Logical and Personal Quandary

[Life_by_Fire]

Quick stats:

Age: Dw and She 32. 2 kids, 2.5 and 1.5

Current income: approx. 200k

So here's the thing. Both of us have always wanted to RE. Life events in last 2 years have made us want that to happen even sooner. Yes we are young but both have plenty of hobbies and side interests to take up time, some income making, that in RE we plan to increase.

So I've been thinking about realistically what do we need. Currently have about $1.5 million in accessible money. Majority is in a pre secure act inherited IRA (I have grown this substantially from what it was). The bulk of investments are in Pimco Stocks Plus (PSLDX). For us, this averages 100k in divedends/distributions with about 130k shares. This year dividends at $135k through 2 quarters.

Ok so we currently invest/save around $70k per year. I project expenses, including health insurance, in retirement to be around $115k if we live "large."

My thoughts are when we get to 200k shares, we are probably safe. Typical dividend/distribution for PSLDX in a year is $1/share. This is a change from my previous mindset focusing on achieving $5 million before RE. DW and I plan to do a couple income creating things but would love to stop the grind. I can't state how much I dislike my current career. My job leaves me feeling dirty everyday and changing paths has become very difficult due to changes in the field. I'll save that rant for later.

So after the long rant and mind vomit, what are people's thoughts on leaving the workforce once the investments start regularly producing around $150-200k in divedends/distributions? I know market and risky investments, but if I can cut the w*rk years down, I will do most anything.

 

[stepford]

So just ballparking here... you are saying when you grow your savings to around $2.0-2.5M you'll want to retire with a withdrawal rate of $115K/yr for a projected 50+ year retirement. That works out to a 4.6-5.7% WR. I realize that you've done well with your specific investments over the last few years (as have many of us), but that is a very aggressive withdrawal rate expectation over the long time horizon you have.

It does seem though, that if you can stomach working a few years longer you can realize your ER dreams. I would recommend planning on a WR under 3.5% (or else be damn sure you have fall back employment options).

While many of us have been in a jobs we hated, I think most of us in that situation who successfully retired either gritted our teeth as long as necessary or carefully looked for another job while milking the current one. I know having your soul crushed daily is no way to live, but going off half-cocked and risking your (and your family's) future on a poorly thought out, overly aggressive plan is something you may regret for a long time.

 

[Life_by_Fire]

I absolutely agree with you. And I could have stated, I have been actively applying to jobs of more interesting fields but focused on remote. I think if I gave up remote, I'd have more luck.

I also won't be pulling the plug unless I'm completely sure my family is secure. That's why I have the $5 million figure in mind which with saving rate and hopeful returns, could be there in 10 years, assuming no large salary increases that allow larger savings rate. Current raises have been 6+% and 3+%.

I do believe change for the better is right around the corner but when I have these types of days, I like to think, how much do we really need given historical returns? I know that is fanciful thinking, but I can't help it.

 

[yhoomajor]

I think I can relate and here is my story. I was 34 in 2007/2008. And like many, knew that Housing was in a big bubble and markets were frothy.

Being rebellious by nature, I didn't want to serve mega-corp overlords anymore. Married, but no kids at that time, I took the step and quit my well paying job. On side, I was making bare minimum money (but livable) from arbitraging opportunities in stock market.

Knowing that US markets were extremely overvalued, while emerging markets were still fairly valued (remember BRICs era?), I went short on SPY and long on EMs.

What I predicted (in my own mind) - did happen. Housing collapsed and then financial markets collapsed. After first few days of emerging markets strength.. things took a turn. USG and fed intervened and EM took a nose dive while US markets started to go down less than emerging markets. After several months and over next year and two - EM never recovered and US markets did, because Fed and USG bailed out the US markets. Long story short, I still have carry-over capital loss of $175k.

Tarred and feathered, I did look and found a job in 2009 and I am back on my feet. Now 48 and with golden handcuffs, my rebellious nature is back in action and if I leave now I would be leaving decent amount of money.

You're 32 , my advice would be go for what you dream of. But also make sure:

a) that you are not concentrated in one strategy (like I was).
b) Plan and have diversified sources of revenue, see if you can grow your income from your hobbies. With young kids, only you can judge.. because as kids grow, their needs grow.

