Author Topic: What is the appropriate time horizon to use for investing prior to FIRE?  (Read 14724 times)

brooklynguy

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Please help me settle the following debate I'm currently having with myself.

Let's assume you have decided that $X is your FIRE number.  You have thoroughly done your homework, and you are completely comfortable that you can safely retire with a stash equal to $X.  Accordingly, when your stash hits $X, you will pull the trigger on FIRE.

Let's also assume you are pretty close to reaching FIRE.  You've already got 75% of $X.  You estimate that it will take another two years to save up the remaining 25% (ignoring returns on your investments).

Finally, let's assume that you are pretty young (maybe 30 years old) and your desired asset allocation upon retirement is 80% stocks or some percentage north of that.

Would it be a rational decision to invest your stash today as if your time horizon is only two years, rather than the rest of your life?  (Meaning you would invest in relatively low-risk, low-return assets, just as if you were going to need to access all of those funds in two years--so something close to 100% cash or bonds.)  After all, if you've already decided that, come hell or high water, you are going to commence retirement when your stash hits $X, and you are only two years away, then increasing your stock allocation now is really just a gamble to shorten the remaining time until retirement that comes with a fairly high risk of instead increasing your remaining time until retirement.  The most you can save yourself is two years, but you also stand to lose time, potentially delaying retirement by even more than two years.  So you might decide that it makes not to take the risk and put all your funds in cash until you hit $X, at which point you will promptly commence retirement and shift to an 80/20 stock/bond allocation.

Now, my answer to this argument is that it's the wrong way to think about this.  The time horizon for your current investments is in fact not two years but the many decades that constitute the remainder of your life.  And, by mentally rearranging things this way, you are increasing your exposure to sequence of returns risk (if the market goes up in the remaining two years to retirement, you've missed out on those gains; if the market goes down in the remaining two years, you've missed out on buying assets while they were on sale)--on the other hand, if we stick with our assumption that you are confident in your FIRE number, the sequence of returns risk issue shouldn't matter, because sequence of returns risk has already been accounted for in your determination that $X is a safe number to retire on.

Anyone have any thoughts on this?

Fallenour

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #1 on: December 12, 2014, 10:54:56 AM »
To address all your concerns in a rapid and simple fashion:

RE: 40
Stock ETF: 40
Bonds and Treasuries: 10
Cash: 10

All of those represent % of Amount, which is how much of the total of your "X" is. Those percents will allow to mitigate your risks, your worries, and your concerns on markets gains/losses, and lost potential incomes due to time.

Appreciation + ETFs allow your money to grow with time, and with markets, while through the RE allowing you to continually collect monthly income, and have a "job" so that you dont lose your mind (Your only 35 O.o)

Bonds and treasuries for stability (russias returns at the moment for longer terms are at 10.5-14%).

The cash allows for liquid capital for emergencies with your RE, as well as any "needs and/or wants" you might have during retirement.

Please exercise caution when using the cash pool (I know you're going to >.>), as well as for your bonds funds (you'll end up swapping to shorter terms for faster access, people always do >.>)

Hope that helps.

Runge

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #2 on: December 12, 2014, 11:00:34 AM »
I think you should stick to the asset allocation that you determined was suitable for you using cFIREsim and/or FIRECalc. Doing this helps to solidify your $X. Since the simulations have shown that your allocation, $X, and withdrawal amount will hold throughout your retirement, why change the equation by changing your allocation?

Determine your allocation, $X, and withdrawal rate and stick to it before and after retirement, because if you switch to a more conservative allocation, then you'll likely not get the returns needed to weather any storms over the long-haul.

Maybe I'm over-simplifying it, but that's how I see it.

matchewed

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #3 on: December 12, 2014, 01:02:16 PM »
No it wouldn't be rational in my opinion. What you have control over and what is determining your time to hit $X is your savings rate. Increasing your volatility in order to shave off a negligible amount of time is silly.

Essentially the use for investing prior to FIRE is not important. It is solely the savings rate which matters. Investing is (should be) knowledge for the long term success of FIRE not actually hitting the number while working.

It could also be thought of as saving is the tool which gets you to FIRE while investing is the tool which you use after you FIRE.

brooklynguy

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #4 on: December 12, 2014, 01:16:29 PM »
Matchewed, you seem to be arguing for the opposite position.  The question was whether it might be rational to decrease volatility in order to avoid delaying retirement.  (The hypothetical investor's desired asset allocation for the long term is 80/20 stocks/bonds, and the question was whether it might make sense to use a much more conservative allocation (like 100% cash or short-term bonds) in the two years leading up to FIRE.)

mxt0133

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #5 on: December 12, 2014, 01:36:00 PM »
For me personally I might dial down the equities and riskier assets as I get close to FIRE, like 1-3 year out, and increase my bond portion to 15-20% to reduce volatility.  Withing my bond allocation I would put 5-7% in shorter duration funds which will be used to fund the following years expenditures and of course re-balance as I draw down.

matchewed

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #6 on: December 12, 2014, 01:37:27 PM »
Sorry misread. I stand by my statements even if they don't apply to the question.

Wade Pfau discussed strategies for risk mitigation at near retirement in a similar manner, where one would increase their bond percentage right after retirement. I still believe that the main driver being your savings rate that your AA is a smaller determinant as to when you'll FIRE, however it is a large determinant as to how long your FIRE will last.

skyrefuge

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #7 on: December 12, 2014, 02:30:52 PM »
if you've already decided that, come hell or high water, you are going to commence retirement when your stash hits $X

I think this assumption is valid for essentially nobody in the real world, and without it, the rest of the hypothetical falls apart.

To the extent that anyone ties their retirement date to a trigger that cannot be disarmed, it's almost always going to be a time-based event rather than a dollar-based event (45th birthday, when I finish this major project next July, etc.) Dollars fluctuate so rapidly from day to day, and $X in the stock market in 2009 felt completely different than $X in the stock market in 2014, that strictly targeting a dollar amount makes no sense. Picking a time-based event instead means that your gun is less-likely to fire based on a freak anomaly, and regression-to-mean makes it safer. Yes, the time-based trigger must be informed by a dollar amount, but shifting to a date is a way to let things average out a bit more.

Imagine two people in 2007. Mr. A, making reasonable projections for investment returns, sets up his trigger for 2009, and Mr. B, with a smaller portfolio, sets up his trigger for 2014. Mr. A's portfolio on trigger-day was surely much smaller than he expected it to be, while Mr. B's portfolio was probably right around his projections. But Mr. A's retirement is probably going as planned, and much better than if he spent another 5 years working in order to get to his originally projected $X amount.

If you accept that a time-based trigger makes more sense than a dollar-based trigger, then the idea of pulling any "tricks" to hit a particular dollar amount seems rather pointless, and shifting around asset allocation before and after retirement would actually prevent the time-based regression-to-mean from happening, since you'd be changing your mean around.

