In search of the best income generating machine for FIRE

[DawgMan]

Background...
- 4 to 5 yrs from FIRE (targeting age 55)
- By then, all 4 kids will be thru with college, but may have 2 more weddings to plan for, otherwise, it's time for me and DW to have "our time"!
- Self employed my whole life, DW has been a SAHM for almost 26 yrs, no pensions, it's just me and my investments
- investable assets include an AA of stocks/bonds (funds/etfs) and RE investments.
- No debt other than some on primary residence with plans to downsize and pay cash for last house when FIRE
- I have been exploring the different models many in FIRE have employed and so far primarily run my modeling based on a SWR of 4% with an AA of 75/25
- My plan (and I am tracking) is to jump into FIRE with a target of $200K after tax per yr (I realize that may seem excessive to many, but that is my goal based on my plans... at least for now)

Questions for particularly those of you who have been in FIRE the last 10 yrs and have ridden thru the market ups/downs...
- What strategies have worked best for you?
- What didn't work, what did you change?
- Based on your objectives 10 yrs ago, where do you stand today in hitting those goals (both in income and current asset value)?

Let me state some of the obvious and what I have heard from others which may answer some of my own questions...
- Practices I have heard include dividend harvesting, AA rebalancing/harvesting at some planned SWR, bucket system,partial annuity usage along with other assets
- obvious fall backs include cutting expenses, going back to work full or part time.

Clearly, those of you who have pensions, SS, working spouses, or you still do some kind of part time work that covers a significant part of your FIRE expenses, your risk/perspective will be a little different. My question is more geared towards those of you who have been relying 100% of your assets to fund your FIRE life.

 

[REWahoo]

Let me state some of the obvious and what I have heard from others which may answer some of my own questions...
- Practices I have heard include dividend harvesting, AA rebalancing/harvesting at some planned SWR, bucket system,[-]partial annuity usage along with other assets[/-]
- obvious fall backs include cutting expenses, [-]going back to work full or part time.[/-]

I modified your list above to indicate what's worked for us for the 10 1/2 years we've been retired. SS kicked in after the first five years, but had I decided to delay taking SS until age 70 I would have used the same strategy.

 

[DawgMan]

I modified your list above to indicate what's worked for us for the 10 1/2 years we've been retired. SS kicked in after the first five years, but had I decided to delay taking SS until age 70 I would have used the same strategy.

Thanks

Curious... when you looked at your NW and launched into RE 10 1/2 yrs ago, how close have you been in hitting your projected income needs (vs. the years you chose/needed to cut back expenses) and is your original asset balance still in tack? Have you modified your AA, dividend, bucket approaches much since you launched?

 

[Senator]

Your own business likely will be your most successful asset class. Find a way to hire out the management. I have rental property and that has been successful for me.

I will still manage and maintain my rentals for a few years, just to make sure the income stays higher. It's a part-time gig I do not mind.

 

[DawgMan]

Your own business likely will be your most successful asset class. Find a way to hire out the management. I have rental property and that has been successful for me.

I will still manage and maintain my rentals for a few years, just to make sure the income stays higher. It's a part-time gig I do not mind.

That's always an option, but I put that in the "work" category which I ideally want to look at only if I want to do it, not necessarily a requirement to generate part of my income. I own both residential and commercial RE as part of my assets, some as the active manager/operator, others as an LP, and my experience is it is not always a picnic being an operator. Yes, you can hire a manager, but like all investments, you need to understand what your true ROI taking into account risk/reward/time/hassle and compare that to alternative investments.

 

[Senator]

That's always an option, but I put that in the "work" category which I ideally want to look at only if I want to do it, not necessarily a requirement to generate part of my income. I own both residential and commercial RE as part of my assets, some as the active manager/operator, others as an LP, and my experience is it is not always a picnic being an operator. Yes, you can hire a manager, but like all investments, you need to understand what your true ROI taking into account risk/reward/time/hassle and compare that to alternative investments.

There are definitely trade-offs. I know I can do management better than a property manager, and I can do the maintenance better and cheaper than most maintenance folks or handymen types. I have 23 residential renters, and 1 commercial renter. Not really a huge rental portfolio, but not super small either. My income will likely be close to ~$200K, especially after I pay off the mortgage I am focusing on now. Since I only need ~$40K to live on, I plan on some extra traveling after I leave my real job. I should be able to get away at least 50% of the time if I desire.

RE will likely give you the highest return for the investment, but is also the most risk. As you know, with rentals, it's easy to take much of the risk out of the picture with proper tenant screening and fast responses to tenant defaults. A REIT might be good.

Dividends are also decent in some stocks, but not without risk. 3% seems like a high 'safe' dividend and still allowing for some growth.

Annuities can give income, but seem like that is not much better than a dividend stock, like SPY or IVV. There is less downside with an annuity, but not always. If the insurance company goes broke, or changes the rules, there goes your income.

I would say get elected to congress. After just a few years you can get a $200K pension that include healthcare...

 

[nun]

If you use a conservative 3% annual withdrawal you'll need $6.6M to support a withdrawal of $200k.

As far as asset allocation goes I would probably have some rental property and a 60/40 couch potato portfolio. If you need a withdrawal of under 3% you can probably be a bit more aggressive, but if you need more you might look into an annuity to give you a basic floor of income. If you have significant after tax assets then tax planning becomes very important and you might consider tax free munis.

 

[Animorph]

FIRECalc assumes a total return strategy, selling as needed. It does not really cover something like a dividends-only strategy unless you invest for total return and the dividends happen to cover your needs.

I use a 100% equity AA. According to FIRECalc it's not that much more risky than a 50/50 AA (though way more interesting), but on average results in a much larger portfolio. Normally I'll sell as needed for cash. However, if the portfolio value reaches a yearly target ahead of time I sell for those yearly expenses. I had cash for all of 2015 and because of budgeting accruals probably through most of 2016. So pretty much on target so far. I need a 13% portfolio gain for the next yearly step, so I may be back to monthly selling if the market goes nowhere or down through 2016.

 

[OrcasIslandBound]

I have a plan, 45% stocks, 55% bonds, 1/3 of those long term. But, you know what they say about people who have their plans? Mike Tyson had this to say:

 

[DawgMan]

FIRECalc assumes a total return strategy, selling as needed. It does not really cover something like a dividends-only strategy unless you invest for total return and the dividends happen to cover your needs.

I use a 100% equity AA. According to FIRECalc it's not that much more risky than a 50/50 AA (though way more interesting), but on average results in a much larger portfolio. Normally I'll sell as needed for cash. However, if the portfolio value reaches a yearly target ahead of time I sell for those yearly expenses. I had cash for all of 2015 and because of budgeting accruals probably through most of 2016. So pretty much on target so far. I need a 13% portfolio gain for the next yearly step, so I may be back to monthly selling if the market goes nowhere or down through 2016.

So let me get this by way of simple example... Let's say you are banking on a 4% SWR which we will call $40k and you are 100% equity AA = $100k. Yr 1 the your returns are 10% so you are selling monthly a min of 1/12 of your needed $40k for living expenses and then if the market has done better than your needed 4% annual return that month, you are selling the excess return and holding that money in cash which effectively becomes the $ you use next month/year first before selling more equities if still in excess cash? Am I hearing you correctly? This effectively forces you to sell when the market exceeds a 4% annualized return (in this example)? So, I suppose in back to back years of a declining market you have no choice but to sell your equities as they fall (unless you have cash from previous year gains)? How many years have you been RE where you have employed this strategy (market cycles you have experienced)? Was this your only source of income?
Interesting approach.