 

[SecondCor521]

Why PSLDX? I took a look at it's holdings and wow it's a weird fund. Credit default swaps, municipal bonds, options, long dated Treasuries, forward currency swaps, an Argentinian sovereign bond paying 36% interest, etc.

What are your plans for helping with kids' college etc, and how are you doing on that goal?

How much flex do you have in your $115K budget? Does that include income taxes?

 

[NW-Bound]

I did not know about PSLDX, so looked it up. The dividend is 17%, which is astounding. But how about the principal?

PSLDX started out in Oct 2007 at 10.67/share. It is today at 9.08/share. And then, there's inflation over those 14 years.

In order to keep up with inflation, PSLDX has to be at 13.75 in today's dollar (using official inflation numbers). Instead its current value is only 66% of that.

With high-dividend stocks or MFs, an investor cannot spend all of the dividend payouts, and needs to reinvest some of it, if he wants to preserve his buying power over a few decades.

 

[chassis]

Go for it. Make investing your own money your full time job. It doesn't require 40 hours per week. It's work from home. What's not to like?

Keep your pretax living expenses below 4% of your portfolio.

Keep us updated on your progress.

 

[mrfeh]

Relying on a fund w/ 17% dividends, and apparently ignoring total return...

Sounds like a recipe for disaster.

 

[pb4uski]

I would be hesitant as your plan has a high risk of financial ruin.

While PSLDX has a great track record, it is only 14 years old. If you are reliant on PSLDX, all it takes is one significant misjudgement by the fund manager to ruin you.

For example, say that the current PSLDX manager retires or moves on to their own fund and the new PIMCO manager has a particular investment hypothesis and goes with it in an effort to prove themselves and then it goes horribly wrong.

If you quit working at 200k shares of PSLDX plus $350k your WR would be 5.3%... a bit too high for my taste for a very long retirement.

You are wealthy and could easily change careers since you are so unhappy with your current career. Between me and my 4 siblings, only 2 of the 5 of us ended up staying in the career that we trained for... the other three ended up doing something very different than what they trained for.

 

[Life_by_Fire]

Thank you all for the replies and the positive feedback.

The budget is flexible and has a lot of cushion built in. It includes taxes, healthcare, etc. We have separate accounts for the kids' college expenses which are in good shape and will cash flow the rest.

I should say, I don't plan on leaving the workforce today. I know I can't. Really I'm just asking myself what we really need and should we want, pull the trigger sooner.

People either love or hate PSLDX. I personally love it. In addition to its 5 star rating, it has an average annual return of over 17% since inception. The share price doesn't grow because all short and long term capital gains are distributed each year along with the quarterly dividends (never hold in taxable). Back test it against other index funds and you will see the appeal. I'm a fan of risk parity.

I also hold the standard VTSAX and VTIAX which is about 35% of portfolio right now.

So if in your mid 30s with 2 kids, would you consider leaving the workforce if you had dividend income of $150k + and reinvesting some of it?

 

[ERD50]

... I like to think, how much do we really need given historical returns? I know that is fanciful thinking, but I can't help it.

That's not fanciful thinking at all, historical returns are as good a reference point as we have. And of course, the future could be worse than the worst of the past.

But historically, someone with a long retirement needs to keep withdrawals down to < 3.5% of the initial portfolio, and that can be increased by inflation each year.

And that is with a balanced, diversified portfolio ( ~ 75 in a broad index stock fund, 25% in a broad index bond fund). Your plan for a much higher withdraw rate from a non-diversified portfolio is very risky.

Relying on a fund w/ 17% dividends, and apparently ignoring total return...

Sounds like a recipe for disaster.

Amen. Also ignores diversification. Double disaster.

Go for it. Make investing your own money your full time job. It doesn't require 40 hours per week. It's work from home. What's not to like?

Keep your pretax living expenses below 4% of your portfolio.

Keep us updated on your progress.

How do you figure? Taxes could take them over 4% WR, that's pretty risky for a young family.

-ERD50

 

[Whisper66]

.......So if in your mid 30s with 2 kids, would you consider leaving the workforce if you had dividend income of $150k + and reinvesting some of it?