Furthermore, in your example, it makes no sense to ignore investment returns in your last two years prior to FIRE. I appreciate matchewed's reminder that saving is generally more important than investing for FIRE, but as the FIRE date approaches, investing does become more important than saving. My investment returns over the last few years have been at least as important to my net worth increase as my added savings. And thus, if you're ignoring your investment returns when determining how "close" you are to FI time-wise, you're essentially deciding to work longer than necessary. Why work longer and shift your investments more conservative for that period? Though I guess doing it that way, you essentially are using a time-based trigger in disguise; instead of using time to smooth out market volatility, you're smoothing it out by ignoring it!

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #8 on: December 12, 2014, 02:38:24 PM »
I've divided my FIRE stash into two components- short term (<7 years) and long term (>7 years). Any money that I know I'm going to need to spend in the short term, I've invested in 'safe' investments (i.e. fixed interest, bonds, cash). My long term stash is invested in investments with more potential reward, but also more risk. I've blogged about it here:

http://livingmyrichlife.wordpress.com/2014/10/15/the-secret-of-the-golden-buckets/

brooklynguy

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #9 on: December 12, 2014, 03:34:04 PM »
if you've already decided that, come hell or high water, you are going to commence retirement when your stash hits $X

I think this assumption is valid for essentially nobody in the real world, and without it, the rest of the hypothetical falls apart.

I'm not so sure about that.  I'll give you that this assumption is most likely not valid for the vast majority of us, because we are all humans subject to human psychology.  Just about anyone who claims to have established a dollar-based trigger will start second-guessing him/herself and disarm the trigger if and when it gets activated primarily as a result of a significant market run-up (rather than accumulation of savings).  But for the sake of the hypothetical, let's assume we are able to operate with robotic, Vulcan logic (the same way you like to say that for such a person, for sufficiently long-term investing, a 100% stock allocation makes the most sense, while bonds serve no purpose beyond operating as a psychological security blanket (which I agree with)).


To the extent that anyone ties their retirement date to a trigger that cannot be disarmed, it's almost always going to be a time-based event rather than a dollar-based event (45th birthday, when I finish this major project next July, etc.) Dollars fluctuate so rapidly from day to day, and $X in the stock market in 2009 felt completely different than $X in the stock market in 2014, that strictly targeting a dollar amount makes no sense. Picking a time-based event instead means that your gun is less-likely to fire based on a freak anomaly, and regression-to-mean makes it safer. Yes, the time-based trigger must be informed by a dollar amount, but shifting to a date is a way to let things average out a bit more.

Imagine two people in 2007. Mr. A, making reasonable projections for investment returns, sets up his trigger for 2009, and Mr. B, with a smaller portfolio, sets up his trigger for 2014. Mr. A's portfolio on trigger-day was surely much smaller than he expected it to be, while Mr. B's portfolio was probably right around his projections. But Mr. A's retirement is probably going as planned, and much better than if he spent another 5 years working in order to get to his originally projected $X amount.

If you accept that a time-based trigger makes more sense than a dollar-based trigger, then the idea of pulling any "tricks" to hit a particular dollar amount seems rather pointless, and shifting around asset allocation before and after retirement would actually prevent the time-based regression-to-mean from happening, since you'd be changing your mean around.


To the Vulcan robot, I don't accept that a time-based trigger makes more sense than a dollar-based trigger.  If you are going to project your retirement's likelihood of success on the basis of history (which is an admittedly imperfect way to do it, but there are no perfect methods of predicting the future), then a dollar-based trigger is better than a time-based trigger.  One can pick a dollar amount which (based on the assumption that the future is no worse than the past) can be expected to result in success Y% of the time (with the precise value for "Y" depending on one's individual comfort level).  By any measure, the dollar amount of your stash on the day you declare FIRE is a better indicator of your chances of success than the date on which you happen to retire.

I'm not quite following your example of Messrs. A and B.  If Mr. A retired as planned in 2009, with a stash much smaller than expected, why is his retirement going better than if he spent another 5 years working?  Do you mean it is "going better" in the sense that it exists at all (i.e., that he is retired rather than working)?


Furthermore, in your example, it makes no sense to ignore investment returns in your last two years prior to FIRE. I appreciate matchewed's reminder that saving is generally more important than investing for FIRE, but as the FIRE date approaches, investing does become more important than saving. My investment returns over the last few years have been at least as important to my net worth increase as my added savings. And thus, if you're ignoring your investment returns when determining how "close" you are to FI time-wise, you're essentially deciding to work longer than necessary. Why work longer and shift your investments more conservative for that period? Though I guess doing it that way, you essentially are using a time-based trigger in disguise; instead of using time to smooth out market volatility, you're smoothing it out by ignoring it!

I ignored investment returns only for the purpose of providing the data point of how much longer it will take the hypothetical person to accumulate X% in the absence of investment returns.  In other words, I wasn't making any assumption that the investment returns should in fact be ignored for those last two years.  Instead, they should be taken into account under the two alternatives--under the alternative of sticking with your long-term asset allocation, market returns might power you to the finish line in less than two years (or they may be negative, delaying your retirement beyond two years), while under the alternative of shifting to an ultra-conservative allocation until commencing retirement, market returns will be close to zero (and you will get to the finish line almost entirely through additional accumulation of savings).

deborah

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #10 on: December 12, 2014, 03:48:04 PM »
It depends on your situation. Initially I said - just do what you're going to do - put your savings into your post-retirement asset mix. Why would anyone be asking this question - it's what I did - isn't it?

Then I realised it was not what I did. My stupid HR department would not put part of my retirement savings into the place I wanted it to go, so I had to set up an account for 3 years that was only ever temporary. I could have put part of each pay into this account and transferred it the next day somewhere else, but I decided to leave it there. As it was only ever going to be in the account for 5 years, I chose an investment mix that is right for <5 years - not stocks. When I retired, the money was moved the next day to where I wanted it.

So, if you need to move your assets after you retire, put them into a short term investment that will keep its value. If you can, put your investments where they will be longer term.

Dodge

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #11 on: December 12, 2014, 10:21:02 PM »
It depends on how important that particular FIRE date is to you.  It's likely an 80/20 portfolio in two years will appreciate about 15-18% from its value today.  Is it worth leaving that on the table, to try and guarantee your FIRE date?

Tyler

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #12 on: December 13, 2014, 10:35:23 AM »
I personally don't like the idea that one should invest differently before and after they retire. It plays to all the wrong investing psychology. Stop looking for risky shortcuts to financial independence, and don't slam the brakes when you get there.  Just build a sustainable financial system you can stick to through the inevitable ups and downs, and stay the course.

arebelspy

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #13 on: December 13, 2014, 10:52:46 PM »
Your investment time horizon is the rest of your life.  You may want to get more conservative as you get older, but not as you get closer to FIRE, other than it relates to age.

If you FIRE at 40 with too conservative of a portfolio, you will get eaten alive by inflation.  (Inflation is the early retiree's #1 enemy, not market crashes... you can recover from a market crash, you can't recover from inflation - in other words, it is very likely the market will go back up, but deflation to gain back the power of your dollar is very unlikely.)

