Modeling Options for Early Retirement - Post Sabbatical Thinking

[RetireAbroadAt35]

Howdy folks,

About 2 years years ago, I had an epiphany and left my soul-sucking job to explore different ways to live. It got me thinking about early retirement, which I talked about in this thread:

http://www.early-retirement.org/forums/f28/modeling-options-for-early-retirement-61988.html

I spent most of that time traveling and camping and traveling some more, from Alaska to Costa Rica, driving around in an old truck and enjoying the hell out of life. I met people from all walks, from wage slaves to partial-retirees to trustafarians to fully retired folks. It was a fascinating experience. I came away with two realizations:

1. I will never be bored if I retire. The world is just too fascinating.
2. I could live and retire in Latin America and be happy with it.

The one thing I didn't do was sort out my AA or really put together a financial strategy. I recently returned to work, amazingly negotiating a 25% raise to return, and I am now motivated like hell to make retirement a possibility.

In this thread, I'd like to bounce some ideas off y'all, share my current AA, and start pondering my next steps.

All I can say at this point is the only thing that brings me into the office is possibility that prudent investing will get me off the hamster wheel.

 

[pb4uski]

Hate to break the bad news but slow and steady wins the race.

 

[RetireAbroadAt35]

1) With enough income and low enough expenses, that's not true

2) In my case, slow and steady doesn't bother me one bit. I've been saving slow and steady for over a decade now and don't see that changing.

 

[MasterBlaster]

For asset allocation, compare what you have now to the Vanguard tool recommendations. This allocation just may be as good as anything and at very low cost.

https://personal.vanguard.com/us/funds/tools/recommendation

 

[RetireAbroadAt35]

Hate to break the bad news but slow and steady wins the race.

To expand on this, I'm not looking for short-cuts, but I am looking for ways to make up for some lost time. I did better than most of my peers when I was younger but I wasn't focused. Now I am. Read into it what you will, but I've never been prone to wishful thinking.

For asset allocation, compare what you have now to the Vanguard tool recommendations. This allocation just may be as good as anything and at very low cost.

I'm a vanguard user so I will check that out.

I'll be posting some more details here later to get some ideas from y'all. My previous thread was very enlightening, despite the best efforts of some of the crankier posters on this forum

 

[RetireAbroadAt35]

I just pulled together all of my finances, built a spreadsheet and determined my as-is allocations.

I am currently at:

• 62% domestic stocks
• 12% foreign stocks
• 11% domestic bond
• 1% foreign bonds
• 12% liquid cash
• 1% "other".

Some time back, after reading at bogleheads and trying various calculators, I decided on:

• 40% domestic stock
• 35% international stock
• 15% bonds
• 10% cash

I'm highly tolerant of risk for the time being. If things go well, I hit early retirement in the next 5 years and adopt a more conservative allocation. This would require retiring to a low cost of living area, perhaps abroad, as even my rosiest forecasts would only give me about $30k to draw down and live on. If things don't go well, I keep working.

Any comments on my current and targeted allocations?

 

[RetireAbroadAt35]

Given that my monthly living expenses are currently low, I'm thinking 10% cash represents more than I really should have on hand. A 6 month "emergency" fund for me would constitute around $20k. That may change in the future but for now I have no mortgage ... only rent, insurance, cell phone, food ...

So I'm thinking it makes sense to drop cash reserves down to 5% so that money can earn something.

• 45% domestic stock
• 35% international stock
• 15% bonds
• 5% cash

or

• 40% domestic stock
• 40% international stock
• 15% bonds
• 5% cash

or

• 40% domestic stock
• 35% international stock
• 20% bonds
• 5% cash

In my ideal world, I continue earning and saving for the next 5 years. Then I go into early/partial retirement. That's my horizon.

 

[sengsational]

If I were 35, I'd have a lower bond allocation than 15-20%. I'd transfer 40% of your current liquid cash to foreign equities and another 40% of of your current liquid cash to foreign bonds and be done with it. If the crap hits the fan on equities and doesn't recover before your cash and bonds run out, your young enough to w*rk again. And by the time you get there, 100 will be the new 80...you need your money working for you!

