Author Topic: Crash During FI  (Read 2086 times)

channant

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Crash During FI
« on: August 05, 2018, 06:28:01 AM »
I get that during the accumulation phase if there's a crash you just gotta sit tight and hold the course, but what happens if you're living the life right smack in the middle of FI with most of your money in equities and the market starts plummeting? Imagine having been happy to have finally reached FI in 2005 and then a few years in...

terran

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Re: Crash During FI
« Reply #1 on: August 05, 2018, 06:41:21 AM »
Bad sequence of returns (a crash early in retirement when you need to withdraw and your portfolio hasn't had a chance to grow yet) is one of the biggest dangers, and having most of your investments in stocks is dangerous because of this. The answer seems to be to not have most of your investments in stocks early on. See the many posts on the topic starting at https://earlyretirementnow.com/2016/12/07/the-ultimate-guide-to-safe-withdrawal-rates-part-1-intro/ and part 19 in particular https://earlyretirementnow.com/2017/09/13/the-ultimate-guide-to-safe-withdrawal-rates-part-19-equity-glidepaths/

Retire-Canada

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Re: Crash During FI
« Reply #2 on: August 05, 2018, 07:42:08 AM »
Imagine having been happy to have finally reached FI in 2005 and then a few years in...

You better have a FIRE plan that can handle that situation.

Ya it would suck to see your portfolio go down like that. But you wouldn't panic because you thought about this and were ready for it.

Here's what I would do:

- remember I have 3 years full spending in bonds and other non-equity investments
- reduce my spending by eliminating big luxury items so I now have 4+ years of spending in those investments
- relax and not panic
- spend from my non-equities portion of the portfolio
- keep an eye on things
- re-evaluate every year
- if the recovery isn't happening as fast as I'd like I'd look for an easy PT gig to make $10K-$20/yr for a couple years
- keep having fun and enjoying my retirement

In your example I may not get to the PT gig part of my plan in the 2007/08 crash since I had enough SORR funds to span the crash and the start of the recovery.

Much Fishing to Do

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Re: Crash During FI
« Reply #3 on: August 05, 2018, 08:07:47 AM »
This is why most choose an extremely conservative SWR like 3-4%, to survive this happening instead of a more 'reasonable' 5-6% that would work just fine if your retirement timing isn't so unlucky.

I think all you can do is to know what it means for your money ahead of time so you really do know what your risk tolerance is in retirement (Even the experts that told people not to panic  still encouraged a lot of people to 're-visit' their risk tolerance in 2009, which of course just led to selling low for many.... )

When settling on my final asset allocation, I worked thru a lot of scenarios with back testing of the different portfolios I was considering, including both good ones like retiring in 2010, and tough ones like retiring in 2000 to see what the balance would look like thru time while taking steady 4% withdraws and no additional contributions.  It definitely gives you a much different picture than if you were not FIREd and was still contributing, as a basic 80/20 portfolio would total only be worth half of where you started in 2000 inflation adjusted, so is a good gut check to what you can handle and decide ahead of time what you would do (consider going back to work/cutting spending, etc)

Frankies Girl

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DreamFIRE

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Re: Crash During FI
« Reply #5 on: August 05, 2018, 11:02:31 AM »
I get that during the accumulation phase if there's a crash you just gotta sit tight and hold the course, but what happens if you're living the life right smack in the middle of FI with most of your money in equities and the market starts plummeting? Imagine having been happy to have finally reached FI in 2005 and then a few years in...

You should expect it to happen at some point and be prepared with an appropriate AA.  And if/when it happens, rebalance your investments including drawing down on your non-stock stash resources.
« Last Edit: August 05, 2018, 11:05:22 AM by DreamFIRE »

appleshampooid

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Re: Crash During FI
« Reply #6 on: August 06, 2018, 07:46:25 AM »
If you use an investing strategy that's based on the dividend income produced by your holdings, fluctuations in the market matter less. Most index funds pay quarterly dividends so if that's the core of your portfolio you'll still receive income despite the change in their underlying value.