Plan with that in mind.  The fact that you're 2 years, or 5 years, from FIRE is not nearly as relevant as you're making it out to be.

The only thing that might change is if you do some sort of cash buffer or bond system for when you're FIREd.. then you can transition to that a year or two before.  But your FIRE AA should be planning for a long ER, and appropriately aggressive, within your risk tolerance, and so your pre-FIRE AA shouldn't have to adjust much at all.
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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #14 on: December 14, 2014, 09:35:42 AM »
Your investment time horizon is the rest of your life.  You may want to get more conservative as you get older, but not as you get closer to FIRE, other than it relates to age.

If you FIRE at 40 with too conservative of a portfolio, you will get eaten alive by inflation.  (Inflation is the early retiree's #1 enemy, not market crashes... you can recover from a market crash, you can't recover from inflation - in other words, it is very likely the market will go back up, but deflation to gain back the power of your dollar is very unlikely.)

Plan with that in mind.  The fact that you're 2 years, or 5 years, from FIRE is not nearly as relevant as you're making it out to be.

The only thing that might change is if you do some sort of cash buffer or bond system for when you're FIREd.. then you can transition to that a year or two before.  But your FIRE AA should be planning for a long ER, and appropriately aggressive, within your risk tolerance, and so your pre-FIRE AA shouldn't have to adjust much at all.


+1... Took me awhile to truly understand the significance of this but Arebelspy is spot on imho.

brooklynguy

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #15 on: December 15, 2014, 07:56:12 AM »
Your investment time horizon is the rest of your life.  You may want to get more conservative as you get older, but not as you get closer to FIRE, other than it relates to age.

If you FIRE at 40 with too conservative of a portfolio, you will get eaten alive by inflation.  (Inflation is the early retiree's #1 enemy, not market crashes... you can recover from a market crash, you can't recover from inflation - in other words, it is very likely the market will go back up, but deflation to gain back the power of your dollar is very unlikely.)

Plan with that in mind.  The fact that you're 2 years, or 5 years, from FIRE is not nearly as relevant as you're making it out to be.

The only thing that might change is if you do some sort of cash buffer or bond system for when you're FIREd.. then you can transition to that a year or two before.  But your FIRE AA should be planning for a long ER, and appropriately aggressive, within your risk tolerance, and so your pre-FIRE AA shouldn't have to adjust much at all.


This is true, but inflation is really only a major risk over the course of an early retiree's extended retirement, not during the two (or even five) year period leading up to FIRE.  In the original example, if you opted to go 100% cash for the last two years before FIRE and then switched to your desired long-term allocation (80/20 stocks/bonds) immediately upon commencing retirement, you aren't materially increasingly your exposure to inflation risk.  Your portfolio might suffer a bit due to inflation during those two years, and you might miss out on market returns during those two years (which, continuing with the assumption that you're using a dollar-based trigger for retirement, would in turn mean that you missed out on the opportunity to retire earlier than two years), but you've "guaranteed" yourself a retirement start date in two years with a portfolio equal to your target number (reduced in value by two year's worth of inflation, but you will be appropriately protected against inflation on a going forward basis).

I think the better explanation for why this scenario doesn't make sense is along the lines of what skyrefuge said--that it is almost contradictory to assume that a person who is willing to tie their retirement date to the hair-trigger of a specific dollar number is also unwilling to accept the risk of market fluctuations during the two years leading up to retirement.  After shifting to an ultra-conservative allocation during those two years in order to "guarantee" their retirement date, that person could end up in a situation where their portfolio drops immediately after retirement to a value even lower than what it was two years earlier when they were not yet comfortable retiring.  So it makes no sense to insure against the risk of delaying the time until you hit your magic number (at the cost of potentially increasing the time until you hit your magic number) when you have no insurance against falling below your magic number after commencing retirement anyway.

matchewed

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #16 on: December 15, 2014, 08:58:28 AM »
Inflation is still a risk for a two year cash position. If by chance you hit double digit inflation during your cash only period because you're trying to mitigate other risks and "guarantee" your FIRE date, you still won't be ready to FIRE.

Two back to back years of 10% inflation (assuming it affects you at that static amount) means an increase in expenses of 21%. Or just changing your expenses in the default values of cFIREsim by 21% moved your success rate from 93% to 74%.

I think it's good to know your number, but know it in relation to the criteria which will change it. In other words going more conservative doesn't guarantee anything and just shifts your risk to different places. A part of an AA is knowing and accepting your risks, why near FIRE is that acceptance changing?

mak1277

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #17 on: December 15, 2014, 11:22:30 AM »
Please help me settle the following debate I'm currently having with myself.

Let's assume you have decided that $X is your FIRE number.  You have thoroughly done your homework, and you are completely comfortable that you can safely retire with a stash equal to $X.  Accordingly, when your stash hits $X, you will pull the trigger on FIRE.

Let's also assume you are pretty close to reaching FIRE.  You've already got 75% of $X.  You estimate that it will take another two years to save up the remaining 25% (ignoring returns on your investments).

Finally, let's assume that you are pretty young (maybe 30 years old) and your desired asset allocation upon retirement is 80% stocks or some percentage north of that.

Would it be a rational decision to invest your stash today as if your time horizon is only two years, rather than the rest of your life?  (Meaning you would invest in relatively low-risk, low-return assets, just as if you were going to need to access all of those funds in two years--so something close to 100% cash or bonds.)  After all, if you've already decided that, come hell or high water, you are going to commence retirement when your stash hits $X, and you are only two years away, then increasing your stock allocation now is really just a gamble to shorten the remaining time until retirement that comes with a fairly high risk of instead increasing your remaining time until retirement.  The most you can save yourself is two years, but you also stand to lose time, potentially delaying retirement by even more than two years.  So you might decide that it makes not to take the risk and put all your funds in cash until you hit $X, at which point you will promptly commence retirement and shift to an 80/20 stock/bond allocation.

Now, my answer to this argument is that it's the wrong way to think about this.  The time horizon for your current investments is in fact not two years but the many decades that constitute the remainder of your life.  And, by mentally rearranging things this way, you are increasing your exposure to sequence of returns risk (if the market goes up in the remaining two years to retirement, you've missed out on those gains; if the market goes down in the remaining two years, you've missed out on buying assets while they were on sale)--on the other hand, if we stick with our assumption that you are confident in your FIRE number, the sequence of returns risk issue shouldn't matter, because sequence of returns risk has already been accounted for in your determination that $X is a safe number to retire on.

Anyone have any thoughts on this?

I've been thinking a lot about this very question....right now I have a target RE date in mind, and I know that I can hit my SWR target in that time frame through savings alone.  The primary threat to my RE date is a large market crash/correction/downturn.

Here are two questions I've been asking myself:

1) If the market did take a fairly significant downturn, would I be willing to retire at a higher SWR than planned, knowing (hoping?) that I was retiring at a lower point in market valuation?