 

[daylatedollarshort]

This would require retiring to a low cost of living area, perhaps abroad, as even my rosiest forecasts would only give me about $30k to draw down and live on. If things don't go well, I keep working.

Any comments on my current and targeted allocations?

You could look for a "digital nomad" type job that makes at least $60K+ full time. Then try to work half time, live where you want and you don't need any draw down.

 

[LOL!]

I think your proposed AA is all fine and dandy and in the ballpark. Small tweaks to it will be psychological which could be very important to you (I found them important to me), but may not change the performance significantly.

One other way to think about the stock:bond ratio is what you will do when stocks lose 50% of their value as happens from time to time. An AA of 75:25 will then lose 37.5% of its value (roughly). It is not enough that you can sit tight and not sell equities at the low, but you also have to be able to exchange from bonds into equities in the face of true gloom and doom at the market lows which you will not even know are market lows until much much later.

 

[galeno]

My philosophy and strategy.

1. WGD (wide global diversification)
2. CMM (cost matters most)
3. KIS (keep it simple)

Set your AA so that you can sleep well (volatility risk) and eat well (inflation risk).

Risk tolerance (for volatility) is an acquired taste. Too many people think they are braver than they are. When all hell breaks loose they panic and sell at the bottom. That's the absolute worst thing that an investor can do.

 

[RetireAbroadAt35]

If I were 35, I'd have a lower bond allocation than 15-20%. I'd transfer 40% of your current liquid cash to foreign equities and another 40% of of your current liquid cash to foreign bonds and be done with it.

Even if you thought you might want to start living off those investments five years from now?

If the crap hits the fan on equities and doesn't recover before your cash and bonds run out, your young enough to w*rk again. And by the time you get there, 100 will be the new 80...you need your money working for you!

Despite my above comment, this makes a lot of sense to me. I hate the hamster wheel and how much of my life is spent in the office. It's ridiculous.

However, I can't ignore the fact that in my industry, I am earning more now than I likely ever will in the future. I've got several good years ahead of me before it will be hard to stay competetive. I should work those years and take advantage of it, and hope I don't get hit by a bus in the meantime.

Perhaps this is the right mix for me.

• 45% domestic stock
• 40% international stock
• 5% domestic bonds
• 5% international bonds
• 5% cash

There's another factor I haven't thought too much about. Yet. My investments are about 50% in tax protected retirement accounts and 50% in taxable non-retirement accounts. Surely that will factor into my ability to retire early. I'll be largely retiring on the taxable non-retirement accounts for the next 30 years before I can dip into the 401k/Roth IRA.

 

[RetireAbroadAt35]

You could look for a "digital nomad" type job that makes at least $60K+ full time. Then try to work half time, live where you want and you don't need any draw down.

This is likely part of my early retirement strategy. I'm anticipating a 3% draw-down paying me about $30k a year. Enough to live on, but should I want to splurge on something ... a car ... a boat ... a trip ... some kind of toy, I'd pick up some IT work on the side to supplement the income I pay myself through draw-down on my investments.

 

[RetireAbroadAt35]

One other way to think about the stock:bond ratio is what you will do when stocks lose 50% of their value as happens from time to time.

When that happens, I generally don't notice, because I'm working and saving and largely ignoring what the market does.

Once I'm in draw-down mode, I'd like to think this would make me excited to move bonds/cash into stocks to take advantage of the coming upswing.

It might also inspire me to seek out some paying work to generate cash I could then invest in cheap stocks. All of this would require me getting a bit more savvy and also learning to pay attention to what my investments are doing.

 

[RetireAbroadAt35]

My philosophy and strategy.

1. WGD (wide global diversification)
2. CMM (cost matters most)
3. KIS (keep it simple)

This makes a lot of sense to me.

Risk tolerance (for volatility) is an acquired taste. Too many people think they are braver than they are. When all hell breaks loose they panic and sell at the bottom. That's the absolute worst thing that an investor can do.

I've never sold or bought in reaction to market conditions. This is easy for me now since I'm earning. Will I stay brave when those investments represent my only income? I like to think so ...

