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Old 11-03-2009, 05:12 PM   #21
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I guess you could go four ways between CD's, Gold, Real estate and oil. That would get you FIRE without the stock market.
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Old 11-03-2009, 05:47 PM   #22
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Originally Posted by FIREdreamer View Post
The problem is taxes. With TIPS, chances are taxes will eat a good chunk of the real return so you SWR will probably have to be much lower than 2-3% to make it work. So, as I said earlier, you will need to have a nest egg far exceeding your needs.
I agree. To put some numbers on this... With all-taxable-TIPS plan, let's say you are able to buy TIPS paying you 2% real rate, and let's say inflation is 3% during some year. In that year, you earned 5% nominal. You have to pay ~1%-1.67% for taxes and 3% for inflation (to keep your portfolio at same real buying power to provide future value). So you are left with 0.33-1% to live on...

If inflation happens to be 7% during the year, you get 10% nominal. Out of that you pay 2-3% in taxes and 7% for inflation. So, now you have 0-1% left for your expenses depending on whether you pay 20 or 30% tax that year.

If you get a high inflation some year, say 13%, then your TIPS give you 15% nominal. With 20% tax, you have to pay 3% in tax and 13% in inflation... in other words you have to go to work and earn (3+13-15=) 1% of your portfolio just for that year + your expenses for that year... You don't want to know the 30% tax case ;-)

Taxes will of course depend on how large your taxable portfolio is and what the tax laws are.
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Old 11-03-2009, 06:09 PM   #23
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Those with 'true grit' probably don't post here.

Who here is old enough to remember Mother Earth News?

Or:

'The Good Life' by Scott Nearing. A book on back to the land in Maine.

Things go in cycles.

heh heh heh -
Mother Earth News is alive and well - it's one of the few magazines I subscribe to. (And I have The Good Life, too.)

(Is that a Flower Child emoticon?)
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Old 11-03-2009, 06:18 PM   #24
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Mother Earth News is alive and well - it's one of the few magazines I subscribe to. (And I have The Good Life, too.)

(Is that a Flower Child emoticon?)
How cool! I haven't seen Mother Earth News in years.
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Old 11-03-2009, 06:40 PM   #25
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I agree. To put some numbers on this... With all-taxable-TIPS plan, let's say you are able to buy TIPS paying you 2% real rate, and let's say inflation is 3% during some year. In that year, you earned 5% nominal. You have to pay ~1%-1.67% for taxes and 3% for inflation (to keep your portfolio at same real buying power to provide future value). So you are left with 0.33-1% to live on...

If inflation happens to be 7% during the year, you get 10% nominal. Out of that you pay 2-3% in taxes and 7% for inflation. So, now you have 0-1% left for your expenses depending on whether you pay 20 or 30% tax that year.

If you get a high inflation some year, say 13%, then your TIPS give you 15% nominal. With 20% tax, you have to pay 3% in tax and 13% in inflation... in other words you have to go to work and earn (3+13-15=) 1% of your portfolio just for that year + your expenses for that year... You don't want to know the 30% tax case ;-)

Taxes will of course depend on how large your taxable portfolio is and what the tax laws are.
but if the TIPS are in your IRA then you would only pay taxes on your WD and in the case of a $40K WD, for a single w/ std deduction the fed income tax would be $4180 and the inflation protection stays inside the IRA so no ground is lost.
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Old 11-03-2009, 06:50 PM   #26
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so then i guess maybe you "need" a portfolio of $2-2.5 million to pull it off then. or maybe you need to invest in riskier bonds. or do some hard money lending...

That's a definite possibility, however personally, I view risky (high yield) bonds as equities in my portfolio.
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Old 11-03-2009, 07:44 PM   #27
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You can't escape the risk / return trade off. I don't see how substituting equity market risk with high yield or hard money loan default risk necessarily puts you ahead of the game. Same thing with concentrated real estate bets.

The only way you can make a "low risk" portfolio work is to have a commensurately low withdrawal rate, or plan on having a short withdrawal period.
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Old 11-03-2009, 07:51 PM   #28
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You can't escape the risk / return trade off. I don't see how substituting equity market risk with high yield or hard money loan default risk necessarily puts you ahead of the game. Same thing with concentrated real estate bets.

