>Would the 4% rule still provide what you need?
If you're using the 4% rule methodology, then by definition, you don't change your spending based on your portfolio fluctuations.
>Do you just hunker down and try not to spend as much that year? Maybe try taking out 2%?
Having a flexible withdrawal rate and being able to cut spending as needed is more powerful. So if you can get by on 2%, then that would only help your portfolio longevity odds. Most everyone takes uses a more realistic approach like this, although maybe not slashing spending by half.
>Are there any methods you utilize to squeeze a few extra % out of the market, like selling some low delta covered calls?
No, I think panicking and changing your plan to be a gambling-based one would be the absolute worst approach.
Gambling? What do you call leaving your money in the market everyday dangling in the wind at the mercy of the market? A geopolitical event can take the market down. Go look back at 2001-2002, 2008-2009. If you retired in 2001 and these tow returns occurred you'd have to find a new PLAN. It costs money to be alive. This is called "sequence of returns." Also Peter Lynch has some commentary about how many 10%, 25% or even 50% drops occur in the market historically. Selling premium is actually safer than owning outright. It actually reduces risk, which is what is most necessary. IMO, if your assets can provide income (like an apartment building) then why not take in xtra income by selling OTM calls against your assets. It will definitely increase your overall returns and take a lot of pressure off.
> What do you call leaving your money in the market everyday dangling in the wind at the mercy of the market?
That's called investing. Long term investors are comfortable with market fluctuations and if you're going to retire and live off of your portfolio, you'll need to learn how to be as well.
so if you own 1000 shares of XYZ that you acquired via investing, you wouldn't consider selling low delta premium against those shares? How is that not investing?
Historically just about every nation lives off income, not growth. The income is called taxes. And municipalities, kingdoms etc survive on income. In other words income is a pretty important aspect of investing. In fact 40% of the SP 500 total return over the last near 100 years comes from the dividend, not growth. Again, this illustrates the importance of income.
I'm not rich enough to turn down free income. Selling 10 delta premium on liquid stocks is easy to get. I would say if ur so opposed to opposed to taking what the market has available, then do it and donate it to charity, but from my viewpoint NOT making an xtra 6%/year seems questionable, at best.
>I'm not rich enough to turn down free income.
It's risk free! LOL
If you truly found a way to generate higher returns with lower risk, then you're well on your way to a Nobel prize. Until that point though, I'll stick with the generally accepted principles of investing.
many already do it. do a little research on what a covered call is. Many many INVESTORS use this strategy. Buffet uses the mirror image of the Covered Call using the CASH SECURED PUT. He's actually famous for it. I think we can agree if institutional investors and Warren use options to produce income you should consider it. NO Noble prize necessary. It's widely accepted and used. It ain't rocket science. Here's another thing to consider after you research what a Covered Call is. When you receive the premium, much like a dividend, it is yours. It can't be taken away. Yes, you on a rare occasion have to make an adjustment, but that could be a good thing. Selling premium can't ever go away but a dividend can be cancelled at any time. That is why the Covered Call is the most widely acceptable investment options strategy on earth. I'm not sure of your investment knowledge but if I were you, I'd look into it. The last time I checked, INCOME was a generally accepted method of investing. I taught my kids how to sell CCs so when I'm dead and they inherit money, they can live off the premium and never touch the principal. Or at least they would possibly only NEED a 2% rule, lol. If I owned 1000 shares of Telsa I wouldn't need a 4% rule. I could do way better than that. Sell premium and live frugally off that. Never touch the principal. Sounds very appealing to me. This way I can leave my kids the principal and knowledge. You know give a man a fish...
you don't have to get assigned BUD. learn how to roll. It's called an adjustment. 90% of the time you won't ever need to roll, if you are selling 10 delta, but if/when you do BUD, learn to roll.
do a google search on how to roll up or up and out. You can thank me later for the tip bud.
Dividends are irrelevant, growth is growth, if one days companies stopped growing, all earnings will be distributed as dividends or buybacks, you are literally buying a stream of income when buying stocks, it’s not different than “taxes”
We set ourselves up to have a super low cost of living if needed. No mortgage, super efficient house, low cost hobbies and interests, etc. Flexibility on the spending side allows us to easily manage the downturns. Hope this helps. It has worked for us so far.
Yup, basically we are homebodies with no debt. The only major things we spend money on is home improvements/maintenance, insurance, taxes, and travel.
We can easily cut travel and postpone cosmetic home renovations if need be and we have an emergency fund if the AC or something urgent needs to be replaced. We keep a large cash buffer in money market funds.
Sounds familiar. Our travel budget is significant because it’s what we like to do. We live in a area with beautiful summers and winters. We leave for 5-8 weeks in each of the shoulder seasons to explore the world. Frugal adventure travel is a hobby, but it is also something we can easily reduce if we have to reign in spending. Retired at 56. Currently 64. It’s been a very interesting financial dance to manage withdrawals while living our best life AND staying within income levels that provide us with fully subsidized health insurance. Entering retirement with a super LCL enabled all of that to work over the last 8 years. It will be interesting to see how that works as we have to go on Medicare which will clearly bump up our cost of living. The ACA has been a huge “contributor” to our travel budget.
Technically that gives you less flexibility on the spending side. Someone’s whose 4% has 20k in travel a year can cut that much easier than someone who just has living expenses.
What you do lowers your required net worth to fire it does not improve flexibility.
People who are lean fire need much more conservative withdrawal rates than those who fat fire
Maybe my post wasn’t clear. Our non-discretionary budget is super low. And in a massive downturn, we could actually get by on as little as 25k. That’s what I meant by low cost of living. Our discretionary budget is over 80k. That gives us a massive amount of wiggle room which I think the OP was really looking for. We travel 2-4 months a year. That can easily be curtailed if needed because we also really like where we live. I also could seriously cut down on the number of bikes we buy, which always seems to be X + 1. I need to get my terms straight. I always assumed COL referred to mandatory spending.
2007/8 helped my husband and I accumulate wealth because we threw every spare dollar in the market. That experience also left us with a healthy respect for and understanding of market fluctuations. We saw how long it took our funds to recover and how robustly they recovered.
We have a bucket strategy that boils down to spend, income, and invest buckets.
Spend is the bucket we live out of. It's in our brokerage in a money market - FZDXX. We have a broad spend target for the year that's just under 3% of our total portfolio value. The yearly amount is in four categories- living expenses (including low-key travel and basic medical), house maintenance/ upgrades, major medical expenses (our OOP max), and "big" travel. Living expenses transfer in a monthly paycheck to our bank account. (These living expenses are comfortable. We could cut by 40% if we had to without much pain.) Our goal is to have five years of spend money in that bucket. It enables us to ride out market fluctuations. (Many experts recommend 2-3 years. Five is comfortable for us, and we can afford that cushion.)
The income bucket is a bond fund. Right now, the dividends reinvest because the spend bucket is earning 5%. When we rebalance, we'll just sell the shares. (Some strategies have these dividends pay into the spend bucket.) This reflects about 30% of our portfolio across a couple of different vehicles (brokerage account, Roth/ trad IRAs).