 

[daylatedollarshort]

It might also inspire me to seek out some paying work to generate cash I could then invest in cheap stocks. All of this would require me getting a bit more savvy and also learning to pay attention to what my investments are doing.

It is amazing what you can learn sitting at home and just asking questions on forums. This place is great for investing and financial advice. On other forums I learned about lap top income from people already doing it just by asking a lot of questions. Many were very generous with free advice. There are many people out there already living the kind of life you would like to lead. One of the people that helped me I've never met in person as he lives on a tropical island in the south Pacific.

 

[RetireAbroadAt35]

I've met some of those folks in my recent travels. Laid off pharmaceutical employees starting a hotel in the Yucatan while consulting part time for their former employers. Graphic designers meandering Latin America. A 45 year-old early retiree in Nicaragua managing software projects over the internet part-time to pay her day-to-day expenses. Social security / disability bums getting by on the bare minimum.

I know it's possible, and I'll probably use some of those techniques if I need to supplement my income.

However, I came back to the states intentionally after a year abroad because I learned one thing from all those interactions:

Don't Retire Too Early. There are a lot of financial corpses in Latin America from younger people who tried to get out earlier than they should have.

So I'm going to bust my ass for a few years, peak earning and all, and hopefully use the savings to enable an easier time of it when I do pull the rip-cord.

What forums do you find useful?

 

[sengsational]

Perhaps this is the right mix for me.

• 45% domestic stock
• 40% international stock
• 5% domestic bonds
• 5% international bonds
• 5% cash

• Not that I'm any kind of expert, but that looks better to me, given you might need to keep it going 80+ years. Shoot, you might make it to the singularity

There's another factor I haven't thought too much about. Yet. My investments are about 50% in tax protected retirement accounts and 50% in taxable non-retirement accounts. Surely that will factor into my ability to retire early. I'll be largely retiring on the taxable non-retirement accounts for the next 30 years before I can dip into the 401k/Roth IRA.

Not much you can do with traditional or rollover IRA funds except pay the 10% penalty.

Concerning Roth funds, a withdrawal of your regular contributions is always tax- and penalty-free even if you're under age 59 1/2 or have had the account for less than five years. However, the earnings are taxable and subject to penalty.

Concerning 401k funds, if your money is still in your former employers 401k, and the expense ratio is good, leave it there. That way, you leave yourself the opportunity to access the funds penalty-free at 55 instead of 59.5. To execute on that "5 year" improvement (depending on where in the year your birthday falls), you get any job long enough to qualify for the 401k, transfer from the old 401k to the new one, then quit "in the year you turn 55, or later". Then you can pull out money without penalty.

Of course, by the time you get there, who knows what our wise leaders will have written into the law books. But that's the situation as I see it now.

 

[pb4uski]

If I were 35, I'd have a lower bond allocation than 15-20%. ....

+1 If I was 35 with a steady job, tolerant of risk and looking to make up lost ground, I would be 100% equities other than my emergency fund. (BTW, I was 100% equities at 35).

I would carve out an emergency fund and then target 70%-80% domestic equities (like Vanguard Total Stock Market Index) and 30%-20% international equities (like Vanguard International Stock Index). If you want to be adventurous, make 10%-5% emerging markets (like Vanguard Emerging Markets Stock Index) with commensurate reductions to international equities.

 

[CoolChange]

...

However, I came back to the states intentionally after a year abroad because I learned one thing from all those interactions:

Don't Retire Too Early. There are a lot of financial corpses in Latin America from younger people who tried to get out earlier than they should have.

So I'm going to bust my ass for a few years, peak earning and all, and hopefully use the savings to enable an easier time of it when I do pull the rip-cord.

What forums do you find useful?

It sounds like your travels have bought you wisdom beyond your years.

I have to admit that I would be quite interested in hearing some stories of the failed ER's since we rarely encounter those on this board. Maybe there are lessons there to be learned by others. One of my biggest fears when reading the glowing accounts of ER here is that I have no idea how to account for the inherent survivor bias.

