Younger retirees... Your game plan?

[FIREd]

It's insightful how the WR is in the low or mid 2's for those of us who grew up working without any promise of a pension and skepticism that SS will be there in full when we hit full Retirement Age.

My WR is currently just under 3% but will be permanently reset to the low 2's next year when we move to a lower cost of living area.

 

[papadad111]

Fuego. Thanks for chiming in. Great response. Nice to hear from our 30 and 40's FIREd members

A follow up question for clarity:

What is your source of living expenses?
*$1.x million portfolio covers living expenses at a 2-3% withdrawal rate (div yield > avg 2014-2015 expenses).

So expenses are approx 30k per year? Fully covered by dividends ? Anything unique about your portfolio - dividend Titans or utilities or just broad market stuff like SP500 etc? Do you reinvest dividends now or hold as cash ?

Fuego: also started a blog and some other side projects post-FIRE and it covers ~100% of living expenses.

So blog income also generates 30k per year above the dividend income. ?

Fuego: Wife is also still working (but not for long) which covers 100%+ of living expenses.* for now, DW's income covers 100%+ of annual expenses.

So in effect you have at this point 3x the income vs expenses annually ??
If yes, I can see why you have attempted to adjust the spending upward ...

Quite different from dividends + blog + wife working sum of which just covering 1x expenses.

Nice. Sounds like you're still very much in accumulation phase of early early retirement !!!

 

[FUEGO]

Papadad, you got it. Our budget for 2015 was $32.4k, but we only spent $25k. Div income was just short of $30k. Blog/freelance/consulting income grossed a little over $30k, probably under 30 after SE taxes. DW's net was probably in the $60k range.

So our income is ~4x our expenses. DW is barely working now (1-2 days/wk) and her income will end in 2016. I have no clue how much my side hustles will bring in (since I'm not really focusing any energy on growing the biz).

In spite of our efforts, we're still accumulating right now.

 

[papadad111]

Background: I FIRED in 2015 at 45. 2 kids. No pension ever. SS is 22 years out. who knows what we'll get by then...if anything.

What we have is...what we have. FWIW no trust fund or big inheritance either.... and...damn it... I wasn't one of the powerball winners either!

Are you doing anything differently now that the market has corrected?

Nothing different except turning off CNBC. Actually I think the overly bearish sentiment by everyone on wall street is good for the market....waiting for the covers of Newsweek and Time to know when this down spell is about over.

What is your source of living expenses? Need about 3% WR to cover our basics. 3.5% to cover basics+accruals for long term capital outlays.

2016-2017: deferred comp fm mega corp net of taxes should fully fund
2018: draw from taxable account - dividend income should cover approx 3/4 of our annual "base" needs.

The other 1/4 of income needs (plus extras like new car etc) in 2018 will come from a combination of some or all of the following:

A) selling / spending principle.... either taxable or maybe a 72T from IRA depending on tax efficiency....
B) hobby income (at best, covers 10% of annual expenses) and
C) rental income (at best, covers 10% of annual expenses) or
D) DW may take on some part time work
E) I am currently swapping my time (teaching part time) for health insurance and free university tuition... assuming degree completion, University might offer me a role instead of payment-in-kind. Sounds like work though...so not so fast to go forth.....

Note: Base budgetary needs do not include large 1x capital expenditures like new roof, new car, or high OOP medical deductibles. Covering those would require a dip into principle.

Note: College tuition x 2 kids x 4 yrs are already tucked away via 529 etc and when that is spent the DK's are on their own to pay for school. Not spending principle for their tuition.

At the rate gas prices are headed - there is some built in cost savings happening in multiple budget place and that could allow as much as 5% reduction in total base annual spend.

Are you selling anything. or spending principle (cash) or only living on dividend and interest income.

See above...

Any other sources of passive ( you're retired right) income such as real estate or hobby income? see above

At what market level from the top do you start to be very concerned about capital preservation in the short run ? Down 10-20-30-50-66 percent etc

I believe 30% down from the all time highs of 2131 will make me nervous. That's a 650 point drop in the SP500.. down to 1500. That would take us below the highs of October 2007. I start to get concerned at that level because we're already in a bear market and we have already been in negative REAL market returns through the entirety of the last year ( 2015)...A serious and significant sequence of returns risk is already happening.

What's your asset allocation ?
Currently: 87% equities / 13% cash (I dont hold bonds at all). Domestic 80% and International is 20% Couch potato 2 fund portfolio. I have a mad money trading account and just play short term with that.

my preferred AA is 90/10. At my age, I believe both sequence of returns risk as well as inflation risk are real and thus the higher equity allocation.