In my mid 30's in a job I hated? ..... I'd definitely jump jobs in an instant (even outside my field if needed) but wouldn't stop working for many years without a lot more savings than you have. The tough thing about life is it throws you curve balls. Things change. For example, a simple car wreck by an inexperienced teen leads to a need for expensive permanent long term medical help. A fall on kid's head in a fun rock climbing park may cause long term mental damage. A perfectly normal teenager suddenly changes for some unknown reason and can no longer face the world .... now is parents responsibility for rest of his life. A close family member loses mental ability as they age and needs someone to watch over them physically and financially for many years. Unexpected divorces happen and nest eggs one thought were great are chewed up with legal fees and supporting two households. I've avoided these things but my friends have not. Make sure you leave yourself plenty of financial room to address the unexpected and unplanned.

 

[ERD50]

...

People either love or hate PSLDX.

...

I cross posted with you.

This isn't about "loving" or "hating" an investment (and neither applies to me), it is about sound principles. Putting all your eggs in one manager's basket is not prudent. Anyone can show charts of a specific fund/stock that has outperformed over some period of time. To count on that is not a plan, it's a wish.

You also make the (fairly common) mistake of assigning special status to dividends. It's all money, total return is what you live off of (and yes, that fund has done well in total return too). Divs are not magic money.

-ERD50

 

[pb4uski]

From Portfolio Visualizer... Sept 2007 to June 2021

Ticker	Name	Allocation
PSLDX	PIMCO StocksPLUS Long Duration Instl	100.00%
VTI	Vanguard Total Stock Market ETF	100.00%

Portfolio performance statistics

Portfolio	Initial Balance	Final Balance	CAGR	Stdev	Best Year	Worst Year	Max. Drawdown	Sharpe Ratio	Sortino Ratio	US Mkt Correlation
Portfolio 1	$10,000	$89,093	17.13%	18.78%	52.60%	-33.13%	-50.85%	0.91	1.39	0.86
Portfolio 2	$10,000	$40,015	10.54%	16.19%	33.45%	-36.98%	-50.84%	0.66	0.97	1.00

 

[Life_by_Fire]

A lot of great risks and points to think about. This has been helpful to show that I need to stick with the original plan and not "get cute."

PSLDX is currently our core holding but no new money is going into it. We reinvest the dividends but add nothing else. All other savings ~70k/year go into VTSAX and VTIAX according to our AA.

 

[38Chevy454]

I see a couple issues to be concerned with:
1) Too much reliance on one investment. PSLDX represents approx 2/3 of your total savings. That is not diversification, even if the PSLDX is a fund with many different holdings. Better than a single company stock or bond, but you have too many eggs in that PSLDX basket.
2) For long term horizon, you need to consider risk of the 5% or more withdrawal rate. Sure it has been good in past 10 years, but can you maintain that for 40+ years? That is why several previous replies have mentioned being 4% or under as the withdrawal goal.


I do understand the desire and goal to retire as soon as you can and get off the working treadmill. Just beware that inflation will cause increase in budget needs, so your portfolio needs to be able to keep up with the increasing withdrawals. There is nothing special about dividend money vs capital appreciation or whatever. The net goal is you need the portfolio to support a withdrawal rate that meets your budget. Speaking of budget, beware that as kids grow up the expenses increase. Not just college savings, which you are already putting money into. Has your budget covered large occasional expenses like car replacement, big house repairs, unexpected medical, or similar?

 

[chassis]

@Life_by_Fire go for it. You seem to have ability to evaluate risk, and to understand your complete financial situation. Ignore naysayers. You probably know this, but the typical poster on this site is likely more than twice your age. There are many posters that are almost three times your age. Whether a poster can admit it or not, he/she posts with their own bias coming through the keyboard, as is the case with me. I am not twice your age btw.

Investors make very sudden and very strong shifts in risk tolerance after retiring, mainly in the 60s years of age. I have seen this repeatedly. What was once a risk tolerant growth investor transforms into a bond lover in a short time period. This affects the tone of what you read on this site.

