FIRE without the Stock Market?

[emi guy]

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?

 

[ziggy29]

For most of us, FIRE without the stock market probably requires one of two things: a large inheritance or a large pension.

I suppose it can be done, but I think most of us would have to be unbelievably prodigious savers in order to safely FIRE without investing in stocks. Because of the lack of growth, you'd have to save a lot more instead of rely on growth, and your SWR would probably be a lot lower, too.

 

[jdw_fire]

For most of us, FIRE without the stock market probably requires one of two things: a large inheritance or a large pension.

I suppose it can be done, but I think most of us would have to be unbelievably prodigious savers in order to safely FIRE without investing in stocks. Because of the lack of growth, you'd have to save a lot more instead of rely on growth, and your SWR would probably be a lot lower, too.

i can think of a couple of other ways (i posted them on another thread) income real estate and hard money lending. and calculating an SWR would be done differently but i dont think it would necessarily lower.

hmmm, a thought just popped into my head, what about owning your own, successful business that you sell for millions of dollars enabling you to retire?

another thought, how bout the combination of 2 or more of these like someone with a small pension and a small to medium inheritance?

 

[FIREd]

The problem with fixed income investments is that they tend to barely keep up with inflation and that's when you reinvest the income. So if you need the income to pay the bills, your purchasing power erodes year after year. Is this a problem? Maybe, maybe not. If you retire with a large nest egg far exceeding your needs, probably not. If you are willing to lower your standard of living as you age (the way people used to retire), maybe not. Otherwise, it will be like dying of a thousand paper cuts. But, some people claim they can in fact retire without the stock market so they must know something I don't.

P.S. My parents and grandparents retired with virtually all their savings in cash. My grandparents and mom opted to reduce their spending with age while my dad has a nest egg far exceeding his needs. If they knew we had half of our money in the stock market they would slap us in the back of the head.

 

[jdw_fire]

The problem with fixed income investments is that they tend to barely keep up with inflation and that's when you reinvest the income. So if you need the income to pay the bills, your purchasing power erodes year after year. Is this a problem? Maybe, maybe not. If you retire with a large nest egg far exceeding your needs, probably not. If you are willing to lower your standard of living as you age (the way people used to retire), maybe not. Otherwise, it will be like dying of a thousand paper cuts. But, some people claim they can in fact retire without the stock market so they must know something I don't.

actually if, once you are retired and living off your FI portfolio, you are invested in inflation protected bonds (like TIPS) you could maintain your standard of living but then the SWR would be around 2-3% (for TIPS) which is why i think ziggy made the comment about a lower SWR.

and as an aside i have gotten the impression that brewer does very well investing in bonds, hopefully he will comment.

 

[FIREd]

actually if, once you are retired and living off your FI portfolio, you are invested in inflation protected bonds (like TIPS) you could maintain your standard of living but then the SWR would be around 2-3% (for TIPS) which is why i think ziggy made the comment about a lower SWR.

and as an aside i have gotten the impression that brewer does very well investing in bonds, hopefully he will comment.

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.

 

[superdave]

I think you could RE without the stock market. You just have to earn lots in your prime earning years and LBYM. Then you really don't have to worry about market fluxuations.

Lets just say that my stock market gains havn't been the thing that put me on easy street ER.

I really question how much inflation would really impact a ER person who is adapt at LBYM. Provided your major house, kids costs, etc. are out of the way, you really don't have that much exposure to inflation. Just my opinion.

 

[calmloki]

... income real estate and hard money lending....

Lots of #1, recently some of #2. #2 was funded from #1. Right now, #2 is having vague odors of #2 - be interesting to see if we do well enough to cover the bad loans.

 

[Tesaje]

There is this guy's analysis to consider:

Mish's Global Economic Trend Analysis: Long Term Buy And Hold Is Still Bad Advice

 

[Leonidas]

For most of us, FIRE without the stock market probably requires one of two things: a large inheritance or a large pension.

For most of us I agree.

I suppose it can be done, but I think most of us would have to be unbelievably prodigious savers in order to safely FIRE without investing in stocks.

I've seen that in action. Former co-w*rker, he had a pension but was almost a scary miser. He took his 7 year old daughter fishing but only if his brother (the rich dentist) took them out on his boat and if the daughter paid for the worms. He worked plainclothes and got a clothing allowance, but refused to buy clothes. His wife was a high school PE teacher and everybody in the family wore old PE clothing she brought home from the gym lost & found box at school. Which looked hilarious on him because he was 6'4" or so, and most of the stuff he wore was way too small. His wife was allocated 160 miles a week on her 20 year old car so it would have a higher resale value due to low mileage. And so on, etc.

