Hi from TickTock

[TickTock]

Delurking…

Hello, TickTock here!

I’m 40, DW is 41. Double income, no kids.

About five years ago we got aggressive with saving – we don’t budget as such, but we’re LBYM types – living expenses about 3/8 of income, savings about 3/8 of income, taxes about 1/4 of income. (I’m not comfortable with posting actual numbers at this time.) We have about 3.8x income in investments and another 1.0x income in home equity.

As far as investment philosophy goes, I’m pretty much a Vanguard poster child; passive investing, asset allocation, buy-and-hold, rebalance, low costs. My investing library is Armstrong, Bernstein (both Four Pillars and Asset Allocator), Bogle, Brennan, Siegel, Swedroe...

Asset Allocation: 80% equity / 20% bonds & cash (cash portion is our money market emergency fund. In equities, 15% each: US large, US large value, US small, US small value, 10% REIT, 30% Total Foreign. Rebalance once a year. Fully fund 401(k)s and Roth IRAs.

Both DW and I have been getting less tolerant of the frustration that our j*obs entail. When would we like to ER? TOMORROW!!! But we don’t have the assets yet. Really, it’s a time vs. standard of living trade-off.

So far I’ve been focused on the accumulation phase, not so much draw-down, so I’ve got thoughts and questions on that (which will be started in other threads). I recently purchased both Your Money Or Your Life and Work Less, Live More. Interesting reading.

I will start tracking expenses November 1st to get a better handle on where our money’s actually going, and to better estimate ER income needs. Paying off the mortgage will free a goodly chunk of expenses (PITI plus a bit extra principal is ~36% of expenses, looking at maybe 11 years to payoff, or less if we downsize the house. Decisions, decisions )

Looking forward to interesting discussion on these forums!

 

[Sandy]

TickTock,

Welcome. It sounds like you have the mentality of a true FIRE dreamer. There are many threads in the "best of" and FAQ that address withdrawal patterns. Also, tracking expenses is an important part of the planning process, especially for individuals who are strong savers - the amount of income that needs to be replaced is lower than commonly reported percentages.

We look forward to your participation.

 

[travelover]

Welcome TickTock.

I can tell from your post that you are going to ER successfully. As mentioned, read the Best of and FAQs. There is a wealth of information there.

 

[TickTock]

Sandy and travelover,

Thanks for the replies!

The Best Of and FAQs were big reasons why I decided to delurk. Spent many hours reading the forums before I posted. Hope to avoid some common newbie gaffes...

I'm aware of the 'standard' 4% SWR. I'm interested in methods that might increase the percentage (yeah, hey, who wouldn't ) I'm sure that much research has been done on this. Still, I've read a couple of names on these forums that I don't recognize, and am interested in learning more. Also, I'm interested in Monte Carlo analysis and *how* portfolios fail - if most fail during early harsh bear markets, then what kind of corrective action might be taken to mitigate the failure? For example, if going from 4% to 5% takes the failure rate from 95% to 84%, where do the failures occur and how can they be avoided?

 

[twaddle]

So far, all of the failure sequences start with a bear market. Early losses are the hardest to recoup. A 50% drop requires a 100% gain to recover.

So, consider a relatively high bond allocation or a reduced withdrawal rate in the first few years.

 

[REWahoo]

So, consider a relatively high bond allocation or a reduced withdrawal rate in the first few years.

And if you are the belt and suspenders type like some of us, both.

 

[TickTock]

twaddle,

That's the kind of research I'm interested in. Can a higher cash/bond allocation in the early years increase the SWR?


REWahoo,

I do consider myself a belt and suspenders type... probably makes my estimates *too* conservative... gotta watch that

 

[twaddle]

That's the kind of research I'm interested in. Can a higher cash/bond allocation in the early years increase the SWR?

I asked dory36 (author of FIREcalc) to add a variable allocation feature to FIREcalc, but he ignored me, so we may never know.

There's not a lot of difference in survivalbility between 50/50 and 70/30, so I prefer something like 50/50 as a starting point, and if my nest egg grows beyond my needs, I may either decide to take more risk and "shoot for the moon" or reduce my risk and live off my fattened nest egg with reduced volatility.

The 4% SWR is based on a worst-case sequence, so the odds of you seeing a "good" initial sequence are very high. If you do see one, then whatever your initial allocation, you potentially have the opportunity to reevaluate your situation and adjust either your lifestyle or your need for taking risk.

 

[TickTock]

Exactly!

If my plan is based on not having a bad >2 standard deviation result in the first (one, two, five) years, then what do the odds change to? Given that an ER might well note the chance of failure, and then take corrective action to prevent it... temporary gig at the last j*b, or in the same field, or as a WalMart greeter, or temporary day labor, or temporary UPS work during the holiday season, or...

... you get the idea. Why should anyone base their plan on the worst 5% scenario *if* they can mitigate it?

