Revisiting the asset allocation question - The case for 100% stocks

[mathjak107]

the leverage is variable . it gets less and less with each payment  and is relative to what you owe .   plunk down a big down payment and leverage is all over the place . but there is usually some leverage involved at least in the early years ,if you invest the whole enchilada . but that does not really  answer the question as to why own bonds and a mortgage nor dies it assume you are going to borrow that money and throw it all in investments so leverage is a factor .


in fact many with a mortgage have little to invest in anything else so a mortgage is best kept as an expense in my opinion . what you do after that is something else .

the mere fact that most folks suck as investors and demonstrate poor investor behavior means that leverage can be a double edge sword and cut them too .

[AdrianC]

a 4% mortgage and returns on TLT at 18% ytd and 13% the last 3 years   is why .   bond returns are more about appreciation than interest .

when the tide shifts it may not be a great idea to have conventional bond funds but for now a mortgage is just another housing  expense and bonds are an investment .

Going forward:
30 year fixed 3.49%
30 year bond 2.23%

15 year fixed 2.78%
10 year note 1.51%

Expecting bond appreciation is speculation, not investment. No one can reliably predict interest rates. The best estimate of bond returns is the rate on the day you buy it.

[mathjak107]

same apply's to stocks . appreciation is all speculation as to what we may get . but we all invest anyway and take our chances . any bonds i own now are only being held for total return , not just interest . so far so good , especially my high yield bond  fund up double digits since i bought it .

[AdrianC]

same apply's to stocks . appreciation is all speculation as to what we may get . but we all invest anyway and take our chances . any bonds i own now are only being held for total return , not just interest . so far so good , especially my high yield bond  fund up double digits since i bought it .

In the long run the appreciation of stocks is due to the company's earnings. Long term buy and hold of stocks is investing, not speculation.

Sure, in an interest rate reducing cycle bonds have done well. Do you expect more appreciation from your bond funds? Why?

[mathjak107]

my portfolio is dynamic . the types of funds i hold shift slightly with the bigger picture .right now my bond funds are appreciating as much or more than my stock funds . once that trend is over and rates rise different types of bond funds will replace  the existing ones.

so far my high yield bond fund is up 13%  , my total bond fund almost 8% , i trade in and out of TLT  as a speculation  and have seen 15% from those trades  but tlt is not an active part of my portfolio , it is fun trading .   i dart in and out of kmi,gld and tlt sometimes within just days . so far that fun money is up 37% ytd

[Frs1661]

Since a mortgage can't be 'called' if the market goes down, what do you see as the additional risk of holding a mortgage in a downtown?

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[boarder42]

Since a mortgage can't be 'called' if the market goes down, what do you see as the additional risk of holding a mortgage in a downtown?

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there is less risk but the downturn the pay down your mortgage crowd uses is along the lines of utter market devestation for multiple years.  which regardless of if your home is paid off our not turns the entire premise of the 4% rule on its head and will likely land you back trying to get an income stream regardless of house paid down or not. 

[mathjak107]

Since a mortgage can't be 'called' if the market goes down, what do you see as the additional risk of holding a mortgage in a downtown?

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those extra mortgage payments you are pulling out while spending down increase draw rate and increase sequence risk .

[boarder42]

Since a mortgage can't be 'called' if the market goes down, what do you see as the additional risk of holding a mortgage in a downtown?

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those extra mortgage payments you are pulling out while spending down increase draw rate and increase sequence risk .

except historically sequence risk hasnt affected this and has increased chances of you being successful in retirement if you held a mortgage vs not.  just plug numbers into CFireSim.  its not all doom and gloom.

[mathjak107]

but as we all know the past may be very different going forward in these uncharted waters . we really have no history under these conditions . my vote is keep sequence risk as low as you can . it is a far worse retirement killer than returns are .

[Frs1661]

Thanks for your responses. Starting with 100 yen 30, 20,  and 10 years ago the real value in today's yen is 115.83, 101.57, and 101.86, respectively. This does not appear to be catastrophic to a mortgage payer on its own.

If ones only acceptable investments are guaranteed to pay less than ones mortgage interest rate, of course pay off the mortgage.


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[boarder42]

Thanks for your responses. Starting with 100 yen 30, 20,  and 10 years ago the real value in today's yen is 115.83, 101.57, and 101.86, respectively. This does not appear to be catastrophic to a mortgage payer on its own.

If ones only acceptable investments are guaranteed to pay less than ones mortgage interest rate, of course pay off the mortgage.


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I agree.  I think levering using a mortgage is fine... it's just a risk preference and it usually pays off, but not always. 

