Author Topic: Asset allocation changes for approaching FIRE  (Read 1901 times)

bigchrisb

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Asset allocation changes for approaching FIRE
« on: August 03, 2017, 12:32:31 AM »
Hi all,

I'm rapidly approaching a trial FIRE date.  I keep debating about what (if anything) I should do to make the first couple of years of FIRE a higher probability of success.

Life situation: Married, me 35 DW 37.  First child due in October.  To date, both have been working full time.
All dollar figures are in Australian dollars, as that's my local currency.  If it matters, the current exchange rate is approx AUD$1=USD$0.80
Plan is to both take 6 months off after the arrival of kid 1. 
Following that, my wife is returning to her job, we are being posted to Europe for 3 years, and I'll be playing daddy daycare.  I'd like for us to both FIRE after the end of the posting, but my wife is yet to be convinced.

Income
Current:
(gross/pre-tax): Me $214k/year, wife $130k/year, investment income (shares dividends/rents) $130k.  Total ~$474k/year

Future:
Wife: $130k/year + free accommodation (3 years), investment income $160k (includes additional rent from PPOR).  Total $290k/year

Assets:
Stocks (in taxable / trust accounts): $1,815k
Property: $1,500k (approx $1m in PPOR which will be rented for the posting time, $500k investment apartment)
Superannuation (think 401k): $628k, mostly stocks
Other investments: $100k
Cash $60k
We don't count cars/personal effects etc
Total assets: $4,103k

Liabilities:
My investment loans: $500k
Wife's investment loans: $120k
Total liabilities: $620k

Net worth: $3,483k.

Our expenses are high in absolute terms, but low relative to income.  Expenses last year were $110k post tax between us, but this included about $50k in abnormal costs (wedding, surgery, pre-baby bucket list travel etc), for a steady state spend of about $60k of consumption. We also spend about $25k on investment loan interest.  Our savings rate has been in the 60%-75% range the last 5 years.

There is more info on my part of the expenses and assets in my journal for the voyeurs.

On paper, we can live off our investment income or my wife's salary alone, and will still have an effective ~50% savings rate.  In practice, we are stressing about the reduced income and reduced savings rate - my wife more than I. 

Our investments have been self made, so I'm comfortable with our general psyche that we will spend less than we earn.  There is also a safety net that we don't count, we are both likely to have moderate ($500k-$1m) inheritances at some stage. 

Worries/questions:
1.  We are worried about a substantive reduction in savings rate.  What coping mechanisms have others used for this psyche?
2.  We are worried about future unknown costs.  The costs of kids is an unknown to us, and I have a degenerative medical condition that will cause some disability at some stage in future, timeline unknown.
3. My wife thinks that we should reduce investment exposure for the next few years - kick the investment loans, increase cash holdings.  I'm of the view that our future savings rate is still likely to be in the ~50% range with me not working, or about $100k post tax.  With a continuing savings stream, I see that as our buffer, along with the ~$60k in cash, which is about a year's expenses.

Any feedback for us?  Apologies if this seems like a bunch of first world problems.

Peanutty

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Re: Asset allocation changes for approaching FIRE
« Reply #1 on: August 03, 2017, 10:17:53 AM »
Hmm, I'm not sure I understand the concerns honestly. Your expenses last year were $110k, with what you say was +/- $50k of abnormal expenses (travel, wedding). So your normal expenses are $60k/year? Even assuming you continue spending $110k per year (assume $50k for kids and medical, which to me seems pretty darn conservative), aren't you saying that RIGHT NOW you have $130k of passive investment income, from a stash that presumably will continue to grow? And regardless for the next 3 years you're looking to have an income of $290k and save a bunch of it and add to your stash.

I guess I don't understand your question. To me it seems pretty obvious that you can do whatever you want at this point, you're FI. Even if you continue spending $110k per year, it looks like you're good to go based off just your investment income alone, and not eating into any stash at all. Not touching your stash in FIRE seems like a pretty surefire way to make FIRE a success. Or am I missing something here?

bigchrisb

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Re: Asset allocation changes for approaching FIRE
« Reply #2 on: August 03, 2017, 05:40:01 PM »
Hmm, I'm not sure I understand the concerns honestly.

