Hoping to retire early 2026...

[OldShooter]

I think my fears center around:

1) Health Insurance until 65, especially given the current ACA environment
2) The fact that very few of my colleagues of similar age are retiring
3) That the market (especially the US) is significantly overvalued currently

Am I overblowing those fears?

Thanks everyone in advance for your time.

I think you are missing an important risk and it's common around here: inflation. Go back and look at an inflation graph from the mid-70s through the mid-80s. Quite a wild ride compared to the low-and-flat assumptions that people tend to make.

When we retired in the mid-2000s we felt we were financially in good shape except for the inflation risk. Our solution was to buy enough TIPS into a tIRA that we could feel pretty safe. A 20 year TIPS seemed like a long bond back then, but ours (2s of2 6) matures very soon now. Its face value has grown by 60% since purchase, not catastrophic inflation and we have not sold any part of it, but over time it has given us the same sort of comfort we get from our fire insurance. So, inflation is one I'd add to your list and consider mitigating with whatever dose of TIPS you judge to be conservatively adequate.

 

[Koolau]

I get that, and it is obvious we've had some terrible national situations lately. However, I can't stomach paying exorbitant auto premiums for half coverage. It has become obvious to me that I'm financially better off self insuring.

It's not worth it to hire a lawyer to fight Allstate for $12K. They know it, I know it. But $8K full coverage premiums mean replacement value in all practical terms.

They won't get another dime from me.

One place you just might get some "action" is the state Insurance commission that governs your insurance company. One complaint probably won't help, but if you and 1000 other honked-off rate payers protest, it's just possible something will be done.

I assume you don't plan to go naked on liability - just collision and perhaps comprehensive. That's what I do on my 25 year old Buick. A good scratch or dent and I'm sure that puppy is totaled.

 

[davidfin]

Hello Everyone,

Longtime lurker - first time poster. I've been enjoying reading about others who have successfully retired in similar situations.

I posted on another forum (starts with B - ) about 18 months ago and got mostly positive results. The markets have also been kind since then. I'm currently doing OMY (in a stressful job) since then trying to get the courage to pull the trigger early next year.

Ages: me (58), DW (61)
3 kids - 2 out of college (1 moved out), 1 a freshmen in college (I have money set aside for this outside of retirement money).

House value - $830K no mortgage
debt - $5K on a 0% car loan
MCOLA with state income tax

Pensions - None
Social Security Plan :
Me: take at 67 (2034) - PIA $46,380 annually
DW take at 62 (2026) - $10,668 annually
DW take spousal at her 70 (2034) - $8046 annually

Taxable Investments (combined):
$670K - This is a mix of index funds, a couple of iBonds, and laddered MYGAs through my age 65. The HSA was also considered here as I have several years of receipts allowing me to withdraw much of it tax free.

Traditional IRAs (combined) :
$755K - includes laddered MYGAs through my age 67 and index funds

Roth IRAs (combined) :
$45K - index funds

401K (mine):
$1.93 million - index funds

Total investments - $3.4 million
Asset breakdown : 51% equity, 49% bonds (MYGAs considered in this bucket) - about 3/4 of equities are US, remainder international. Plan is to start with 50/50 and begin an increasing equity glide path moving to 65/35 over 12-15 years. Plan to use Bogleheads VPW as a withdrawal approach.

Current annual spending $125K annual - excludes taxes and out of pocket health care expenses. Includes travel. With healthcare and taxes I'm assuming a $145K annual spend for the next few years, with it hopefully dropping as remaining kids move out. Plan is to keep income low enough by spending from taxable account, and utilize ACA for healthcare until medicare, controlling income to get subsidies as possible. With family of 3 on ACA, I plugged into my state's ACA site and got an estimate of $1000 per month with a similar deductible of $4k - $7200 annual.

I have a $300k home equity credit line to use for tax free income (to keep MAGI in the right spot) and to reduce sequence of returns risk during earlier retirement if I need to.

Firecalc, ficalc, and Flexible Retirement planner show 100% probabilities of success, especially if a variable spending approach is used and/or expenses are reduced in the future (Bernicke with reductions at age > 70), which should be highly likely. Boldin (Monte Carlo) shows a 93% probability of success.