I also think about behavioral impulses.  Like imagine a guy (Guy A) with 100% stocks who has a 500k home with an 80% LTV mortgage and $1.2m in invested assets.  So his net worth is $1.3m.  Say he has 30k of expenses ex mortgage and pays $30k a year on the mortgage.  In a big 50% crash he suddenly has invested assets of $600k and a mortgage of 400k, with 60k of cash outflow per year and possibly an underwater house, so he's taking 10% out of his stash per year when the market is at a low and feeling nervous.  Let's say the house is down 15% and his net worth is now $625k .

In contrast, the guy who doesn't have a mortgage (let's call him Guy B) only has 800k in invested assets pre crash.  His net worth also starts at $1.3m and has 30k of expenses.  In that big 50% crash he now has invested assets of 400k, with 30k of outflow per year.  That's still steep but he's taking 7.5% out not 10%, so his sequence of returns risk is lower.  If his house is also down 15%, his net worth is now $825k.

Our hypothetical unlevered guy has over 30% more net worth after the crash than the levered guy and if it were me I'd be feeling better in the second scenario.  This works in both directions, of course--in an upswing our levered gentlemen will be getting much higher levered returns.  Now many folks will say that over the long run the market will likely recover and Guy A will be richer.  But my goal is not to be the richest person.  My goal is to have a fortress balance sheet so that I can do what I want to do and not have to work for money.  With my low WR of 3.3% it makes a lot of sense for me to pay off a mortgage and get a guaranteed return that approximates my WR rather than take on more risk just to try to capture a risk premium above my WR (which I don't need).

So it may be that people have different goals.  My goal is just to take out the amount I need and not be forced back to work even in really shitty scenarios.  My secondary goal is not to lose sleep when the market tanks.  A third goal is to simplify my life and not have to deal with banks etc if I don't have to.  Paying off my mortgage in my particular case helps me achieve all these goals. 

 

     

correct and since the market runs up more than down scenario b is much more likely than your first scenario therefore less risky when historical data is applied.

[AdrianC]

My goal is to have a fortress balance sheet so that I can do what I want to do and not have to work for money.  With my low WR of 3.3% it makes a lot of sense for me to pay off a mortgage and get a guaranteed return that approximates my WR rather than take on more risk just to try to capture a risk premium above my WR (which I don't need).

So it may be that people have different goals.  My goal is just to take out the amount I need and not be forced back to work even in really shitty scenarios.  My secondary goal is not to lose sleep when the market tanks.  A third goal is to simplify my life and not have to deal with banks etc if I don't have to.  Paying off my mortgage in my particular case helps me achieve all these goals. 

Agree completely.

[Retire-Canada]

My goal is to have a fortress balance sheet so that I can do what I want to do and not have to work for money.  With my low WR of 3.3% it makes a lot of sense for me to pay off a mortgage and get a guaranteed return that approximates my WR rather than take on more risk just to try to capture a risk premium above my WR (which I don't need).

So it may be that people have different goals.  My goal is just to take out the amount I need and not be forced back to work even in really shitty scenarios.  My secondary goal is not to lose sleep when the market tanks.  A third goal is to simplify my life and not have to deal with banks etc if I don't have to.  Paying off my mortgage in my particular case helps me achieve all these goals. 

Fair enough. You have to run your own race.

My perspective is that shooting for a sub-4% WR and paying off my mortgage rather than investing the funds is a sure way to work extra years FT and if that means a small risk of having to work PT at some point down the road I'm more than happy to accept that. I'm suspect there will be a point in my life when a chill PT job related to one of my hobbies will be welcome.

[DrF]

In contrast, the guy who doesn't have a mortgage (let's call him Guy B) only has 800k in invested assets pre crash.  His net worth also starts at $1.3m and has 30k of expenses.  In that big 50% crash he now has invested assets of 400k, with 30k of outflow per year.  That's still steep but he's taking 7.5% out not 10%, so his sequence of returns risk is lower.  If his house is also down 15%, his net worth is now $825k.   

Your scenario B guy doesn't seem to be paying property taxes and insurance on his paid off house. Some places this could be as little as an extra $2k a year, but in other places it could be $10k a year. This changes your argument, best case the person has to use 8% of their nest egg, and worst case they will be equal to guy A at 10%.

I know that these numbers are all made up anyway, but long term the money you invest should provide you with enough cushion that even in the event of a huge economic downturn you have more than enough investment reserves to withdraw less % than someone who paid off their mortgage.

[DrF]

Then guy A is paying $30k a year on principal and interest?

I call BS!!

[DrF]

I know these numbers were probably off the top of your head, so let's run some real numbers. Let's say a person got their mortgage and started investing from zero in 1992. I chose this year randomly, but wanted them to be invested through the dot com crash and then retire before the 2008/9 crash.

