Karsten Spoke, We Listened. Here's What We Learned.

[@TwoSidesOfFI]

What was the most impactful take-home for you from our conversation with Karsten? Let us know in the comments below. In case you missed it, check out that episode here: kzbin.info/www/bejne/n6jPhXqgqbulps0

[@nickdoyle-achievefinancial2464]

I like that you two are shifting towards rules-based strategies for the bucket & asset allocation changes. Everything we can do to remove the emotion is a win IMO.

[@TwoSidesOfFI]

We must be emotionless robots about our finances! That can be pretty hard to do, right? We are only human after all.

[@turquhart1]

I love your videos. I was unexpectedly laid off over a year ago, mid pandemic. I was loosely playing with the idea of retiring soon, when all of a sudden, I was in it to win it! I had not hit 'my number', but I have been planning and rearranging and drinking knowledge from a fire hose to put all my systems in place and make it work. I am very excited to come across your content and resources!!!!

[@TwoSidesOfFI]

Thanks so much, Tammy. Sometimes those unexpected hard times can lead to focus and soul searching that enables the great things that come next! Wishing you all the best in achieving your goals

[@bob.popular]

Perhaps the most important comment in this video was Jason drawing the distinction between risk tolerance and risk capacity. As the self-styled bear of this channel (even more so than Karsten, who is more sanguine about current valuation levels than I am), I would encourage everyone to understand that distinction, for which Karsten's work is invaluable. Keep up the good work, guys. In addition to the main content, I'm interested in continuing to monitor Eric's level of FOMO with respect to his bond allocation. :-)

[@TwoSidesOfFI]

Thanks, Bob. It's essential that we each think about this topic as it pertains to our own situation.

[@Sanjuro806]

I've been binging on your videos and giving you "Likes" along the way. I've been practicing medicine for 20 years, but I know there has to be a "Carlito's way" out of this life style... and I'm trying to figure it out. I truly appreciate the contents you are creating. Thank you.

[@TwoSidesOfFI]

Thanks, Kazu! We appreciate your support. Best wishes to you in determining + realizing your own path.

[@retiretosomething9868]

A few years ago, I created a spreadsheet to calculate how to rebalance various stock/bond portfolios including various "safe" withdrawal rates. Since I have a military pension which makes up most of my annual income and more than covers my living expenses, I have pretty much ignored withdrawal rate and my spreadsheet. As a result of the current downturn, I am not taking money out of my investments and living off my pension and some of my cash which is being wrecked by inflation. I am fortunate to be in this position even though I would enjoy the challenge of calculating my withdrawal strategy. Thanks for the video, this may have sparked an idea for my next project.

[@TwoSidesOfFI]

You're very welcome! Be sure to let us know how that exercise goes.

[@Pieter2360]

The episode with Karsten was an eye-opener and I’ve been binge-reading his blogs. What a treasure! 18:30 thanks for addressing the misconceptions on dividend investing. I share your concern for the people that blindly follow some sort of high dividend screening to set their asset allocation. Ben Felix has two excellent episodes on his channel on the Irrelevance of Dividends.

[@TwoSidesOfFI]

Glad to hear you enjoyed it! Totally agree - those Ben Felix episodes are great.

[@IreneZhu]

I'm with Karsten in regards with the dividend investing - there is no free lunch as the price return and income return always have the 'tug of war' relationship, let alone the tax drag of any dividend received during the accumulation phase. This apply to both stocks and real estate investing. Of course there are good quality dividend stocks that the price return is not compromised so much by the lucrative dividends, but I would rather like to use the total return approach.

[@TwoSidesOfFI]

So true, Irene! If you peruse the comments sections of several of our episodes, you'll see there are (so) many people who disagree with us on this important point! We like total return as well.

[@rocinante6530]

Thank you for your informed conversations. You are following the same people as me: Big ERN, Fritz Gilbert and Wade Pfau.

[@TwoSidesOfFI]

You're welcome!

[@mikesurel5040]

This was a great episode. I am still a few years out from pulling the trigger on retiring. As far as withdrawal rates, I look at my expenses as the floor and (insert rule here) as the ceiling. I will probably waffle a dozen times between now and Friday, never mind 3-5 years from now. Lots of good things to think about here.

[@TwoSidesOfFI]

Thanks, Mike! You’ve got time to work out your strategy. Best wishes to you.