2) If I did switch everything to cash until my RE date, how hesitant would I be to pull the trigger on going back to an 80/20 (or whatever) allocation after RE date?

Personally, I'm not concerned too much with missing out on possible gains over the period between now and RE date, because all I will be doing is increasing my safety net (decreasing my SWR).  For me, the date is set, not the dollar amount.  I do think it's ...weird?...to actually become significantly more aggressive in my investments after retirement, though.  My plan is to stick with my post-RE asset allocation and ride it out, even though the idea of even one more year at work is distasteful.

brooklynguy

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #18 on: February 24, 2016, 12:30:20 PM »
I'm reviving this old thread because Kitces just put out a new post on exactly this topic:

"Retirement Date Risk - The Impact of Sequence of Returns Risk on Those Still Accumulating for Retirement"

In it, he makes the case for why it might make sense for someone who is approaching retirement and who wants to avoid the risk of materially delaying retirement to dial down the volatility/equity exposure of their portfolio.  It's an interesting read, but ultimately I'm still in the "continue investing for the long-term even as you approach retirement" camp, for all the reasons discussed above, and the following in particular:

I think the better explanation for why this scenario [i.e., shifting to an extra conservative allocation upon nearing retirement] doesn't make sense is along the lines of what skyrefuge said--that it is almost contradictory to assume that a person who is willing to tie their retirement date to the hair-trigger of a specific dollar number is also unwilling to accept the risk of market fluctuations during the two years leading up to retirement.  After shifting to an ultra-conservative allocation during those two years in order to "guarantee" their retirement date, that person could end up in a situation where their portfolio drops immediately after retirement to a value even lower than what it was two years earlier when they were not yet comfortable retiring.  So it makes no sense to insure against the risk of delaying the time until you hit your magic number (at the cost of potentially increasing the time until you hit your magic number) when you have no insurance against falling below your magic number after commencing retirement anyway.

arebelspy

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #19 on: February 24, 2016, 12:55:03 PM »
I'm reviving this old thread because Kitces just put out a new post on exactly this topic

I don't even know how you remember that these old threads exist when you find new information for them, but I'm glad you do.  Thanks for posting!

After reading Kitces.... I still agree with us.  :)
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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #20 on: February 24, 2016, 01:38:01 PM »
Brooklynguy, I think it's a valid idea that's worth exploring further. 

Sequencing risk is highest in the early years.  Retirement income planners have evaluated various glidepaths, and surprisingly, an initial low risk portfolio with a rising equity glidepath in later years can reduce failure risk & improve the probability of a successful outcome.  The idea is to decrease risk leading up to the retirement date, keep risk low in the early years of retirement, then continue adding risk as you age.  This strategy reduces sequencing risk in the early years.  In the later years as the stash grows and remaining years shrink, the plan can support more equity risk. 

Here's an enlightening paper written by pfau & kitces. 

https://www.onefpa.org/journal/Pages/Reducing%20Retirement%20Risk%20with%20a%20Rising%20Equity%20Glide%20Path.aspx

BBub

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #21 on: February 24, 2016, 01:46:58 PM »
Ok, nevermind - I see you already read a similar report.  It's an interesting idea though.  (full disclosure: this type of strategy appeals to me because I'm a wuss). 

I'm considering adopting some type of hybrid approach to incorporate the concept.  I certainly won't begin retirement with 30/70 mix, but I do plan on having 10x or so in laddered bonds.  Plan A is to live off the interest & dividends, but if timing is bad I'll have the added buffer of a bond coming due each year to support living expenses.  Probably another 2x cash in laddered CD's as well, which would be the first line of defense.

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #22 on: February 24, 2016, 02:25:47 PM »
Retirement income planners have evaluated various glidepaths, and surprisingly, an initial low risk portfolio with a rising equity glidepath in later years can reduce failure risk & improve the probability of a successful outcome.

Yeah, the rising equity glidepath idea makes sense to me assuming you're going to be having some conservative allocation in the first place, but I prefer to just stick with 100% equities forever (especially for superlong expected retirements).  The rising equity glidepath approach is really just trading more protection against one specific sequence of returns risk (poor early returns) for more exposure to another (good early returns/high early inflation (while you're tilted towards conservative assets) followed by poor later returns (while you're tilted back towards equities)).

opnfld

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #23 on: February 24, 2016, 03:04:41 PM »

Here are two questions I've been asking myself:

1) If the market did take a fairly significant downturn, would I be willing to retire at a higher SWR than planned, knowing (hoping?) that I was retiring at a lower point in market valuation?

2) If I did switch everything to cash until my RE date, how hesitant would I be to pull the trigger on going back to an 80/20 (or whatever) allocation after RE date?

I'm in favor of a consistent allocation for the long term for the sake of simplicity and not inadvertently injecting additional risk.  But I've been asking myself question 1 a lot recently.  Does one mitigate sequence of return risks if you RE at a lower market valuation?

Another perspective - if at one point I hit my number, than drop below that number but continued to invest; has the risk of running out of money decreased?  I suppose it depends on the magnitude of the drop and other unpredictable factors.

I'm operating on a time-based trigger, but with an eye on a dollar-based trigger and attempting to build-in some flexibility with part-time work in case the latter compromises the former.

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #24 on: February 24, 2016, 03:10:18 PM »
Retirement income planners have evaluated various glidepaths, and surprisingly, an initial low risk portfolio with a rising equity glidepath in later years can reduce failure risk & improve the probability of a successful outcome.

Yeah, the rising equity glidepath idea makes sense to me assuming you're going to be having some conservative allocation in the first place, but I prefer to just stick with 100% equities forever (especially for superlong expected retirements).  The rising equity glidepath approach is really just trading more protection against one specific sequence of returns risk (poor early returns) for more exposure to another (good early returns/high early inflation (while you're tilted towards conservative assets) followed by poor later returns (while you're tilted back towards equities)).
My personal view is that the 100% equity approach is nice on paper, looking backwards.  But the level of resolve required during multi-year downturns, wars, recessions, pick your disaster.. is very high.  Especially on a 4% SWR.  Now, it would be a different story after a decade or two of stellar returns with a bloated stash & WR down in the 1-2% range.  But seeing a $1m nest egg reduced to $500k early on, even if temporary, seems like an unnecessary gut-check I'm not willing to endure.
« Last Edit: February 24, 2016, 03:13:30 PM by BBub »

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #25 on: February 24, 2016, 03:19:20 PM »
Retirement income planners have evaluated various glidepaths, and surprisingly, an initial low risk portfolio with a rising equity glidepath in later years can reduce failure risk & improve the probability of a successful outcome.