So, if they put 20% down on a $480k home, they would have a principal balance of $400k. If you want a paid off home before you retire early, and let's say you would need 15 years to save 25x your yearly budget, then you better get to making those extra payments - to the tune of an EXTRA $1075 per month. That's on top of your $1796 per month normal P&I payment just to pay it off in 30 years (this is with a 3.5% mortgage rate, which was UNHEARD of in 1994!! but anything more than ~5-6% and paying down the mortgage is a no-brainer). So, here are the 2 scenario's:
1 = pay normal mortgage payment of $1796 and invest the extra $1075 per month
2 = pay a $2871 mortgage payment to have a paid off house in 15 years

Who gets to an invested portfolio that can support a 4% SWR first? It takes saving ~$24k for 15 years for scenario 2 to have a paid off house and a $750k portfolio which would support a $30k annual spend at 4% SWR. If you had invested the extra for 15 years you would have a total of ~$1.17MM, but you'd have to withdraw ~$51.5k per year for the next 15 years until you pay off your mortgage. This represents a SWR of 4.4%.

So, if both retired at the end of 2007 (basically right before a downturn) - how would they have fared?

1 = Withdrawing a constant $51.5k a year, with $51.5k withdrawn as cash at the beginning of 2008, at the end of 2015 you'd have ~$1.248MM
2 = Withdrawing a constant $30k a year, with $30k withdrawn as cash at the beginning of 2008, at the end of 2015 you'd have ~$841k

Or, you could pay off the remainder of the mortgage (~$251k) in one swoop at the end of 2007, which would leave you with ~$919k invested. This would give you a ~3.3% SWR going forward.

If you calculated it so that you only worked long enough so that after you paid a lump sum on your mortgage when you retire you would have 25x expenses, you would only have to work ~14 years (1 year less than paying down your mortgage early).

[boarder42]

I know these numbers were probably off the top of your head, so let's run some real numbers. Let's say a person got their mortgage and started investing from zero in 1992. I chose this year randomly, but wanted them to be invested through the dot com crash and then retire before the 2008/9 crash.

So, if they put 20% down on a $480k home, they would have a principal balance of $400k. If you want a paid off home before you retire early, and let's say you would need 15 years to save 25x your yearly budget, then you better get to making those extra payments - to the tune of an EXTRA $1075 per month. That's on top of your $1796 per month normal P&I payment just to pay it off in 30 years (this is with a 3.5% mortgage rate, which was UNHEARD of in 1994!! but anything more than ~5-6% and paying down the mortgage is a no-brainer). So, here are the 2 scenario's:
1 = pay normal mortgage payment of $1796 and invest the extra $1075 per month
2 = pay a $2871 mortgage payment to have a paid off house in 15 years

Who gets to an invested portfolio that can support a 4% SWR first? It takes saving ~$24k for 15 years for scenario 2 to have a paid off house and a $750k portfolio which would support a $30k annual spend at 4% SWR. If you had invested the extra for 15 years you would have a total of ~$1.17MM, but you'd have to withdraw ~$51.5k per year for the next 15 years until you pay off your mortgage. This represents a SWR of 4.4%.

So, if both retired at the end of 2007 (basically right before a downturn) - how would they have fared?

1 = Withdrawing a constant $51.5k a year, with $51.5k withdrawn as cash at the beginning of 2008, at the end of 2015 you'd have ~$1.248MM
2 = Withdrawing a constant $30k a year, with $30k withdrawn as cash at the beginning of 2008, at the end of 2015 you'd have ~$841k

Or, you could pay off the remainder of the mortgage (~$251k) in one swoop at the end of 2007, which would leave you with ~$919k invested. This would give you a ~3.3% SWR going forward.

If you calculated it so that you only worked long enough so that after you paid a lump sum on your mortgage when you retire you would have 25x expenses, you would only have to work ~14 years (1 year less than paying down your mortgage early).

yes makes perfect sense horse has been beat to death but the pay down your house people always argue that you cant predict future returns.  but what they never seem to understand is that if those doomsday returns hit that they keep saying ARE A CHANCE ... then both people in those scenarios are fucked.  ... there is also a chance the earth erupts in nuclear war.  i dont have a bomb shelter i'll just die... a chance aliens will invade.  a chance someone gets elected president and declares all housing free and forgives all mortgages. a chance pigs fly.  the chance that people try to protect against by getting rid of a mortgage hasnt ever happened before and if it ever did it woud be devastating no matter how diverse your portfolio or withdrawal rate mortgage or not.

[K-ice]

Interest Compound and other familiar names I see here often have really good advice.  I am just bookmarking so I can read more later.