Now if you're a capital appreciation player, you'd need to be concerned when the market crashes. This is why I don't recommend or own Amazon, Google, Facebook, Tesla, etc.  While 3 out of the 4 are very profitable, the only way you currently make money owning those stocks is if the price goes up.

Adopting a dividend growth approach allows you to do well regardless of the market direction. If you're interested, I wrote an article comparing the two approaches here: https://ron-henry.com/capital-appreciation-vs-dividend-growth-investing/
I wouldn't recommend owning FANGT ethire, other than the slice you get in your domestic equity index fund. capitalninja, do you recommend picking individual stocks that have historically paid high dividends, or do you use a fund like VHDYX to chase higher dividends?

Frankly I don't understand the obsession with dividends. jlcollinsnh did a great article on this: http://jlcollinsnh.com/2011/12/27/dividend-growth-investing/ . To crib from that article:
Quote
1. With vanishingly rare exception Index Investing bests all other methods.
2. Receiving dividends in a taxable account is a taxable event.
3. The payment of dividends represents a reduction in the companyís value that precisely matches the amount paid.
Much more detailed discussion if you follow the link.

I'll stick with broad index funds, which do pay some dividends after all.

spartana

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Re: Crash During FI
« Reply #7 on: August 06, 2018, 05:06:48 PM »
I FIREd shortly before the crash. Not fun to see your NW take an almost 50% nose dive. But before quitting I had set myself up to be able to live on a VERY low amount of money to cover barebones expenses if ever needed and had a lot of fluff in my budget I could easily cut for unneeded expenses like travel. I had enough in cash (laddered CDs and bonds) to last me a few years so didn't have to draw on investments or sell the paid off house.  Or get job or roommate -  options for more income if needed. My NW (house value and stash) bounced back to a higher level since then.  I prefer to be debt and mortgage free in FIRE and have lower expenses but that's just me and YMMV.

ETA I found living just on my barebones expenses for a few years really great. It was not a hardship at all and I enjoyed the low cost/free things I could do locally.
« Last Edit: August 06, 2018, 05:16:44 PM by spartana »

capitalninja

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Re: Crash During FI
« Reply #8 on: August 07, 2018, 04:33:01 PM »
The most important thing that dividends represent to an investor is income. They allow you to pay for expenses and enjoy life without having to sell your position in the company that generated them.

The fact that they create a taxable event is irrelevant. Taxes are and forever will be part of realizing income. Dividends allow the investor to pay the best possible tax rates on that realized income. If you're still very much in the accumulation phase and you want to temporarily shelter your dividend income from taxation then hold the securities in an IRA. Once you max that out, you're still left with buying them in your taxable account if you plan on continuing to grow your positions throughout the year.

In fact, there are some income-producing securities (MLPs for example), where it's actually better to hold them in a taxable account.

I'm not opposed to indexing. ~80% of my portfolio is made up of index funds. As great as they are, index funds traditionally do not produce income levels anywhere near what good dividend paying stocks or MLP units can.

Plus there are fees associated with high yield dividend funds/ETFs.
« Last Edit: August 07, 2018, 04:34:54 PM by capitalninja »

appleshampooid

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Re: Crash During FI
« Reply #9 on: August 07, 2018, 10:34:09 PM »
The fact that they create a taxable event is irrelevant. Taxes are and forever will be part of realizing income. Dividends allow the investor to pay the best possible tax rates on that realized income. If you're still very much in the accumulation phase and you want to temporarily shelter your dividend income from taxation then hold the securities in an IRA.
I disagree that it's irrelevant. With capital appreciation, the investor chooses when to realize the gains (including the possibility of realizing them while not paying any taxes on capital gains due to low income in retirement).

Given your limited portfolio exposure, using an IRA is a possibility. For other dividend chasers who build their whole portfolio around dividends, not so much.

Thanks for the response! I don't agree with your strategy, but I wish you good returns.

UndergroundDaytimeDad

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Re: Crash During FI
« Reply #10 on: August 08, 2018, 07:38:47 AM »
The most important thing that dividends represent to an investor is income. They allow you to pay for expenses and enjoy life without having to sell your position in the company that generated them.