[@andyd102]

Awesome episode guys! Great, to give Karstens episode a debriefing. It really deserves that, and it gets rarely done on YTube. Karsten is very thorough in his analysis, and while I personally think it may be too much in the weeds I believe his math is very complex at times, but sound. I really agree with Jason’s comment at the end that its very personally and any strategy should be based on individual needs and circumstances. Sometimes we get carried away by “Rules” etc, but the reality is that we have to fit a retirement plan with our life’s stages and goals. And there are many things that go into it. The math may give us some comfort as far as directionally…But in the end its all about perspective and how to translate risk into an acceptable withdrawal strategy so that stored real value will last a lifetime…Things get very complex quickly if you have multiple buckets, like taxable, tax deferred, and tax free accounts and how to balance each according to risk profile. It’s definitely not easy for a DIY investor. Personally I know no one who uses the 4% rule or any other wdr, other than the YTube crowd. I am FIRED, myself and honestly don’t know anyone personally who actually did also other than online, even signed up for meetup, but only know some who are aspiring too…There are so few of us who even know FIRE and only a fraction of those who actually pulled it off. In other words for every Jason there are a 100 Eric’s, no disrespect Eric, I know you will get there very soon! Great content guys, love your shows!

[@TwoSidesOfFI]

Thanks, Andy! Glad to learn that you liked it. We appreciate your feedback and support!

[@TwoSidesOfFI]

Eric replying here...ouch!

[@andyd102]

@@TwoSidesOfFI No disrespect at All Eric! You are doing a great job and you are very close to your goal! I love the perspective you offer and the value you add buy the questions you have and trying to wrap your head around. It’s not easy bro, but you knew this already! I just mean that so many are aspiring FIRE and so few who actually do it. It’s not easy, this journey, the least of which is getting comfort at actually pulling the trigger at your young age… Just for full disclosure, I do know folks who want to FIRE, mostly for the wrong reason, because they hate their jobs…I am very fortunate to have found a partner who is like you, working very hard on her goal. Hopefully she will be able to and maybe someday we will live the nomadic Life. She will likely be FiRINg in 6 months…she is so close. It’s a tough journey for sure, you are almost there, two thumbs up. I am looking it from my perspective, as a FIRED guy myself like Jason, I am blessed to have Fired last year, not the best time in hindsight because of the markets, but was able to do it…For me it seems I am in a desert, I absolutely know no no one in person who has done it, other than YTube of course…It’s very rare indeed…

[@davidboeger6766]

It's been awesome seeing you guys go more in depth about some of the nitty-gritty details of your strategies in recent episodes. I do wonder though if we'll see more lifestyle-focused discussions in the near future though? If I remember correctly, I think you started out the channel talking about motivations, post-FIRE life, personal goals, etc., and I kind of miss some of that stuff. It'd be cool to get sort of a tick-tock cadence where even-numbered videos are lifestyle-focused and odd-numbered ones are strategy-focused. Just an idea.

[@TwoSidesOfFI]

Jason here - Thanks, David. We appreciate the feedback. We do try to maintain a mix with a tilt more towards lifestyle vs. mechanics. Have you seen my one-year (kzbin.info/www/bejne/qGSuioWFmchmiMk) and two-year post-FIRE reviews (kzbin.info/www/bejne/ZpfYpWewiq2NfLs), or perhaps the travel episode (kzbin.info/www/bejne/banNqXyLateoedE)? These are almost entirely lifestyle-focused.

[@davidboeger6766]

@@TwoSidesOfFI Oh, I've been watching them all! This is a fun channel, I feel like we're witnessing you guys going through the process, even if a lot of the personal details are kept private. I'm not nearly as far along the FIRE journey, but planning to get there some day. We're in the "messy middle" trying to find daycare for our first child, so we're just getting to the hard stuff I guess.

[@jershir7599]

I know you are not Dividend investors but there was a comment in the video that is incorrect. The dividends paid does not go down with the share price. Share price and dividend are completely separate. The Board sets the dividend, not the market.

[@TwoSidesOfFI]

Yes, they don’t direct track with share price. However, company valuation certainly does. And this is very much part of a Board’s consideration in whether + how dividends are to be paid from profits. My comment was primarily about the idea that dividends are somehow immune from impact of any external factors. -Jason

[@davidmorley3734]