[AdrianC]

I also wonder whether we are even talking about the same scenario.  If I have a fully owned house and financial assets that I need a 3.3% return on to keep pace, do you really think I should run out and get a mortgage?  I can understand someone in the accumulation phase wanting to take that bet but why should I?   If things go well I end up with more money than I need and if the bad scenarios play out I end up nervous about my WR.  Doesn't seem like a good trade to me. 

Yes. It's almost inevitable that early on in our quest for financial independence we have a mortgage and invest in stocks. It just makes the most sense, most of the time. As net worth rises - mainly due to a very high savings rate - there is less need to take so much risk. Some folks diversify into bonds. We liked the idea of being debt free.

We moved to a low cost of living area some years ago, and our house is less than 10% of net worth. A mortgage just isn't worth the bother.

[mathjak107]

at this stage i have little desire to start with a mortgage if we buy another place next year. i am no longer ,nor do i have to be the aggressive investor i used to be .

now i am more interested in decreasing sequence risk by reducing draw rate . adding a mortgage would increase draw rate   and make us more dependent on markets .

we are doing whatever we can to reduce that dependency such as holding out longer to take social security .

[NorcalBlue]

This is a fascinating thread.  In theory, I believe this is the way to go for someone like me with a lot of flexibility (43, single, no kids, no mortgage, etc.).

My issue is this:  I have over saved (good problem to have I know) as I knew nothing about the mechanics of ER/RE/FIRE a few years ago.  My portfolio is currently $1.4M and I'm still accumulating (easy money in my current gig) for another 6 months or so.  My current annual spend is only $30k.  That being said, I'd like to responsibly expand my lifestyle (spending) as much as my portfolio warrants moving forward (blasphemy around here I know).

Given the above, I'm really struggling selecting an appropriate A.A.  I feel like I've "made it" for the lack of a better term.  And that's the one issue I have with a 100% stock A.A. at this point with a CAPE sitting around 26.  Having a great depression like event and leaving me with $200k would be a disaster.  If I had a smaller stache, I believe the 100% stock/vpw is the way to go, hands down.  Just not sure it's worth the risk at this point for me.  I'm about 65/15/20 at this point (stock/bond/cash - still working on allocating my cash). 

On the other hand, I'm comfortable with a $30k spend if necessary which could be supported strictly by dividends in a 100% stock portfolio even in a downturn).  I feel I have the flexibility to use the VPW and 100% Stock AA method.  Given that I'm only 43, it just feels like this approach is the way to go.

I know it's a thread hijack, but I'm really struggling with this - would be a great help if some of you on this thread would comment on what you would do in this situation?  Thanks.

[nobodyspecial]

What to do depends on what you are worried about - the best AA is one that lets you sleep at night.
If you are concerned about a 50% drop in the market - the question is why?

If you simply don't bother to read the news or check your balance it will bounce back after a year or two. You have enough cash that you can take capital out, to live on, even at the bottom without wiping yourself out. If you can cut costs for a couple of years it might even have negligible effect.
 
Having bonds/cash around would mean that you have a buffer to live on or even invest while the market is down. Historically this might have reduced your overall long term gain but if you already had more than you need and this plan makes you happier then do it.

Assuming you aren't in a field where can jump back into work for a few years at high salary. Generally the first few years post FIRE are the riskiest, so would call for the safest strategy. 

[Interest Compound]

This is a fascinating thread.  In theory, I believe this is the way to go for someone like me with a lot of flexibility (43, single, no kids, no mortgage, etc.).

My issue is this:  I have over saved (good problem to have I know) as I knew nothing about the mechanics of ER/RE/FIRE a few years ago.  My portfolio is currently $1.4M and I'm still accumulating (easy money in my current gig) for another 6 months or so.  My current annual spend is only $30k.  That being said, I'd like to responsibly expand my lifestyle (spending) as much as my portfolio warrants moving forward (blasphemy around here I know).

Given the above, I'm really struggling selecting an appropriate A.A.  I feel like I've "made it" for the lack of a better term.  And that's the one issue I have with a 100% stock A.A. at this point with a CAPE sitting around 26.  Having a great depression like event and leaving me with $200k would be a disaster.  If I had a smaller stache, I believe the 100% stock/vpw is the way to go, hands down.  Just not sure it's worth the risk at this point for me.  I'm about 65/15/20 at this point (stock/bond/cash - still working on allocating my cash). 

On the other hand, I'm comfortable with a $30k spend if necessary which could be supported strictly by dividends in a 100% stock portfolio even in a downturn).  I feel I have the flexibility to use the VPW and 100% Stock AA method.  Given that I'm only 43, it just feels like this approach is the way to go.