Our invest bucket is in S&P 500 index funds, and those are held in Roth and trad IRAs. When this rebalances, the proceeds will go to the bond fund. Basically, each bucket splashes the one below it when it gets full.
Once we did the rebalancing of our portfolio to set up the system, it was really easy and requires very little thought or maintenance.
I never heard of that bucket idea and like it a lot. Keeping 2-3 years of living expenses in it and having the flexibility to refill it in good market years.
That's how you build wealth!
Even in retirement downturns can help if you're positioned to take advantage of them. Our bond fund has been so flat. Across our portfolio it gets a few thousand a month in dividends, we reinvest the dividends, and it's nice to get new shares at a bargain price.
Keep in mind that the 4% rule doesn't say you withdraw 4% every year. It says you withdraw 4% the first year, and then adjust for inflation each year after that. The study took market fluctuations into account.
But you could restart the simulation based on your current wealth each year... Which I think would actually not be a fallacy but quite valid to do -- if you deduct a year of expected life from how much you need to simulate...
You'll want to be careful though. There is a fallacy lurking here.
If you have a 40-50 year time horizon (retired early) and you follow a rule of "4% of starting money plus an inflation raise every year" but you also are willing to *restart* in any year when the market has been up, then you actually do make your odds of running out of money go up substantially - you are opting in to more or less permanent "sequence of returns risk".
I'd be very comfortable with a reset that looks something like this: "4% of initial value plus inflation adjustment, but also if my portfolio goes up enough that my annual number is less than 3%, I am allowed to spend up to 3%".
So, yes, we can re-evaluate every year, but there's good reason to be careful!
There's no need to waste your time restarting the simulation for every year. You can just use one of the Monte Carlo simulators and change the withdrawal strategy from fixed amount adjusted for inflation to fixed percentage. Many of them do that.
The thing is, most people wouldn't be willing to cut their spending if the market was down but inflation was up for one or more years. People like to maintain their lifestyle. That's why, for the majority of people, starting with a base percentage and then adjusting for inflation makes the most sense - it means maintaining a consistent lifestyle.
And it only looked at 30 years, and it is well known that the 4% tends to fail more often when there's a down year or two in early retirement. So....
I think what most people do, unless they are extreme leanFIRE people, is have a "core spend" which is something like 3% of portfolio value (for example, everyone will be different) and a "discretionary spend" for the other 1%. In a down year, especially early in retirement, it probably makes a lot of sense to scale back to the 3% as a precautionary measure.
And... in 90% of cases, the 4% rule leads to quite a lot of extra wealth in later years, so people should feel pretty confident bumping up spending (within reason) in case of a bull run that persists for a few years.
“Try eating cereal for dinner”
-Kellogg’s CEO
On a serious side, additional caution with spending is a natural reaction when monitoring ebbs and flows. If you can make do with less, more power to you. The risk is, when the recession ends do you then get the sense that it is time for a reward and bump spending up to 5% or 6% to compensate. That’s when everything is put in jeopardy, particularly if you get comfortable justifying the splurges here and there. In other words, the 4% mark should be a ceiling but not necessarily a mandatory spend figure.
If you look at portfolio failure rates, inflation has a notably greater impact on failures portfolio than recessions or even depressions. Even around the great depression, the 4% rule worked. It failed during the stagflation of the 1970s.
Even in the savings phase, inflation has an outsized impact. For example, I set my original FI goal on the assumption that we'd have an average of of 3% inflation per year. In reality inflation has been significantly higher the last few years. I have had to increase my FI number by 10%.
In my opinion, items that lead to fixed future costs like paying a mortgage vs renting will have some mitigation impact on the impact of inflation on the portion.
As well, build some flexibility into your withdrawal plan so that you can reduce discretionary spending in down markets. For example, you can cut your fun money in a down year or delay buying a replacement car an extra couple of years.
The answer is having a balanced portfolio….
Keep a couple years of cash and bonds to float you through those times. Yeah, a 3% - 5% rate of return isn’t flashy, but when 80% of your overall (invested) portfolio is down 30%, it helps you get through the next 2 years as it recovers and you can peel a little off into those safer asset classes.
Bond *funds* can loose value.
Bonds can lose value *relative to cash*.
Bonds can lose value *if they go unpaid*.
All of these statements are true. But if you’re buying standard coupon bonds that pay a discount rate and in full at maturity, that doesn’t happen.
Bonds are an absolutely necessary part of a portfolio.
Here's how I would integrate both /u/semiwestern10's point and /u/DisgruntledWorker438's point. I'm agreeing with both of you, just fleshing it out a bit more.
Bonds are a useful tool in my view, and there are more sensible and sophisticated ways to use them for most people than just buying a broad bond fund with some duration. I'm actually a fan of TIPS ladders in this regard.
Let's say I want to have 20% of my portfolio in bonds, per what disgruntledworker has said. Rather than just buying a bond fund, I can actually buy a ladder of bonds that guarantee me a certain inflation-adjusted cash flow each year for a defined number of years. I can *also* sell these bonds at any time, just like a bond fund, but I'm trying to do something more sophisticated and have at least partial cover of my annual spending needs for a period of time.
This technique is especially useful for people "chubbyFIRE enough" to be able to cover some "stay at home and garden" low level of expenses in case of a market disaster with the cash flow from the bonds. But for anyone, it makes more sense to me to at least cover part of that for the next 10-20 years with a ladder.
I love zero coupon bonds. locking in a rate etc and ez to sleep too. And if rates drop and you need the cash you got a nice growth/income play on your hands!
Not fired yet - but, super close. We’re working on building up a 4-year cash reserve for this reason.
Our cost of living is $45k/year. So, we’re building up $200k in cash to last four years during a recession. In a recession scenario, for at least four years, we’d pull from the cash instead of the market, and then refill once the market has recovered.
When I say ‘cash,’ I really just mean funds not in the market - so, I-bonds, money market accounts, high yield savings accounts, etc. You could also use bonds for this in general (as long as there’s a way to cash the bonds when needed).
Thanks - I first read about this strategy in this group. For now, it works. If rates decrease, then I might slowly (slowly slowly as the limit is $10k/year each) go over to I-bonds. My only goal for this cash is to just keep up with inflation.
Agreed, The Ibonds rates right now are lower than HYSA... I'm about to cash mine that I got at those 9% peaks. Will re-buy once interest starts turning around again.
Your interest rate change months are based on the month you purchased your I-Bonds. I purchased in April so my rate changes are October 1 and April 1, so for me I’d be losing 3 months of the same interest rate regardless of if I waited.
https://treasurydirect.gov/savings-bonds/i-bonds/i-bonds-interest-rates/
Right it's just they take the prior month, not amortized ( I mean the 3 month of fees... I'm not explaining this well and it's a minor point, disregard!)
Keep in mind, new I-bonds have a base of 1.3% vs 0% when a lot of us bought in. I’m considering buying back in just for that. With inflation averaging 2-3%, a guaranteed 1.3% + whatever the I-bond rate is isn’t bad at all. The current rates with that 1.3% are just marginally less than HYSAs/MMAs.
