Luck.

What is it exactly? Per the Oxford Languages Dictionary, luck is “success or failure apparently brought by chance rather than through one’s own actions.”

It was recently suggested that we may have been the beneficiaries of luck, which is why we are able to enjoy the lifestyle to which we have become accustomed. And given that this is the product of chance, it is irresponsible or misleading to suggest that others could do the same if only they made similar choices.

Is that an accurate statement? Let’s explore.

# Getting Lucky

With games of chance we know the exact probability of specific outcomes. With a coin toss we know the odds of Heads or Tails are exactly 50%.

I don’t think too many people would be surprised by the outcome of a single coin toss, but many would say it was very lucky to toss 5 Heads in a row (or unlucky, depending on how you were betting.)

But what about things that are less cut and dry, like retirement?

Is someone lucky because the stock market didn’t crash the day they retired? (What are the odds?!)

Is it lucky for a retirement portfolio to continue to grow even years after the paychecks stop? (Is it still luck if a person’s choices/actions contributed to the growth, e.g. spending only dividends?)

We could try to answer these hypotheticals with our gut feel, but I prefer a numbers based approach.

## Historical Portfolio Growth in Retirement

We recently celebrated our 10-year anniversary of nontraditional living. Despite spending a great deal of money during those years, our portfolio has increased in size.

Did we get lucky?

It is better than the alternative, obviously, but is it the same as tossing 5 Heads in a row?

To answer that question I once again turned to the wonderful cFIREsim tool and asked it what historical portfolios looked like a decade into 4% withdrawals (with a 75/25 stock/bond mix.)

The results include 143 data points.

Portfolio Value (relative to Starting Value) | n | P |
---|---|---|

Less than | 48 | 33% |

Equal to | 95 | 66% |

1.5x | 48 | 33% |

2x | 18 | 12.5% |

The odds are clearly tilted in a favorable direction – throughout history you were more likely to lose a coin toss bet than to have less money 10 years into retirement. It is the normal and natural outcome. Having 2x as much is as likely as tossing 3 consecutive Heads.

## Statistics are better

These numbers are interesting, but some statistical analysis to see how the outcomes are distributed gives a better perspective. (Hint: if you retired with $1 million and 10 years later you had $999,000 (real), would you call that a loss?) For this I used Excel to generate a histogram.

The average / typical portfolio value after a decade of spending 4% would be worth 30% more than the starting point.

Note that “10 years of 4%” is just another way of saying you already spent 40% of the initial portfolio value.

## How do we stack up?

Now that we have a baseline and an idea of what would be a normal or reasonable outcome, how do we come out?

Looking at our net worth in mint or Empower at the 10 year point (about October of 2022) has us at **1.6x** (real / inflation adjusted.) If you factored in all of our tax shenanigans as well (by estimating after-tax value) we would probably look a little better still.

1.6x… I** don’t see any coin-tossing skill on display**. In fact, I think our luck has been terrible and that number should be much higher. (The mean with a 3% withdrawal rate is ~1.5x.)

This all assumes no volition on our part – it’s just following the script, making no choices, ho hum I guess we spend another 4% this year.

After all we have done… spending much less in the early years, always spending less than 4%, travel hacking, adding a little income, holding a higher percentage of equities…. and all I get is a small fraction of σ?

Oh well, you place your bets and you takes your chances.

(And I feel lucky – we won at life for sure, no matter what the number on the screen says.)

## Summary

Luck – when you benefit from outcomes that are unlikely or improbable (and *irrepeatable*.)

Growing your retirement portfolio in retirement – normal and expected.

If you do what we did, most likely you end up at a similar station in life. Average. No gambling or good luck charms required.

Good luck!

1.6x in 10 years is amazing with the 4% withdrawal rate. Does this consider extra income? You guys had some income over these 10 years.

Not amazing. Typical.

Net worth includes everything.

Millennial Revolution is experimenting with two portfolios. They are at about 1.5x the original portfolio while all post retirement income is in another portfolio.

I really like your no nonsense approach to FIRE and trusting the numbers. So many scared people out on the internet trying to get their withdrawal rate as low as possible.

