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Originally Posted by five2fire
This is an introduction and a question. Should I be posting it here or over in “FIRE and Money”?*  |
Welcome, Dan, here is fine!
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Originally Posted by five2fire
My 401k will be my main source of retirement income, although there will be a small pension, and some Roth dollars. My 401k & Roth investments are all in mutual funds, nicely balanced by style, type, sector, region, etc., but fairly aggressive. No bond funds, one blended fund, my total in stocks is about 93%.
I’m weighing the importance of staying largely in equities for my lifetime versus the two-pile approach, and am wondering your thoughts. I don’t want to get to 55 and think I can’t retire just because the markets happen to be low at the time.
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Presumably you've solved the biggest ER challenge-- health care and its expenses.
I'm assuming that you're familiar with asset allocation like Bernstein's "Four Pillars" book and that you're comfortable with the high volatility of a high-equity portfolio.* The good thing about a high-equity portfolio is that it's much more likely to achieve long-term returns in excess of inflation.* So if you're sleeping at night with a high-equity AA, great.* If you're not sleeping at night, then none of the subsequent math matters and you might want to reduce your equity % of your AA.* Or you might want to shift into dividend-paying stocks.* A couple ERs here live off their dividends and a 90-something poster at M* has a 100% equity portfolio, although admittedly he's not too worried about consuming principle anymore.
The next step is to plug your numbers (including your expenses & SS) into FIRECalc to see what your success rate is.* If your success rate is above 90% (some would even say above 80%) then you guys probably have enough to last for the rest of your lives.
Expenses should account for large lumps as well as the monthly stuff.* You'll eventually have to buy a new roof, perhaps pay for a kid's college or wedding, replace appliances & vehicles, or take a fantasy vacation.* Those are one-time expenses but, although you have some flexibility over when it's spent, they have to be included in the spending plan.*
Many of us have "regular" ER budgets with belt-tightening backups.* FIRECalc doesn't adjust your spending for down years but if you were living through 2002 all over again you'd probably find ways to spend less money, reduce that year's SWR, and give your portfolio some breathing room.* If your pension covers a large chunk of your basic belt-tightening budget, then you have a separate source of reliable cash flow that also helps reduce your SWR.
Some financial advisors would count a pension as the equivalent of a bond fund.* You could even torture the analogy by assuming a govt pension is the equivalent of T-bills, a corporate pension the equivalent of corporate bonds, and an auto/airline pension the equivalent of junk bonds.* You have to decide how reliable that pension will be and how much it'll drive your spending.* If you count your pension as a bond then you may decide that your current equity holdings are lower than 93% of the total.
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Originally Posted by five2fire
I don’t want to get to 55 and think I can’t retire just because the markets happen to be low at the time. I am thinking I could maybe start putting my new deposits into bonds, and then in five years time I’d at least have a year’s salary set aside. Then I’d still have to figure out, over time, when to sell what funds, while still trying to keep the portfolio balanced.
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If you have the flexibility & desire to keep working after age 55 then you don't have to worry so much about the market.* The key is not to retire with a small bleeding-edge ER portfolio after a really socko year-- like January 2000.* I retired in June 2002 and the size of our portfolio has been rising ever since.
In FIRE your salary is irrelevant-- most think of their portfolios in terms of annual* spending.* We keep a year's spending in cash (in a money market) and a second year's expenses in a CD.* We replenish the stash after a good year and draw it down after a not-so-good year.*
If you're trying to keep your portfolio within 5-10% of your desired AA then you'll find yourself selling off bits of your winners and letting the losers recover.* That decision tends to handle itself unless you decide to change your AA.
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Originally Posted by five2fire
Any thoughts on what a guy like me should be doing five years in advance?
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Yeah, track your spending and project those big expenses.* Some of the posters on the board have taken it to extremes and others just keep some slack in the budget for the unexpected expenses.*
Max out your healthcare & dental benefits before you retire.* If you can see the need for some significant work then get it done now.
If you haven't already then read "Four Pillars".* You'll also want to read Bob Clyatt's "Work Less, Live More".*
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Originally Posted by five2fire
Or down the road to maximize return while keeping the risk down?
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Well, you have to decide what kind of risk matters most to you.* If you're trying to avoid the risk of losing to inflation then a high-equity portfolio should stay ahead.* If you're trying to minimize the risk of a high-volatility portfolio then you might need to reduce the equity portion.
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