Author Topic: How close to FIRE should I stop investing?  (Read 775 times)

FireLane

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How close to FIRE should I stop investing?
« on: April 16, 2021, 07:55:36 PM »
I'm planning to FIRE this year (it was going to be last year, but COVID lockdown happened and I thought there was no harm in working a little longer while I couldn't travel or see friends). I haven't set a definite date, but probably sometime in the summer.

My stash is a little over $2M, with about 1% in cash accounts and the rest split 80/20 between stocks and bonds. I should be able to live comfortably off a 3% WR.

My question is this: assuming I'm going to FIRE in a few months, should I still be putting money from my paycheck into investments, or should I just focus on building up a bigger cash cushion so it will be longer before I have to sell shares? What are the considerations either way?

ixtap

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Re: How close to FIRE should I stop investing?
« Reply #1 on: April 16, 2021, 08:05:43 PM »
Before you FIRE, you should have a drawdown plan for how you plan to access your funds. If your plan includes having a large cash buffer, then you should start building it as your approach your date. If your plan just includes your normal cash buffer, there is no reason to build a bigger one now.

The cons are always the inflation and growth drag of cash. The pros are that if there happens to be a crash, you don't have to sell stocks (but you should have bonds, anyway, which generally don't crash as hard). Also, a bigger cash buffer may be helpful in controlling taxable income if you are looking to hit a sweet spot, such as for ACA subsidies.

ChpBstrd

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Re: How close to FIRE should I stop investing?
« Reply #2 on: April 16, 2021, 08:21:54 PM »
There's not really a difference between halting investments to build up a larger cash cushion and setting a different asset allocation. If you're happy with your AA, then stay.

You should max out my 401k to reduce taxes, ensure my plan for health insurance was funded, etc. and then enjoy the ride. Given your 3% WR, I might consider buying some put options with this year's cash flow to protect yourself from a first-year SORR event that wouldn't matter anyway at a 3% WR, but could be emotionally stressful. If the puts end up worthless, they'll be handy as tax write-offs anyway, which would allow you to move more assets into a Roth acct.

FireLane

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Re: How close to FIRE should I stop investing?
« Reply #3 on: April 16, 2021, 08:56:57 PM »
Before you FIRE, you should have a drawdown plan for how you plan to access your funds. If your plan includes having a large cash buffer, then you should start building it as your approach your date. If your plan just includes your normal cash buffer, there is no reason to build a bigger one now.

The cons are always the inflation and growth drag of cash. The pros are that if there happens to be a crash, you don't have to sell stocks (but you should have bonds, anyway, which generally don't crash as hard). Also, a bigger cash buffer may be helpful in controlling taxable income if you are looking to hit a sweet spot, such as for ACA subsidies.

Yep! I've got the drawdown plan here. I'm planning to take the dividends first, sell shares for the rest of my normal living expenses, and do Roth conversions each year up to the standard deduction.

I wasn't intending to build up a large cash buffer - 1 to 2% of my total NW should be plenty. In general, I agree with the MMM philosophy that every dollar should be put where it earns the highest expected return. I'm keeping some cash on hand in an HYSA solely as a source of emergency liquidity just in case any big unplanned expenses come up in the first year or so of retirement. If none do, I'll gradually spend it down on decadent vacations. :)

My thinking was more along the lines of, given that stocks aren't recommended as a place to park money you'll need in the short term, is it worth investing cash now that I'll just have to pull out again in a few months? Should I be building a cash runway for myself now, to smooth out any market swings at the beginning of retirement?

Given your 3% WR, I might consider buying some put options with this year's cash flow to protect yourself from a first-year SORR event that wouldn't matter anyway at a 3% WR, but could be emotionally stressful. If the puts end up worthless, they'll be handy as tax write-offs anyway, which would allow you to move more assets into a Roth acct.

That's a very interesting idea. I've never looked into options in detail, I thought they added a lot of complexity to a portfolio for only a small expected reward. But I didn't realize you could claim an unexercised option as a capital loss. That does change the picture somewhat.

Rdy2Fire

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Re: How close to FIRE should I stop investing?
« Reply #4 on: April 17, 2021, 08:58:52 AM »
I didn't stop investing even after FIRE'd but I did stop investing in Tax deferred (401K/IRA) type of investments about 2.5 yrs before I FIRE'd. FIREing wasn't exactly planned when it happened but I did know that the more I put into tax deferred investments, the longer I'd have to wait to use it penalty free or without a ladder conversion.

nereo

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Re: How close to FIRE should I stop investing?
« Reply #5 on: April 17, 2021, 04:35:01 PM »
Quote
My thinking was more along the lines of, given that stocks aren't recommended as a place to park money you'll need in the short term, is it worth investing cash now that I'll just have to pull out again in a few months? Should I be building a cash runway for myself now, to smooth out any market swings at the beginning of retirement?

ChpBstrd has a great answer
Understand the money you are saving now largely *isnt* short term. Most of that you will keep invested for years, even decades. You say you have an AA anc a draw down strategy - fantastic. Now in your final accumulation year consider taxes and stick to the plan.