I know it's a thread hijack, but I'm really struggling with this - would be a great help if some of you on this thread would comment on what you would do in this situation?  Thanks.

You answered the question yourself. You aren't comfortable with 100% stocks, so under no circumstances should you be 100% stocks. Looking at the worst-case scenario, a 65/35 stocks/bonds $1.4 million portfolio never went below a $30k withdrawal with VPW, and had a median withdrawal of $65k a year.

A more typical scenario has a median withdrawal of about $100k a year.

The rule: Your asset allocation should be based on your unique ability, willingness, and need to take financial risk.  You have the willingness, but it seems you don't have the ability, and you definitely don't have the need. If 65/35 is what you're comfortable with, you'll be fine :)

[NorcalBlue]

This is a fascinating thread.  In theory, I believe this is the way to go for someone like me with a lot of flexibility (43, single, no kids, no mortgage, etc.).

My issue is this:  I have over saved (good problem to have I know) as I knew nothing about the mechanics of ER/RE/FIRE a few years ago.  My portfolio is currently $1.4M and I'm still accumulating (easy money in my current gig) for another 6 months or so.  My current annual spend is only $30k.  That being said, I'd like to responsibly expand my lifestyle (spending) as much as my portfolio warrants moving forward (blasphemy around here I know).

Given the above, I'm really struggling selecting an appropriate A.A.  I feel like I've "made it" for the lack of a better term.  And that's the one issue I have with a 100% stock A.A. at this point with a CAPE sitting around 26.  Having a great depression like event and leaving me with $200k would be a disaster.  If I had a smaller stache, I believe the 100% stock/vpw is the way to go, hands down.  Just not sure it's worth the risk at this point for me.  I'm about 65/15/20 at this point (stock/bond/cash - still working on allocating my cash). 

On the other hand, I'm comfortable with a $30k spend if necessary which could be supported strictly by dividends in a 100% stock portfolio even in a downturn).  I feel I have the flexibility to use the VPW and 100% Stock AA method.  Given that I'm only 43, it just feels like this approach is the way to go.

I know it's a thread hijack, but I'm really struggling with this - would be a great help if some of you on this thread would comment on what you would do in this situation?  Thanks.

You answered the question yourself. You aren't comfortable with 100% stocks, so under no circumstances should you be 100% stocks. Looking at the worst-case scenario, a 65/35 stocks/bonds $1.4 million portfolio never went below a $30k withdrawal with VPW, and had a median withdrawal of $65k a year.

A more typical scenario has a median withdrawal of about $100k a year.

The rule: Your asset allocation should be based on your unique ability, willingness, and need to take financial risk.  You have the willingness, but it seems you don't have the ability, and you definitely don't have the need. If 65/35 is what you're comfortable with, you'll be fine :)

Thanks for the response I.C.  I guess I've always been a value person.  If the market had a CAPE below 17 right now, I'd be 100% stocks.  Not trying to time anything, but historically, this market seems frothy.  But I'm curious, what would you do in the same situation I'm in - I'm interested?  Thanks.

[NorcalBlue]

What to do depends on what you are worried about - the best AA is one that lets you sleep at night.
If you are concerned about a 50% drop in the market - the question is why?

If you simply don't bother to read the news or check your balance it will bounce back after a year or two. You have enough cash that you can take capital out, to live on, even at the bottom without wiping yourself out. If you can cut costs for a couple of years it might even have negligible effect.
 
Having bonds/cash around would mean that you have a buffer to live on or even invest while the market is down. Historically this might have reduced your overall long term gain but if you already had more than you need and this plan makes you happier then do it.

Assuming you aren't in a field where can jump back into work for a few years at high salary. Generally the first few years post FIRE are the riskiest, so would call for the safest strategy.

Thanks for the response.  I'm curious - what would you do in the same situation?

[nobodyspecial]

What to do depends on what you are worried about - the best AA is one that lets you sleep at night.
If you are concerned about a 50% drop in the market - the question is why?

If you simply don't bother to read the news or check your balance it will bounce back after a year or two. You have enough cash that you can take capital out, to live on, even at the bottom without wiping yourself out. If you can cut costs for a couple of years it might even have negligible effect.
 
Having bonds/cash around would mean that you have a buffer to live on or even invest while the market is down. Historically this might have reduced your overall long term gain but if you already had more than you need and this plan makes you happier then do it.

Assuming you aren't in a field where can jump back into work for a few years at high salary. Generally the first few years post FIRE are the riskiest, so would call for the safest strategy.

Thanks for the response.  I'm curious - what would you do in the same situation?