 

[mountaintosea]

I think tracking your expenses is a big step. I started when I read Your Money or Your LIfe. A friend gave the book to me. It's been real helpful in knowing where I spend etc. Now I've been keeping track for years and don't mind it a bit. At first I didn't like keeping track, too much truth. But now I keep a little spiral notebook in the car and keep track of my spending as I proceed through my day, week , month. I tally at the end of the month and voila I have an accounting. I make up a graph of my capital increase times the 30 year bond rate vs. my spending. Similar to what the authors suggest in the book. But I also throw in a line for my pension and current dividend income and net pay.At first I kept a paper chart/graph. Now I've graduated to spread sheets and graphs on my PC. It's just my method of keeping score.

 

[Maurice]

That's the kind of research I'm interested in. Can a higher cash/bond allocation in the early years increase the SWR?

I'm interested in this as well. I may do some modeling of my own.

 

[RunningBum]

So, consider a relatively high bond allocation or a reduced withdrawal rate in the first few years.

Are people really doing this (high bond alloctation in the first few years)? The conventional wisdom is to take more risks in the stock market early when you have time to recover, and slide to bonds later. Sure, an early bear market will hurt, but being light in stocks during a long bull run means you don't build up as much of a nest egg if/when a bear market hits later.

 

[TickTock]

When in the withdrawal phase, a bear market hurts because you're selling assets at depressed prices. Different situation than the accumulation phase.

 

[REWahoo]

The graph dory36 shows on his FIRECalc Background & Information page is a great illustration of nest egg vulnerability during the first few years of the withdrawal phase. Once you get past the first 5-7(?) years intact, you should have clear sailing.

Rule of thumb: Not a good idea to retire as we're about to head into a bear market.

Of course the trick is accurately predicting the future...

 

[RunningBum]

The graph dory36 shows on his FIRECalc Background & Information page is a great illustration of nest egg vulnerability during the first few years of the withdrawal phase. Once you get past the first 5-7(?) years intact, you should have clear sailing.

Yeah, but the good graph shows an early uptick for a bull market. If you're heavy on bonds, you would have a flatter line. Instead of 5-7(?) years to get to clear sailing, it might take more like 10(?) years before you're no longer exposed to a bear market. Would you agree?

 

[twaddle]

You SWR is based on your *initial* nest egg size. So, if your nest egg size falls below the intial size in the first few years, you're at risk. A bear market in the first few years could cut your nest egg in half if you have a high stock allocation.

With something like a 50/50 allocation in the first few years, you reduce the damage a bear market would do to you, but you still participate in the upside of any bull markets.

After a few years in a bull, your nest egg should have increased in size relative to your initial size. So, you can now more easily make it through a bear market.

For example, if you initially see a 5-year bull run with 20%/year gains, a 50/50 allocation would still increase your portfolio size by 61% (assuming you consumed all of the interest from the bonds). If you then switched to 100% stocks and immediately saw a nasty bear that cut you in half, that 50% drop would "only" feel like a 20% drop of your initial nest egg since you experienced early growth.

Obviously it's a little more complicated with inflation, but that's the basic idea. It would be nice to simulate it, though.

 

[laurence]

FireCalc is a great tool to give you a general smell test on your portfolio. But do you really think anybody here is going to crank out 4.45% withdrawals from their portfolio if we have a serious market tank? I think most of us have a subsistence level withdrawal in mind ( mine is somewhere in the 2.5% range) that we'll move towards if the market takes a serious hit. If you need the 4%+ just to pay the rent and eat, it's probably not quite the time to retire anyway! FireCalc is an enormously useful starting point, but that's what it is.

On the other hand, I think there are a few posters here who survived the stock market crash of 2000 just fine using the SWR. If you let yourself become to paralyzed with analysis and fear, you can rationalize not retiring for far too long.

 

[RunningBum]

I see the points. Another concern of mine is that if you don't build up enough early, inflation may catch up to you eventually. I agree that there is more exposure to an early stock market tank, but if you've only been retired for a year you could most likely get back in the job market to rebuild if you have to. If you run out in your 80s, you have a lot fewer options. I'm be interested to see some simulations to see which is a bigger risk.

My personal plan has been to build up enough buffer before retiring that I could weather a big drop. That means I've been working longer than I probably need to, but for a few reasons it's been a good idea for me to hang on these last couple of years.

I've also been in asset building mode for so long it's easy to forget that once you go into retirement at any age you need the assets for income and have to protect them more. So this has me rethinking my stock/bond ratio for when I do retire next year. Right now I'm at just over 75/25. I need to absorb this discussion and decide if I should reduce the stocks some more when I pull the trigger. Glad I participated in this discussion, there's always more to learn.

btw I was at nearly 100/0 ratio in 2000, and most were individual tech stocks, so I've already gone much safer now, so really we're just talking about the degree of conservatism. The one thing I'm still wrestling with is going even more conservative early in retirement, and then adjusting upward in stocks later. Every other plan I've seen had you constantly going more to bonds with age.