Yeah, the rising equity glidepath idea makes sense to me assuming you're going to be having some conservative allocation in the first place, but I prefer to just stick with 100% equities forever (especially for superlong expected retirements).  The rising equity glidepath approach is really just trading more protection against one specific sequence of returns risk (poor early returns) for more exposure to another (good early returns/high early inflation (while you're tilted towards conservative assets) followed by poor later returns (while you're tilted back towards equities)).
My personal view is that the 100% equity approach is nice on paper, looking backwards.  But the level of resolve required during multi-year downturns, wars, recessions, pick your disaster.. is very high.  Especially on a 4% SWR.  Now, it would be a different story after a decade or two of stellar returns with a bloated stash & WR down in the 1-2% range.  But seeing a $1m nest egg reduced to $500k early on, even if temporary, seems like an unnecessary gut-check I'm not willing to endure.

If you're gearing up for a long early-retirement, you'll need a large allocation to stocks. If you're 80/20 stocks/bonds, and your portfolio drops from $1m to $600k (instead of $500k) early on, will you really feel much better?

opnfld

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #26 on: February 24, 2016, 03:38:51 PM »
If you're gearing up for a long early-retirement, you'll need a large allocation to stocks. If you're 80/20 stocks/bonds, and your portfolio drops from $1m to $600k (instead of $500k) early on, will you really feel much better?
Not much, but at least you could rebalance.  Not possible with 100% equity allocation.

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #27 on: February 24, 2016, 03:53:32 PM »
If you're gearing up for a long early-retirement, you'll need a large allocation to stocks. If you're 80/20 stocks/bonds, and your portfolio drops from $1m to $600k (instead of $500k) early on, will you really feel much better?
Not much, but at least you could rebalance.  Not possible with 100% equity allocation.

Adding bonds to your portfolio for stability during a market crash? Great idea!
Adding bonds to your portfolio to increase returns with the re-balancing effect? Nope.

Look at the scenario above. Stocks fall 50%, your portfolio is now $600k (400k stocks and 200k bonds). You re balance. You are now $480k stocks and $120k bonds. Stocks double back to their original value. You now have $960k stocks and $120k bonds, for a total portfolio of $1080k.

Even during a best-case-scenario like stocks falling 50%, the re-balancing effect only gives you an extra 8% one-time bonus. A bonus which will likely be usurped by the 100% stock portfolio after a few years. If that crash doesn't happen during the first few years, you will forever be behind the 100% stock investor.

Buy bonds for stability, not return.

BBub

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #28 on: February 24, 2016, 03:58:12 PM »
Retirement income planners have evaluated various glidepaths, and surprisingly, an initial low risk portfolio with a rising equity glidepath in later years can reduce failure risk & improve the probability of a successful outcome.

Yeah, the rising equity glidepath idea makes sense to me assuming you're going to be having some conservative allocation in the first place, but I prefer to just stick with 100% equities forever (especially for superlong expected retirements).  The rising equity glidepath approach is really just trading more protection against one specific sequence of returns risk (poor early returns) for more exposure to another (good early returns/high early inflation (while you're tilted towards conservative assets) followed by poor later returns (while you're tilted back towards equities)).
My personal view is that the 100% equity approach is nice on paper, looking backwards.  But the level of resolve required during multi-year downturns, wars, recessions, pick your disaster.. is very high.  Especially on a 4% SWR.  Now, it would be a different story after a decade or two of stellar returns with a bloated stash & WR down in the 1-2% range.  But seeing a $1m nest egg reduced to $500k early on, even if temporary, seems like an unnecessary gut-check I'm not willing to endure.

If you're gearing up for a long early-retirement, you'll need a large allocation to stocks. If you're 80/20 stocks/bonds, and your portfolio drops from $1m to $600k (instead of $500k) early on, will you really feel much better?
I don't plan on an 80/20 mix when I begin retirement.  That was BG.  80/20 at the beginning of retirement is a bit too aggressive for me.  I'm perfectly comfortable being more aggressive than that now, but I'm still firmly in accumulation phase & adding heavily each month.

At the beginning of FIRE, I'm planning on something like 65 equity/ 30 fixed/ 5 cash with a 3% SWR.  (Oh, the horror).  I'll probably just not rebalance, which will have the effect of drifting my equity exposure up in the long run.  Basically, Plan A is to live off the dividend & interest income of ~3%, roll my maturing bonds over each year to the back rung of the ladder & let the equities ride.  If timing is bad, I'll still have some income from interest & dividends, plus about 12 yrs of regular liquidity via the CD's and maturing bond ladder.  If timing is good, after the first decade or so the equities will have doubled & I'll be way overfunded.  Here's some numbers to illustrate, as percentages can be difficult to visualize:

$650k Equities
$300k Bonds (10yr ladder)
$50k CD's
$1,000k Total Stash

$30,000 ann spending

BBub

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #29 on: February 24, 2016, 04:13:30 PM »
Buy bonds for stability, not return.

This is true in today's interest rate environment.

However, if rates increase again in the future there will be great money to be made in bonds.  Consider a 30yr treasury selling for 2.6% today.  Assume rates double in 10yrs.  That bond will still have 20 years left to maturity and will likely sell for near half price on the secondary market.  So, you could then buy that very bond on the secondary market for $500, the yield would be 5.2%, it would mature in 20 yrs for $1,000 - which is a 3.5% annualized capital gain.  8.7% total return on a risk-free investment.  As long as the bond you buy isn't callable, bonds can be very profitable when when rates are high.

Interest Compound

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #30 on: February 24, 2016, 04:22:04 PM »
Retirement income planners have evaluated various glidepaths, and surprisingly, an initial low risk portfolio with a rising equity glidepath in later years can reduce failure risk & improve the probability of a successful outcome.

Yeah, the rising equity glidepath idea makes sense to me assuming you're going to be having some conservative allocation in the first place, but I prefer to just stick with 100% equities forever (especially for superlong expected retirements).  The rising equity glidepath approach is really just trading more protection against one specific sequence of returns risk (poor early returns) for more exposure to another (good early returns/high early inflation (while you're tilted towards conservative assets) followed by poor later returns (while you're tilted back towards equities)).
My personal view is that the 100% equity approach is nice on paper, looking backwards.  But the level of resolve required during multi-year downturns, wars, recessions, pick your disaster.. is very high.  Especially on a 4% SWR.  Now, it would be a different story after a decade or two of stellar returns with a bloated stash & WR down in the 1-2% range.  But seeing a $1m nest egg reduced to $500k early on, even if temporary, seems like an unnecessary gut-check I'm not willing to endure.

If you're gearing up for a long early-retirement, you'll need a large allocation to stocks. If you're 80/20 stocks/bonds, and your portfolio drops from $1m to $600k (instead of $500k) early on, will you really feel much better?
I don't plan on an 80/20 mix when I begin retirement.  That was BG.  80/20 at the beginning of retirement is a bit too aggressive for me.  I'm perfectly comfortable being more aggressive than that now, but I'm still firmly in accumulation phase & adding heavily each month.