Personally, work out what the minimum you need to live on - whether that's rent a cabin in the woods, travel in an RV, or living in Mexico or Thailand.  Put 24x (ie 4% SWR) that in a safe 60/40 stock/bond (or whatever Vanguard say is the safe portfolio).
Have that 4% SWR amount paid to yourself as a baseline salary every month

Then you know you are covered, if there is a market crash just ignore it for a couple of years knowing that you are completely safe for ever and it will bounce back without you running out of money

The rest 100% stocks, mostly ETFs but maybe 25% individual stocks /reits and watch that grow,  when it is doing well consider that "a good year" and buy a boat !

[larmando]

What to do depends on what you are worried about - the best AA is one that lets you sleep at night.
If you are concerned about a 50% drop in the market - the question is why?

If you simply don't bother to read the news or check your balance it will bounce back after a year or two. You have enough cash that you can take capital out, to live on, even at the bottom without wiping yourself out. If you can cut costs for a couple of years it might even have negligible effect.
 
Having bonds/cash around would mean that you have a buffer to live on or even invest while the market is down. Historically this might have reduced your overall long term gain but if you already had more than you need and this plan makes you happier then do it.

Assuming you aren't in a field where can jump back into work for a few years at high salary. Generally the first few years post FIRE are the riskiest, so would call for the safest strategy.

Thanks for the response.  I'm curious - what would you do in the same situation?

Personally, work out what the minimum you need to live on - whether that's rent a cabin in the woods, travel in an RV, or living in Mexico or Thailand.  Put 24x (ie 4% SWR) that in a safe 60/40 stock/bond (or whatever Vanguard say is the safe portfolio).
Have that 4% SWR amount paid to yourself as a baseline salary every month

Then you know you are covered, if there is a market crash just ignore it for a couple of years knowing that you are completely safe for ever and it will bounce back without you running out of money

The rest 100% stocks, mostly ETFs but maybe 25% individual stocks /reits and watch that grow,  when it is doing well consider that "a good year" and buy a boat !

Why would you do that? Isn't it better to have a larger portfolio, live on less than 4% but still more than the "bare absolute minimum" as ones preferences go, and then if things go well slowly increase expenses mostly in non recurring items. e.g. take a nicer holiday, treat yourself with food, etc knowing if the market goes down you can always cut. If you buy a boat you have recurring expenses about it forever or until you sell (good luck in a downturn) and in the meantime you've lived in a cabin in the woods for that.

[nobodyspecial]

Yes - I was being slightly facetious. But the point stands of having a guaranteed safe minimum amount as a safety if the market really goes down would give you peace of mind.

[force majeure]

Hi all, I posted on Bogleheads forum for the first time. Boy, do I feel lowly in their company. Am I right in thinking in general, they are bigger fish with more investment knowledge, and bigger wedge? I mean, my 4% SWR was basically rubbished, said it will not work for an RE scenario, thought about inflation, health insurance costs etc? I mean, I have done my sums, and I am FI already, probably need to shift more into bonds, then I am ready to roll. Yes, I am heavy on equities, but I have been thru market volatility before, I dont blink, just keep getting my dividends and will not need to sell. I took a breath, looked at my IPS, and feel better. I will continue to save hard and live modestly.

 

[arebelspy]

Most people on the Bogleheads forum don't understand the word "optimism" or "enough."

[steveo]

Most people on the Bogleheads forum don't understand the word "optimism" or "enough."

I haven't been there much but I think people in general are like this. We all worry about the downside. I do it as well. I've done the analysis and I think I'm good at a 5.5% WR. I can downsize my house and I should get social security and possibly a tonne of inheritance. I should basically be fine.

The problem is I keep thinking about when I get to that level and I keep wondering about buying more stuff.

I think pulling the trigger will be hard for me.

[Retire-Canada]

The problem is I keep thinking about when I get to that level and I keep wondering about buying more stuff.

That's the choice we all face. You can have stuff or you can have your freedom. You can also replace "stuff" with "fear". Either way you can out spend or out fear your ability or invest.

I love my sports bling, but it's becoming very apparent to me I can have a new flash mountain bike whenever I want and enjoy it on the weekends while I work during the week to pay for it or I can keep riding my old one that's just fine and shortly be able to ride it in all those amazing places they shoot ads in bike magazines.

So far the choice for freedom is winning out.

[steveo]

The problem is I keep thinking about when I get to that level and I keep wondering about buying more stuff.

That's the choice we all face. You can have stuff or you can have your freedom. You can also replace "stuff" with "fear". Either way unless you can out spend or out fear your ability or invest.

I love my sports bling, but it's becoming very apparent to me I can have a new flash mountain bike whenever I want and enjoy it on the weekends while I work during the week to pay for it or I can keep riding my old one that's just fine and shortly be able to ride it in all those amazing places they shoot ads in bike magazines.