The fact that they create a taxable event is irrelevant. Taxes are and forever will be part of realizing income. Dividends allow the investor to pay the best possible tax rates on that realized income.


Agree with the above.  Certainly because the topic is Post FI.  Without an earned income you are looking at taxes on dividends and capital gains.

The replies here are US focused, so I thought I would throw in some Can Con (Canadian Content).  https://www.theglobeandmail.com/globe-investor/investment-ideas/strategy-lab/dividend-investing/you-do-the-math-almost-50000-in-earned-dividends-0-in-tax/article4599950/ 
I am not familiar with US tax rules on dividends, but for Canadians, certainly couples, you can earn a very respectable household income from dividends that is incredibly tax advantageous, certainly versus earned income from employment. 

Malkynn

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Re: Crash During FI
« Reply #11 on: August 08, 2018, 08:01:23 AM »
Uh...yeah...you need to plan for this. Itís a critical part of understanding the whole process.

How you handle it will depend on your particular circumstances:

-If you are planning on a very lean FIRE, where you are anticipating needing to spend your full WR every year no matter what, then you need to plan for this extremely carefully and probably aim for a lower WR than 4%. 

-If you plan on a fat-FIRE, then you can probably just cut the fat on your spending and temporarily lower your spending drastically to adapt to massive market and net worth drops.

-If a defined benefit pension thatís indexed to inflation makes up a good chunk of your annual spend, that also drastically lowers sequence of returns risk.

-Additionally, some people are very open to geo-arbitrage or hopping back into paid work when the market takes a dive.

Everyone has a combination of circumstances that modulates their risk.
Personally, due to our particular combo of circumstances, DH and I have virtually no concern about sequence of returns risk. Between a pension, ability to work high paid casual work even in a recession, and a lot of fat in the budget, we could aim for a 6% WR and have no risk.

The only risk we have is divorce, which I personally think is a much higher risk on average than sequence of returns. Peteís divorce would devastate their FIRE finances if they hadnít continued to make money post-FIRE.

appleshampooid

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Re: Crash During FI
« Reply #12 on: August 08, 2018, 09:30:24 AM »
The only risk we have is divorce, which I personally think is a much higher risk on average than sequence of returns. Peteís divorce would devastate their FIRE finances if they hadnít continued to make money post-FIRE.
Whoa, MMM and Mrs. MMM are divorced? I pretty much only read this section of the forum.

Malkynn

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Re: Crash During FI
« Reply #13 on: August 08, 2018, 11:21:59 AM »
The only risk we have is divorce, which I personally think is a much higher risk on average than sequence of returns. Peteís divorce would devastate their FIRE finances if they hadnít continued to make money post-FIRE.
Whoa, MMM and Mrs. MMM are divorced? I pretty much only read this section of the forum.

No, they arenít divorced and I meant it more as a hypothetical that *if* they got divorced that they would have been screwed if they were actually living on their 4% and not earning additional income.

Iím always surprised that this subject never seems to come up among the endless debates over then various, less likely factors that could cause a ďFIRE failureĒ. Meanwhile, itís one of my only realistic concerns about early retirement and I struggle with how much I want to allow it to influence my financial decisions.

That said, as much as it was meant to illustrate a hypothetical point, Mrs MMM posted awhile ago that they separated, so itís not just hypothetical and itís triggered many thoughtful conversations between DH and I. Heís already once divorced, so we talk very openly about it.

Retire-Canada

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Re: Crash During FI
« Reply #14 on: August 08, 2018, 11:30:06 AM »
Iím always surprised that this subject never seems to come up among the endless debates over then various, less likely factors that could cause a ďFIRE failureĒ. Meanwhile, itís one of my only realistic concerns about early retirement and I struggle with how much I want to allow it to influence my financial decisions.