At the beginning of FIRE, I'm planning on something like 65 equity/ 30 fixed/ 5 cash with a 3% SWR.  (Oh, the horror).  I'll probably just not rebalance, which will have the effect of drifting my equity exposure up in the long run.  Basically, Plan A is to live off the dividend & interest income of ~3%, roll my maturing bonds over each year to the back rung of the ladder & let the equities ride.  If timing is bad, I'll still have some income from interest & dividends, plus about 12 yrs of regular liquidity via the CD's and maturing bond ladder.  If timing is good, after the first decade or so the equities will have doubled & I'll be way overfunded.  Here's some numbers to illustrate, as percentages can be difficult to visualize:

$650k Equities
$300k Bonds (10yr ladder)
$50k CD's
$1,000k Total Stash

$30,000 ann spending

Got it. You'll have to save up an extra $250k ($750k to $1m) to make this happen (3% rule instead of 4% rule). Cfiresim says it takes an average 5 years for a 65/35 $750k portfolio to grow to $1m. If you're saving $2k a month, that becomes 4 years. Not that long in the overall scheme of things, but make sure you know what you're giving up.

P.S. If you compare it to the 5.2% Variable Withdrawal I'll be doing, that's an extra 6 years of working on average.

Interest Compound

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #31 on: February 24, 2016, 04:27:20 PM »
Buy bonds for stability, not return.

This is true in today's interest rate environment.

However, if rates increase again in the future there will be great money to be made in bonds.  Consider a 30yr treasury selling for 2.6% today.  Assume rates double in 10yrs.  That bond will still have 20 years left to maturity and will likely sell for near half price on the secondary market.  So, you could then buy that very bond on the secondary market for $500, the yield would be 5.2%, it would mature in 20 yrs for $1,000 - which is a 3.5% annualized capital gain.  8.7% total return on a risk-free investment.  As long as the bond you buy isn't callable, bonds can be very profitable when when rates are high.

Sure. If we assume bonds have a great return, they will have a great return. :-P

My point is that stocks always have a higher expected return than bonds. If bonds are giving 8.7%, we can expect something like 11-12% from stocks. Either way, you don't pick bonds if you're trying to maximize return.

opnfld

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #32 on: February 24, 2016, 05:01:57 PM »
If you're gearing up for a long early-retirement, you'll need a large allocation to stocks. If you're 80/20 stocks/bonds, and your portfolio drops from $1m to $600k (instead of $500k) early on, will you really feel much better?
Not much, but at least you could rebalance.  Not possible with 100% equity allocation.

Adding bonds to your portfolio for stability during a market crash? Great idea!
Adding bonds to your portfolio to increase returns with the re-balancing effect? Nope.

Look at the scenario above. Stocks fall 50%, your portfolio is now $600k (400k stocks and 200k bonds). You re balance. You are now $480k stocks and $120k bonds. Stocks double back to their original value. You now have $960k stocks and $120k bonds, for a total portfolio of $1080k.

Even during a best-case-scenario like stocks falling 50%, the re-balancing effect only gives you an extra 8% one-time bonus. A bonus which will likely be usurped by the 100% stock portfolio after a few years. If that crash doesn't happen during the first few years, you will forever be behind the 100% stock investor.

Buy bonds for stability, not return.
You are right of course, but I do think there is a psychological advantage to 1) losing $100K less on the dip, and 2) having the ability to take action in a down market.  Also, over the last 45 years, the return premium of an all-equity portfolio over 80/20 is ~1% annually.  That's significant over time - you are right about that - but it comes with 25% more volatility.  Anyway, i think we agree on the math and the theory and have come to different conclusions about personal strategy.  Keep up the good work!

MoonShadow

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #33 on: February 24, 2016, 05:07:58 PM »

Would it be a rational decision to invest your stash today as if your time horizon is only two years, rather than the rest of your life?

It seems to me, that this is what you are trying to do here...

http://www.dividendmantra.com/2015/10/quit-your-9-5-faster-the-auxiliary-fund/

Tyler

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #34 on: February 24, 2016, 05:18:36 PM »
As always when talking about "stocks" and "bonds", it's important to be specific.  The portfolio you choose will affect the average time horizon and uncertainty of your FIRE date in unexpected ways.  There's a lot more to it than simply racing to the finish line as fast as you can and then worrying about uncertainty when you get close.  I prefer the holistic approach of matching your portfolio to your ultimate goals from the start.

Here's something I wrote a little while back on the topic:

Your Ideal Route to Financial Independence May Be Off The Beaten Path

It includes a calculator that lets you see the projected FIREtime for your own portfolio and savings rate, and there are charts that show the historical accumulation process and relative uncertainty for a bunch of different popular lazy portfolios. 
« Last Edit: February 24, 2016, 05:25:08 PM by Tyler »

BBub

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #35 on: February 24, 2016, 05:40:55 PM »
Retirement income planners have evaluated various glidepaths, and surprisingly, an initial low risk portfolio with a rising equity glidepath in later years can reduce failure risk & improve the probability of a successful outcome.

Yeah, the rising equity glidepath idea makes sense to me assuming you're going to be having some conservative allocation in the first place, but I prefer to just stick with 100% equities forever (especially for superlong expected retirements).  The rising equity glidepath approach is really just trading more protection against one specific sequence of returns risk (poor early returns) for more exposure to another (good early returns/high early inflation (while you're tilted towards conservative assets) followed by poor later returns (while you're tilted back towards equities)).
My personal view is that the 100% equity approach is nice on paper, looking backwards.  But the level of resolve required during multi-year downturns, wars, recessions, pick your disaster.. is very high.  Especially on a 4% SWR.  Now, it would be a different story after a decade or two of stellar returns with a bloated stash & WR down in the 1-2% range.  But seeing a $1m nest egg reduced to $500k early on, even if temporary, seems like an unnecessary gut-check I'm not willing to endure.

If you're gearing up for a long early-retirement, you'll need a large allocation to stocks. If you're 80/20 stocks/bonds, and your portfolio drops from $1m to $600k (instead of $500k) early on, will you really feel much better?
I don't plan on an 80/20 mix when I begin retirement.  That was BG.  80/20 at the beginning of retirement is a bit too aggressive for me.  I'm perfectly comfortable being more aggressive than that now, but I'm still firmly in accumulation phase & adding heavily each month.

At the beginning of FIRE, I'm planning on something like 65 equity/ 30 fixed/ 5 cash with a 3% SWR.  (Oh, the horror).  I'll probably just not rebalance, which will have the effect of drifting my equity exposure up in the long run.  Basically, Plan A is to live off the dividend & interest income of ~3%, roll my maturing bonds over each year to the back rung of the ladder & let the equities ride.  If timing is bad, I'll still have some income from interest & dividends, plus about 12 yrs of regular liquidity via the CD's and maturing bond ladder.  If timing is good, after the first decade or so the equities will have doubled & I'll be way overfunded.  Here's some numbers to illustrate, as percentages can be difficult to visualize:

$650k Equities
$300k Bonds (10yr ladder)
$50k CD's
$1,000k Total Stash

$30,000 ann spending

Got it. You'll have to save up an extra $250k ($750k to $1m) to make this happen (3% rule instead of 4% rule). Cfiresim says it takes an average 5 years for a 65/35 $750k portfolio to grow to $1m. If you're saving $2k a month, that becomes 4 years. Not that long in the overall scheme of things, but make sure you know what you're giving up.