So far the choice for freedom is winning out.

It's also fear as well isn't it. In Australia we have our retirement fund called Super. You can't touch this until you are 60. My plan involves getting to Super with a fair degree of safety. Super hould then take me through to social security. I also have buffer though within my house. The buffer is probably massive.

So my planned WR is really high at 5.5% but I think it's basically pretty safe. The thing is I keep thinking should I get down to 4%. It seems crazy for me to even bother though because I don't really care. It's going to be interesting seeing what I do though.

[MustacheAndaHalf]

Most people on the Bogleheads forum don't understand the word "optimism" or "enough."

:) There might be one Bogle who understood "Enough":
https://www.amazon.com/Enough-True-Measures-Money-Business/dp/0470524235/

[Retire-Canada]

It's also fear as well isn't it. In Australia we have our retirement fund called Super. You can't touch this until you are 60. My plan involves getting to Super with a fair degree of safety. Super hould then take me through to social security. I also have buffer though within my house. The buffer is probably massive.

So my planned WR is really high at 5.5% but I think it's basically pretty safe. The thing is I keep thinking should I get down to 4%. It seems crazy for me to even bother though because I don't really care. It's going to be interesting seeing what I do though.

How old will you be [were you] when you'll start FIRE at 5.5%WR?

[steveo]

It's also fear as well isn't it. In Australia we have our retirement fund called Super. You can't touch this until you are 60. My plan involves getting to Super with a fair degree of safety. Super hould then take me through to social security. I also have buffer though within my house. The buffer is probably massive.

So my planned WR is really high at 5.5% but I think it's basically pretty safe. The thing is I keep thinking should I get down to 4%. It seems crazy for me to even bother though because I don't really care. It's going to be interesting seeing what I do though.

How old will you be [were you] when you'll start FIRE at 5.5%WR?

I'm not FIRE'd yet. I will be 47.

[boarder42]

It's also fear as well isn't it. In Australia we have our retirement fund called Super. You can't touch this until you are 60. My plan involves getting to Super with a fair degree of safety. Super hould then take me through to social security. I also have buffer though within my house. The buffer is probably massive.

So my planned WR is really high at 5.5% but I think it's basically pretty safe. The thing is I keep thinking should I get down to 4%. It seems crazy for me to even bother though because I don't really care. It's going to be interesting seeing what I do though.

How old will you be [were you] when you'll start FIRE at 5.5%WR?

I'm not FIRE'd yet. I will be 47.

you also have to look at what the historical market trends say the current market trends will support which right now in the us as of this post is 3.65%  and your money would have historically lasted forever in the US.  now you're just looking at 23 years so thats a different story. but my plans at 37 in the US dont include social security.  thats more of just an added safety net.  and in 7 years i plan to look at the shiller PE and see where my money stands.  the company i work for has insane returns on our private ESOP which i have to sell when i leave.  so depending on market conditions this likely only adds 1 year to FIRE if it is lower than 3.8%

[Retire-Canada]

I'm not FIRE'd yet. I will be 47.

We are similar ages. I'm definitely not working FT until I hit 4%WR. Like you I'll have the Canadian version of SS and a house that will likely be equal to 40% to 50% of my FIRE portfolio when its paid off. I feel like free time is too previous at this age to be chained to a desk chasing a false sense of security.

Focusing on money as = FIRE success is missing the big picture in my opinion. There are so many ways a FIRE could fail that do not involve $$.  If a 5.5% WR gets you rolling and you've got a bunch of buffers to reduce the risk go for it. We are not getting any younger! ;)

[AdrianC]

at this stage i have little desire to start with a mortgage if we buy another place next year. i am no longer ,nor do i have to be the aggressive investor i used to be .

now i am more interested in decreasing sequence risk by reducing draw rate . adding a mortgage would increase draw rate   and make us more dependent on markets .

we are doing whatever we can to reduce that dependency such as holding out longer to take social security .

Bill Bernstein: "...the best "annuity purchase" you can make is to delay beginning Social Security until age 70".

Returning to the mortgage question, I ran my actual data in cFiresim, solving for Max Initial Spending over a 40 year retirement, with and without a mortgage.

Mortgage 75% of house value, 30 year fixed at 3.4%. Proceeds from mortgage invested per asset allocation. Asset allocations of stocks/bonds/cash: 50/45/5, 60/35/5, 75,20,5.

Result: With the mortgage the Max Initial Spending increases by 2.5% to 2.8% depending on success rate (90-100%). A useful improvement in spending versus less hassles and a few chips off the table. Those with higher house value to net worth ratios would obviously see more advantage in holding the mortgage.

