&P Return Account Value $
12/31/2002            621,851
12/31/2003 28.7%            800,446
12/31/2004 10.8%            887,055
12/31/2005 4.8%            929,544
12/31/2006 15.7%         1,075,855
12/31/2007 5.5%         1,134,596


Things aren’t that easy though. 2008 brought the financial crisis which again lopped off almost 40% from the investor’s nest egg. Another shot to his confidence in meeting his retirement goals.

However, if the investor held on, again, the subsequent stock market recovery/ boom rewarded him/her and the account value ballooned to $2.5 million.

Since retiring, the account value generated a 5.4% CAGR on his investments.

Date S&P Return Account Value
12/31/2007         1,134,596
12/31/2008 -37.2%            712,300
12/31/2009 27.1%            905,404
12/31/2010 14.9%         1,040,038
12/31/2011 2.1%         1,061,566
12/31/2012 15.9%         1,230,143
12/31/2013 32.4%         1,629,079
12/31/2014 13.8%         1,854,054
12/31/2015 1.3%         1,878,342
12/31/2016 11.9%         2,102,429
12/31/2017 21.9%         2,563,491

stock jpeg

18 years of a wild ride and a lot more uncertain than a flat 4% growth rate! But a historical lesson on staying invested no matter how scary the current uncertain environment is at any given time.  If you can stay entirely invested…


Impact of Withdrawals

But wait, you’re retired! You have to live on something! What about that safe 4% withdrawal rate?

This is where the path of returns really matters.

Let’s review what happens to our retiree who planned to take out 4% of his $1 million nest egg every year. I’ve assumed to withdraw the $40,000 at the beginning of the year for simplicity.

Year 1 starts off with a slap in the face. Not only is there a $40,000 withdrawal, the market value of the investments shaves off another $87,000.

Year 2, bad year, and lost another $100,000 in addition to the $40,000 of expenses.

Year 3, down 22%, $153,000 and another $40,000 of expenses and the account value has declined almost 50% to $537,000!

But i’m staying invested! I’m waiting for the recovery. Ok, here it is, and it’s great. Except you have liquidated over $120,000 in living expenses over the last three years. That’s not benefiting from any recovery.

The account value climbs back to $688,000 by 2007 – still 30% below the original nest egg.

2008 came with a bang and the retiree’s nest egg is down to $403,000.  This was not the safe 4% withdrawal rate the investor was expecting. What happened to steady 4% growth in perpetuity? Eight years have passed and the account is down 60%.

Another great recovery for the next nine years, but the damage has already been done.  The account value is too low now and the withdrawal rate too high. The high returns are muted by the excessive withdrawal rate. The investor’s account balance at the end of 2017 is $545,000.  Far below that $1 million initial nest egg.

Not exactly the care free retirement that was expected.


Year Beg Balance $ Return Expenses Market Change Ending Balance
2000 1,000,000 -9.1% $40,000 (87,456) 872,544
2001 872,544 -12.0% $40,600 (99,667) 732,277
2002 732,277 -22.3% $41,209 (153,901) 537,167
2003 537,167 28.7% $41,827 142,262 637,602
2004 637,602 10.8% $42,455 64,395 659,542
2005 659,542 4.8% $43,091 29,528 645,979
2006 645,979 15.7% $43,738 94,793 697,034
2007 697,034 5.5% $44,394 35,634 688,274
2008 688,274 -37.2% $45,060 (239,404) 403,810
2009 403,810 27.1% $45,736 97,074 455,148
2010 455,148 14.9% $46,422 60,778 469,504
2011 469,504 2.1% $47,118 8,743 431,130
2012 431,130 15.9% $47,825 60,869 444,174
2013 444,174 32.4% $48,542 128,303 523,935
2014 523,935 13.8% $49,270 65,551 540,216
2015 540,216 1.3% $50,009 6,422 496,629
2016 496,629 11.9% $50,759 53,192 499,062
2017 499,062 21.9% $51,521 98,146 545,687


stock jpeg withdrawals

The two outcomes are vastly different because of the annual withdrawals.

The path of returns is critical and those seeking FIRE or already retired should be mindful of how the early years can affect your long term retirement plans and consider reducing their withdrawal rate during market downturns.

12 Rules for Money: An Antidote to Financial Chaos

man and woman holding check signage

I’ve been listening to lots of podcasts lately and came across Jordan Peterson, a Canadian Professor of Psychology and Clinical Psychologist, and involved in the so called intellectual dark web. Look it up if you haven’t heard about it yet; it is quite interesting.

Mr. Peterson’s recent book is called ’12 Rules for Life: An Antidote to Chaos.’  I haven’t read it yet and am not endorsing Mr. Peterson, though I have found the first few interviews quite interesting.  However, the book did give me the idea on what are the 12 Rules of a Financially Literate Life?

So, here they are:

12 Rules of Financial Freedom: An Antidote to Financial Chaos

1. Invest in yourself (get educated). You don’t get rich by saving nickels and dimes. You need to earn money over time. This doesn’t have to be $100,000 per year. There are plenty of stories of people earning $50K per year accumulating wealth with the right habits over time. But you will reach your financial goals a whole lot quicker if you focus on growing your income.

2. Monitor your spending habits (don’t spend more than you earn). Enough said.

3. Prioritize saving over spending. Develop a mindset for getting satisfaction out of saving as much as or more than buying things.

4. Understand compound interest. Not enough people understand the basics of compound interest and the impact it has on your investments over time.

5. Setup an automated bi-weekly investment plan. Setup a plan and stick to it. Remove the manual effort of saving and your future self will thank you.

6. Learn the basics of low-cost diversified stock mutual funds. Stop picking stocks. Select low-cost, diversified stock index funds. If you are older and want to reduce risk with some blend of bonds, go for it. Don’t complicate things. Stick with a few broadly diversified index funds.

7. Pay off your credit cards every month. Never, ever, ever consider leaving a balance on your credit cards. 16% or more interest is outrageous.

8. Don’t ever spend your year-end bonus. It’s your found money. You don’t even need it to get by month to month, so just sock it away.

9. Don’t buy more house than you can afford. This is tough for people in high cost of living areas (like many areas these days), but the less house you can reasonably buy, the better for your financial picture. Since you’re living here, there is understandably a bit more that impacts this decision (spouse, kids, schools, etc.)

10. Drive a used car. The difference in cost between a new and used car is enough to pay attention.  Even worse is trading up for a new car every three years and just keeping a drag of the big car payment into perpetuity. Buy used.

11. Max out your 401(k). Hit the limit. $18,500 in 2018.  10% is a rule of thumb but is not putting you above average. Save more, invest more.

12. Pay off your debts. Student loans, car loans, personal loans. Pay them off. There are differing views on what’s the best route to do this, but pick one and do it. Your debt is killing your financial freedom.


Those are 12 Rules that I just came up with. Let me know what your top few would be to move along the path towards financial freedom.