P.S. If you compare it to the 5.2% Variable Withdrawal I'll be doing, that's an extra 6 years of working on average.
Right.  The tradeoff is more time for more security.  Certainly not for everyone.

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #36 on: February 24, 2016, 05:43:04 PM »
As always when talking about "stocks" and "bonds", it's important to be specific.

With this sentence, I thought you were going to link to this article: http://portfoliocharts.com/2016/02/08/coffee-stocks-and-the-importance-of-being-specific/
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BBub

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #37 on: February 24, 2016, 05:45:55 PM »
Buy bonds for stability, not return.

This is true in today's interest rate environment.

However, if rates increase again in the future there will be great money to be made in bonds.  Consider a 30yr treasury selling for 2.6% today.  Assume rates double in 10yrs.  That bond will still have 20 years left to maturity and will likely sell for near half price on the secondary market.  So, you could then buy that very bond on the secondary market for $500, the yield would be 5.2%, it would mature in 20 yrs for $1,000 - which is a 3.5% annualized capital gain.  8.7% total return on a risk-free investment.  As long as the bond you buy isn't callable, bonds can be very profitable when when rates are high.

Sure. If we assume bonds have a great return, they will have a great return. :-P

My point is that stocks always have a higher expected return than bonds. If bonds are giving 8.7%, we can expect something like 11-12% from stocks. Either way, you don't pick bonds if you're trying to maximize return.
10-4. I know what u were getting at, sorry to trail off topic. Can't help myself sometimes.

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #38 on: February 24, 2016, 07:34:20 PM »
As always when talking about "stocks" and "bonds", it's important to be specific.

With this sentence, I thought you were going to link to this article: http://portfoliocharts.com/2016/02/08/coffee-stocks-and-the-importance-of-being-specific/

Apparently my language skills are in a temporary loop.  :) 

brooklynguy

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #39 on: February 25, 2016, 09:37:42 AM »

Would it be a rational decision to invest your stash today as if your time horizon is only two years, rather than the rest of your life?

It seems to me, that this is what you are trying to do here...

http://www.dividendmantra.com/2015/10/quit-your-9-5-faster-the-auxiliary-fund/

The strategy discussed in this article is a completely different animal, because it's premised on an underlying dividend-centric approach; instead of using a total-portfolio-dollar-value-based retirement trigger, the author is using a dividend-yield-based retirement trigger (because his underlying plan is to use dividend income (and only dividend income) to cover retirement expenses).

The proposed strategy in the article is to speed up time to retirement by building up a cash buffer to be used as a sinking fund to cover the shortfall that will exist when you retire before reaching the point when your dividend income will totally cover your expenses.  It's sort of a schizophrenic approach, in that it tries to solve one of the problems of using a dividend-focused "never eat into the principal" strategy (namely, that if you artificially limit your portfolio withdrawals solely to dividends, you will generally need to accumulate a bigger portfolio and thereby delay your time to retirement) by earmarking a separate bucket of funds purely for principal-eating.  A more sensible approach, in my view, would be to simply recognize the acceptability of "eating into principal" to begin with and use an approach based on total-return/total-portfolio-value in the first place.

The proposed strategy in the hypothetical in the OP (which is identical to the strategy discussed in the Kitces article) is simply to shift to a more conservative (less volatile) portfolio asset allocation as you near retirement in order to mitigate the risk that market fluctuations will delay your retirement, assuming that you're using a total-portfolio-dollar-value-based retirement trigger.  But, again, for all the reasons discussed upthread, I'm not a fan of that strategy.

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #40 on: February 25, 2016, 10:00:52 AM »
And the problem with that dividend strategy and using income to cover the gap is that you're assuming your dividends grow faster than your expenses (i.e. in real terms), especially in a quite short amount of time.  I think that's a dangerous bet.
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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #41 on: February 25, 2016, 10:25:26 AM »
We view the historical success rate of a 4% WR as a measure of confidence. When you mute the potential gains or losses incurred over the next two years using a less volatile investment strategy, you also change the confidence that your 4% WR will go the distance. Compounding isn't linear so missing a big run up will inevitably raise the risk that your 4% won't last because you have less money to be compounded. However, missing a big drop would only strengthen your position for future compounding, assuming that under either circumstance you intended to be 80% stocks/20% bonds or whatever your ratio is when you FIRE. The gamble is you can't know which way it will have affected you until after the fact. The result ends up looking similar to market timing.

The danger here is that it was the confidence in a 4% WR of X that made you comfortable with X in the first place. You're talking about messing with that confidence number (for better or worse), which might ultimately change the number X is. Again, only hindsight could tell you that.
« Last Edit: February 25, 2016, 10:46:13 AM by Mr. Green »

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #42 on: February 25, 2016, 11:06:14 AM »
Retirement income planners have evaluated various glidepaths, and surprisingly, an initial low risk portfolio with a rising equity glidepath in later years can reduce failure risk & improve the probability of a successful outcome.

Yeah, the rising equity glidepath idea makes sense to me assuming you're going to be having some conservative allocation in the first place, but I prefer to just stick with 100% equities forever (especially for superlong expected retirements).  The rising equity glidepath approach is really just trading more protection against one specific sequence of returns risk (poor early returns) for more exposure to another (good early returns/high early inflation (while you're tilted towards conservative assets) followed by poor later returns (while you're tilted back towards equities)).

I wrote this, but started thinking and not sure what's right. The more I think the more confused I get.
As the 4% WR is based on the one (or a few) worst case historical scenarios, if that one does not happen during your lifetime then you will end up with many times the starting portfolio. So if your 60/40 portfolio grow during the early years, and you keep the 4% WR the same (+inflation) hasn't your buffer increased? One could say no, as the SWR is based on this growth, to survive the down years. But how is that be different than working longer and retiring later with a lower WR?

e.g:
work years 0-5. Increase portfolio $1MM to $1.2MM. Retire at $40k/year
or
Retire year 0 with $40k/year of $1MM. Portfolio growth-withdraw year 5 is $1.2MM.

Ignoring a slight different due to inflation, which is safer?

The 4% SWR is also based on a 60/40 portfolio, so a how would that affect things? I'm thinking a equity allocation >60% in good times would increase your safety vs the research, while lower it in bad times? So if you go down to 60/40 for years 0-5 of retirement and times are good you've lowered your chance of success (but only down to that of the 4% SWR). In case of a drop you're obviously gone the other way. Now times are good more than they are bad, so does this makes sense do to? I'm not sure.

sorry for a confused, rambling post
« Last Edit: February 25, 2016, 11:16:12 AM by Scandium »

Eric

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #43 on: February 25, 2016, 11:08:35 AM »
I'm reviving this old thread because Kitces just put out a new post on exactly this topic

I don't even know how you remember that these old threads exist when you find new information for them, but I'm glad you do.