Note: I was 80% cash in 2007 through 2009. Missed some big gains in 2010 and 2011.... I wont try to time the market again... felt good when everyone else was down but I didn't get back in soon enough. fear and greed...fear and greed.

How many years of "cash" do you need to feel secure - for living expenses
I would speculate that if I had 10 years of cash beyond dividend income, to cover the basics, that would help me sleep at night but also know holding that much cash is detrimental to total return on portfolio due to inflation. Dont see how people can hold 40% in bonds when bonds earn so little now days...but that's just me.

I hold somewhere between 4 - 6 years of "what I need in cash above my dividend income to cover all our base expenses"....

Note that I settled on 4-6 years because the avg duration of bear markets across the globe tend to be 4-6 years. USA bears tend to be shorter but I think we could face a protracted down turn like the 1930s or a Japan, Latin America, or Russia market some day too... hence cash.

Do u have dry powder to throw at the market if so what percent of portfolio. Per my AA, I'm a little higher on cash than ideal, but not enough to make me do any sort of rebalance to equities now. If we see another 10% down, I'll put that 3% into equities --

 

[FIREd]

Dont see how people can hold 40% in bonds when bonds earn so little now days...but that's just me. [/COLOR]

It depends how well capitalized you are. With a low 2% WR all in (for basics and accruals like new cars, home repairs, healthcare OOPC, etc...), we have enough capital to reach our mid 80s (further still with SS), even if our investments just keep up with inflation. It should be more than doable even with a fairly conservative 50/50 AA. We also have non-retirement assets that could be liquidated in a pinch.

A recent article by Swedroe painted a pretty gloomy pictures of future returns for both bonds and stocks, yet under his rather pessimistic scenario a 50/50 AA should still be able to return around 2% real - in line with my expected WR, and enough to more or less preserve my capital in real terms without touching the non-retirement assets.

The biggest danger to our retirement is making a big mistake like taking more risk than we can bear and then freak out when the market inevitably corrects and sell at exactly the wrong time.

 

[papadad111]

It depends how well capitalized you are. With a low 2% WR all in (for basics and accruals like new cars, home repairs, healthcare OOPC, etc...), we have enough capital to reach our mid 80s (further still with SS), even if our investments just keep up with inflation. It should be more than doable even with a fairly conservative 50/50 AA. We also have non-retirement assets that could be liquidated in a pinch.





The biggest danger to our retirement is making a big mistake like taking more risk than we can bear and then freak out when the market inevitably corrects and sell at exactly the wrong time.

Recalling the 1970s, I would suspect risk of inflation is a far bigger danger systemically than selling at a market bottom. If you adopt the "never sell" strategy and continue to live in a 2-3 percent WR, your money in absolute and real terms should last forever. 2 percent bonds are gonna suck when global inflation returns - why not just hold dividend paying equities -- at least they tend to rise during inflation. Then again you did say you were swapping in TIPS so maybe you are well diversified against inflation too.

Your response got me thinking ....

 

[Mulligan]

Papadad, you got it. Our budget for 2015 was $32.4k, but we only spent $25k. Div income was just short of $30k. Blog/freelance/consulting income grossed a little over $30k, probably under 30 after SE taxes. DW's net was probably in the $60k range.

So our income is ~4x our expenses. DW is barely working now (1-2 days/wk) and her income will end in 2016. I have no clue how much my side hustles will bring in (since I'm not really focusing any energy on growing the biz).

In spite of our efforts, we're still accumulating right now.

If things ever get tight for me, I am going to have you show me the ropes on living on 25k, Fuego. Very impressive! But I am afraid what you tell me may not be what I want to hear. Or at least what my GF wont want to hear me tell her, as that is where my budget "leakage" occurs I am pretty sure.


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[FIREd]

Recalling the 1970s, I would suspect risk of inflation is a far bigger danger systemically than selling at a market bottom. If you adopt the "never sell" strategy and continue to live in a 2-3 percent WR, your money in absolute and real terms should last forever. 2 percent bonds are gonna suck when global inflation returns - why not just hold dividend paying equities -- at least they tend to rise during inflation. Then again you did say you were swapping in TIPS so maybe you are well diversified against inflation too.

Your response got me thinking ....