Every dime he saved went into savings account until there was enough to buy a CD and that's where all of his money was. He had $1.2 Million by the time he was in his early 40's. Somebody mentioned to me that he hit $2 Million a couple of years ago, and I think he's about 50-52 years-old.

His brother was able to talk him into buying a stock once and he was unable to keep his eyes off the ticker all day. He sold it the next morning because he had lost a couple of bucks. It went up tremendously over the next few months but he refused to see the logic because he had "lost" money.

I don't know what his attitude was toward drier sheets, but if I had to hazard a guess, I would say that he wouldn't waste money on such foolishness.

 

[unclemick]

In ancient times I met a few who:

cola pension plus some cd/mm/bonds

raw land parcels bought in bits and pieces including some in - yikes! Texas.

an engineer(aerospace) who never sold his houses(5 I think) in California - rented or had relatives stay in them and then sold in retirement. Later he bought a Bed and Breakfast in New Orleans - thus coming out of retirement.

straight forward rental real estate cats including one lady who got hubby to by and rehab moble homes for their trailer park - a combo of lots and rentals.

my favorite was the English guy who taught sailing in Portugal plus a small ?pension/Brit version of SS?

heh heh heh - More than one way to skin a cat.

 

[crazy connie]

Free and clear housing with low property taxes, a do it yourself fixit mindset, a good size garden, hunting and fishing for protein. Toss in a modest pension and healthcare and you've got it made. Simple wants, needs and finances. That is what my parents were able to do.

 

[ziggy29]

Free and clear housing with low property taxes, a do it yourself fixit mindset, a good size garden, hunting and fishing for protein. Toss in a modest pension and healthcare and you've got it made. Simple wants, needs and finances. That is what my parents were able to do.

True. But to tie this to another thread, in this day and age young folks can't count on getting the deal many of their parents and grandparents got, particularly where retiree health care and pensions are concerned.

 

[unclemick]

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 -

 

[JustNtime]

Military retirement pay for last 7+ yrs has been more than sufficient for our needs and allowed us to continue to save for the future. I keep our stock market exposure limited (less than a third of our $$). Including annuitized value of my cola'd pension and our home value, our stock market exposure would be less than 5% of total net worth. So we are currently doing it w/o aid of stock market and I doubt we'll ever really 'need' the stock market to stay retired. (Our home and car are paid for and our only debt is zero % CC balances which could be easily paid for with available cash)... We're comfortable and still frugal - yrs of practice. Perhaps some future small inheritances and/or SS will challenge us to find ways to spend more and break some life-long habits.

 

[Bikerdude]

Sure you can do it if you have $10 million and only need 100K to live on. Then you can do as the rich do and invest in tax free muni's. On the other hand if you have $1 million and need $40,000 a year @3% inflation you'll need a 7% return. Hard to do with fixed income over the long haul.

 

[jdw_fire]

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 thought most people on this forum held to the belief that you pay your taxes out of your SWR (besides you pretty much have to if you own bonds and you dont want to sell them). if you do that then you can pull that size of an SWR. besides you should keep bonds in your tax advantaged accounts, right?

i dont agree with your "you will need to have a nest egg far exceeding your needs" statement because if you need that size of a bond portfolio to safely retire then, by definition, it doesnt exceed your needs, it is exactly what you need.

 

[FIREd]

i thought most people on this forum held to the belief that you pay your taxes out of your SWR (besides you pretty much have to if you own bonds and you dont want to sell them). if you do that then you can pull that size of an SWR. besides you should keep bonds in your tax advantaged accounts, right?

Well I was answering your post and I know how much you love to pay taxes so...

i dont agree...

I am shocked, shocked I tell you...

 

[jdw_fire]

Sure you can do it if you have $10 million and only need 100K to live on. Then you can do as the rich do and invest in tax free muni's. On the other hand if you have $1 million and need $40,000 a year @3% inflation you'll need a 7% return. Hard to do with fixed income over the long haul.

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...

 

[jdw_fire]

Well I was answering your post and I know how much you love to pay taxes so...

oooo i dont like paying taxes but i do like high yields and unfortunately paying taxes comes along with it.

 

[FANOFJESUS]

I guess you could go four ways between CD's, Gold, Real estate and oil. That would get you FIRE without the stock market.

 

[smjsl]

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.

 

[hguyw]

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?)

 

[W2R]

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.

 

[jdw_fire]

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.