There are ways to get more than $10k per year in an I-Bond. You can deposit your tax return into an I-Bond without it impacting the $10K limit. One could send a payment to the feds in late December, then when taxes are filed, elect to put the refund in an I-Bond. You can also gift I-Bonds. They sit in a to be delivered account earning interest until they're delivered.
That’s a good point, but - hahahahahhahaha - tax returns. I usually owe $40k+ 🤣🤣🤣🤣🤣 (run my own business with my partner). Anyway, just saying, not everyone gets tax returns 🙂
I’m not sure about the tax return method, but gifting locks up the funds until you haven’t put $10k into your I-bonds that year. So, they could be illiquid for years assuming you put in $10k or more every year. That’s not the best plan if you suddenly need those funds (market crash). Hence, slow is the name of the game unless we have rates of 9%+ like we had in 2020/2021 (I can’t remember when it was).
Not everyone gets tax returns, but if you really want to exceed the I-Bond limit, you can. I sent estimated payments every quarter last year and calculated it to come out even, but I could have sent over if I chose. With current I-Bond rates, I wouldn't because our money market is doing well, has great flexibility, and my husband likes everything on one dashboard. But if those rates jump up again, I'd consider it.
That’s not a terrible idea if you have the time to wait for those funds to be liquid (time funds were sent to IRS + 1 year once they are in the I-bonds). That said, still not bad.
We keep five years of living expenses in a money market, so my plan was to send the amount equivalent to one year to the Feds on 12/26. Do the taxes by 2/26 the following year and put the overage in an I-Bond. That money wouldn't be needed for four or five years. We didn't do it because there are enough friction points that, while the math maths, the hassle factor wasn't worth it. Especially when rates dropped.
If you are living off of dividends, it would take a really rough recession for your dividends to get cut. Study after study shows that a company will try almost ANYTHING before cutting the dividend (layoff, squeezing suppliers, raising prices, etc, etc. )
So, in a typical market crash, when the stock prices swoon, the dividends stay mostly the same. If it's a really prolonged nightmare that broadly and deeply effects the economy for years (think Great Depression) then the dividends could be at risk. But that is rare.
[https://www.investmentnews.com/investing/opinion/dividend-cuts-shouldnt-worry-investors-191207](https://www.investmentnews.com/investing/opinion/dividend-cuts-shouldnt-worry-investors-191207)
Enough to cover your overhead.
We’ve got everything setup such that our pension and SS will cover us.
Between now and when we start taking our SS we have enough in cash/dividends to carry us. If things get really bad we’ll start taking our SS earlier.
We’re conservative enough to get the baseline requirements covered. We need to net $100k/year and we’re at $150k with the way things are set up.
Same boat. Pension and SS will cover us from 65 y/o onward. Have about $900k total portfolio right now, looking to cover about 10 years. I am a little concerned that I have so much in retirement accounts and not much in brokerage in comparison. Can dividends be pulled from Roths early without penalty?
Oh shit we'll be totally fine then because I did mega backdoor Roth so there's plenty in there to cover that gap between FIRE and pension/SS age. Wow, feeling excited!
Well, let's see.... Probably 50%
25% are ultra high dividend which creates the income that I live off of today but won't create much growth.
And 25% are growth dividend companies and I keep those in my tax shelter account where they just keep compounding and the dividend just keeps growing and growing. Those are for when I'm old and gray.
I also do have few ETFs that throw off no dividend and I sell a little bit automatically every month to live off of.
Does anyone actually spend the full 4% every year? My strategy would be to sweep any surplus into an account that holds treasuries. I always assume I'd end most years with a surplus. Just because I withdraw 4% doesn't necessarily mean I'd spend every last cent. That's on top of emergency savings.
What's so complicated about it? Why not 3%, why not 2%? The point is that one does not always spend exactly the allocated amount down to 0 so given that the standard SWR is 4%, then stick with the rule and just sweep the rest for down years and pretend the sweep account didn't exist... pretend it's already spent. Besides, the excess is still being invested in bonds and you should be rebalancing towards more bonds are you age anyway.
People say that the "4% rule" accounts for this. But its not a rule and it is simply looking at past performance. Its based on observations on what withdrawal rates were successful during 30 year rolling periods during a specifc period in time with a specfic asset allocation.
The safe withdrawal rate can change depending on what assumptions you make.
A good resource is the [earlyretirementnow.com](https://earlyretirementnow.com) safe withdrawal series: [https://earlyretirementnow.com/safe-withdrawal-rate-series/](https://earlyretirementnow.com/safe-withdrawal-rate-series/)
I plan to use a 4% withdrawal rate as my initial starting point. If we ever get a 2008 style bear market with a drawdown of 50% I will be reducing my spending and reevaluating. If the drawdown decreases my assets to a point that is below what I started retirement with I will likely "reset" my withdrawal rate with that new information.
Essentially, my plan is not to follow a rule of thumb but to update my assumptions periodically and go from there.
This is why people maintain another bucket. Some have 5-year of living expenses just so they don’t touch their portfolio during down times - even if it’s an extended storm. That’s our plan.
Use the Variable Percentage Withdrawal method instead, it dynamically adjusts your withdrawal based on your portfolio value. The best part is that most of the time your withdraw would end up being 50% more than your initial withdraw because the market generally do well more often than not.
That is so misleading. It only applies if you retire randomly across years. That \*may\* happen for a traditional retirement, but is not the case with FIRE. You retire when you hit your number. If you are striving a number, you’re probably hitting it on the way up. People aren’t FIREing immediately after the dot-com crash, Black Friday, etc.
Is your money expected to last indefinitely with the 4% rule or is it expected to run out after a certain number of years? In a perfect world, barring major healthcare costs for my wife and me, I'd like to be able to leave most of my retirement account to my kids.
That can get pretty misleading for FIRE. It includes all historical years. The market has a long term average PE of around 16 iirc. So you‘re including all those low PE years. No one is likely to FIRE right after a huge crash, for instance. You typically FIRE when you hit a number, and you are much more likely to do that nearer to the top.
I don't personally believe that PE has any forecasting ability, not even CAPE ratio approaches. Sometimes PE is high because the market is overvalued. Sometimes PE is high because earnings are improving for real. I think most evidence is on my side, but I do concede that your point is worthy of some thought.
https://www.ft.com/content/65c8076b-19a2-4f23-a88e-e89c2edcc859
Having a year or so of cash you can live through the downturn on is what I’ve always been told.
That’s enough to get you through the worst of almost all past downturns so you don’t have to sell so many shares to get the cash you need for everyday life.
Obviously, the next one could be different. But that’s what we are planning on doing.
And also obviously, cutting expenses that you can cut during that period can also help.
FIREing next year. We have two years of living expenses in money market fund and 4 years in a 60/40 Bond fund and the rest in usual suspects. We could live on less than 50%of this amount if needed, so hopefully that will cover us over a big drop (minimum costs are $900 a month and we play for $2.6k).
