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The Crossover Point
Old 07-20-2014, 08:58 AM   #1
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The Crossover Point

Having read a significant part of people's FIRE strategy, it seems like the majority of the people use investable assets with a target WR and spending to come up with a target number and date for ER. Most of this is extrapolated on historical investment returns (supported by the 4 pillars of investing, bogglehead, etc).

I find myself leaning toward another approach -- which is another popular one -- in which you generate enough passive income, which grows over time that hopefully match inflation, so that you don't ever need to touch principal. Passive income comes from dividend, interest, annuities, rentals.

Does anybody else approach FIRE this way?

For me, while I can safely use the 4% WR of my investable assets to cover my current expenses, I still feel uncomfortable that this is enough. Whereas my passive income from my taxable accounts can now cover about 80% of my expenses, I hope to increase it to 100% by next year. At this crossover point (the term used by your money or your life), my strategy is then to shift from living off my salary to living off off my passive income and transfer all my earnings into passive instruments so that my passive income goes up even more over time. Once it hits 175% of my annual spending, I'd feel confident that I can forever live off my assets and therefore, I am "financial independent" without significant risk of going back to work.

In this equation, I don't consider any assets or returns from pre-tax, SS, and a small pension I have. I just categorize these assets in the back of my mind as ones to leverage when I truly "retire" at 65, which is still far off for me to think about ever touching.
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Old 07-20-2014, 09:15 AM   #2
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I use a total return approach. It seems to me that if you plan to live on dividends and interest and never touch principal and ignore retirement income streams like pension and SS then it is more likely that you'll end up working longer than you really need to and/or leave a large estate to your heirs. I'm sure they will appreciate it though.
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Old 07-20-2014, 09:25 AM   #3
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Yup same approach. I expect to spend dividend yield only until 70 at which point we will have to bump up withdrawals from 401k and IRA account.

If I am alive at 70 we will convert brokerage accounts into irreversible Trust for our descendants (daughter and her kids), if not I hope DW will do so.
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Old 07-20-2014, 09:44 AM   #4
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I'd say that "live off the dividends and interest" is the first strategy that most people consider. Then, they realize they need to think in terms of "real" interest and dividends.

Historically, real interest rates have been maybe 3%, but have fluctuated significantly. Today, it's more like 0% (hard to generate income on that). Broad stock averages have dividend/price ratios of 2%. Most people look for a way to retire sooner.

You'll find lots of people on this board who are fans of Wellesley.
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Old 07-20-2014, 10:04 AM   #5
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Total return.

"Investing for income" makes me very uneasy.
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Old 07-20-2014, 10:36 AM   #6
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I have a slightly different approach, based on maturing of assets and my age. Each stage should add to what I have, but still provide plenty of ‘just in case’ money.

I 'need' about $40K in income to live. I do not even spend near that now, but that is the minimum goal. And I know I may be a bit light if I missed things. So I plan for more. I am planning in stages of my life.

Stage 1. At 56 years of age, my draw will be 100% rental income. My rental property currently generates ~$110K per year, after all expenses, including vacancy (5%), maintenance (10%), and management (7%) and mortgages. ($295K gross rents). So that should cover 100% of my needs for the short run. I should still be able to save a bit, although I plan on traveling quite a bit. I also pick up a side gig once in a while to make a quick buck or two.

I also have a small VA disability amount. Stage one income will be rents and VA Disability. If needed, I could collect a small megacorp pension any time after 55.

Stage 2. 62 to 65 years of age. Add investments. I have an investment account that just crested $1M, and if I continue my savings, it will be ~1.5M in two years when I leave my ‘real’ job. At a 3% withdrawal rate, that should also be enough to cover 100% of my needs. I do not plan on touching it for a few years after FI, so it can get over ~$3M by this stage. But it will be there for my needs when I want/need it from day one.

Stage two income will be rents, VA Disability and possibly investment withdrawals.

Stage 3. 65 years of age. Add pension, switch rentals. I start picking up a small pension ($13K annually) from my mega-corp job.
I plan on selling my rental properties, and doing a 1031 exchange to a different type of easy to manage rental asset, such as farm or ranch land. Even with a 3% return, it should be enough to pay my way.

I should also have enough equity in 10 years, via appreciation or mortgage pay-down to have at least $2M in equity. (I have ~$1.5M now).
Stage three income will be VA Disability, investment withdrawals, small pension and rent from other sources.

Stage 4. 70 years of age. Add Social Security. Social Security at 70 should cover another $30K, in today’s dollars, so that should also cover me at that age. My other income and investment income should also add to it.

Stage four income will be VA Disability, investment withdrawals, small pension and rent from other sources and social security.


Of course the DGF also has a sizable chunk, and most of the other same retirement income sources, so that should add to the pile if needed. We may get married at that point to have spousal benefits as she is quite a bit younger than me.

As I write this, I wonder why I do not bail from work tomorrow… It’s interesting as you start to actually write things out what you find.
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Old 07-20-2014, 10:43 AM   #7
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I guess I am doing both the "total return" and the "spending dividends only" approach, since I make sure my spending is consistent with either approach.

So far in five years of retirement, the balance of my spending over and above my tiny pension has never exceeded my dividends. Likewise it has never exceeded a reasonable SWR; so far my annual withdrawal rate has varied between 1.98% - 2.61%.