@@TwoSidesOfFI I agree with the principle of dividend irrelevance, except it is backwards. The dividends are the primary driver of value, in fact the text book definition of the value of a company is the sum of all the distributions + residual value of any assets. Once you've discounted them to today's dollars you have the current value of the company. So in theory it is the stock market that is irrelevant not the dividend, so why isn't that the case in our mental model? I believe the issue is psychological not technical. Firstly, all of Wall Street is compensated based on 'value' (e.g. AUM) so their offerings are viewed through that lens. Secondly, for all intents and purposes it is because to try and build a retirement income based purely on dividend income is simply too expensive for most people so we have to also plan to burn down our investment in order to make that affordable. We are treating the stock market as an abstraction or proxy for calculating the value of the company, which is important but it is an abstraction and you have to be aware of the limitations. I love Karsten's work on SoR, but the reason it is so essential is that we've painted ourselves into a corner. We need the stock market abstraction to be accurate and stable (neither trait it exhibits for very long) so we can rely on the mathematics to work out. Compensating for just how unhinged the market becomes (whether we are going to the moon, or the world is ending) drives the bulk of the work, if we are only worrying about variances in dividend income the issues would become much more benign. Dividends aren't immune to the economy, but they are immune to the daily noise of the market, companies are funding dividends out of profits/cash-flow, as a result they are significantly less volatile. This is obvious when you go back to the definition and realize that an expectation of a reduced dividend is multiplied over time because again the stock market is irrational and, to paraphrase, can remain so longer than we can remain solvent. In summary, dividends and dividend growth are the floor under the SWR decision. The SoR gyrations are essentially trying to determine how I safely take more than that minimum in order to reduce the cost of retirement.

[@brucecampbell208]

I feel as if a lot of people in the FIRE community are panicking (which I expected), once the market started to correct. It will be interesting to see where things go from here.

[@TwoSidesOfFI]

Some are for sure. Hopefully it's a vocal minority as many do recognize the value of continuing to invest during a down market when everything is on sale.

[@KyithNg]

I have read Karstan's series before and like that you guys decide to do an after action review after the episode. I feel it is rather important to take stock and see if there are changes that needs to be carried out. A lot of the media out there is more like trying to push a formula but doesn't really discuss the challenges surrounding each strategy. I wonder if you guys explore looking at your entire expenses based on how flexible the expenses can be and how long you will need? Instead of the traditional time-segmentation bucketing, a more suitable way would be to think based on the repercussions of failure if you faced a poor sequence and the duration you need. I give an example. Most of us have a group of expenses that are rather inflexible and usually essential. The nature of this group of expenses is that you cannot adjust down easily. You need this stream to be rather inflation protected. Then the other group are those that can be flexible and more discretionary. If there is a poor sequence, your family could cut down. I think if you try to break up the spending in this way, you have more control. Those food, transport and utilities, you can assign a 2.8% initial withdrawal rate. it is lower, you need more money, but you have higher confidence it is more insulated towards inflation. For those vacation expenses you can assign a 5% of current portfolio value to it. In this way, you can also visualize things better in a year. you would know how much you could spend on essential and what is available for vacation.

[@TwoSidesOfFI]

Thanks, Kyith. Glad you liked it. Your idea makes good sense, though it's not the approach we took. The concept of a "dignity floor" of basic needs - very often covered by fixed income or a SPIA, fits in well with this approach. Thanks for sharing your thoughts.

[@KyithNg]

@@TwoSidesOfFI just be aware that a large part of uncertainty stems from viewing the entire expense as inflexible spending. If someone feels otherwise, then perhaps the dignity floor method works. Trying to ascertain a safe withdrawal rate is indirectly trying to create your own spia with inflation adjustment

[@vnilla2921]

Not to beat a dead horse but dividends are just a way to get returns to shareholders. The other way is stock price appreciation. I think that’s it. (buybacks just are a method of getting price appreciation). Neither help with sequence of return risks. Dividend can make you feel good because the short term volatility is low which may be worth something. For sequence of return risk: On portfolio visualizer there is a section on historic asset correlation. Using a non correlated mix will help volatility but hurt return But, the best historical non coronated mix is stocks and long treasuries, but in this bear market they were correlated. One could argue (and the data supports) that all assets are headed toward full correlation maybe due to active Fed and information becoming more available and more accurate. Reducing withdraw rate does help the sequence of return risk, but is probable a way to give most of your money to your kids when you die rich. Love the show.

[@TwoSidesOfFI]

Thanks for your support!

[@davidfolts5893]

Big ERN is one of the smartest people in any room. Read his Safe Withdrawal Series and discover his depth of thinking.😀

[@TwoSidesOfFI]

Indeed he sure is a sharp guy. It was a pleasure to speak with him albeit a little intimidating!

[@davidfolts5893]

@@TwoSidesOfFI Thanks for having him on your outstanding show. Hearing Karsten speak makes me think through subjects in greater detail.

[@patriciagolding7092]

So true that FI and 4% are completely different per person. My 60 year old husband vs my 32 year old son. They both save like fiends but the rest is quite personalized. Often what makes perfect, simplistic sense for us would absolutely be crazy for him. ( and you)

[@TwoSidesOfFI]

Excellent point, Patricia!