 

[RetireAbroadAt35]

I have to admit that I would be quite interested in hearing some stories of the failed ER's since we rarely encounter those on this board.

I don't have a whole lot of details but I'll try and post a couple anecdotes.

Regarding my taxable/protected investments, my portfolio breaks down like this:

• 401(k) Index Funds - 53%
• Roth IRA Index Funds - 1%
• Taxable Index Funds - 34%
• Liquid Cash - 12%

The cash I'm going to re-allocate. My question is about the taxable index funds and the IRA. I started the IRA a long while back but haven't been under the income limits to add to it since then. Last year, when I wasn't working, I was an idiot and missed the opportunity to shift some of my cash into the IRA. This year, I'm not sure, but I might be able to contribute.


Questions:

1. If I can contribute to the Roth IRA, should I?
2. How do I determine if I should max out the 401(k) and put the rest into taxable index funds OR contribute the minimum to get a company match into the 401(k) and put more into the taxable index funds?

 

[haha]

I have to admit that I would be quite interested in hearing some stories of the failed ER's since we rarely encounter those on this board.

Go any place cheap and warm and hang around some bars and you will find Americans from 30s to mid 60s who are drunks, who messed up marriages, who lost money speculating on dumb projects, and who fell prey to almost every other character weakness one could think of. Most people do much better with more structure and with people who care about them trying to keep them straight.

Not only is there a lot of survivor bias here, the people here are mostly very unusual. Where else are you going to find people in early middle age with $3mm willing to live on $60-65K gross? It isn't quite normal, if normal means according to the norm.

Ha

 

[RetireAbroadAt35]

+1 If I was 35 with a steady job, tolerant of risk and looking to make up lost ground, I would be 100% equities other than my emergency fund. (BTW, I was 100% equities at 35).

The only reason I have any funds in bonds is because everybody tells me to I'm fine with 100% equities. If the dropped in value 50% tomorrow I wouldn't notice (except for the news reports). I'm highly tolerant of risk because I have no plans to spend this money until I can start gliding down into ER.

The only question this brings to mind ... I met someone on the road who manages his investments at a very macro-level. When the market looks like equities are going to fall (debt ceiling debate, looming shutdown, etc) he shifts his pricey equities into bonds before they lose value. When he senses an upward shift is coming, he shifts back into equities.

It seems sane, but I'm not willing to do the research to try and make those gambles. I'll probably just go 100%, or nearly 100%, into equities, set up an auto-investment to move funds from my checking account into equity index funds, and go back to ignoring all this stuff.

Now, if I decide to get out of bonds, that means I have to transfer my 401(k) funds out of that Vanguard Target Retirement fund into a couple of individual index funds. That target fund alone holds ~12% bonds. Can I do this without a penalty? I'll have to play on the Vanguard site and see if I can just do a transfer.

 

[pb4uski]

There should be no penalty to exchange your target retirement fund for a stock fund as long as you stay inside your 401k.

 

[Options]

...

What forums do you find useful?

Bogleheads Investing Advice and Info

Mr. Money Mustache

http://http://www.mrmoneymustache.com/forum/

Go any place cheap and warm and hang around some bars and you will find Americans from 30s to mid 60s who are drunks, who messed up marriages, who lost money speculating on dumb projects, and who fell prey to almost every other character weakness one could think of. Most people do much better with more structure and with people who care about them trying to keep them straight.

Not only is there a lot of survivor bias here, the people here are mostly very unusual. Where else are you going to find people in early middle age with $3mm willing to live on $60-65K gross? It isn't quite normal, if normal means according to the norm.

Ha

+1
There are many dimensions to retirement: physical/health, psycho/social, as well as financial/material. It's good to think through all of them. Bernstein states that all of life is full of the unexpected and unthinkable. This applies to the personal side of retirement as much as the financial. Question is, how prepared/resourceful is a person when/if unexpected black swans occur? Resourcefulness and flexibility are akin to black gold in retirement.

You may or may not benefit from the above MMM links, but your posts do remind me of him and his attitude toward life, ER, and risk. Personally, I much more risk adverse, although I have benefited from his attitude towards being conscious when spending.