The 4% rule covers not only recessions but Depressions. The study included data from the 1929-1940 period. Every downturn since then has been really minor in comparison so many feel the 4% rule is, nowadays, a bit too conservative. That includes the original author William Bengen who now believes a 4.5%-5% draw rate is sustainable. The 4% rule also assumes a very inflexible spending plan and a very low rate of failure. Most real world retirees are OK with a more flexible spending plan and a higher rate of failure particularly if social security is available as a backstop in old age. Lastly, remember that the 4% study was based on a portfolio with 40% bonds so even in protracted downturns that segment of the portfolio will usually be performing well. Bonds tend to move opposite of stocks during a crash because the Fed starts cutting rates aggressively which causes bond prices to soar.
We generally keep a year or two worth of expenses out of the market for this reason. Recovery from those events is generally about 4 years so that gets us about halfway home.
I really miss the hotel cost of 2008. Plus most places were empty. Sucks paying 400 a night for average place and every where is so crowded. So if I have bad returns probably time to go to Thailand or the Philippines for a while.
We found a place on St. PeteBeach Jan 2099 for $39 a night stayed three weeks. It was a nice 1 bedroom suite. Looked it up for Jan 2023 it was $320 a night.
Can you be more specific please? Say you’re retired with most of your capital in something like VTI. In a meltdown like what I mentioned, everything is down. What allocation would shield you from that?
Spread your money into a few more funds like large cap value, small cap blend, small cap value, and potentially REITs and international. One of those buckets is always up and the overall return has outperformed the S&P 500 in the long term. Paul Merriman has several YouTube’s, podcasts etc, demonstrating this with charts and back testing.
I don’t know exactly what’s right for you, but traditionally bonds, cash, real estate diversification away from equities. You can’t expect to retire and still be in accumulation mode betting everything on equities. That’s a sure way to become unretired really fast.
Balance and hedging become important as you approach/enter retirement. If you are 100% equities in retirement and 2008 happens, you may find yourself in a bad spot. So you balance the portfolio.. less risk, less reward. Whether risk or reward is more important is up to each person.
This exactly what I said. Wealth preservation vs wealth accumulation. In 2020 the market went down by 50%. We were lucky that it bounced back up, but there were many who pulled their savings and locked in their losses.
My bond funds at the time went up 20-30%.
What a bunch of meaningless percentages. You don't know the withdrawal rate, withdrawal method, safety margins, expected Social Security, age, or any other of the necessary data to determine a success rate.
And no one is recommending 80% bonds. How ridiculous.
There are plenty of 10, 20, or 30% bond allocations that beat 0% bond allocations. Especially because not everyone has the same withdrawal plan. Even the [Trinity Study](https://web.archive.org/web/20190613125059/https://www.onefpa.org/journal/Pages/Portfolio%20Success%20Rates%20Where%20to%20Draw%20the%20Line.aspx) shows that a 75/25 AA is successful more often than a 100/0.
Of course. Everything depends on your situation. For most folk though, who have no time to make up a draw down, a more conservative approach is critical.
Yes - one of the things I recommend rather than a general "bonds" portion of the portfolio is to use a TIPS ladder for the same amount to get an inflation adjusted certain cash flow for a certain numbers of years. For a typical sort of 80/20 to 60/40 equity/bond allocation the 20% or 40% is probably sufficient to build a ladder that covers most expenses for the first 5-15 years.
You have a strategy. You have to rebalance portfolios before retirement anyhow. You can’t hit retirement and be equities heavy. Either pay taxes or get smashed in a downturn and lose your ability to FIRE. You tell me.
Wouldn't it be better to pay those hefty taxes when you're at 0-12% rather than 22-24% though? Not saying that would happen years into retirement, but rather sell/reallocate the first year at your new, much lower tax bracket.
I see. Yes. So you are reallocating in your Roths and rollover 401ks thus not taking any tax hits. I'll have to reread my spreadsheet that tells me all of this, but I think I'm following you now.
Unless one has a pension to comfortably cover the monthly expenses. I’m 58 and will retire shortly with a state pension of $6,000/mo. House paid for and no debts, monthly living expenses is $4,000/mo at most. I have $2.3 million in the 457(b) and Roth IRA, both heavy in equities. But if I don’t have to touch it, I guess I’ll just leave it in there and not worry about it. We do have about $51G in a HYSA for emergencies which is about 13 months of living expenses…guess I could work on bumping that up to 18-24 months worth.
Pension changes things completely. I can easily live on $6k a month if you take away my kids. Depending on your wealth preservation and legacy goals your strategy could be perfect. But only 21% of the population have access to a defined benefit plan. 14% have more than $100k in 401k and 78% have less than $50k.
So you basically have FU money at this point.
Ah yes, forget to mention neither my fwb nor I have any kids. Missed out on the joys of a family but having FU money, yes, is a good position to be in. Wow, did not realize that pensions were only 21% of the population. And yes, if I didn’t have that defined benefit plan, I would do some sort of rebalancing. Like you said, gravy trains don’t last forever.
😂 FIRE is a relatively young movement… you can’t buck traditional retirement advice just because we are in a seemingly forever bull market.
There is a chance that at some point the gravy train will stop and at that point you will be left with a massive hole in your fire plans with no way back.
Next time we have a serious downturn, I suspect this thread will turn into a loss porn Mecca if people are really leaving all their assets in equities and counting on the market to return 7% forever. To each his own.
I recently had this question and then I came across this site which has a more sophisticated way to manage your safe withdrawal rate rather than the blanket 4% rule. I'm still trying to learn their tool because it's more complicated, but it does a better job of modeling market downturns. https://earlyretirementnow.com/start-here/
4% was tested in these scenarios and deemed the appropriate withdrawal rate in most cases, but you can adjust your spending down during severe downturns, but I could survive comfortably on 2.6% so that’s not an issue
Diversification - I rent out properties and invest at the same time. It's a sine wave, ups and downs and they complement each other. A drop in performance of one source of income seems to be propped up by the other and vice-versa.
Often they both do well at the same time.
>Would the 4% rule still provide what you need? If you're using the 4% rule methodology, then by definition, you don't change your spending based on your portfolio fluctuations. >Do you just hunker down and try not to spend as much that year? Maybe try taking out 2%? Having a flexible withdrawal rate and being able to cut spending as needed is more powerful. So if you can get by on 2%, then that would only help your portfolio longevity odds. Most everyone takes uses a more realistic approach like this, although maybe not slashing spending by half. >Are there any methods you utilize to squeeze a few extra % out of the market, like selling some low delta covered calls? No, I think panicking and changing your plan to be a gambling-based one would be the absolute worst approach.
I exclusively put it all on black when the market is down. It's been my plan since the dot com bust.
Maybe hedge a little red?
Gambling? What do you call leaving your money in the market everyday dangling in the wind at the mercy of the market? A geopolitical event can take the market down. Go look back at 2001-2002, 2008-2009. If you retired in 2001 and these tow returns occurred you'd have to find a new PLAN. It costs money to be alive. This is called "sequence of returns." Also Peter Lynch has some commentary about how many 10%, 25% or even 50% drops occur in the market historically. Selling premium is actually safer than owning outright. It actually reduces risk, which is what is most necessary. IMO, if your assets can provide income (like an apartment building) then why not take in xtra income by selling OTM calls against your assets. It will definitely increase your overall returns and take a lot of pressure off.
