Author Topic: FI vessel  (Read 1683 times)

Uturn

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FI vessel
« on: September 16, 2017, 06:30:51 PM »
Let's say you are getting closer to FI.  Where do you park your stash?  I understand during wealth accumulation you should be in total market funds, or whatever you wealth building investment strategy says.  But where do you park money if you are 5 years our, or even have reached FI?  Drawing on investments must look different than wealth building. 

sokoloff

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Re: FI vessel
« Reply #1 on: September 16, 2017, 06:33:08 PM »
If you have 40+ years to live off the money, you need to have a LOT of it still in stocks for growth.

I plan to enter retirement still at 97+% equities.

koshtra

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Re: FI vessel
« Reply #2 on: September 16, 2017, 07:17:29 PM »
There's lots of ways to play it. One way would be to put everything into a range of blue-chip stocks with nice hefty dividends, in the 3 or 4 percent range, and just never touch the capital: those stocks only rarely cut their dividends -- but if they did, you'd just flex your frugality muscles and get by on whatever they return, until the dividends go back up. And in the long run they'll appreciate, and the dividends will get larger, though with a total return a little worse than the index funds. A nice psychological advantage to this is that you'd get the habit of treating your capital as sacred. You're *never* selling that stuff, so you don't even think about it. (I guess people do the same sort of thing with bonds, but I've never taken to bonds.)

Or you can just eat the risk and keep the index funds and ride the bumps. I'm kind of inclined to do that, because I'm more interested in handing stuff down to my kids than in minimizing my risk.

I think you really have to know what kind of investor you are. I've got thick skin: I just shrugged and held my stuff through the 2008 collapse, and didn't worry about it. Some people would find that impossible, or at least a stressor that would really torque their daily lives. You really have to imagine yourself, 75 years old and pretty unemployable, and think realistically about what you'd do if the market took a plunge at that point, and set things up for yourself accordingly.

Monkey Uncle

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Re: FI vessel
« Reply #3 on: September 17, 2017, 05:26:37 AM »
If you believe that the past holds some predictive power for the future, then cFiresim will tell you that the highest SWR is achieved with somewhere between a 60/40 and 80/20 stock/bond allocation for the duration of your retirement. 

See also the thread about rising equity glide paths, wherein you shift your stock/bond allocation to something like 50/50 near the beginning of retirement, then gradually move back to a heavier stock allocation (c. 80/20) as retirement proceeds.  The point of this exercise is to mitigate sequence of return risk early in retirement.

Laura33

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Re: FI vessel
« Reply #4 on: September 17, 2017, 07:17:58 AM »
So, I have been comfortable forever being 100% in stocks; never even been tempted to sell in a downturn, because I know I have plenty of time to recover.  However, the problem is that if I stay 100% in stocks, the need to take out living expenses every year would force me to sell in a downturn, because I'd need to cover my costs even when the market crashes.

So my current plan is to take a chunk of my savings -- say 3 years' living expenses -- and put it in something like a bond* or CD ladder.  In a normal year, as one set of bonds matures, I will sell off stocks and buy a new set of bonds maturing in another three years; in a bad year, well, I've got the next two years covered, so I can ride it out.  That will probably bring my overall allocation down to maybe 80% stocks/20% bonds, which I think still works with the 4% rule. 

And then I will probably keep extra cash in my bank account, just because it's me and I like cash on hand in case I need a new roof or something, but I'm not counting that towards my 4%.

* Individual bonds, not bond funds.

koshtra

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Re: FI vessel
« Reply #5 on: September 17, 2017, 10:06:04 AM »
So my current plan is to take a chunk of my savings -- say 3 years' living expenses -- and put it in something like a bond* or CD ladder.  In a normal year, as one set of bonds matures, I will sell off stocks and buy a new set of bonds maturing in another three years; in a bad year, well, I've got the next two years covered, so I can ride it out.  That will probably bring my overall allocation down to maybe 80% stocks/20% bonds, which I think still works with the 4% rule. 

Oh, I like that! Just enough to hop over the gap, if the bottom falls out for a year or two.

protostache

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Re: FI vessel
« Reply #6 on: September 17, 2017, 01:03:40 PM »
So, I have been comfortable forever being 100% in stocks; never even been tempted to sell in a downturn, because I know I have plenty of time to recover.  However, the problem is that if I stay 100% in stocks, the need to take out living expenses every year would force me to sell in a downturn, because I'd need to cover my costs even when the market crashes.

So my current plan is to take a chunk of my savings -- say 3 years' living expenses -- and put it in something like a bond* or CD ladder.  In a normal year, as one set of bonds matures, I will sell off stocks and buy a new set of bonds maturing in another three years; in a bad year, well, I've got the next two years covered, so I can ride it out.  That will probably bring my overall allocation down to maybe 80% stocks/20% bonds, which I think still works with the 4% rule. 

And then I will probably keep extra cash in my bank account, just because it's me and I like cash on hand in case I need a new roof or something, but I'm not counting that towards my 4%.

* Individual bonds, not bond funds.

This is effectively what Nords does, as described here. They start every year with two years of expenses in cash. At the end of the year they evaluate. In up or flat years they sell another years worth of stock to fill up the cash bucket. If the market is down for the year they hold off. Most recessions last less than two years so this works out well, but extending the cash cache to three or more years may be prudent depending on your views and cash needs.

Nords

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Re: FI vessel
« Reply #7 on: September 23, 2017, 08:05:55 AM »
So, I have been comfortable forever being 100% in stocks; never even been tempted to sell in a downturn, because I know I have plenty of time to recover.  However, the problem is that if I stay 100% in stocks, the need to take out living expenses every year would force me to sell in a downturn, because I'd need to cover my costs even when the market crashes.

So my current plan is to take a chunk of my savings -- say 3 years' living expenses -- and put it in something like a bond* or CD ladder.  In a normal year, as one set of bonds matures, I will sell off stocks and buy a new set of bonds maturing in another three years; in a bad year, well, I've got the next two years covered, so I can ride it out.  That will probably bring my overall allocation down to maybe 80% stocks/20% bonds, which I think still works with the 4% rule. 

And then I will probably keep extra cash in my bank account, just because it's me and I like cash on hand in case I need a new roof or something, but I'm not counting that towards my 4%.

* Individual bonds, not bond funds.

This is effectively what Nords does, as described here. They start every year with two years of expenses in cash. At the end of the year they evaluate. In up or flat years they sell another years worth of stock to fill up the cash bucket. If the market is down for the year they hold off. Most recessions last less than two years so this works out well, but extending the cash cache to three or more years may be prudent depending on your views and cash needs.
Just to update that:  it works great, but after 15 years of military retirement our assets have grown to the point where we're no longer susceptible to sequence-of-returns risk.  We've stopped carrying two years' expenses in cash and we've been drawing it down.

terran

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Re: FI vessel
« Reply #8 on: September 23, 2017, 09:44:52 AM »
I found the arguments here compelling: https://earlyretirementnow.com/2017/09/20/the-ultimate-guide-to-safe-withdrawal-rates-part-20-more-thoughts-on-equity-glidepaths/

Basically start at a 60/40 allocation at retirement and raise it by 0.4% per month until 100% stocks (a little over 8 years). It results in a slightly lower portfolio if you retire into a good market, but does a lot better in a bad market, so it helps a lot with sequence of returns risk.