I think my fears center around:

1) Health Insurance until 65, especially given the current ACA environment
2) The fact that very few of my colleagues of similar age are retiring
3) That the market (especially the US) is significantly overvalued currently

Am I overblowing those fears?

Thanks everyone in advance for your time.

ACA costs may be easier to manage if you have a sufficient cash reserves for subsidizing your living expenses plus capital gains managed to the top of the zero tax bracket. Then you’ll qualify for ACA subsidies that will greatly lower your premium costs. Must have sufficient income to qualify for the ACA. If your AGI is too low you’ll be placed in a Medicaid program.

 

[DreamingOfFI]

ACA costs may be easier to manage if you have a sufficient cash reserves for subsidizing your living expenses plus capital gains managed to the top of the zero tax bracket. Then you’ll qualify for ACA subsidies that will greatly lower your premium costs. Must have sufficient income to qualify for the ACA. If your AGI is too low you’ll be placed in a Medicaid program.

Thank you. Yes, I'm hoping to stretch the money in my taxable account over the 7 years that we'll need ACA coverage and try to get decent subsidies. If the market takes a dive during that time for an extended period I may utilize the home equity loan to temporarily generate tax free 'income' to continue to get subsidies until medicare. At least that is the plan.

 

[DreamingOfFI]

I think you are missing an important risk and it's common around here: inflation. Go back and look at an inflation graph from the mid-70s through the mid-80s. Quite a wild ride compared to the low-and-flat assumptions that people tend to make.

When we retired in the mid-2000s we felt we were financially in good shape except for the inflation risk. Our solution was to buy enough TIPS into a tIRA that we could feel pretty safe. A 20 year TIPS seemed like a long bond back then, but ours (2s of2 6) matures very soon now. Its face value has grown by 60% since purchase, not catastrophic inflation and we have not sold any part of it, but over time it has given us the same sort of comfort we get from our fire insurance. So, inflation is one I'd add to your list and consider mitigating with whatever dose of TIPS you judge to be conservatively adequate.

Thank you. I do have a portion of our bond funds in TIPs, but probably should consider increasing that position.

 

[OldShooter]

Thank you. I do have a portion of our bond funds in TIPs, but probably should consider increasing that position.

Re "increasing" the question is "by how much?" I see posts from people talking about 5% in TIPS; IMO that is not enough protection unless 5% represents several years of spending. In theory, equities will be a long-term inflation shelter. Emphasis on long-term. If long-term is three years, then IMO the TIPS should cover at least that many years of spending. YMMV, of course. Depending on assumptions, our TIPS position will cover maybe five years considering that they are in a tIRA and will be taxed as the money is withdrawn.

 

[Koolau]

Do "we" (FIRE retirees) need more than a year (or maybe two) of cash-protection from market pull-backs? We easily have four years cash needs in a combination of regular bond funds, MYGAs, checking and Stable Value funds (probably more).

We've not gotten into TIPS because I'm not comfortable dealing with them. I'm sure they have significant advantages, but I'd have to learn more before changing my approach to market pull-back protection.

 

[OldShooter]

Do "we" (FIRE retirees) need more than a year (or maybe two) of cash-protection from market pull-backs? We easily have four years cash needs in a combination of regular bond funds, MYGAs, checking and Stable Value funds (probably more).

We've not gotten into TIPS because I'm not comfortable dealing with them. I'm sure they have significant advantages, but I'd have to learn more before changing my approach to market pull-back protection.

Nothing you're doing now will protect you against inflation. One can argue that TIPS are not perfect, but they are really the only game in town. Here is a fairly basic education: Amazon.com

 

[RetiredHappy]

Do "we" (FIRE retirees) need more than a year (or maybe two) of cash-protection from market pull-backs? We easily have four years cash needs in a combination of regular bond funds, MYGAs, checking and Stable Value funds (probably more).

We've not gotten into TIPS because I'm not comfortable dealing with them. I'm sure they have significant advantages, but I'd have to learn more before changing my approach to market pull-back protection.

We have 5 years of protection from a bear market to cover RMD with MYGAs and living expenses (dividends).

Nothing you're doing now will protect you against inflation. One can argue that TIPS are not perfect, but they are really the only game in town. Here is a fairly basic education: Amazon.com

I know inflation is real but our discretionary spending is more than 50% of our expenses that we have actually not felt direct impact of inflation, although our restaurant expenses have gone up hugely in the past 2 years. We don't own TIPS anymore because TIPS funds are terrible, work much like Bond funds, and we are too lazy to learn how to buy individual TIPS.

