Value Averaging our way to Semi-Retire

[Nerdjenni]

Quote:

Originally Posted by molof This has nothing to do with cost averaging in. I found that after tax 401(k) contributions allows me to save an additional $11,000 in a Roth IRA annually. They are worth considering for you. If your company allows it, you can sock away after tax investments in your 401(k) and roll them over into a Roth IRA. IF allowed, you can contribute $53,000 including the $18,000 contributions and any employer matching.

Yes I learned about this last year and tried to see if my company allows this. Unfortunately no go. Otherwise that would a great way to save more on taxes. I believe I'm already maxing out on all the tax-shelter options for wage-earners. We do max in my 401k, plus max in my wife's 403b and 457 (she works for the state), and we do max Roth back-door for both of us (since our incomes too high for Roth otherwise). If anyone has any other ideas, I'd love to hear them. Everything else is going into a regular taxed account.

[Seeking Semi-Retirement]

Hello Nerdjenni,

Here’s my take on your questions:

“Anyways, my question is whether I should I invest all the money I'm socking away right now, or keep a big chunk in cash to invest slowly over time post-FIRE.”

AND

“Should I be holding back a chunk of my pre-FIRE savings in cash so that I can gradually put it into my AA over the course of my post-FIRE years? If so, how much?

How are you thinking about this? What does value-averaging look like post-FIRE when you're not adding to the kitty anymore?”

So, for me, I have taken the approach of targeting a specific amount ($1M) in our AA using Value Averaging strategy to get to our early retirement transition. I have no intention of continuing any value path contributions post-FIRE. It’s about survivability of our nest egg from that point onwards, as we plan to scale back to part-time work and supplement our income with modest withdrawals from our AA to support our lifestyle. Indeed, the $1M target for us as an early retirement goal number is based on our lifestyle needs and projected part-time income (using FIREcalc model, etc.) after transitioning to early-retirement.

The answer to post-FIRE value path contributions is really a question of risk tolerance in my view. Bernstein covers this topic pretty well on pages 154-157 in “The Intelligent Asset Allocator” under the ‘Executing the Plan’ section of Chapter 8 when he covers value-averaging.

If you have the cash to plow into your AA, my view is to align your value path plan for getting the cash invested as rapidly as possible to achieve your FIRE goal. If you have a high tolerance for risk, and don’t mind the volatility, no need to hold back any cash from the value-averaging plan. Get your $100k in immediately and plan out quarterly or monthly or bi-weekly or ?? contributions for your ~$200k per year until you hit your target of $2M. For me, I only keep a cash safety cushion of $20k, the rest goes into aggressive value-path plan.

As Pb4uski suggests, you can take whatever cash you have on hand and “new money to bridge the gap” you have to add to your AA now to target a 60/40 split by the time you hit your $2M target. With this strategy you have an AA that is probably better for post-FIRE stage in life. When you hit value path target is $2M by end of 2018, you can shift to a survivability model (using FIREcalc model, etc.) to enjoy the lifestyle you want to have post-FIRE. With the right amount in your AA nest egg and the right risk profile, you should be comfortable with no significant additional contributions to your AA or value-averaging to speak of.

[Seeking Semi-Retirement]

FYI here’s an update on my plan.

About four years into our plan, this is where we stand:

• $668k in DFA funds through Questis (even better than Assetbuilder – Check them out at https://www.questisportfolio.com/)
• $93k and $104k in 529’s for kids – met value paths, no planned additional contributions
• $30k in cash kitty
• Also purchased rental home in my neighborhood, $60k down, $300 in free cash flow per month

[Nerdjenni]

Hi there - thanks for your reply. I'm sold on plan to put the money into market now and not hold back post-FIRE.

Also, would love your thought on this article I just read. Basically, this guy shows that VA hurts you because of the opportunity cost of leaving cash on sidelines. What do you think? I mean in our case, we're not going to be holding back the cash for long since in my case I'm only 3 years to FIRE and I don't think you're very far away either. So I think the downside is lower for us. But, it does make me think perhaps I should just straight up DCA and put in whatever cash I have as I get it. Your view?

Michael James on Money: Value Averaging Experiments