Author Topic: Last-minute pre-FIRE question RE market drop  (Read 1844 times)

OzzieandHarriet

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Last-minute pre-FIRE question RE market drop
« on: October 11, 2018, 02:32:26 PM »
I hope this isn't a dumb question ...

My husband will be retiring in two weeks. Our plan for cash flow for the next year or so is to sell some after-tax investments (total about $130k) and move the proceeds into a money market account and draw from that every month. We could also tap our 401k/tIRA money if necessary. We should be good with other cash already on hand through the end of the year.

I was going to wait to do this sale until January so it won't impact our taxable income for this year. But now I'm worrying that a big chunk of it will vanish before then. I'm sort of cursing myself that I didn't do it last month. Obviously I won't do it right now ... thinking I will stand firm and wait as planned.

Good idea? Or better to move the money before? If anyone has a crystal ball please chime in.

Capital gains amount will be something along the lines of $20k.

2Birds1Stone

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Re: Last-minute pre-FIRE question RE market drop
« Reply #1 on: October 11, 2018, 02:48:34 PM »
Stick to the plan. If the past two days have spooked you, you should probably re-evaluate your long term asset allocation.

OzzieandHarriet

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Re: Last-minute pre-FIRE question RE market drop
« Reply #2 on: October 11, 2018, 03:50:45 PM »
I dunno -- this is pretty spooky for someone who is just about to stop earning and start drawing.

terran

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Re: Last-minute pre-FIRE question RE market drop
« Reply #3 on: October 11, 2018, 04:46:37 PM »
Do you not own an fixed income investments? That's not something I'd be comfortable with after committing to retiring in only 2 months.

Abe

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Re: Last-minute pre-FIRE question RE market drop
« Reply #4 on: October 11, 2018, 08:16:54 PM »
Stick with the plan you are just as likely to have more money in January as to have less money. I have to agree that if you find this drop concerning, I strongly urge you to adjust your asset allocation towards more bonds. A 5% drop is well within the expected volatility of the stock market.

harvestbook

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Re: Last-minute pre-FIRE question RE market drop
« Reply #5 on: October 12, 2018, 05:52:05 PM »
If you're that worried, you can always dollar-cost-average out of the account--sell a chunk at a time leading up to next year instead of all at once. The math says the market is likely to be higher by then, but of course that's not a guarantee. If you don't have any bonds you can sell, I'd do whatever helps you sleep better at night.

Retire-Canada

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Re: Last-minute pre-FIRE question RE market drop
« Reply #6 on: October 12, 2018, 06:09:41 PM »
I dunno -- this is pretty spooky for someone who is just about to stop earning and start drawing.

The problem is this is a normal market fluctuation and so if it bothers you that much you may not have an investment plan that you can actually implement under real world conditions.

FrugalSaver

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Re: Last-minute pre-FIRE question RE market drop
« Reply #7 on: October 12, 2018, 08:16:12 PM »
No one mentions $140k in a MM and living off interest (presumably thatís only a portion of retirement plan). At 4% thatís not even $400/month pre tax

Freedomin5

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Re: Last-minute pre-FIRE question RE market drop
« Reply #8 on: October 12, 2018, 08:22:52 PM »
Yes, I thought most of the DIY FIRE sites suggest a 2-3 year cash cushion to reduce sequence of returns risk, or something like that. Millenial Revolution calls it the Yield Shield, which is designed specifically to protect you if the market drops shortly after you retire.

lhamo

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Re: Last-minute pre-FIRE question RE market drop
« Reply #9 on: October 12, 2018, 09:17:57 PM »
I think the OP's issue was that they were planning to have the 2-3 year cash stash set up once they FIREd, but they still hadn't gotten around to cashing out the investments to set it up. 

@FrugalSaver, the cash stash is typically used just for immediate expenses, and refilled with dividend payouts and capital gains, as needed/advantageous.   It's a cash flow plan, just part of the overall picture.  They aren't planning to live off the interest on $140k....

OzzieandHarriet

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Re: Last-minute pre-FIRE question RE market drop
« Reply #10 on: October 12, 2018, 09:29:15 PM »
No, the $130k isnít our entire stash! We have more than two million total.

pbkmaine

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Re: Last-minute pre-FIRE question RE market drop
« Reply #11 on: October 12, 2018, 09:36:41 PM »
Yes, I thought most of the DIY FIRE sites suggest a 2-3 year cash cushion to reduce sequence of returns risk, or something like that. Millenial Revolution calls it the Yield Shield, which is designed specifically to protect you if the market drops shortly after you retire.