Stocks usually more than keep up with inflation over the long term (and remember I still have half of my portfolio invested in stocks for inflation protection), but they don't necessarily do well in a high inflationary environment. Check out those poor market returns in the 1970s! On the bond sides, I might trail inflation but if I stick to i-Bonds, TIPS held to maturities, as well as shorter term bonds or CDs, I should be able to limit the carnage. Personally, I think that deflationary pressures will still be the main concern for some time.

 

[FUEGO]

If things ever get tight for me, I am going to have you show me the ropes on living on 25k, Fuego. Very impressive! But I am afraid what you tell me may not be what I want to hear. Or at least what my GF wont want to hear me tell her, as that is where my budget "leakage" occurs I am pretty sure.

Yeah, she probably won't want to hear it. I lucked out with a frugal wife. And she reminds me of my good fortune frequently!

$25k will probably be one of our lowest spending years while the kids are still in the house. We didn't have any major capital items in 2015, which helped. 2014 included an $8k major home improvement project (new siding, new windows, roof repair) and the spending showed it at $34k. 2016 is likely to be in the $34-40k range since we're trying to upgrade from a 15 year old sedan to a 6-8 year old minivan ($7-10k cost after selling the old car).

2015 was also lower than average since we didn't have any significant OOP medical or dental bills.

 

[photoguy]

The biggest danger to our retirement is making a big mistake like taking more risk than we can bear and then freak out when the market inevitably corrects and sell at exactly the wrong time.

+1

Our goal in investing is to avoid strikeouts and not necessarily hit homeruns. A bad investing mistake could terminate early retirement but what does hitting a homerun mean to us? maybe we fly business instead of coach or we get a nicer car.

Also I think it is a mistake to look at the low returns of bonds independently of everything else in your portfolio. High quality bonds (i.e. US treasuries) usually behave nicely when equities tank. Bonds are essentially the "dry powder" to throw into the market.

Last year one of my best performing asset classes were CDs (I lump this with bonds). And of course this year bonds are doing well.

 

[papadad111]

Yes. Not making a mistake - not selling at a market bottom. But again in a "never sell" mentality which is the case if WR is down at the dividend yield rate.... That won't happen. Much bigger risk is inflation even at 2 percent will erode principle and your bond face value amount over the long term

Recall here that we are fired and so not in accumulation phase. Money is either in the left pocket in equities or right pocket in bonds. No new money flowing into either pocket. (Assume we are spending the dividends or coupons to live off of).

So aside looking at the account balance at a particular point in time, being in your 40s meaning you hope to live another 40-50 years, I don't see why one would limit their upside potential of principle by being in bonds at such a young age, especially when yield covers expenses. Just live on that yield/ dividends, wait for the market increases.... It always does. At least in modern times. The daily monthly or yearly fluctuation doesn't matter much.

That's a better shot than buying bonds, holding to maturity, earning a return that barely covers long run rates of inflation but having to spend it to live on. At the end of 40 years and having spent the bond coupon /interest, you're left with dollars returned that are seriously devalued due to inflation. Your principle is intact but it's worth way less ... Equities at least have a fighting chance over the long term to increase your principle return equal to or maybe a little beyond inflation.

Long term , equities simply outperform.

So .... With such a long time horizon, why the conservatism? Unless the reality is one needs to spend principle too... Early on in retirement. Like during the 50s or early 60s.... Or If dividends are at risk...or the actual WR is moving higher than just the dividend yield due to lifestyle spending creep.

Otherwise I just don't get it. Perhaps it's the sleep at night factor that I'm missing.

Or the desire to draw down principle and buy that big house/car/yacht etc at a moments notice rather than treat the principle sorta like a permanent and untouchable investment with a stream of cash flows like an annuity .

I see a different scenario toward older age where you may have huge expenses for health care beyond dividend yield amount and need that principle. That's when you might want or need some bond assets or cash - in 60s and 70s ... And then SPIA in 80s for longevity insurance.

Good discussion. I historically was overly conservative but have changed my habits over time... Maybe I'm overly aggressive now holding just stocks in broad market funds and some cash ...

Early early retirement is truly unique with long long time horizons to manage, little if any safety nets such as defined pensions , and even uncertainty about SS...

 

[Senator]

I am not quite FIRE’d yet, but will be in a few months.

Are you doing anything differently now that the market has corrected?
No, just continue to buy. January I actually buy just a bit more, due to Roth and my 401K match. I typically buy ~$10-11K a month of an S&P equivalent

What is your source of living expenses?
I will use rental income for 100% of my living expenses. I hope too still be able to invest ~$5K month for a few years.