I've talked about it. My partner and I have separate FIRE plans that work single or together. If we are single there are fewer luxuries, but it's easier to focus on just what each person wants. Together there is more money, but it doesn't necessarily get spent as efficiently as each single person would do on their own. Not considering a relationship problem in FIRE would be a huge oversight in my books.

simonsez

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Re: Crash During FI
« Reply #15 on: August 08, 2018, 11:45:21 AM »
Iím always surprised that this subject never seems to come up among the endless debates over then various, less likely factors that could cause a ďFIRE failureĒ. Meanwhile, itís one of my only realistic concerns about early retirement and I struggle with how much I want to allow it to influence my financial decisions.

That said, as much as it was meant to illustrate a hypothetical point, Mrs MMM posted awhile ago that they separated, so itís not just hypothetical and itís triggered many thoughtful conversations between DH and I. Heís already once divorced, so we talk very openly about it.
Agree, divorce definitely seems to be an underrated force as it comes to financial planning.  It seems the expectation is, honestly, to not expect divorce (or not expect it again or to not be that ugly, etc.) due to the brilliance of the financial plans laid out. /eyeroll  But part of that has to be selection bias, it's hard to talk about or plan for and if you are going through a hard time, you're definitely not racing to your keyboard to blab to Internet strangers about how this affects your FIRE plans.

You do get some real talk in the Journals, though.  Unfortunately, it is always after the marriage/relationship crumbled and you are reading about the aftermath.

ChpBstrd

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Re: Crash During FI
« Reply #16 on: August 08, 2018, 12:31:28 PM »
In a crash, you spend down your bonds/cash avoiding the sale of shares whenever possible until they again reach a reasonable price. Expect large dividend cuts to follow a crash/recession by a couple quarters.

Most big crashes recover in 2-3 years. If you had a $1M stache, $40k/year in nonnegotiable spending, and a 12% bond allocation, you could spend your bonds and exit a 3 year dip with the exact same number of shares you started with.

Actually you come out better than that. If your original $880k in equities throws off 1% in dividends (that's factoring in a huge dividend cut, index-wide) you exit those difficult 3 years having sold only about 94k of your bonds.

So on the imaginary day in 3 years when everything returns to their pre-crash levels at the same time, your shares are again worth $880k and your remaining bonds would be about $26k. Your now-$906k stache took a hit, but your retirement is secure. Yes, your WR is now 4.4% instead of 4% and your allocation is 3% bonds instead of 12% bonds, but your shares are restoring their dividends and growing faster in an economic environment where the underbrush has burned off. Your survival at this WR and allocation is still a very high probability, and chances are good you'll see $1M again in a year or two. Crashes tend to be followed by several years of great returns, so it's a good thing you held onto your shares!


MustacheAndaHalf

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Re: Crash During FI
« Reply #17 on: August 09, 2018, 09:31:25 AM »
...  right smack in the middle of FI with most of your money in equities ...
Why does that situation seem like a good idea to you?  If you look at Vanguard's target date funds, they hold 10% bonds when retirement is far away.  But when retirement is even 2 years away (Vanguard Target 2020), Vanguard holds 46% bonds and only 54% stocks.

Or you could look to Fidelity.  Fidelity's target date funds also use 10% bonds for investors far from retirement.  But Fidelity Freedom 2020 holds 32% bonds and 13% cash - again close to 50/50 stocks/bonds for people ready to retire.

So it's worth questioning your premise - why would you enter retirement before you have a significant amount of your portfolio in bonds?  And in case you don't trust two of the largest holders of retirement accounts and their billions in assets, you can also see for yourself.  Vanguard has a nest egg calculator that lets you experiment with withdrawal rate and stock/bond mixture.
https://www.vanguard.com/nesteggcalculator

Retire-Canada

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Re: Crash During FI
« Reply #18 on: August 09, 2018, 09:35:40 AM »
So it's worth questioning your premise - why would you enter retirement before you have a significant amount of your portfolio in bonds?  And in case you don't trust two of the largest holders of retirement accounts and their billions in assets, you can also see for yourself.  Vanguard has a nest egg calculator that lets you experiment with withdrawal rate and stock/bond mixture.
https://www.vanguard.com/nesteggcalculator

Because a high % of bonds lowers your success rates against historical market data. It feels safe, but it's actually a more risky allocation.