Right?!  The guy's a machine!  Mind like a steel trap!  :)

brooklynguy

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #44 on: February 25, 2016, 11:25:57 AM »
I'm reviving this old thread because Kitces just put out a new post on exactly this topic

I don't even know how you remember that these old threads exist when you find new information for them, but I'm glad you do.

Right?!  The guy's a machine!  Mind like a steel trap!  :)

I'm not sure this is necessarily something to be proud of.  See my post here (and the meta joke is that I remember that post itself!).

Tyler

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #45 on: February 25, 2016, 11:35:07 AM »
The 4% SWR is also based on a 60/40 portfolio, so a how would that affect things? I'm thinking a equity allocation >60% in good times would increase your safety vs the research, while lower it in bad times? So if you go down to 60/40 for years 0-5 of retirement and times are good you've lowered your chance of success (but only down to that of the 4% SWR). In case of a drop you're obviously gone the other way. Now times are good more than they are bad, so does this makes sense do to? I'm not sure.

The classic 4% rule was actually derived by studying a wide variety of different percentages of a stock fund and a bond fund.  Between like 30% stocks and 80% stocks, it makes a lot less of a difference than you think.  Higher percentages of stocks do increase average end portfolio value but with corresponding added uncertainty, so the SWR (that focuses on the worst cases, not the average) doesn't necessarily follow.

Any strategy that only invests in assets when they do well will obviously post fantastic withdrawal rates.  The problem is knowing the future ahead of time to be able to act on it.  Sure stocks tend to go up more than they go down, but because of the way compounding works it may take multiple up years to compensate for one down year.
« Last Edit: February 25, 2016, 11:37:51 AM by Tyler »

neil

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #46 on: February 25, 2016, 11:41:48 AM »
I really think looking at 1/2 of the picture (accumulation phase) and making investment decisions based on that is a little dangerous.  A lot of these methods of accelerating or guaranteeing certain aspects of retirement (FIRE or ordinary) just look like accounting tricks to make you feel better, and those tricks come at the cost of return.  Return you were relying on to retire.

I generally agree it is better to stay invested.  There are a number of people who don't really want to think of this stuff at all and blindly invest.  However, that doesn't mean valuation is unimportant to future returns (when they are eventually discovered in the future, of course).

Let's say you are 1 year away from your "number" and over the course of the year stocks fall enough to still keep you one year away.  A normal correction year, and an event that is relatively common.  Seems like a candidate for OMY syndrome.  But you have been buying these depressed shares and your current purchases have more value (even if you aren't sure how much).  I agree the value of your existing portfolio dominates these recent purchases, but you are still owning a higher percentage of the market than if it has been a "normal" or good year.  You can, of course, decide to OMY anyway, which is where the flexibility comes in.  But I wonder if it's strictly necessary to hit your number.  The alternatives seem worse to me.  If you were one year older, you retired and that correction hit in your first year - which is the worst time to start drawing from your portfolio.  If you did something conservative to decrease variation you probably had to work the extra year anyway.

I like charts like the ones Tyler made, but not for the obvious reasons.  I think by learning your retirement "range" is 12-20 years, I would generally be more conservative about retirement if I hit the number after 12 years and aggressive if I hit it in year 20 (or even call it early) because valuation and the time when my retirment ends are both probably not in my favor if I take the shorter path.  I think if you go conservative to stabilize the window (say 15-17 instead) because you absolutely hate your job or some other reason, you are giving up potential upside and you are creating a portfolio that might require a larger target in the first place, defeating the entire purpose.  I actually think it is fairly dangerous to just hit a number and call it, which is what these articles somewhat imply people do.

brooklynguy

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #47 on: February 25, 2016, 02:18:16 PM »
I actually think it is fairly dangerous to just hit a number and call it, which is what these articles somewhat imply people do.

The entire rationale behind the traditional SWR-based retirement approach is that it allows you to "just hit a number and call it" with a reasonable degree of safety.  Your protection against the possibility of retiring at an unlucky time is embedded in the conservativeness of the SWR itself (from which your target stash number is derived).  If you're using a SWR that can be expected to fare well under circumstances approximating history's worst-case scenarios, and you already have additional built-in external margins of safety, it starts to become absurd to delay retirement further in response to then-existing unfavorable market conditions (given that that's exactly what your plan is already designed to protect you against!) unless you are extremely pessimistic about the future.

Travis

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #48 on: February 25, 2016, 04:54:04 PM »
I actually think it is fairly dangerous to just hit a number and call it, which is what these articles somewhat imply people do.

The entire rationale behind the traditional SWR-based retirement approach is that it allows you to "just hit a number and call it" with a reasonable degree of safety.  Your protection against the possibility of retiring at an unlucky time is embedded in the conservativeness of the SWR itself (from which your target stash number is derived).  If you're using a SWR that can be expected to fare well under circumstances approximating history's worst-case scenarios, and you already have additional built-in external margins of safety, it starts to become absurd to delay retirement further in response to then-existing unfavorable market conditions (given that that's exactly what your plan is already designed to protect you against!) unless you are extremely pessimistic about the future.

I'm more worried about missing the mark on how my spending will change over time rather than how the market will perform. 

neil

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Re: What is the appropriate time horizon to use for investing prior to FIRE?
« Reply #49 on: February 25, 2016, 05:36:58 PM »
I don't mean to challenge studies or attempt to value the market.  But I am pretty sure there are additional correlations that can be made.  If you are going to use real life sequence-of-return examples to determine whether $X is good enough, it is also relevant what sequence of returns got you to $X in the first place.  After all, we do have the real data for what happened next.

Consider a retirement strategy with two characteristics:
1) At $X net worth, success rate is 90%
2) At $0 net worth, retirement target is 10-16 years out - average of 13 years.

I don't have the raw data to play with, but it is fairly obvious that failing retirement scenarios (start: 1929, late 1930s, late 1960s) were preceded by faster than average accumulation (1906 is an exception).  While I am not trying to market time or play for value, it completely makes sense to me that value is a factor here.  If I hit my target after the shortest expected time possible I think it would be fair to be more skeptical about pulling the trigger.

Turning this the other way around, I question whether there is really significant retirement date risk.  After hitting the average retirement period, is it strictly necessary to keep working to hit $X?  Maybe the historical success rate is 100% even with 90% of $X.  Looking at SWR studies only, it seems like calling it early is riskier, but not in the context of slower accumulation indirectly implying better value for my initial investments (that simply haven't been realized yet). 

Retirees from 1999-2000 haven't exactly "finished" yet, but they are the very clear winners as the fastest accumulators in history.  Without abandoning the 4% rule or earning more money, these portfolios are in similar positions to ones that have failed in the past.  Probably fine for 30 year retirements, but almost certainly doomed for 50 year ones.  People retiring today accumulated at about an average rate.  2015 retirees are probably fine.

I don't know that any of the information is actionable.  It's only a thought that bothers the mathematical part of my brain.