The pivotal question is whether you can actually earn $40k/year playing a trading game against supercomputers. Do you have, let's say, five years of experience consistently earning this amount in various market conditions, or just the one crazy bull market year that was late 2020-2021? The issue is you have to decide now whether to live an $80k lifestyle or do "Plan B", but you don't yet know if you will actually earn those $40k. It's easy enough to make big money with options during a bull market; you just consistently make bullish bets and keep "compounding" your winnings and it always looks like a plan that will work forever. It's the same way with volatility trades, or really betting on the continuation of any trend. But such things have a way of unwinding and losing years of winnings when the trend reverses, or for some traders even a 15% correction does it.
Another question: Your liquid NW is currently $1.2M and you mention withdrawing $40k/year as a "4% FIRE" amount. Does this mean you set aside $1M to support the "4% FIRE" portion of your planned income, and play options with the remaining $200k? If so, you'll need to earn (40k/200k=) 20% per year with the consistency of a paycheck from options trading. Again, it would be nice to have some long-term history of consistently earning 20% from trading across all market conditions, before committing to spend the money you hope to make.
Thinking through the contingencies... if you're spending $80k a year, and the stock market does one of its not-so-rare 20% drops, your $1M 4% portfolio becomes $800k and your $200k options portfolio comprised of bullish bets could drop to almost nothing. Suddenly, you're on a 10% withdraw rate. Retirement over.
Plan C for your consideration: Just retire on 4%
You don't mention the rent house earning anything, so if it's breaking even could you sell it and have a $1.6M liquid portfolio? Then just retire with a regular AA and a 4%WR which would be $64k/year. Yes, that's $16k/year less than you'd like to spend, but can you cut this much fat out of your budget, change your mortgage, or can your entrepreneurial activities earn this much in the first year? Hell, you can sell plasma and earn most of that difference :). It sounds like you're thinking of starting a business, rather than quitting forever, and it sounds like you want to get rich rather than lean-FIRE. If those are your goals, you need the ability to FOCUS instead of spending your attention dicking around with day trading. If your business works out, the value could be exponentially higher than playing what is a zero-sum game in the long run.
Plan D for your consideration: 5% WR until the business launches or dies
If the $80k spending level is a non-negotiable desired end, you could take the $1.6M liquid portfolio described above and have a 5% WR. Is that a good idea for the next 4 decades? Probably not. Your odds of failure would be around 22% and your odds of eventual poverty/stress would be maybe double that. However if you are launching a business, you will know within the next 2 years whether it will be successful or not. A 5% WR for two years isn't going to kill the portfolio. So you're in a great position to FOCUS on launching a business that could make you a many-times-over millionaire if it works out. If it doesn't work out maybe it earns enough for your portfolio to gain 25% over the next 3 years and you end up retiring with an $80k spend and 4% WR anyway?
With either Plan C or Plan D, you accomplish most of what you want to accomplish while removing any risk that your options trading success last year is not repeatable. If you really enjoy options trading, either of these plans offer great opportunities to do options hedging, such as collars. That's a risk-reducing way to use options instead of adding to your risk. Hedging would also allow you to sleep well through market turmoil so that you can focus on entrepreneurship.
Epic, thank you for your thoughts!
* The bull market unnerves me - but also because it's been a bull market for 10 years which has helped many FI folks. My experience is Individual Stocks about 3 years, Options about 2 years. Lowest month $3k premium, highest month $13k, average $8k per month. I've had more time to invest/trade due to WFH. big tech/Mega Corp Life was everything before this unfortunately.
* I don't have bullish bets on options. I used it to hedge my Core Portfolio that is a mix of mega cap tech, finanicals, and consumer defensive stocks. So it's mostly Covered Strangles, with Cash/Margin secured puts. Some Collars. Occasional long Call on something oversold, or a Leap.
* Breakdown of $1.2M: 200k is 401k holding S&P; 100K Crypto mostly BTC, 900K Stocks/Options - I use about 250k in options collateral for Covered Strangles or Collars.
* Over time, goal is to derisk SWR to be more passive. I use my premium to buy more SPY, QQQ, SCHD, Dividend stocks.
* Rental house about $200/month net profit. Likely better sold for $200K in equity, generating $8k a year via 4% rule. The additional 200K wasn't enough to make Plan A work at $1.4M, for 80K spend (5.7% drawdown).
Plan A ~80k living costs - main issue is the Mortgage+tax+utilities is $40k itself. Our actual living expenses for Two Plus two dogs are just under $40k. So that's where Plan B came in - sell Primary house, move into Rental. Just can't do that until 2023, when I can fully realize Primary House equity without capital gains.
* I think there's something in me for next 3 years to try a business idea in FinTech / DeFi space. But honestly, even something like a Youtube channel with a few thousands subs would be exciting to me. I think just need something that is my own. Perhaps burned by the big tech / mega corp life.
Thanks for hearing that in my post!Paths: 1.
Plan D, Sell Rental Home -- but I have
$1.4M ($1.2M + $200k Equity Rental),
so 5.7% withdrawal rate. Focus on Entrepreneurship. Live in big house.
2.
Plan A for 1 year (hedge with options, 1 year of
6.6% withdrawal rate or 80k spend),
then move to Plan B - Retired 4% (when I can sell Primary House without capital gains tax, move into Rental House). Focus on Entrepreneurship. Live in normal house.
I think I'm
leaning towards Path #2, where my withdrawal rate is high for 1 year, maybe hedged with options. Then fully move to Plan B 4%. All the way thru, Focus on entrepreneurship. ~50k spend
Appreciate you thinking this thru with me! Thanks!. Now to sell to the Mrs. Taco Sushi.