The only way you can make a "low risk" portfolio work is to have a commensurately low withdrawal rate, or plan on having a short withdrawal period.
Good point. Risk is what we are really talking about here.
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Old 11-04-2009, 01:03 AM   #29
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(snip) Same thing with concentrated real estate bets. (snip)
How about diversified real estate bets (i.e. REITs)? They might add some return and also be non-correlated with the bonds, thus cutting the risk of the portfolio as a whole. Unfortunately they don't meet the OP's "all fixed" criterion.
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Old 11-04-2009, 01:25 AM   #30
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If the OP's question was whether it is possible to FIRE by investing only in assets which have returns which are contractually known and certain at the time of investment (subject to changes in law, changes in tax rates and insolvency risk) (such as bonds, CDs and deposits) then I agree with the comments made by others that a combination of (i) lower returns (absence of risk premium) (ii) inflation and (iii) taxes will make this challenging. The only other asset which would would be similar in that the returns are contractualy set up front are annuities (any others?) which are generally best left until later in life to purchase (if at all).

All the other assets mentioned (equities, REITs, real estate, commodities, businesses) do not have contractually agreed returns - in effect they carry a higher level of undertainty or risk compared with fixed return investments. In a rational world (should such a place exist), one would expect to be compensated through higher returns for investing in such assets. (I would also treat junk bonds as equity.)

Accordingly, I would expect it to be harder to achieve a given FIRE goal using fixed return investments only. Not impossible, just more difficult.
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Old 11-04-2009, 07:39 AM   #31
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How about diversified real estate bets (i.e. REITs)? They might add some return and also be non-correlated with the bonds, thus cutting the risk of the portfolio as a whole. Unfortunately they don't meet the OP's "all fixed" criterion.

I'm a big fan of diversification. I see it as the only free lunch in finance. My only complaint is that I still have too few asset classes available to invest in. So certainly I think real estate and REITs should play a part in a well constructed portfolio and retirement plan. But REITs are still equities after all.

My main concern with the original premise is that if someone is trying to create a low risk, high return portfolio by making concentrated bets, they may end up achieving neither objective.
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Old 11-04-2009, 10:35 AM   #32
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Seems like a simple question - How many of you have made it to early retirement by saving in fixed income vehicles; without the aid of the Stock Market?

I ask because I wonder if it is possible to save enough money to retire early by only saving in fixed instruments. In these uncertain times I feel the urge to go "all fixed" and leave the Stock Market uncertainty once and for all. The market bounced back a bit up until last month and now it seems to be headed for another roller coaster ride. I am currently 60/40 (market/bonds) with hopefully nine years to retirement. Will this ever end or are we in for what Japan has been experiencing for the past ten or so years?
Depends on what you mean by "early" and what you mean by "possible to save".

The math is easy. If you can earn inflation + 2.5% on your fixed income investments, your money doubles in 29 years.
Each year while you are working, make sure that your savings equal your spending. (e.g. you spend $30k and you save $30k). In this case, you can retire in 29 years with a perpetuity equal to your spending. (Your saved $30k doubles in 29 years, so you withdraw half and leave the other half to double again.)

Note that "spending" does not include FICA taxes or P&I on mortgage, since they will be gone when you retire. But, you do have to adjust for health care and Social Security.