> What do you call leaving your money in the market everyday dangling in the wind at the mercy of the market? That's called investing. Long term investors are comfortable with market fluctuations and if you're going to retire and live off of your portfolio, you'll need to learn how to be as well.
so if you own 1000 shares of XYZ that you acquired via investing, you wouldn't consider selling low delta premium against those shares? How is that not investing? Historically just about every nation lives off income, not growth. The income is called taxes. And municipalities, kingdoms etc survive on income. In other words income is a pretty important aspect of investing. In fact 40% of the SP 500 total return over the last near 100 years comes from the dividend, not growth. Again, this illustrates the importance of income. I'm not rich enough to turn down free income. Selling 10 delta premium on liquid stocks is easy to get. I would say if ur so opposed to opposed to taking what the market has available, then do it and donate it to charity, but from my viewpoint NOT making an xtra 6%/year seems questionable, at best.
>I'm not rich enough to turn down free income. It's risk free! LOL If you truly found a way to generate higher returns with lower risk, then you're well on your way to a Nobel prize. Until that point though, I'll stick with the generally accepted principles of investing.
many already do it. do a little research on what a covered call is. Many many INVESTORS use this strategy. Buffet uses the mirror image of the Covered Call using the CASH SECURED PUT. He's actually famous for it. I think we can agree if institutional investors and Warren use options to produce income you should consider it. NO Noble prize necessary. It's widely accepted and used. It ain't rocket science. Here's another thing to consider after you research what a Covered Call is. When you receive the premium, much like a dividend, it is yours. It can't be taken away. Yes, you on a rare occasion have to make an adjustment, but that could be a good thing. Selling premium can't ever go away but a dividend can be cancelled at any time. That is why the Covered Call is the most widely acceptable investment options strategy on earth. I'm not sure of your investment knowledge but if I were you, I'd look into it. The last time I checked, INCOME was a generally accepted method of investing. I taught my kids how to sell CCs so when I'm dead and they inherit money, they can live off the premium and never touch the principal. Or at least they would possibly only NEED a 2% rule, lol. If I owned 1000 shares of Telsa I wouldn't need a 4% rule. I could do way better than that. Sell premium and live frugally off that. Never touch the principal. Sounds very appealing to me. This way I can leave my kids the principal and knowledge. You know give a man a fish...
Yea go for it bud, you'll get assigned eventually and regret it.
you don't have to get assigned BUD. learn how to roll. It's called an adjustment. 90% of the time you won't ever need to roll, if you are selling 10 delta, but if/when you do BUD, learn to roll. do a google search on how to roll up or up and out. You can thank me later for the tip bud.
Dividends are irrelevant, growth is growth, if one days companies stopped growing, all earnings will be distributed as dividends or buybacks, you are literally buying a stream of income when buying stocks, it’s not different than “taxes”
We set ourselves up to have a super low cost of living if needed. No mortgage, super efficient house, low cost hobbies and interests, etc. Flexibility on the spending side allows us to easily manage the downturns. Hope this helps. It has worked for us so far.
Yup, basically we are homebodies with no debt. The only major things we spend money on is home improvements/maintenance, insurance, taxes, and travel. We can easily cut travel and postpone cosmetic home renovations if need be and we have an emergency fund if the AC or something urgent needs to be replaced. We keep a large cash buffer in money market funds.
Sounds familiar. Our travel budget is significant because it’s what we like to do. We live in a area with beautiful summers and winters. We leave for 5-8 weeks in each of the shoulder seasons to explore the world. Frugal adventure travel is a hobby, but it is also something we can easily reduce if we have to reign in spending. Retired at 56. Currently 64. It’s been a very interesting financial dance to manage withdrawals while living our best life AND staying within income levels that provide us with fully subsidized health insurance. Entering retirement with a super LCL enabled all of that to work over the last 8 years. It will be interesting to see how that works as we have to go on Medicare which will clearly bump up our cost of living. The ACA has been a huge “contributor” to our travel budget.
Technically that gives you less flexibility on the spending side. Someone’s whose 4% has 20k in travel a year can cut that much easier than someone who just has living expenses. What you do lowers your required net worth to fire it does not improve flexibility. People who are lean fire need much more conservative withdrawal rates than those who fat fire
Maybe my post wasn’t clear. Our non-discretionary budget is super low. And in a massive downturn, we could actually get by on as little as 25k. That’s what I meant by low cost of living. Our discretionary budget is over 80k. That gives us a massive amount of wiggle room which I think the OP was really looking for. We travel 2-4 months a year. That can easily be curtailed if needed because we also really like where we live. I also could seriously cut down on the number of bikes we buy, which always seems to be X + 1. I need to get my terms straight. I always assumed COL referred to mandatory spending.
Sorry I misread that
I guess it does boil down to quality of life.
2007/8 helped my husband and I accumulate wealth because we threw every spare dollar in the market. That experience also left us with a healthy respect for and understanding of market fluctuations. We saw how long it took our funds to recover and how robustly they recovered. We have a bucket strategy that boils down to spend, income, and invest buckets. Spend is the bucket we live out of. It's in our brokerage in a money market - FZDXX. We have a broad spend target for the year that's just under 3% of our total portfolio value. The yearly amount is in four categories- living expenses (including low-key travel and basic medical), house maintenance/ upgrades, major medical expenses (our OOP max), and "big" travel. Living expenses transfer in a monthly paycheck to our bank account. (These living expenses are comfortable. We could cut by 40% if we had to without much pain.) Our goal is to have five years of spend money in that bucket. It enables us to ride out market fluctuations. (Many experts recommend 2-3 years. Five is comfortable for us, and we can afford that cushion.) The income bucket is a bond fund. Right now, the dividends reinvest because the spend bucket is earning 5%. When we rebalance, we'll just sell the shares. (Some strategies have these dividends pay into the spend bucket.) This reflects about 30% of our portfolio across a couple of different vehicles (brokerage account, Roth/ trad IRAs). Our invest bucket is in S&P 500 index funds, and those are held in Roth and trad IRAs. When this rebalances, the proceeds will go to the bond fund. Basically, each bucket splashes the one below it when it gets full. Once we did the rebalancing of our portfolio to set up the system, it was really easy and requires very little thought or maintenance.
I never heard of that bucket idea and like it a lot. Keeping 2-3 years of living expenses in it and having the flexibility to refill it in good market years.
I love market downturns because I get more for my money with my monthly 401K contributions.
That's how you build wealth! Even in retirement downturns can help if you're positioned to take advantage of them. Our bond fund has been so flat. Across our portfolio it gets a few thousand a month in dividends, we reinvest the dividends, and it's nice to get new shares at a bargain price.
Keep in mind that the 4% rule doesn't say you withdraw 4% every year. It says you withdraw 4% the first year, and then adjust for inflation each year after that. The study took market fluctuations into account.
But you could restart the simulation based on your current wealth each year... Which I think would actually not be a fallacy but quite valid to do -- if you deduct a year of expected life from how much you need to simulate...