Not just DIY FIRE sites. Most of the best fee-only financial planners recommend this as well.

MustacheAndaHalf

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Re: Last-minute pre-FIRE question RE market drop
« Reply #12 on: October 12, 2018, 09:53:43 PM »
Are you kicking yourself for not selling everything in your 401(k) and buying it back now?  Probably not, because that requires perfect knowledge of the stock market.  But so does your regret over not selling a month ago.  It's just not something you can predict.

I'd suggest going half with regret, and half with the original plan:  sell half of the amount you need now, and wait 2 months to sell the other half.  That will raise your tax bill, but reduce your uncertainty.  If the market drops again, you're partially taken advantage of that.  If it rises over the next two months, you are waiting to take advantage by selling the other half.

I'm assuming your overall asset allocation is at retirement level.  For example, the typical 60/40 stock/bond allocation makes more sense right before retirement than being 100% in stocks.

OzzieandHarriet

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Re: Last-minute pre-FIRE question RE market drop
« Reply #13 on: October 12, 2018, 10:12:43 PM »
Are you kicking yourself for not selling everything in your 401(k) and buying it back now?  Probably not, because that requires perfect knowledge of the stock market.  But so does your regret over not selling a month ago.  It's just not something you can predict.

I'd suggest going half with regret, and half with the original plan:  sell half of the amount you need now, and wait 2 months to sell the other half.  That will raise your tax bill, but reduce your uncertainty.  If the market drops again, you're partially taken advantage of that.  If it rises over the next two months, you are waiting to take advantage by selling the other half.

I'm assuming your overall asset allocation is at retirement level.  For example, the typical 60/40 stock/bond allocation makes more sense right before retirement than being 100% in stocks.

Thanks - good idea.
Yes, itís approximately 60/40.

ChpBstrd

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Re: Last-minute pre-FIRE question RE market drop
« Reply #14 on: October 12, 2018, 10:21:12 PM »
1) With anything near your net worth, working is optional and with market moves you're talking about the difference between having a metric shit-ton of stuff and merely a whole shitload of stuff.
     1.a It's just stuff you're worried about.
     1.b The value that Mr. Market would pay for your investments will vary 10% or more from month to month and this is normal.

2) Putting $130k in a money market account as a lump sum way of paying for the next 2 years' living expenses seems like an inefficient way of doing things. Do you have bond coupons, dividends, interest, etc. that you could live off of and keep the $130k invested, even if in something safe? Or could you sell investments monthly or biweekly rather than making these huge lump sum moves and holding so much in cash? If you maintain the practice of holding this much cash in MM accounts that pay next to nothing, your underperformance could add up to hundreds of thousands of dollars over a couple of decades. This is the silent market crash nobody talks about - all the money rotting in checking and money market accounts year after year. Worst of all, you don't escape being forced to sell investments this way because you still have to replenish the 2 years living expenses fund every year.

3) Do you remember January of this year when a bigger move occurred, a bunch of people sold out at the bottom, and a recovery occurred within a few months? What if the same occurred in the next few months? Look at a 10 year stock chart and compare the size of the dips.

4) Have you calculated a FIRE number and are you still above it?

5) Have you calculated the expected future earnings of your portfolio? That is, how much EPS each equity share contributes and how much yield each fixed income investment pays? This is a much more comforting and IMO more accurate way of looking at the sustainability of your portfolio, as compared to a "FIRE number" which is based on wildly fluctuating market prices.

OzzieandHarriet

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Re: Last-minute pre-FIRE question RE market drop
« Reply #15 on: October 13, 2018, 07:22:54 AM »
What do you all think of this explanation for the sudden drop, from Robert Reich? And what are the implications for the near future?

Quote
Why is the stock market dropping? Trump blames the Fed. Others blame Trumpís trade war with China. Baloney. The biggest reason is the moratorium on stock buybacks Ė a period starting two weeks before quarterly earnings are released during which companies donít buy back their stock because they have important information about their earnings thatís not yet available to the public, and they want to avoid any whiff of insider-trading.

In most years this blackout isnít a big deal. But it is this year because stock buybacks have become so important to maintaining share prices. Goldman Sachs estimates that the 500 biggest American companies alone will spend a whopping $770 billion on stock buybacks in 2018. Thatís up 44 percent from last year. So a temporary moratorium of buybacks could easily cause the market to plunge.