Are you selling anything. or spending principle (cash) or only living on dividend and interest income.
No selling is planned for a few years, strictly reinvesting dividends. When I do sell, I plan on using only dividend income from my IVV and IVW ETFs. Leaving the principal intact.

Any other sources of passive (you’re retired right) income such as real estate or hobby income?
Rental income. ~$150K+ a year. I do have a real estate license so I may sell a few homes each year to tenants of mine that leave.


At what market level from the top do you start to be very concerned about capital preservation in the short run? Down 10-20-30-50-66 percent etc.
1%... But I rely on 130+ year of market history, and my own inept historical trading to know I must sit tight.


What's your asset allocation?
90%+ US Equities. Large cap. My rentals are my bond portfolio. When I sell those, I will buy more fixed income vehicles.

How many years of "cash" do you need to feel secure - for living expenses
I keep about a year of a minimal existence on hand for any emergencies. I can always generate quite a bit from my rentals, so I need less than many people..

Do u have dry powder to throw at the market if so what percent of portfolio ?
I can generate a bit of extra cash monthly, so I maintain a regular investment schedule.

 

[AnonEMouse]

There's a relevant piece in the Economist about stock/bond returns and whether equities are always the best investment for the long run. We've had 30 year periods (latest ending in 2011) where US equities actually underperformed bonds. Anyway, story at:

Investing: Stocks for the long run? | The Economist

If you hit a paywall, search for "Stocks for the long run?" in your favorite search engine and click the first economist link to read the full article.

 

[REWahoo]

There's a relevant piece in the Economist about stock/bond returns and whether equities are always the best investment for the long run. We've had 30 year periods (latest ending in 2011) where US equities actually underperformed bonds. Anyway, story at:

Investing: Stocks for the long run? | The Economist

If you hit a paywall, search for "Stocks for the long run?" in your favorite search engine and click the first economist link to read the full article.

Another case for a well-balanced AA...

 

[papadad111]

There's a relevant piece in the Economist about stock/bond returns and whether equities are always the best investment for the long run. We've had 30 year periods (latest ending in 2011) where US equities actually underperformed bonds. Anyway, story at:

Investing: Stocks for the long run? | The Economist

If you hit a paywall, search for "Stocks for the long run?" in your favorite search engine and click the first economist link to read the full article.

Good article. Thanks for sharing.

 

[steelyman]

Another case for a well-balanced AA...

And maybe switching to decaf.

 

[MichaelB]

Recall here that we are fired and so not in accumulation phase. Money is either in the left pocket in equities or right pocket in bonds. No new money flowing into either pocket. (Assume we are spending the dividends or coupons to live off of).

Money flows from one pocket to the other on a regular basis. It's called rebalancing, and it is a critical component of portfolio management. It is especially important for those of us that intend to self-finance very long retirements.

 

[photoguy]

Papadad

As per AnonEMouse's link, the reason we don't go all-in for US equities is that asset classes can have long periods of underperformance. Otherwise we would be 100% emerging markets which has way higher expected returns than US equities.

Also I think one very real danger with investing, especially among quantitative types, is that one can *over-optimize* their portfolio. They push their portfolio in the direction that historically looks like it will do very well not fully realizing the data is extremely limited and their analysis may be picking up on random/spurious correlation or missing some long-tail events.

Each asset class is robust to certain shocks/bad events and brittle to others. We want a mix (regardless of what the data says would perform the best historically) so that one bad extended shock doesn't sink us.

 

[papadad111]

Good comments.

My opinion: Today we have what looks finally like capitulation.

 

[W2R]

Good comments.

My opinion: Today we have what looks finally like capitulation.

Otherwise known as a buying opportunity! I'm pretty sure my portfolio will meet my written criteria for rebalancing and if so, I'll be buying at some point to make that happen.

 

[FIREd]

Yes. Not making a mistake - not selling at a market bottom. But again in a "never sell" mentality which is the case if WR is down at the dividend yield rate.... That won't happen. Much bigger risk is inflation even at 2 percent will erode principle and your bond face value amount over the long term

Recall here that we are fired and so not in accumulation phase. Money is either in the left pocket in equities or right pocket in bonds. No new money flowing into either pocket. (Assume we are spending the dividends or coupons to live off of).