Most people find it "impossible" to save as much as they spend. We did it for a few years before the kids started college.
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Old 11-04-2009, 11:52 AM   #33
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and as an aside i have gotten the impression that brewer does very well investing in bonds, hopefully he will comment.
You can do very well investing in credit-risky bonds, but it is work and you have to be willing to stay on the sidelines for prolonged periods of time when the market gets stupid. And you had better hope that your wins outweight your inevitable mistakes. Not that different than stock-picking, although generally lower volatility.
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Old 11-04-2009, 12:56 PM   #34
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You can do very well investing in credit-risky bonds, but it is work
I'd say it takes more work to understand your typical high yield bond than it does to understand your typical equity. You have to do all of the same fundamental business analysis, but understanding the capital structure, covenant, and structural issues in high yield bonds can be a bear. Knowing exactly what you own, and what the company can do to you, is nearly as important as getting the fundamental business call right.
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Old 11-04-2009, 01:13 PM   #35
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My original post was prompted by my recent uneasyness in the stock market. I'm afraid that having gone through the past few years of terrible returns, precisely at a time when I felt like I was making some serious headway toward saving for early retirement has me a bit rattled. Just as my account was approaching a tolerable rebound, the market seems to have turned south again, losing several pecentage points recently. I guess I was hoping for a magic bullet that would bring safety and modest growth. After reading all of your replies, it seems that the potential return that stock market risk ofers is the only way. As I originally mentioned, my asset allocation is currently 60/40 and that needs adjusting as I need to rebalance to 50/50. That being said, I guess I was luckier than most during the recent down turn due to my limited stock market exposure.
I guess I need to read some "good. positve news" rather than the uncertainty and doom and gloom in the press. I try to listen to, what I consider levelled headed thinkers (Kudlow, Brinker etc...) but for every "bull" there seems to be a couple "bears".
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Old 11-04-2009, 01:21 PM   #36
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This guy Warren Buffett - Wikiquote seems to have done pretty well. He says:
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And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful.
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Old 11-04-2009, 01:26 PM   #37
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I'd say it takes more work to understand your typical high yield bond than it does to understand your typical equity. You have to do all of the same fundamental business analysis, but understanding the capital structure, covenant, and structural issues in high yield bonds can be a bear. Knowing exactly what you own, and what the company can do to you, is nearly as important as getting the fundamental business call right.
I disagree. With bonds, all you have to do is figure out if the company will stay on enough of an even keel long enough to make good on the bonds. For an attractive equity, you have to figure out a lot more, namely how a company can grow tremendously (or rebound its way out of a mess) to generate a good equity "story" and mushroom the stock price. Its also easier to figure out when to sell when you call it right (when the bonds hit par or a spread-based value that isn't hard to figure out), whereas with equities it becomes a good deal more challenging.
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Old 11-04-2009, 02:13 PM   #38
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My original post was prompted by my recent uneasyness in the stock market. I'm afraid that having gone through the past few years of terrible returns, precisely at a time when I felt like I was making some serious headway toward saving for early retirement has me a bit rattled. Just as my account was approaching a tolerable rebound, the market seems to have turned south again, losing several pecentage points recently. I guess I was hoping for a magic bullet that would bring safety and modest growth. After reading all of your replies, it seems that the potential return that stock market risk ofers is the only way. As I originally mentioned, my asset allocation is currently 60/40 and that needs adjusting as I need to rebalance to 50/50. That being said, I guess I was luckier than most during the recent down turn due to my limited stock market exposure.
I understand your dilemma. I used to have 65% of my portfolio in stocks and after having recouped all my losses during the recent rally, I reset my asset allocation to 50/50 stocks/bonds & cash. But I found out that I do not feel much more at ease when my portfolio becomes bond heavy. The reason is that all investments have risks, and fixed income investments are not immune: interest rate risk, reinvestment risk, inflation risk, call risk, etc... By being bond heavy, you are escaping certain kinds of risks but introducing others. That's why I think diversification is important. You never know which asset is going to blow up in your face next.
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Old 11-04-2009, 02:32 PM   #39
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all investments have risks, and fixed income investments are not immune: interest rate risk, reinvestment risk, inflation risk, call risk, etc... By being bond heavy, you are escaping certain kinds of risks but introducing others. That's why I think diversification is important. You never know which asset is going to blow up in your face next.

Exactly.
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Old 11-04-2009, 09:25 PM   #40
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How many of you have made it to early retirement by saving in fixed income vehicles; without the aid of the Stock Market?...
Many forum members are/were heavily invested in the stock market, but you don't have to be.

Most of my money was in CDs and bonds when I retired in 2001 with about $900K. I arrived there chiefly through LBYM (saving a large part of each paycheck throughout my career).

I held a few stock mutual funds, but the amount was between 10% and 20% of my money assets. I lost more than I made in stock market mutual funds before I retired. I was (and remain) skeptical of the financial industry.

CD interest rates are pitifully low now and 2 of my banks have failed in the past month. On the other hand, my CDs are FDIC insured. My net worth was down only 4 to 5% at the stock market's lowest dip and I have been blessed with more money now than when I retired.

There are lots of other factors besides fixed income vs. stocks. In my case:

- LBYM (i.e., spending a lot less than I earned)
- thrifty wife who still works
- no children
- have a pension (but, no COLA)
- good health
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