 

[OldShooter]

... I know inflation is real but our discretionary spending is more than 50% of our expenses that we have actually not felt direct impact of inflation, although our restaurant expenses have gone up hugely in the past 2 years. We don't own TIPS anymore because TIPS funds are terrible, work much like Bond funds, and we are too lazy to learn how to buy individual TIPS.

TIPS funds are bond funds, which is an excellent reason to avoid them. To buy TIPS, call the bond desk at your broker, discuss what you want, and place the order. No different than buying any other bond. I use Schwab and their bond desk guys are very helpful and not paid commissions. IIRC there is a $25 charge for dealing with a person instead of a web site, but IIRC usually they waive it for me. TIPS are buy-and-hold for me, so I don't do this too often.

 

[tulak]

Agree with avoiding funds. TIPS are easy to buy at both auction and the secondary market. I’ve done both, but mostly at auction as I fill in my ladder. Also buy and hold until maturity and in an IRA to keep taxes simple.

 

[Koolau]

Nothing you're doing now will protect you against inflation. One can argue that TIPS are not perfect, but they are really the only game in town. Here is a fairly basic education: Amazon.com

If you are correct that TIPS are the only way to protect against inflation, then your commitment to them has to be extremely high. You can't just protect a little bit of your wealth and insure that inflation won't affect you.

I disagree that TIPS are the only way to protect against inflation. They are A way and probably a GOOD way, but not the ONLY way IMHO.

 

[OldShooter]

If you are correct that TIPS are the only way to protect against inflation, then your commitment to them has to be extremely high. You can't just protect a little bit of your wealth and insure that inflation won't affect you.

Seems obvious, doesn't it? A small asset held in a portfolio can only have small effects on the portfolio's value. Actually the example that makes me smile is the common recommendation to hold 5% in gold. In our case, we hold 5+ years of spending in TIPS. I think that gives us a reasonable amount of time to wait for equities to catch up following a burst of inflation.

I disagree that TIPS are the only way to protect against inflation. They are A way and probably a GOOD way, but not the ONLY way IMHO.

Nassim Taleb: "Don't tell me what you think. Show me your portfolio." From your post #32 you apparently have no inflation protection at all. Very common IMO, but (IMO again) not very wise.

 

[Koolau]

Seems obvious, doesn't it? A small asset held in a portfolio can only have small effects on the portfolio's value. Actually the example that makes me smile is the common recommendation to hold 5% in gold. In our case, we hold 5+ years of spending in TIPS. I think that gives us a reasonable amount of time to wait for equities to catch up following a burst of inflation.

Nassim Taleb: "Don't tell me what you think. Show me your portfolio." From your post #32 you apparently have no inflation protection at all. Very common IMO, but (IMO again) not very wise.

I said nothing about inflation in that post so I don't see how you conclude from post #32 that I have no inflation protection. I simply said that we keep more than average amount of cash-like investments in case other investments tank.

My point is that while TIPS ameliorate inflation, they do so only to the extent of the % of your AA that are in TIPS.

 

[fognostic]

One can argue that TIPS are not perfect, but they are really the only game in town.

I'm not seeing it. The premium over CPI on TIPS of any term bought at auction has not exceeded 2.5% over the last decade and the average TIPS premium over that time has been only ~1%. Short (VTIP) and intermediate term (SCHP) TIPS funds did no better (ever so slighly worse) than inflation over the last decade.

I suppose I might be able to beat a professionally managed TIPS bond fund if I was lucky enough to cherry pick and lock in decade high TIPS premiums over CPI. But housing price growth has exceeded CPI by ~3.9% CAGR over the last decade. So, our owned home comprising ~15% of our net worth has done a much better job than TIPS protecting us from inflation, even if I were lucky enough to cherry pick a 2.5% decade high TIPS premium over CPI. Our substantial S&P 500 ETF allocation and tiny gold ETF allocation have both beat CPI by over 10% CAGR over the last decade.

The "only game in town" doesn't look like an inflation protection game I want to play. For inflation protection, I'm sticking with stocks, real estate and, if I want to get fancy, a small alternative commodity allocation.