Also Oct22 was quite the low point! Bet your portfolio is around 2.0x at this point.

~1.5x as of 30 seconds ago, assuming zillow’s home value estimate is correct (it is not)

Delta from Oct 22 is from:

– markets up

– inflation up

– minus 1 year spending

We also have been tracking our net worth while dealing with inflation and market fluctuations and major RV expenses. Thank you for this article, it affirms our steadfastness.

You are usually very meticulous with your # s but in this case I don’t believe you accounted for your earned income since retirement.

How so?

I’m just looking at the ratio of two net worth numbers 10 years apart. Net worth includes all income from all sources earned before/after retirement.

The accurate way would be a long the lines of taking starting assets + income – expenses = X

Ending assets – X = Income

Income / starting assets = return %

(Return / months since started) x 12 would give annual return

The above would be roughly , as it wouldn’t account for when you added income.

I don’t know if that is how you figured your returns.

This would give a different number. But is it a better number?

I always find it interesting when people decide that another person shouldn’t share their journey simply because chance may be a factor.

How would knowledge of anything transfer?

I think it’s unfortunate that people don’t see the potential behind particular circumstances: more frugality and intentionality can lead to more freedom.

I’m a security guard and an aspiring writer. I could make other choices to earn more income (I have an engineering degree) but I like my life as is. I may never retire early but learning from people like yourself and others, has vastly opened mind to what’s possible. It’s also changed how I use my security guard income which will certainly be the difference between me working full time until I die versus working 2-3 days a week until I die (you gotta have something to do when you get old).

And, who knows, I might get lucky and write a best seller that nets me a million dollars. And I’ll know how to make it last forever because of people like yourself.

Keep rolling my friend!

Very nicely said, good sir.

More importantly, congratulations on enjoying life.

One can be very lucky and have also met their personal ‘normal’ expectations at the same time. They are not mutually exclusive. That fact that FI was even a realistic possibility for people like us already makes us incredibly lucky. We may have certainly enhanced our chances of success through our actions but our success will always have more to do with random chance than it will any good decisions on our part.

These aren’t my normal expectations. It is normal for history.

Would it be fair to summarize your statement as this:

P(extremely unlikely events) + P(totally normal events) = 1 = everyone is lucky?

What is your current NW multiple in nominal terms or not inflation adjusted?

Also do you think the Zillow estimate for your home is too low or high?

Thanks.

Zillow is too high based on $/sq.ft. on recent sales for similar properties in the area.

Nominally it is about 2x

well i think “adding a little income” understates your blog success.

I’ve heard humility is a virtue ;)

The bigger it is the worse our investment returns look. Lucky to have had some blog income, unlucky to get lower than historical investment returns.

Luck = Preparation + Opportunity

Do you know what the nominal and the inflation-adjusted NW multiples are if you don’t include any earned income? Curious, as many of us will not have any earned income. Thanks.

It’s about a 0.1 difference

I can’t be more specific than that without a lot of work

I know this has been asked before, but this assumes the 4% withdrawal only gets adjusted for inflation?

So, for example, assume you start the simulation with a $1MM portfolio. You take out $40k the first year. The market goes down so that at the end of the first year your portfolio is worth $900k. The simulation assumes that the second year you still take out $40k, right? In other words, you do not tighten your belt to take out only $36k.

Yes, in all years you spend $40k (inflation adjusted.) Standard of living remains constant.

But you were withdrawing less than 4% from what I had been reading, right?Either because your spending is that low or you had earned income in any given year.

Because spending is “low.” Not because of income

This is our situation. In the simulation the spending is 4%. Spending less than 4% should obviously result in having more $ and therefore a higher multiplier after 10 years.

Would you clarify how the inflation adjustment works?

In year one you take $40K (if the porfolio is worth $1 million).

In year 2, inflation was 2% in year one so you take $40K plus 2% or $40,800.

In year 2 inflation was 5% so in year 3 you take $40,000 plus 5% or $42,000?

I’ve never understood how this works. Is it cumulative, or recalculated each year based on the prior year’s inflation %? If you wouldn’t mind walking me through an example it’d be much appreciated.