Ok, let me re-phrase the question.  The numbers in the spreadsheet or cfiresim look fine.  But yet I am still nervous, and my wife is highly dubious. 

I'm looking for advice on how to cross the gap between a good looking spreadsheet and happily taking the leap into FIRE.  We can't be the only ones that have a disconnect between the figures and the psychology.

I'm looking for any experiences that have helped to reduce the psychology gap, be it holding more cash, thinking about expenses differently, or pre-allocation of money to end uses.


Feivel2000

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Re: Asset allocation changes for approaching FIRE
« Reply #3 on: August 05, 2017, 03:06:39 AM »
You are nervous about what? Your wife has doubts about what? Not beeing able to keep up a 50%/100k savings rate while you FIRE?

Do you have other saving goals than FIRE? If not, your savings rate could go to 0% and you should not need to wory. You are able to live of your dividends, but you will make 130k per year AND  won't have any housing costs for three years.

Assuming you wouldn't get any dividends/rent, you could live for the next 38 years just by consuming your assets!

Relax!

(What kind of investing loans do you have? If it's anything else than mortages for rental properties, I would say it's a good time to get rid of them.)


deborah

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Re: Asset allocation changes for approaching FIRE
« Reply #4 on: August 05, 2017, 03:59:29 AM »
It is very nerve-wracking to try to believe a bit of paper which tells you something that nothing in your life has prepared you for. We are all told that people retire at 65, and that even then, a lot of people end up their lives poor. So something must be wrong with the piece of paper.

If your wife is in the government, I suspect she may be in the PSS. If so, State Plus offer free advice on the first session with a financial planner (and they know the government schemes - which a lot of planners don't, and they get them wrong). I did this before I left work, and told them what I was doing, and they said I was right. It was somebody else rather than just a piece of paper - and somebody totally independent of everyone else. If she's not in a defined benefit scheme, most other companies also give you a free first visit (I only recommend them because most financial advisors even here really don't understand the DB schemes). You can also talk to the Financial Information Service (which is located in Centrelink) - often called the FISOs. They will talk to anyone (but they won't offer ADVICE - although it sounds pretty close to me) - https://www.humanservices.gov.au/customer/services/financial-information-service

You might also find a disability investment person (you probably have done all this already) - I know there are such people here (the son of a guy I worked with got a settlement after he was severely disabled after a motor bike accident) - and they would have the knowledge to work out the likely costs of your degenerative disease, appropriate accounts for money for it, and how it could work out in costs over your lifetime. This could help with that unknown, because it is a big one.

The other thing that helped me was time. You have a three year gap, after your child is born, where you can both review your finances as regularly as you like and make sure that you are going in the direction you think you will.  It sounds like you have both agreed that this will happen, so it's not like you're stepping off the edge of a cliff tomorrow. The cliff won't appear for another three years. If you have both reviewed things enough between then and now, and things have gone smoothly, you should feel safe about the cliff. If it's been a rough ride, you will have three years of experience to work through it. But I suspect that it's just jitters.

bigchrisb

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Re: Asset allocation changes for approaching FIRE
« Reply #5 on: August 09, 2017, 07:13:54 PM »
Sadly, no defined benefit pensions for us.  My wife is in the public service, but post-dates the PSS and CSS. 

I did see one of the FISO's at Centrelink, who was pretty general in nature, and to be honest, not a great deal of use.

I also had a session at a fee for service financial planner.  They were semi-useful, but very super focused - following this I ended up making some post tax contributions, but not to the degree they were recommending - I was unconvinced that was leaving enough accessible outside super.

Re the loans, they are secured against residential property (so not callable), but are technically used to finance stocks.  Less blow up risk than margin.

Peanutty - thanks for the comment.  No, you aren't missing anything.  The numbers are clear cut.  However, my confidence in the numbers is what's low.  At the end of the day, its always going to be a bit of a leap of faith.

None the less, notice has now been given at work, so its going to happen.  Main things I'm doing to improve my confidence are padding cash accounts, and celebrating each dividend (and dividend increase) that gets announced. 