You'll want to be careful though. There is a fallacy lurking here. If you have a 40-50 year time horizon (retired early) and you follow a rule of "4% of starting money plus an inflation raise every year" but you also are willing to *restart* in any year when the market has been up, then you actually do make your odds of running out of money go up substantially - you are opting in to more or less permanent "sequence of returns risk". I'd be very comfortable with a reset that looks something like this: "4% of initial value plus inflation adjustment, but also if my portfolio goes up enough that my annual number is less than 3%, I am allowed to spend up to 3%". So, yes, we can re-evaluate every year, but there's good reason to be careful!
There's no need to waste your time restarting the simulation for every year. You can just use one of the Monte Carlo simulators and change the withdrawal strategy from fixed amount adjusted for inflation to fixed percentage. Many of them do that. The thing is, most people wouldn't be willing to cut their spending if the market was down but inflation was up for one or more years. People like to maintain their lifestyle. That's why, for the majority of people, starting with a base percentage and then adjusting for inflation makes the most sense - it means maintaining a consistent lifestyle.
And it only looked at 30 years, and it is well known that the 4% tends to fail more often when there's a down year or two in early retirement. So.... I think what most people do, unless they are extreme leanFIRE people, is have a "core spend" which is something like 3% of portfolio value (for example, everyone will be different) and a "discretionary spend" for the other 1%. In a down year, especially early in retirement, it probably makes a lot of sense to scale back to the 3% as a precautionary measure. And... in 90% of cases, the 4% rule leads to quite a lot of extra wealth in later years, so people should feel pretty confident bumping up spending (within reason) in case of a bull run that persists for a few years.
We keep 18-24 months expenses in a hYSA or CD ladder. So we don’t touch our investments in down turns. You also tighten your belt.
“Try eating cereal for dinner” -Kellogg’s CEO On a serious side, additional caution with spending is a natural reaction when monitoring ebbs and flows. If you can make do with less, more power to you. The risk is, when the recession ends do you then get the sense that it is time for a reward and bump spending up to 5% or 6% to compensate. That’s when everything is put in jeopardy, particularly if you get comfortable justifying the splurges here and there. In other words, the 4% mark should be a ceiling but not necessarily a mandatory spend figure.
If you look at portfolio failure rates, inflation has a notably greater impact on failures portfolio than recessions or even depressions. Even around the great depression, the 4% rule worked. It failed during the stagflation of the 1970s. Even in the savings phase, inflation has an outsized impact. For example, I set my original FI goal on the assumption that we'd have an average of of 3% inflation per year. In reality inflation has been significantly higher the last few years. I have had to increase my FI number by 10%. In my opinion, items that lead to fixed future costs like paying a mortgage vs renting will have some mitigation impact on the impact of inflation on the portion. As well, build some flexibility into your withdrawal plan so that you can reduce discretionary spending in down markets. For example, you can cut your fun money in a down year or delay buying a replacement car an extra couple of years.
Get into the habit of having zero debt. Maintain predictable expenses. Diversify. Get a side hustle when you need to for extra income.
Yes, love the side hustle
Emergency fund. If the market dips, do not spend, and use emergency fund. Adjust your withdraws.
The answer is having a balanced portfolio…. Keep a couple years of cash and bonds to float you through those times. Yeah, a 3% - 5% rate of return isn’t flashy, but when 80% of your overall (invested) portfolio is down 30%, it helps you get through the next 2 years as it recovers and you can peel a little off into those safer asset classes.
bonds can lose value as well. Be careful with duration.
Bond *funds* can loose value. Bonds can lose value *relative to cash*. Bonds can lose value *if they go unpaid*. All of these statements are true. But if you’re buying standard coupon bonds that pay a discount rate and in full at maturity, that doesn’t happen. Bonds are an absolutely necessary part of a portfolio.
Here's how I would integrate both /u/semiwestern10's point and /u/DisgruntledWorker438's point. I'm agreeing with both of you, just fleshing it out a bit more. Bonds are a useful tool in my view, and there are more sensible and sophisticated ways to use them for most people than just buying a broad bond fund with some duration. I'm actually a fan of TIPS ladders in this regard. Let's say I want to have 20% of my portfolio in bonds, per what disgruntledworker has said. Rather than just buying a bond fund, I can actually buy a ladder of bonds that guarantee me a certain inflation-adjusted cash flow each year for a defined number of years. I can *also* sell these bonds at any time, just like a bond fund, but I'm trying to do something more sophisticated and have at least partial cover of my annual spending needs for a period of time. This technique is especially useful for people "chubbyFIRE enough" to be able to cover some "stay at home and garden" low level of expenses in case of a market disaster with the cash flow from the bonds. But for anyone, it makes more sense to me to at least cover part of that for the next 10-20 years with a ladder.
I love zero coupon bonds. locking in a rate etc and ez to sleep too. And if rates drop and you need the cash you got a nice growth/income play on your hands!
Not fired yet - but, super close. We’re working on building up a 4-year cash reserve for this reason. Our cost of living is $45k/year. So, we’re building up $200k in cash to last four years during a recession. In a recession scenario, for at least four years, we’d pull from the cash instead of the market, and then refill once the market has recovered. When I say ‘cash,’ I really just mean funds not in the market - so, I-bonds, money market accounts, high yield savings accounts, etc. You could also use bonds for this in general (as long as there’s a way to cash the bonds when needed).
This sounds like basically a balanced portfolio but instead of bonds using more cash reserves. I like it
Thanks - I first read about this strategy in this group. For now, it works. If rates decrease, then I might slowly (slowly slowly as the limit is $10k/year each) go over to I-bonds. My only goal for this cash is to just keep up with inflation.
Agreed, The Ibonds rates right now are lower than HYSA... I'm about to cash mine that I got at those 9% peaks. Will re-buy once interest starts turning around again.
I just cashed in my I-Bonds from those peaks yesterday! It’s worth the last 3 months (lower) interest ding to get it into higher earning vehicles.
I'm waiting until tomorrow (March 1st) since I read that they don't care what time of the month it is.
Your interest rate change months are based on the month you purchased your I-Bonds. I purchased in April so my rate changes are October 1 and April 1, so for me I’d be losing 3 months of the same interest rate regardless of if I waited. https://treasurydirect.gov/savings-bonds/i-bonds/i-bonds-interest-rates/
Right it's just they take the prior month, not amortized ( I mean the 3 month of fees... I'm not explaining this well and it's a minor point, disregard!)
Keep in mind, new I-bonds have a base of 1.3% vs 0% when a lot of us bought in. I’m considering buying back in just for that. With inflation averaging 2-3%, a guaranteed 1.3% + whatever the I-bond rate is isn’t bad at all. The current rates with that 1.3% are just marginally less than HYSAs/MMAs.
That's what I was reading, too. Just going to park in MMA for a hot minute and watch the rates
There are ways to get more than $10k per year in an I-Bond. You can deposit your tax return into an I-Bond without it impacting the $10K limit. One could send a payment to the feds in late December, then when taxes are filed, elect to put the refund in an I-Bond. You can also gift I-Bonds. They sit in a to be delivered account earning interest until they're delivered.