Personally I would not care to live off dividends if that also meant spending over 3.5% or so because I would be concerned that the quest for high dividends could adversely affect my investment strategy. Beyond 3.5%, I would rely more heavily upon a total return approach.
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Old 07-20-2014, 11:32 AM   #8
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Originally Posted by Senator View Post
...As I write this, I wonder why I do not bail from work tomorrow]
As I read it, I wondered the same thing!
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Old 07-20-2014, 12:00 PM   #9
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I guess I am doing both the "total return" and the "spending dividends only" approach, since I make sure my spending is consistent with either approach.
I am following this hybrid strategy too. I invest for total return but plan on only spending the income (dividends and interests). I don't try to artificially boost my income by investing in high yield instruments. I'll just make do with the income generated by my well diversified portfolio (currently yielding sub 3%).
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Old 07-20-2014, 12:01 PM   #10
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I have a slightly different approach, based on maturing of assets and my age. Each stage should add to what I have, but still provide plenty of ‘just in case’ money.
Our stages are similar if I forecast it out to post "65" retirement, in which I'm trying to accumulate both financial and real estate assets, but my stages 1 and 2a (post-tax) are both in play if I decide to retire at age 50 and plus 2b (pre-tax) after 59.5 age. 2a is based on dividends, rentals and other passive income and 2b is based on total returns. Stages 3 and 4 would be similar.

I am sure if I retire today, I could make it but I'm still working on specific career goals, which I set 20 years ago. So, it's not OMY symdrone that drives me but curiosity and finishing something I started, similar to FIRE objectives.
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Old 07-20-2014, 12:06 PM   #11
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As I read it, I wondered the same thing!
+2
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Old 07-20-2014, 12:09 PM   #12
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I just don't get this stages thing. Money is fungible and I have different future income streams available to be beginning at certain times (pension now and SS at 62) but it is more optimal to defer some of those income streams and I will do so if I can (like i am with my pension and plan to with SS). My investments need to provide for the gap between what I need to live and any applicable income streams. IMO, no need to make it any more complicated than that.
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Old 07-20-2014, 02:43 PM   #13
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As I read it, I wondered the same thing!
+3. Income is already ~3x minimum expected expenses from rentals, not including investments, SS, Pension... I'd be done tomorrow!
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Old 07-20-2014, 03:16 PM   #14
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While it is nice to never have to touch principal, for me, it would require many more years of w*rk to achieve this. I don't see the point of leaving a chunk to those who have not earned it and wouldn't appreciate it. Since I have no family this is not an issue.

My housing is paid off. Planning to sell it and rent later in life, just so I don't leave anything on the table.
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Old 07-20-2014, 04:32 PM   #15
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While it is nice to never have to touch principal, for me, it would require many more years of w*rk to achieve this. I don't see the point of leaving a chunk to those who have not earned it and wouldn't appreciate it. Since I have no family this is not an issue.

My housing is paid off. Planning to sell it and rent later in life, just so I don't leave anything on the table.
But I think happiness is good health, enough money and relationship with friends and family.

Who knows which one is most important.......For this reason I do not mind leaving some things on a table.
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Old 07-20-2014, 04:59 PM   #16
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I find myself leaning toward another approach -- which is another popular one -- in which you generate enough passive income, which grows over time that hopefully match inflation, so that you don't ever need to touch principal. Passive income comes from dividend, interest, annuities, rentals.
What would your withdrawal rate be from investible assets?
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Old 07-20-2014, 05:58 PM   #17
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What would your withdrawal rate be from investible assets?
The income that gets generated from dividends, interest, or rental income (after expenses). The dividend income is between 3-4% yield and the yield rates based on cost go up as companies raise their dividend payments. Similarly, rental incomes goes up over time as you increase rents.

This way, you never have to sell any securities during a bear market and only worry about dividend cuts.
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Old 07-20-2014, 06:01 PM   #18
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Red rover, red rover, my dividends helped me cross-over.
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Old 07-20-2014, 06:23 PM   #19
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The income that gets generated from dividends, interest, or rental income (after expenses). The dividend income is between 3-4% yield and the yield rates based on cost go up as companies raise their dividend payments. Similarly, rental incomes goes up over time as you increase rents.

This way, you never have to sell any securities during a bear market and only worry about dividend cuts.

+1

But I am only getting about 2.1-2.2 yield on my portfolio which is 100% in equities.

But overall yield goes up much much faster then inflation rate.
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Old 07-20-2014, 07:51 PM   #20
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Having read a significant part of people's FIRE strategy, it seems like the majority of the people use investable assets with a target WR and spending to come up with a target number and date for ER. Most of this is extrapolated on historical investment returns (supported by the 4 pillars of investing, bogglehead, etc).

I find myself leaning toward another approach -- which is another popular one -- in which you generate enough passive income, which grows over time that hopefully match inflation, so that you don't ever need to touch principal. Passive income comes from dividend, interest, annuities, rentals.

Does anybody else approach FIRE this way?
I do. My ER plan included generating a surplus of dividends over expenses so that over time the worst thing which would happen would be to see that surplus erode a bit despite excess dividends getting reinvested, helping me to generate slightly more dividends. I have not had to touch principal in the nearly 6 years of ER. In fact, I have added to it, besides the growing value of the portfolio.

Except for health insurance premiums, my expenses have been pretty flat. HI premiums have jumped around, first rising in 2010 and 2011, then declining later in 2011 before rising in 2014 with the ACA (I am fine with this becasue I regained a policy more to my liking). The HI premium I pay now is still less than what I paid in 2009.

Even if I have to dip into principal before I turn ~60 (8 years from now), that is okay because once I hit that age I can begin accessing the first of my "reinforcements" which are (a) unfettered access to my IRA, (b) my frozen company pension, and (c) Social Security. My taxable accounts and their generated dividends will no longer be my sole source of paying my expenses, making my overall ER picture look better as time goes on.
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