Go for it with your eyes open and manage your money as a full time job. It’s fun and doesn’t take 40 hours per week.

 

[mrfeh]

From Portfolio Visualizer... Sept 2007 to June 2021

Good results does not imply a sound strategy.

I could go to a Vegas roulette wheel and put half my portfolio on 00. If I won, would that have made it a good choice?

 

[MRG]

Magic funds, how original.

I was in a magic fund for many years. Running up to 1999 I was a 40yo 401k millionaire, then I wasn't for many years. Seems like the magic was gone. Now I'm in a lawsuit with 400 of my previous peers for breech of fiduciary duty by the magic fund management and Megacorp. I didn't understand the risks the fund was taking on or I wouldn't have been there. My loss is minor, a small six figure amount, some lost much, much more. Good luck.

 

[Koolau]

I agree with those suggesting more diversity. Typically, even in "bad" times, SOMETHING is up or at least not down as much.

What are you doing about your "ballast" (cash funds or CDs, bonds/bond funds, or MYGAs, etc.)?

Maybe even 2 to 5% PMs?? Very much a YMMV move and most here detest PMs but they have typically been "good" when stock and bonds drop.

I can't relate to retirement at 32 but, hey, that's certainly "early" which is what we're supposed to be about. I sheepishly admit that my ER was at 57, so don't listen to me.

 

[pb4uski]

From Portfolio Visualizer... Sept 2007 to June 2021

Good results does not imply a sound strategy.

I could go to a Vegas roulette wheel and put half my portfolio on 00. If I won, would that have made it a good choice?

How in the world could you infer that I was in any way shape or form implying that it was a sound strategy? I was simply providing information. If you go back to post #9, you'll see that I was suggesting caution. Wake up man.

I would be hesitant as your plan has a high risk of financial ruin.

While PSLDX has a great track record, it is only 14 years old. If you are reliant on PSLDX, all it takes is one significant misjudgement by the fund manager to ruin you.

For example, say that the current PSLDX manager retires or moves on to their own fund and the new PIMCO manager has a particular investment hypothesis and goes with it in an effort to prove themselves and then it goes horribly wrong. ...

 

[mrfeh]

How in the world could you infer that I was in any way shape or form implying that it was a sound strategy? I was simply providing information. If you go back to post #9, you'll see that I was suggesting caution. Wake up man.

I inferred no such thing. I was just pointing out to anybody reading this thread that looking at results from the last 14 years does not indicate a sound strategy.

 

[OldShooter]

Professional fiduciaries and trust officers' portfolios are regularly reviewed by their organization's management. Any holding beyond 10-15% of the total is considered to be "an imprudent concentration of assets."

It is a fine thing to be conscious of the risk you are taking, but it is a far better thing to minimize it. Betting the farm on a crazy long/short fund with high expenses and high turnover does not minimize risk. The fact that the manager has recently been lucky, is irrelevant. Mountains for research have shown that (gasp!) past results do not predict future performance.

 

[TheWizard]

Professional fiduciaries and trust officers' portfolios are regularly reviewed by their organization's management. Any holding beyond 10-15% of the total is considered to be "an imprudent concentration of assets."

It is a fine thing to be conscious of the risk you are taking, but it is a far better thing to minimize it. Betting the farm on a crazy long/short fund with high expenses and high turnover does not minimize risk. The fact that the manager has recently been lucky, is irrelevant. Mountains for research have shown that (gasp!) past results do not predict future performance.

I must be missing something.
More than 15% of financial assets in an S&P 500 or total market index fund is imprudent?
Shirley you must be joshing...

 

[OldShooter]

I must be missing something.
More than 15% of financial assets in an S&P 500 or total market index fund is imprudent? Shirley you must be joshing...

Sorry, it was me who missed something -- a more complete explanation. A truly diversified stock fund, like a total market fund, is not considered to be a single investment. Typically these concentration criteria are used to look at holdings of individual stocks, but in the OP's case PSLDX can't IMO be considered to be a diversified holding. It is a very strange beast, as @SecondCor521 points out in Post #5. Personally I wouldn't touch it, but the OP says he is in love so I'm suggesting that he at least limits the love a bit. Sorry for any confusion.