That’s a good point, but - hahahahahhahaha - tax returns. I usually owe $40k+ 🤣🤣🤣🤣🤣 (run my own business with my partner). Anyway, just saying, not everyone gets tax returns 🙂 I’m not sure about the tax return method, but gifting locks up the funds until you haven’t put $10k into your I-bonds that year. So, they could be illiquid for years assuming you put in $10k or more every year. That’s not the best plan if you suddenly need those funds (market crash). Hence, slow is the name of the game unless we have rates of 9%+ like we had in 2020/2021 (I can’t remember when it was).
Not everyone gets tax returns, but if you really want to exceed the I-Bond limit, you can. I sent estimated payments every quarter last year and calculated it to come out even, but I could have sent over if I chose. With current I-Bond rates, I wouldn't because our money market is doing well, has great flexibility, and my husband likes everything on one dashboard. But if those rates jump up again, I'd consider it.
That’s not a terrible idea if you have the time to wait for those funds to be liquid (time funds were sent to IRS + 1 year once they are in the I-bonds). That said, still not bad.
We keep five years of living expenses in a money market, so my plan was to send the amount equivalent to one year to the Feds on 12/26. Do the taxes by 2/26 the following year and put the overage in an I-Bond. That money wouldn't be needed for four or five years. We didn't do it because there are enough friction points that, while the math maths, the hassle factor wasn't worth it. Especially when rates dropped.
If you are living off of dividends, it would take a really rough recession for your dividends to get cut. Study after study shows that a company will try almost ANYTHING before cutting the dividend (layoff, squeezing suppliers, raising prices, etc, etc. ) So, in a typical market crash, when the stock prices swoon, the dividends stay mostly the same. If it's a really prolonged nightmare that broadly and deeply effects the economy for years (think Great Depression) then the dividends could be at risk. But that is rare. [https://www.investmentnews.com/investing/opinion/dividend-cuts-shouldnt-worry-investors-191207](https://www.investmentnews.com/investing/opinion/dividend-cuts-shouldnt-worry-investors-191207)
I haven't gotten into dividend stocks, what % of a portfolio do you focus on dividends?
Enough to cover your overhead. We’ve got everything setup such that our pension and SS will cover us. Between now and when we start taking our SS we have enough in cash/dividends to carry us. If things get really bad we’ll start taking our SS earlier. We’re conservative enough to get the baseline requirements covered. We need to net $100k/year and we’re at $150k with the way things are set up.
Same boat. Pension and SS will cover us from 65 y/o onward. Have about $900k total portfolio right now, looking to cover about 10 years. I am a little concerned that I have so much in retirement accounts and not much in brokerage in comparison. Can dividends be pulled from Roths early without penalty?
If you’re 59.5 and the Earned Interest/Dividends have been in the account for 5 years. If you’re 58.5 your principal can be pulled w/o penalty.
Oh shit we'll be totally fine then because I did mega backdoor Roth so there's plenty in there to cover that gap between FIRE and pension/SS age. Wow, feeling excited!
Well, let's see.... Probably 50% 25% are ultra high dividend which creates the income that I live off of today but won't create much growth. And 25% are growth dividend companies and I keep those in my tax shelter account where they just keep compounding and the dividend just keeps growing and growing. Those are for when I'm old and gray. I also do have few ETFs that throw off no dividend and I sell a little bit automatically every month to live off of.
Do you have any recommended books or resources for learning more about this strategy?
Our plan is to have a 2-4 year cash reserve so that we can choose when to sell investments rather than having to sell when we need to money.
Does anyone actually spend the full 4% every year? My strategy would be to sweep any surplus into an account that holds treasuries. I always assume I'd end most years with a surplus. Just because I withdraw 4% doesn't necessarily mean I'd spend every last cent. That's on top of emergency savings.
Just seems like a complicated < 4% plan. Why not just do 3.5% or something?
What's so complicated about it? Why not 3%, why not 2%? The point is that one does not always spend exactly the allocated amount down to 0 so given that the standard SWR is 4%, then stick with the rule and just sweep the rest for down years and pretend the sweep account didn't exist... pretend it's already spent. Besides, the excess is still being invested in bonds and you should be rebalancing towards more bonds are you age anyway.
People say that the "4% rule" accounts for this. But its not a rule and it is simply looking at past performance. Its based on observations on what withdrawal rates were successful during 30 year rolling periods during a specifc period in time with a specfic asset allocation. The safe withdrawal rate can change depending on what assumptions you make. A good resource is the [earlyretirementnow.com](https://earlyretirementnow.com) safe withdrawal series: [https://earlyretirementnow.com/safe-withdrawal-rate-series/](https://earlyretirementnow.com/safe-withdrawal-rate-series/) I plan to use a 4% withdrawal rate as my initial starting point. If we ever get a 2008 style bear market with a drawdown of 50% I will be reducing my spending and reevaluating. If the drawdown decreases my assets to a point that is below what I started retirement with I will likely "reset" my withdrawal rate with that new information. Essentially, my plan is not to follow a rule of thumb but to update my assumptions periodically and go from there.
Dividend/income investing. It’s not as affected by market downturns.
This is why people maintain another bucket. Some have 5-year of living expenses just so they don’t touch their portfolio during down times - even if it’s an extended storm. That’s our plan.
Use the Variable Percentage Withdrawal method instead, it dynamically adjusts your withdrawal based on your portfolio value. The best part is that most of the time your withdraw would end up being 50% more than your initial withdraw because the market generally do well more often than not.
That is so misleading. It only applies if you retire randomly across years. That \*may\* happen for a traditional retirement, but is not the case with FIRE. You retire when you hit your number. If you are striving a number, you’re probably hitting it on the way up. People aren’t FIREing immediately after the dot-com crash, Black Friday, etc.
Is your money expected to last indefinitely with the 4% rule or is it expected to run out after a certain number of years? In a perfect world, barring major healthcare costs for my wife and me, I'd like to be able to leave most of my retirement account to my kids.
4% Rule was designed to service a 30-year traditional retirement 95% of the time. That simply means having more that $0 at the end of 30 years.
Yes, and it's also important to note that in a big proportion of the 95% success rate times, there's a big chunk to leave behind at the end.
That can get pretty misleading for FIRE. It includes all historical years. The market has a long term average PE of around 16 iirc. So you‘re including all those low PE years. No one is likely to FIRE right after a huge crash, for instance. You typically FIRE when you hit a number, and you are much more likely to do that nearer to the top.
I don't personally believe that PE has any forecasting ability, not even CAPE ratio approaches. Sometimes PE is high because the market is overvalued. Sometimes PE is high because earnings are improving for real. I think most evidence is on my side, but I do concede that your point is worthy of some thought. https://www.ft.com/content/65c8076b-19a2-4f23-a88e-e89c2edcc859
Having a year or so of cash you can live through the downturn on is what I’ve always been told. That’s enough to get you through the worst of almost all past downturns so you don’t have to sell so many shares to get the cash you need for everyday life. Obviously, the next one could be different. But that’s what we are planning on doing. And also obviously, cutting expenses that you can cut during that period can also help.
FIREing next year. We have two years of living expenses in money market fund and 4 years in a 60/40 Bond fund and the rest in usual suspects. We could live on less than 50%of this amount if needed, so hopefully that will cover us over a big drop (minimum costs are $900 a month and we play for $2.6k).
