Author Topic: Going from growth mode to FIRE  (Read 897 times)

jnc

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Going from growth mode to FIRE
« on: May 31, 2020, 01:49:18 PM »
So far been focused on growth, so my portfolio is heavily stock based. As I consider the possibility of FIRE, I'd like to know how have others managed the transition. I know there are many aspects to this (lots of great info in the POST-FIRE threads) but I'm specifically wondering about the withdrawals.

Did you change to a more dividends heavy portfolio and living mostly off the dividends? Or perhaps switched to a bonds heavy portfolio as the yield is typically higher than the total stock portfolio? Or do people actually sell off a chunk of their portfolio at the beginning of the year to cover the year's expenses?

Please feel free to point me to the right thread if it's been covered in detail before.

Thanks so much!

vand

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Re: Going from growth mode to FIRE
« Reply #1 on: May 31, 2020, 02:37:52 PM »
In short, yes, it is almost definitely preferable to hold a more stable and predictable portfolio in drawdown by changing your asset allocation, as any volatility works against you (opposite to how volatility works in your favour during accumulation) and potentially exposes you to sequence of returns risk (SORR) which is discussed in lots of threads here (see the pinned 4% rule thread, or the golden butterfly thread). 

Depending on the parameters and desired results, its possible to show how a more stable portfolio can support a higher withdrawal rate than a more volatile portfolio even though its CAGR is lower, so it is not as simple as just having a portfolio that has the highest (expected) growth.
« Last Edit: May 31, 2020, 02:39:27 PM by vand »

EscapeVelocity2020

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Re: Going from growth mode to FIRE
« Reply #2 on: May 31, 2020, 03:14:05 PM »
Not sure if it is definitive, but @Ozlady started a list - https://forum.mrmoneymustache.com/journals/race-to-another-1-3-million/msg2636017/#msg2636017

Unfortunately, I don't think she put in the links correctly...

jnc

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Re: Going from growth mode to FIRE
« Reply #3 on: June 01, 2020, 08:06:53 AM »
Thank you, very much agree with you. Just wondering about the specifics of this. Is there a favorite vanguard ETF or mutual fund for high dividend? I just had a look at VHDYX (which is closed to new investors) which has a yield of 3%. Are there some other highly recommended options out there? The vanguard total bond market index (VBTLX) for instance has a yield of 2.5%. I am wondering if there are some better options out there for the drawdown phase?

Thanks again!

In short, yes, it is almost definitely preferable to hold a more stable and predictable portfolio in drawdown by changing your asset allocation, as any volatility works against you (opposite to how volatility works in your favour during accumulation) and potentially exposes you to sequence of returns risk (SORR) which is discussed in lots of threads here (see the pinned 4% rule thread, or the golden butterfly thread). 

Depending on the parameters and desired results, its possible to show how a more stable portfolio can support a higher withdrawal rate than a more volatile portfolio even though its CAGR is lower, so it is not as simple as just having a portfolio that has the highest (expected) growth.

ixtap

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Re: Going from growth mode to FIRE
« Reply #4 on: June 01, 2020, 08:24:12 AM »
We switched to 70/30 as we approached FI, but never plan to go more conservative than 60/40.

As for withdrawals, we will sell stocks. If necessary, we will then rebalance in 401ks to maintain our AA, since that is where we keep our bond funds.

vand

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Re: Going from growth mode to FIRE
« Reply #5 on: June 01, 2020, 08:40:38 AM »
Thank you, very much agree with you. Just wondering about the specifics of this. Is there a favorite vanguard ETF or mutual fund for high dividend? I just had a look at VHDYX (which is closed to new investors) which has a yield of 3%. Are there some other highly recommended options out there? The vanguard total bond market index (VBTLX) for instance has a yield of 2.5%. I am wondering if there are some better options out there for the drawdown phase?

Thanks again!

In short, yes, it is almost definitely preferable to hold a more stable and predictable portfolio in drawdown by changing your asset allocation, as any volatility works against you (opposite to how volatility works in your favour during accumulation) and potentially exposes you to sequence of returns risk (SORR) which is discussed in lots of threads here (see the pinned 4% rule thread, or the golden butterfly thread). 

Depending on the parameters and desired results, its possible to show how a more stable portfolio can support a higher withdrawal rate than a more volatile portfolio even though its CAGR is lower, so it is not as simple as just having a portfolio that has the highest (expected) growth.

It's not as simple as switching into a high dividend strategy. Dividend payers are still stocks at the end of the day, and a high dividend strategy holds its own risks that it will underperform the wide stock market while still being as volatile or even more so (this has been exactly the case over the last few years).

Suggest you will probably want to read the ERN SWR guide: https://earlyretirementnow.com/safe-withdrawal-rate-series/

GoCubsGo

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Re: Going from growth mode to FIRE
« Reply #6 on: June 01, 2020, 11:37:59 AM »
Second the Big ERN SWR guide.  Truly amazing in-depth series on just that question.  It takes awhile to get through but is internet gold for retirees.

seattlecyclone

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Re: Going from growth mode to FIRE
« Reply #7 on: June 01, 2020, 11:48:51 AM »
Did you change to a more dividends heavy portfolio and living mostly off the dividends?

Nope. Regular index funds (VTSAX, VTIAX, VBTLX, etc.). Dividends for the stock funds come out quarterly and the payments to our taxable account tend to roughly equal our expenses in the months they're paid. In the other months we sell shares. There's nothing magic about dividends. They're just a way to convert the value of your investment to cash, but on the company's schedule instead of yours.

In fact we recently shifted a chunk of our taxable portfolio into Vanguard's Growth Index Fund because it has lower dividends. Once we've spent down more of the taxable account, lower dividend income will make it more likely that we'll be able to qualify for the earned income credit. This credit has a hard cutoff once your investment income hits a certain pretty low threshold, and having a lower amount of taxable dividend income should work in our favor there.

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Or perhaps switched to a bonds heavy portfolio as the yield is typically higher than the total stock portfolio?

Not really. A few years before FIRE we adopted our current asset allocation (70/20/10 stock/bond/REIT), and plan to maintain that indefinitely.

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Or do people actually sell off a chunk of their portfolio at the beginning of the year to cover the year's expenses?

More like once or twice quarterly in our case, but this is basically what we do. We try to keep the checking account between $5,000 and $10,000. Dividends are automatically deposited into there, and we also sell stock to replenish as needed.

For tax efficiency we have all our bonds in retirement accounts. If market conditions would require us to sell bonds to maintain our asset allocation we still sell stock from the taxable account to pay the bills and then swap some bonds for stocks in the retirement account to get things back into balance.

Buffaloski Boris

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Re: Going from growth mode to FIRE
« Reply #8 on: June 01, 2020, 02:26:34 PM »
I third the SWR series at ERN. Spend a weekend or two reading it. Itís worth your time.

jnc

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Re: Going from growth mode to FIRE
« Reply #9 on: June 02, 2020, 09:07:36 AM »
We switched to 70/30 as we approached FI, but never plan to go more conservative than 60/40.

As for withdrawals, we will sell stocks. If necessary, we will then rebalance in 401ks to maintain our AA, since that is where we keep our bond funds.

Thank you for sharing. That's exactly the kind of info I was looking for.

jnc

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Re: Going from growth mode to FIRE
« Reply #10 on: June 02, 2020, 09:19:40 AM »
Thank you all for the recommendation about the SWR series at ERN. I will definitely make sure to read it thoroughly!