Decemberís huge corporate tax cut has gone mostly into stock buybacks, as many of us had predicted -- not into employee wages or new investment. Bottom line: The real problem is that recent stock market valuations have been based on steroidal infusions of cash, coming indirectly from the federal government, rather than on economic fundamentals.

ChpBstrd

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Re: Last-minute pre-FIRE question RE market drop
« Reply #16 on: October 13, 2018, 09:20:26 AM »
What do you all think of this explanation for the sudden drop, from Robert Reich? And what are the implications for the near future?

Quote
Why is the stock market dropping? Trump blames the Fed. Others blame Trumpís trade war with China. Baloney. The biggest reason is the moratorium on stock buybacks Ė a period starting two weeks before quarterly earnings are released during which companies donít buy back their stock because they have important information about their earnings thatís not yet available to the public, and they want to avoid any whiff of insider-trading.

In most years this blackout isnít a big deal. But it is this year because stock buybacks have become so important to maintaining share prices. Goldman Sachs estimates that the 500 biggest American companies alone will spend a whopping $770 billion on stock buybacks in 2018. Thatís up 44 percent from last year. So a temporary moratorium of buybacks could easily cause the market to plunge.

Decemberís huge corporate tax cut has gone mostly into stock buybacks, as many of us had predicted -- not into employee wages or new investment. Bottom line: The real problem is that recent stock market valuations have been based on steroidal infusions of cash, coming indirectly from the federal government, rather than on economic fundamentals.

There could be something to that explanation - if the market dropped during blackout periods in previous quarters. If that were the case, now would be the time to buy. Of course, you'd have to be the first person to figure that out in order to exploit the opportunity.

Of course, there is something economically significant occurring every day. Pundits make a living writing a blurb each day about how the market going up or down is correlated with one of the events. But it's all hindsight.

https://tradingeconomics.com/united-states/calendar

OzzieandHarriet

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Re: Last-minute pre-FIRE question RE market drop
« Reply #17 on: October 13, 2018, 10:21:58 AM »
What do you all think of this explanation for the sudden drop, from Robert Reich? And what are the implications for the near future?

Quote
Why is the stock market dropping? Trump blames the Fed. Others blame Trumpís trade war with China. Baloney. The biggest reason is the moratorium on stock buybacks Ė a period starting two weeks before quarterly earnings are released during which companies donít buy back their stock because they have important information about their earnings thatís not yet available to the public, and they want to avoid any whiff of insider-trading.

In most years this blackout isnít a big deal. But it is this year because stock buybacks have become so important to maintaining share prices. Goldman Sachs estimates that the 500 biggest American companies alone will spend a whopping $770 billion on stock buybacks in 2018. Thatís up 44 percent from last year. So a temporary moratorium of buybacks could easily cause the market to plunge.

Decemberís huge corporate tax cut has gone mostly into stock buybacks, as many of us had predicted -- not into employee wages or new investment. Bottom line: The real problem is that recent stock market valuations have been based on steroidal infusions of cash, coming indirectly from the federal government, rather than on economic fundamentals.

There could be something to that explanation - if the market dropped during blackout periods in previous quarters. If that were the case, now would be the time to buy. Of course, you'd have to be the first person to figure that out in order to exploit the opportunity.

Of course, there is something economically significant occurring every day. Pundits make a living writing a blurb each day about how the market going up or down is correlated with one of the events. But it's all hindsight.

https://tradingeconomics.com/united-states/calendar

I think what he was suggesting is that in other years there might be a drop but not such a large one, but the extent of the buybacks is having a greater effect now. I have no idea - he's an economist, I'm not.

Mr. Boh

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Re: Last-minute pre-FIRE question RE market drop
« Reply #18 on: October 13, 2018, 04:42:57 PM »
What do you all think of this explanation for the sudden drop, from Robert Reich? And what are the implications for the near future?

Quote
Why is the stock market dropping? Trump blames the Fed. Others blame Trumpís trade war with China. Baloney. The biggest reason is the moratorium on stock buybacks Ė a period starting two weeks before quarterly earnings are released during which companies donít buy back their stock because they have important information about their earnings thatís not yet available to the public, and they want to avoid any whiff of insider-trading.

In most years this blackout isnít a big deal. But it is this year because stock buybacks have become so important to maintaining share prices. Goldman Sachs estimates that the 500 biggest American companies alone will spend a whopping $770 billion on stock buybacks in 2018. Thatís up 44 percent from last year. So a temporary moratorium of buybacks could easily cause the market to plunge.