I thought I’ve read that the $40,000 is relevant only for the initial withdrawal and then is not relevant going forward….

Thanks.

Think of it this way – you can buy the exact same amount of stuff every year.

In Year 1 that costs $40k. In Year 2 that costs $40k (inflation adjusted.) Same with year 3 – 30.

If inflation is 10% every year then you spend:

Year / Spending

1 / $40k

2 / $44k

3 / $48.4k

4 / $53,240

etc…

Thanks.

“In year 2, inflation was 2% in year one so you take $40K plus 2% or $40,800.

In year 2 inflation was 5% so in year 3 you take $40,000 plus 5% or $42,000?”

Yes it is cumulative, as Jeremy’s example with 10% per year shows. But to use your numbers, in year 2 you take $40,800 as you said. But in year 3 you take out $40,800 plus 5% so $42,840 (not $42,000).

Thanks, appreciate your further explanation.

This was a really informative article. Looking at the S&P 500, I would have thought that you had retired into a very good sequence of returns and that your numbers would have been higher, especially with all of the things you discuss you have done over the years. It seems the message is that what anecdotally might look like a good sequence of returns is actually quite typical.

One other question: Shouldn’t the percentages in the table add up to 100%?

Numbers don’t add to 100 because several rows are subsets of other cases (e.g. having 2x is a subset of having 1.5x+)

That makes sense! Thanks for explaining.

> 1.6x… I don’t see any coin-tossing skill on display. In fact, I think our luck has been terrible and that number should be much higher.

wondering if allocating part of the assets into real estate could have caused any drag on the overall performance?

Not significantly, no.

Stock market still lower than when I sold stock to pay for a house.

I think, especially given your blog income, you should adjust to 95-100% equities. Why cede return when you don’t “need” to?

My own analysis shows even marginal differences in compounded returns (like 30 basis points) over time add up to large amounts of $.

Yes. GCC Asset Allocation 2023

Stock / Bonds-Cash: ~ 94 / 6

Cash holdings are basically for short-term spending

Lucky to be saving and compounding when:

. China price resulting in increased profits and goods price deflation,

. USA interest rates on a long term decrease to lowest in history,

. USA government willing to spend twice its income for decades,

. USA debt highest ever,

. USA money supply to expand to highest ever.

https://seekingalpha.com/article/4455999-money-supply-a-good-predictor-for-s-and-p-500-index

Perhaps another way to say… good to be saving and compounding as GDP expands.

Also nice to have antibiotics, vaccines, semi-conductor technology, etc…

“good to be saving and compounding as GDP expands”:

and un-good to be in shares when money supply contracts.

SP500 strongly correlated to money supply.

How the Federal Reserve Manages Money Supply

https://www.investopedia.com/articles/08/fight-recession.asp

The Fed … money supply … discount rate ….

https://ycharts.com/indicators/us_discount_rate

money supply strongly correlated to GDP

“money supply strongly correlated to GDP”:

Therefore GDP strongly correlated with money supply. Well known by central bankers.

Using the spreadsheet “PRINTMONEY.xlsx” in:

https://seekingalpha.com/article/4455999-money-supply-a-good-predictor-for-s-and-p-500-index

plus GDP from Fred:

https://fred.stlouisfed.org/series/GDP

for each 1% change of M2 money supply, GDP changes about 0.5% and SP500 about 1.9%; between 2008 and 2021.

During that period China Price resulted in global goods price deflation and CPI dis-inflation allowing / causing central bankers to add to the money supply resulting in proportionally small increase in GDP and larger increase in SP500.

I do not believe that it is just luck. You derseve it. Inflation adjusted portfolio reveals your luck:)

not as lucky as spamming comments with a link to your etsy store (link removed)

The problem is a lot of the best times to retire were just after a lot of bad times like WW1, WW2, and 1970s inflation when it would’ve been hard to save up enough money to retire then. Valuations were a lot lower as well, the CAPE ratios were in the single digits when starting retirement on the 3 points on your graph where you ended up with 2.5x what you started with.

A lot of the worst times to retire were after long bull markets when the CAPE ratio was in the mid 20s or higher.