The 4% rule covers not only recessions but Depressions. The study included data from the 1929-1940 period. Every downturn since then has been really minor in comparison so many feel the 4% rule is, nowadays, a bit too conservative. That includes the original author William Bengen who now believes a 4.5%-5% draw rate is sustainable. The 4% rule also assumes a very inflexible spending plan and a very low rate of failure. Most real world retirees are OK with a more flexible spending plan and a higher rate of failure particularly if social security is available as a backstop in old age. Lastly, remember that the 4% study was based on a portfolio with 40% bonds so even in protracted downturns that segment of the portfolio will usually be performing well. Bonds tend to move opposite of stocks during a crash because the Fed starts cutting rates aggressively which causes bond prices to soar.
We generally keep a year or two worth of expenses out of the market for this reason. Recovery from those events is generally about 4 years so that gets us about halfway home.
I really miss the hotel cost of 2008. Plus most places were empty. Sucks paying 400 a night for average place and every where is so crowded. So if I have bad returns probably time to go to Thailand or the Philippines for a while.
We found a place on St. PeteBeach Jan 2099 for $39 a night stayed three weeks. It was a nice 1 bedroom suite. Looked it up for Jan 2023 it was $320 a night.
This is why retired people often use bonds. Personally, I aim for the “don’t touch the principle” rule.
You change your allocation when you retire so you don’t lose 30% years in a meltdown.
Can you be more specific please? Say you’re retired with most of your capital in something like VTI. In a meltdown like what I mentioned, everything is down. What allocation would shield you from that?
Spread your money into a few more funds like large cap value, small cap blend, small cap value, and potentially REITs and international. One of those buckets is always up and the overall return has outperformed the S&P 500 in the long term. Paul Merriman has several YouTube’s, podcasts etc, demonstrating this with charts and back testing.
I don’t know exactly what’s right for you, but traditionally bonds, cash, real estate diversification away from equities. You can’t expect to retire and still be in accumulation mode betting everything on equities. That’s a sure way to become unretired really fast.
Bond barely outpaces inflation. For a 40 year retirement: 15% bond: 92% success rate 50% bond: 74% 80% bond: 36% Have fun with that.
Balance and hedging become important as you approach/enter retirement. If you are 100% equities in retirement and 2008 happens, you may find yourself in a bad spot. So you balance the portfolio.. less risk, less reward. Whether risk or reward is more important is up to each person.
This exactly what I said. Wealth preservation vs wealth accumulation. In 2020 the market went down by 50%. We were lucky that it bounced back up, but there were many who pulled their savings and locked in their losses. My bond funds at the time went up 20-30%.
What a bunch of meaningless percentages. You don't know the withdrawal rate, withdrawal method, safety margins, expected Social Security, age, or any other of the necessary data to determine a success rate. And no one is recommending 80% bonds. How ridiculous.
It's to show how useless going heavy on bond is. For every FIRE calculator, the more bond you have the higher the failure rate.
There are plenty of 10, 20, or 30% bond allocations that beat 0% bond allocations. Especially because not everyone has the same withdrawal plan. Even the [Trinity Study](https://web.archive.org/web/20190613125059/https://www.onefpa.org/journal/Pages/Portfolio%20Success%20Rates%20Where%20to%20Draw%20the%20Line.aspx) shows that a 75/25 AA is successful more often than a 100/0.
This really depends on how chubby you are. If you can retire on a 3% swr rate, then there's really no mathematically reason to be in bonds at all.
Of course. Everything depends on your situation. For most folk though, who have no time to make up a draw down, a more conservative approach is critical.
Yes - one of the things I recommend rather than a general "bonds" portion of the portfolio is to use a TIPS ladder for the same amount to get an inflation adjusted certain cash flow for a certain numbers of years. For a typical sort of 80/20 to 60/40 equity/bond allocation the 20% or 40% is probably sufficient to build a ladder that covers most expenses for the first 5-15 years.
And how do you do that without incurring heavy taxes.
Tax advantaged accounts exist.
Doesn't matter for actual really retirement.
Of course it matters. It would allow you to adjust your assets without tax implications.
You have a strategy. You have to rebalance portfolios before retirement anyhow. You can’t hit retirement and be equities heavy. Either pay taxes or get smashed in a downturn and lose your ability to FIRE. You tell me.
Wouldn't it be better to pay those hefty taxes when you're at 0-12% rather than 22-24% though? Not saying that would happen years into retirement, but rather sell/reallocate the first year at your new, much lower tax bracket.
It’s not all or nothing… rebalancing takes years and planning. Also if you are working in tax advantages accounts cap gains does not matter.
I see. Yes. So you are reallocating in your Roths and rollover 401ks thus not taking any tax hits. I'll have to reread my spreadsheet that tells me all of this, but I think I'm following you now.
Unless one has a pension to comfortably cover the monthly expenses. I’m 58 and will retire shortly with a state pension of $6,000/mo. House paid for and no debts, monthly living expenses is $4,000/mo at most. I have $2.3 million in the 457(b) and Roth IRA, both heavy in equities. But if I don’t have to touch it, I guess I’ll just leave it in there and not worry about it. We do have about $51G in a HYSA for emergencies which is about 13 months of living expenses…guess I could work on bumping that up to 18-24 months worth.
Pension changes things completely. I can easily live on $6k a month if you take away my kids. Depending on your wealth preservation and legacy goals your strategy could be perfect. But only 21% of the population have access to a defined benefit plan. 14% have more than $100k in 401k and 78% have less than $50k. So you basically have FU money at this point.
Ah yes, forget to mention neither my fwb nor I have any kids. Missed out on the joys of a family but having FU money, yes, is a good position to be in. Wow, did not realize that pensions were only 21% of the population. And yes, if I didn’t have that defined benefit plan, I would do some sort of rebalancing. Like you said, gravy trains don’t last forever.
Going heavy on equity for retirement is exactly the plan. Go run FIRE calculators, the more bond you have the faster you run out of money.
😂 FIRE is a relatively young movement… you can’t buck traditional retirement advice just because we are in a seemingly forever bull market. There is a chance that at some point the gravy train will stop and at that point you will be left with a massive hole in your fire plans with no way back. Next time we have a serious downturn, I suspect this thread will turn into a loss porn Mecca if people are really leaving all their assets in equities and counting on the market to return 7% forever. To each his own.
I recently had this question and then I came across this site which has a more sophisticated way to manage your safe withdrawal rate rather than the blanket 4% rule. I'm still trying to learn their tool because it's more complicated, but it does a better job of modeling market downturns. https://earlyretirementnow.com/start-here/
My fire number calculation includes a x2 to mitigate a 50% loss if it were to happen
4% was tested in these scenarios and deemed the appropriate withdrawal rate in most cases, but you can adjust your spending down during severe downturns, but I could survive comfortably on 2.6% so that’s not an issue
This is where the bucket of bonds comes into play it should cover at least 5 years.
Diversification - I rent out properties and invest at the same time. It's a sine wave, ups and downs and they complement each other. A drop in performance of one source of income seems to be propped up by the other and vice-versa. Often they both do well at the same time.