So aside looking at the account balance at a particular point in time, being in your 40s meaning you hope to live another 40-50 years, I don't see why one would limit their upside potential of principle by being in bonds at such a young age, especially when yield covers expenses. Just live on that yield/ dividends, wait for the market increases.... It always does. At least in modern times. The daily monthly or yearly fluctuation doesn't matter much.

That's a better shot than buying bonds, holding to maturity, earning a return that barely covers long run rates of inflation but having to spend it to live on. At the end of 40 years and having spent the bond coupon /interest, you're left with dollars returned that are seriously devalued due to inflation. Your principle is intact but it's worth way less ... Equities at least have a fighting chance over the long term to increase your principle return equal to or maybe a little beyond inflation.

Long term , equities simply outperform.

So .... With such a long time horizon, why the conservatism? Unless the reality is one needs to spend principle too... Early on in retirement. Like during the 50s or early 60s.... Or If dividends are at risk...or the actual WR is moving higher than just the dividend yield due to lifestyle spending creep.

Otherwise I just don't get it. Perhaps it's the sleep at night factor that I'm missing.

Or the desire to draw down principle and buy that big house/car/yacht etc at a moments notice rather than treat the principle sorta like a permanent and untouchable investment with a stream of cash flows like an annuity .

I see a different scenario toward older age where you may have huge expenses for health care beyond dividend yield amount and need that principle. That's when you might want or need some bond assets or cash - in 60s and 70s ... And then SPIA in 80s for longevity insurance.

Good discussion. I historically was overly conservative but have changed my habits over time... Maybe I'm overly aggressive now holding just stocks in broad market funds and some cash ...

Early early retirement is truly unique with long long time horizons to manage, little if any safety nets such as defined pensions , and even uncertainty about SS...

Being all stock sounds great in theory (a chance to maximize your returns, although not all of us care about hitting a homerun as photoguy wrote above), but you have to take into account human psychology. You wrote earlier that you would start to get nervous with a 30% drop from the recent highs. So you are not a INTJ robot. Are you sure that your "never sell" convictions will hold when the market corrects 50% or more, as it has done on now 2 occasions over the past 16 years? Will you still feel serene when your dividend income gets cut as well? Dividends were cut by the financial sector in 2008 and now another big dividend-paying sector, energy, is starting to cut dividends as well. If you have alternative sources of income to fall back on, then this may not be such a big deal. But will the fact that "equities simply outperform" be of much comfort to you when you see your capital -the only thing that keeps you retired- melt like snow in the sun and everybody is seemingly hitting the panic button?

 

[papadad111]

That conviction is definitely individual.

I held firm as a new investor in 1987 and in 1991, in 2000 and in 2008.

But others may be more risk averse. I was less exposed to equities (50:50) earlier in my investing days and every recovery, I said I wished I had been more exposed. I'm now 90:10

As an aside, look at 20 years of sp500 dividends. 1995-2015. The SP500 dividend amount only declined one year of the past 20 years and that was the financial crisis in 2009- payout that year fell by 20% While Market was down 58 percent. . Dividends climbed steadily there after and returned to all time highs by 2012. Even the dot com crash did not impact the SP500 dividends much. Certain sectors were hit. ... But that's the advantage of holding broad market.

The actual dividend payment has doubled from what it was 10 years ago.

Let's not discuss bond defaults as I think we are referring to treasuries.

Great discussion. All very good thoughts and commentary. I appreciate everyone's participation and perspective especially those early early retirees with no backstops other than a whiff of SS decades out in time.

Today was interesting for sure in the markets.

 

[FUEGO]

Being all stock sounds great in theory (a chance to maximize your returns, although not all of us care about hitting a homerun as photoguy wrote above), but you have to take into account human psychology. You wrote earlier that you would start to get nervous with a 30% drop from the recent highs. So you are not a INTJ robot. Are you sure that your "never sell" convictions will hold when the market corrects 50% or more, as it has done on now 2 occasions over the past 16 years?

I can't speak for papadad but for me, I would start feeling "worried" at around a 40% correction because that's where my budgeted spending would drop below a 4% of portfolio value withdrawal rate.

Not worried in the sense of wanting to sell everything, but rather worried in the sense that I might need to cut back on spending or shift spending on big capital items into future years. The constraints on my spending would be the worry, not the fluctuations in the market.

At least that's my story. And I'm sticking to it.

 

[papadad111]

Well said Fuego. Very Similar concern... It's about WR and sequence of returns risk.

 

[FIREd]

We all make a bet and hope it works out for the best. For us young retirees with no pensions or income backup, this is high flying with no safety net. So fingers crossed!