ZiziPB

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Re: Asset allocation changes for approaching FIRE
« Reply #6 on: August 10, 2017, 10:24:09 AM »
bigchrisb, I am just over 7 months away from FIRE and have a lot of the same feelings you are experiencing.  I've never lived off investments in my life so it's definitely an untested and unfamiliar territory.  Unfortunately, no matter what anyone says, until you experience it yourself, you will have doubts and fears.  At least that's how I'm feeling :-) 

I made a list for myself trying to convince myself that I will be fine.  Mine goes something like this:
- I have no debt and no future financial obligations for children
- I am planning for a withdrawal rate of less than 4%
- I am using a fairly conservative asset allocation (about 60/40 stocks to fixed income)
- I am planning to have 3-5 years of basic expenses in I bonds and CDs
- I am not including SS in FIRE calculations (I'll be 50 when I FIRE so I will get some SS but my numbers work anyway)
- I have built in flexibility in spending (I have a generous travel budget that can be scaled down or scrapped completely if need be)
- if the absolute worst case scenario happens and we have a complete meltdown of financial markets, I own a small farm where I can grow my own food ;-)



deborah

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lhamo

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Re: Asset allocation changes for approaching FIRE
« Reply #8 on: August 11, 2017, 04:43:21 AM »
You have leveraged your way to a healthy net worth that can more than support your living expenses. Congrats, you are FI! If it were me, I would be uncomforrable with the continued risk the loans represent. I would wipe those out and then see what happens to your nest egg the next few years while you are overseas.


Love that profile of Brandon. I have also found it interesting how little I think about money now compared to the run up to FIRE. I hope you have a similar experience. Enough really is enough.
Wherever you go, there you are

bigchrisb

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Re: Asset allocation changes for approaching FIRE
« Reply #9 on: August 13, 2017, 11:26:04 PM »
Hmmm, interesting list!  Probably increased rather than decreased the anxiety levels though, as I don't tick a number of these...

I made a list for myself trying to convince myself that I will be fine.  Mine goes something like this:
- I have no debt and no future financial obligations for children
Cross - I still have about $500k of debt, and first kid arrives in 7 weeks...
- I am planning for a withdrawal rate of less than 4%
Check - if my wife wraps up work after the overseas posting, we are at about 3%
- I am using a fairly conservative asset allocation (about 60/40 stocks to fixed income)
Cross - I'm closer to 100% stocks, depending on how you count your place of residence and loans.
- I am planning to have 3-5 years of basic expenses in I bonds and CDs
Cross - closer to 12 months in cash.  However, ~10 years in re-draw available from debt.  Less certain in times of crisis though. 
- I am not including SS in FIRE calculations (I'll be 50 when I FIRE so I will get some SS but my numbers work anyway)
Cross - Australia doesn't have SS.  I suspect I'll have too many assets for a govt pension.  I have superannuation factored into the above.
- I have built in flexibility in spending (I have a generous travel budget that can be scaled down or scrapped completely if need be)
Check
- if the absolute worst case scenario happens and we have a complete meltdown of financial markets, I own a small farm where I can grow my own food ;-)
Cross

I feel OK about the long term - I think our SWR is low enough that it should ride out most scenarios.  Add in some expenses flexibility and we should be right.

I think what is eating at me is the level of exposure to the short term - if there was a major pullback in equity markets in the next couple of years it won't be very pretty for me, as I'm somewhat leveraged, and won't have the firepower to go shopping for deals.

I think the answer for this is to sell off a little to reduce debt, along with limiting new investment over the next couple of years.  At the end of the day, between the two of us we will still have at least $100k/year of saving capacity for the next three years.   If things go really nasty in the markets, we can always tighten the belt and I can always try to find another job for a couple of years.
« Last Edit: August 13, 2017, 11:28:08 PM by bigchrisb »

powskier

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Re: Asset allocation changes for approaching FIRE
« Reply #10 on: August 15, 2017, 01:09:26 AM »
Your money situation is fine. You can do whatever you want. Don't look for a money solution to your problem.

Your mind or way of thinking is the problem. It is painfully obvious you have enough money. Your mind appears to be on some kind of auto pilot/train ride, get your mind off auto pilot. This is standard over achiever stuff.Go, go, go, succeed so much you don't even know how to stop.
Unplug. Meditate. Go on a LOOOONG holiday.