[@chipper6729]

This is the way - Mando 26:59

[@TwoSidesOfFI]

We are both big fans!

[@joenocera5894]

I'm not a big dividend investor, but a dividend approach seems more reasonable if you use a dividend index fund like VYM. That way you don't have to worry about an individual stock cutting its dividend. Keep up the good work guys!

[@TwoSidesOfFI]

Thanks, Joe

[@DMC8282]

I have read quit like a millionaire and i am reading keys to a Successful retirement. Fritz explains the bucket strategy really well in his book.i like how he brings up stuff like roof repairs and sinking funds for cars stuff like that. One thing that i failed to do is i has so caught up in hitting our 25x number and i was so miserable in my job. I told myself i don’t care if i can only afford to play pickle ball and disc golf for the rest of my life. I really miss my wheeling trips off roading my jeep. I am having a lot of emotions one day i am like i really miss working then the next day i am so glade i am free. I tell myself i don’t miss working i miss the cash i use to make from working.

[@TwoSidesOfFI]

Jason here - Fritz' book is great, isn't it? In my experience, it's all too true that in the early post-retirement stage, emotions can run wild. It's a tremendous change and it's natural for it to take time to process it fully. I talked about this a good deal in our earlier episodes and also wrote about it often on my blog. If you're finding that you're missing cash, it might be a useful exercise to think about what ways you might turn an interest or passion into income. That doesn't mean you have to "return to work". But anything that adds income to the bottom line will allow you to maintain your desired withdrawal rate while allowing you to make those additional expenditures you're finding that you are missing. I wish you all the best.

[@KG-oe8oo]

I think the cat at 8:50 needs a mention :)

[@TwoSidesOfFI]

And here: kzbin.info/www/bejne/pGmUYnePrKqXqNU

[@KG-oe8oo]

@@TwoSidesOfFI love it! LOL!

[@SledsandGear]

Looking for a way to calculate time to retirement given a non-zero starting point at a XX% savings rate. I have a 58%savings rate but I'm also not starting from zero.

[@DonBurke1]

Financial education in the USA is so abysmal that I'm thankful for rules of thumb like the 4% rule. I find tools like it useful for creating scaffolding in teaching others about money and leading them to lightbulb moments. Simple is best at the start. I guess the challenge then becomes ensuring that people move past the simplicity as they learn more and approach their retirement date. As to what I took away from the episode with Karsten: Give yourself some margin, so you don't have to sweat every little nuance. The world of aviation has a concept called defined minimum maneuvering speed, which is about 1.4 X stall speed. It provides a little margin that protects against falling out of the sky during a turn. Fly at DMMS or higher and you can turn with confidence. Fly at Vs and you're on the razor's edge. No matter the financial tool you use, add some margin because most people's natural inclination is to treat the answer it provides like Vstall, the minimum you can get away with.

[@TwoSidesOfFI]

Jason here - Hi Don, I'm not a pilot but def an aviation buff. That's a great analogy, thanks for sharing

[@Boba-Chica]

Can you do a video running the swr toolkit for a sample retiree scenario?

[@TwoSidesOfFI]

Thanks for the suggestion, Sharon! Stay tuned...

[@zekeboz5533]

@@TwoSidesOfFI I think that would be a great idea! I have used the SWR spreadsheet for a few months and it took awhile to grasp all the features and terminology. Additional suggestion to focus on the 'cash flow' tab since you could model out your expected costs to confirm what extra dollars per yr you could spend or need if your unlucky and not have enough savings etc..

[@genetown1960]

Will the 4% rule be negatively affected by the 2022 inflation reduction act regarding the taxing of company buybacks? If so, what adjustments would you recommended to protect retirement returns?

[@TwoSidesOfFI]

Your guess is as good as ours. It's always a worthwhile exercise to look at moderating your projected market returns in tools like this one to see how much it changes the outcomes. Like anything, modeling cases other than "best case" is a great strategy.

[@AnnMitt]

Investing in dividend stocks and letting the dividends reinvest is how my "low waged" father died a multimillionaire. Us kids were blown away when we saw his estate. We had no idea of his portfolio: ExxonMobil, Microsoft, IBM, 3M...

[@TwoSidesOfFI]

We suspect the capital appreciation of those holdings was also a rather important part of the growth of the estate. This isn't merely about dividends.

[@jeumd]

Opportunity to be the first comment. Hi Jason, hi Eric. Keep up the great work 😃

[@TwoSidesOfFI]

Thanks! Will do!

[@graham3558]

100% agree! We can plan and plan, but it's always an iterative process. kzbin.info/www/bejne/n6jPhXqgqbulps0 Happy to have found 2 Sides very recently.