Decemberís huge corporate tax cut has gone mostly into stock buybacks, as many of us had predicted -- not into employee wages or new investment. Bottom line: The real problem is that recent stock market valuations have been based on steroidal infusions of cash, coming indirectly from the federal government, rather than on economic fundamentals.

After the blackout the buybacks will continue. If Reich is right that buybacks were in fact propping up markets, it stands to reason that the stock prices will go back up when the buybacks resume.

OzzieandHarriet

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Re: Last-minute pre-FIRE question RE market drop
« Reply #19 on: October 13, 2018, 09:22:19 PM »
I just want to make it clear - I don't think companies SHOULD be buying back their stock with our tax dollars. For one thing, it's obviously not sustainable. For another, it's not contributing to the well-being of any but the privileged (and I consider myself one of those). But if we're looking for an explanation, this seems plausible, doesn't it?

MustacheAndaHalf

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Re: Last-minute pre-FIRE question RE market drop
« Reply #20 on: October 14, 2018, 05:17:00 AM »
Economists can't predict the stock market.  The easy way to remember this is the joke "economists have predicted 9 of the last 5 recessions."  I respect Robert Reich and Robert Schiller, but they simply can't predict the stock market.

Also keep in mind the second problem: if the market drops -5% and then goes up +10%, missing that pair of events is worse than staying the course.  The extremely difficult task of predicting a crash is made more difficult by the need to predict the recovery, as well.

TomTX

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Re: Last-minute pre-FIRE question RE market drop
« Reply #21 on: October 14, 2018, 06:48:52 AM »
Economists can't predict the stock market.  The easy way to remember this is the joke "economists have predicted 9 of the last 5 recessions."  I respect Robert Reich and Robert Schiller, but they simply can't predict the stock market.

Agreed, except it's more like "economists have predicted 50 of the last 5 recessions."

Retire-Canada

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Re: Last-minute pre-FIRE question RE market drop
« Reply #22 on: October 14, 2018, 06:57:20 AM »
Agreed, except it's more like "economists have predicted 50 of the last 5 recessions."

Yes. You need an investment plan that deals with normal market fluctuations and doesn't depend on "experts" explaining what's going to work.  If you are not comfortable with a small drop like we just had it's time to reassess the plan and see if it's really appropriate for your needs.

OzzieandHarriet

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Re: Last-minute pre-FIRE question RE market drop
« Reply #23 on: October 14, 2018, 10:30:33 AM »
My anxiety was only with this relatively small amount that we need to sell soon because that's short term. Long term, for the rest of our stash, I'm not overly concerned.

lhamo

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Re: Last-minute pre-FIRE question RE market drop
« Reply #24 on: October 14, 2018, 11:46:30 AM »
Note that there is no law that says you MUST have the large cash stash from the get go.  If the market is still down (or lower) come January, you might want to just cash out enough for your first 3-6 months of expenses and see how it goes from there.  But if we see a bit of a rally before the end of the year, it might make sense to cash out a year or so of expenses and pay a bit more in taxes this year.

One of the big advantages of having a large stash is you have a ton of flexibility in how you deploy it.

ChpBstrd

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Re: Last-minute pre-FIRE question RE market drop
« Reply #25 on: October 14, 2018, 01:59:02 PM »
Note that there is no law that says you MUST have the large cash stash from the get go.  If the market is still down (or lower) come January, you might want to just cash out enough for your first 3-6 months of expenses and see how it goes from there.  But if we see a bit of a rally before the end of the year, it might make sense to cash out a year or so of expenses and pay a bit more in taxes this year.

One of the big advantages of having a large stash is you have a ton of flexibility in how you deploy it.

That's why I was thinking the O.P. could simply stay invested and withdraw smaller amounts for living expenses. In an era of $4 trades, what does it hurt to pay oneself on a biweekly basis? This is dollar-cost averaging in reverse. You can be assured you are not making a mistake with a large sum of money, you get to leave more money invested which will improve your odds of long-term success, and you can adjust your withdraws midstream to cover contingencies or take advantage of periods of relative frugality.

davisgang90

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Re: Last-minute pre-FIRE question RE market drop
« Reply #26 on: October 15, 2018, 04:26:31 AM »
I just want to make it clear - I don't think companies SHOULD be buying back their stock with our tax dollars. For one thing, it's obviously not sustainable. For another, it's not contributing to the well-being of any but the privileged (and I consider myself one of those). But if we're looking for an explanation, this seems plausible, doesn't it?

Companies aren't buying back their stock with our tax dollars.  There was a tax cut to the corporate tax rate to make businesses more competitive.  Corporations are using that savings for many things to include buy backs.