 

[Koolau]

I'm not seeing it. The premium over CPI on TIPS of any term bought at auction has not exceeded 2.5% over the last decade and the average TIPS premium over that time has been only ~1%. Short (VTIP) and intermediate term (SCHP) TIPS funds did no better (ever so slighly worse) than inflation over the last decade.

I suppose I might be able to beat a professionally managed TIPS bond fund if I was lucky enough to cherry pick and lock in decade high TIPS premiums over CPI. But housing price growth has exceeded CPI by ~3.9% CAGR over the last decade. So, our owned home comprising ~15% of our net worth has done a much better job than TIPS protecting us from inflation, even if I were lucky enough to cherry pick a 2.5% decade high TIPS premium over CPI. Our substantial S&P 500 ETF allocation and tiny gold ETF allocation have both beat CPI by over 10% CAGR over the last decade.

The "only game in town" doesn't look like an inflation protection game I want to play. For inflation protection, I'm sticking with stocks, real estate and, if I want to get fancy, a small alternative commodity allocation.

I think TIPs would be the play for the cash you want to protect from inflation. Other than that (overall stash-wise) I agree that equities are likely the better way to go - unless one has a big enough stash that all-TIPs is a viable option.

 

[OldShooter]

... The "only game in town" doesn't look like an inflation protection game I want to play. ...

As you like. I view TIPS the same way I view buying fire insurance on our houses. A way to mitigate a substantial risk. If you're focused on a few percent one way or another, we are not seeing inflation risk the same way.

 

[Out-to-Lunch]

I'm not seeing it. The premium over CPI on TIPS of any term bought at auction has not exceeded 2.5% over the last decade and the average TIPS premium over that time has been only ~1%. Short (VTIP) and intermediate term (SCHP) TIPS funds did no better (ever so slighly worse) than inflation over the last decade.

I suppose I might be able to beat a professionally managed TIPS bond fund if I was lucky enough to cherry pick and lock in decade high TIPS premiums over CPI. But housing price growth has exceeded CPI by ~3.9% CAGR over the last decade. So, our owned home comprising ~15% of our net worth has done a much better job than TIPS protecting us from inflation, even if I were lucky enough to cherry pick a 2.5% decade high TIPS premium over CPI. Our substantial S&P 500 ETF allocation and tiny gold ETF allocation have both beat CPI by over 10% CAGR over the last decade.

The "only game in town" doesn't look like an inflation protection game I want to play. For inflation protection, I'm sticking with stocks, real estate and, if I want to get fancy, a small alternative commodity allocation.

But you need to compare like for like. Your inflation hedges have manifold OTHER risks that TIPS do not.

 

[Koolau]

But you need to compare like for like. Your inflation hedges have manifold OTHER risks that TIPS do not.

I suppose that's like comparing riding a bike to driving a car. The risks are different but the potential difference in reward is significant.

 

[fognostic]

Your inflation hedges have manifold OTHER risks that TIPS do not.

Agreed, they certainly do (with compensatory investment return rewards). Stocks and real estate do correlate with inflation though. Indirectly, corporations can and do pass price increases on their inputs through to their customers, and owning a house is a rather direct hedge for housing cost inflation, itself a large slice of living expenses.

And let's not forget TIPS have risks too. I would not have wanted to be selling a TIPS I bought at auction before its term expired (especially 10 or 30 year terms) to fund living expenses while the fed was fighting inflation by raising interest rates recently. TIPS and non-TIPS "total market" bond funds both suffered from this same interest rate risk disease and fared more or less equally poorly during our most recent round of inflation. To be fair, stocks got clobbered a bit too.

I do see the case for TIPS as an inflation protected savings vehicle if unneeded excess cash (stash) is not going to be invested for the long term for reasons I probably would not agree with. I also see the case for building a ladder with short term TIPS having maturities spaced to cover essential expenses over a brief market recovery cycle. Nonetheless, there are other games in town, and over longer terms I am clearly partial to the inflation protection offered by investments in stock and our owned home.

 

[Koolau]

Zvi Bodie wrote a book advocating a very high allocation to TIPS. At the time, such a portfolio would have paid about 3% above inflation IIRC. That might have w*rked then but not sure it would now.

Again, I would say TIPS can protect your cash portion of an AA but I don't see betting the farm on TIPS but YMMV.