[CanuckExpat]

Bill Bernstein: "...the best "annuity purchase" you can make is to delay beginning Social Security until age 70".

Is there a reference for that quote, and more background?

I would have thought it was calculated to be actuarially equal, so unless you happen to know something the actuarial tables don't (heavy smoker, or family history of living to 120, etc) that it was a crapshoot either way.

[arebelspy]

Bill Bernstein: "...the best "annuity purchase" you can make is to delay beginning Social Security until age 70".

Is there a reference for that quote, and more background?

I would have thought it was calculated to be actuarially equal, so unless you happen to know something the actuarial tables don't (heavy smoker, or family history of living to 120, etc) that it was a crapshoot either way.

I think you are reading it as "it's better to delay than take it" (and arguing it's a wash either way), where as he's saying "it's a better annuity than you can buy."

That is, he's not comparing taking it early to late, he's comparing delaying it to purchasing an annuity.  If you want an annuity, delaying SS is more efficient, money wise, because most annuities are such bad deals.  Does that make more sense?

[DavidAnnArbor]

I would have thought it was calculated to be actuarially equal, so unless you happen to know something the actuarial tables don't (heavy smoker, or family history of living to 120, etc) that it was a crapshoot either way.

If you live longer than 82, delay Social Security to 70

[mathjak107]

wait i will check the crystal ball . perhaps if it can give me the exact day i can bounce the check to the undertaker

[MustacheAndaHalf]

mathjak107 - Bond appreciation only happens to someone holding a bond when yields fall.  Since it can't be predicted, it's a guess.  Here knowing history helps: bond yields 25 years ago were 8.05% on the 30-year bond, but are 2.28% today.  On average, bond yields have fallen for decades and as a result there has been more bond capital gains than capital losses.  Would anyone predict another 6% average drop, from 2% to -4% in the next decades?  Because using history without context would make that assumption.

And on a general point, if you only reference your own investments, which nobody else knows, there isn't much room for debate.  You're saying you are correct based on private information you selectively reveal, meanwhile the people debating you relying on published information that others can look up.  If you only quote your own personal information, you won't learn anything and others won't have a way to validate your data.

[steveo]

I'm not FIRE'd yet. I will be 47.

We are similar ages. I'm definitely not working FT until I hit 4%WR. Like you I'll have the Canadian version of SS and a house that will likely be equal to 40% to 50% of my FIRE portfolio when its paid off. I feel like free time is too previous at this age to be chained to a desk chasing a false sense of security.

Focusing on money as = FIRE success is missing the big picture in my opinion. There are so many ways a FIRE could fail that do not involve $$.  If a 5.5% WR gets you rolling and you've got a bunch of buffers to reduce the risk go for it. We are not getting any younger! ;)

I don't think I will have a problem with a 5.5% WR. I may work part time. I may not. We may spend less. We may sell our house and downsize. Social security is always there as a back-up. The kids are getting older and when we are ready to retire the older 2 should be pretty close to independent.

[AdrianC]

Bill Bernstein: "...the best "annuity purchase" you can make is to delay beginning Social Security until age 70".

Is there a reference for that quote, and more background?

I would have thought it was calculated to be actuarially equal, so unless you happen to know something the actuarial tables don't (heavy smoker, or family history of living to 120, etc) that it was a crapshoot either way.

It's from "The Investor's Manifesto". I believe you are correct that SS start dates are calculated to be actuarially equal. Bernstein's idea is to delay so you get higher payments when your human capital (ability to earn) is low or non-existent. It's about risk-reduction more than being financially optimal.

On page 145 he says: "This calculates out to a guaranteed real return from waiting of 8 percent per year, which is hard to beat anywhere in the capital markets. Should you "live too long", the bigger monthly check will come in very handy indeed."

[AdrianC]

And on a general point, if you only reference your own investments, which nobody else knows, there isn't much room for debate.  You're saying you are correct based on private information you selectively reveal, meanwhile the people debating you relying on published information that others can look up.  If you only quote your own personal information, you won't learn anything and others won't have a way to validate your data.

They may have been directed at me? In the interest of sharing and debate, here's an example:

cFiresim, solving for Max Initial Spending, over a 40 year retirement, with and without a mortgage.

$1M Portfolio
$100K house
$75K mortgage 30 year fixed at 3.4%. $332.61/mo, $3991/yr*. Proceeds from mortgage invested per asset allocation.

Asset allocation of stocks/bonds/cash: 75,20,5, cash at 0.5% interest.

95% success rate
No mortgage: Max Initial Spending $35,893
With mortgage: Max Initial Spending $36,401
With the mortgage the Max Initial Spending increases by 1.4%

85% success rate
No mortgage: Max Initial Spending $39,507
With mortgage: Max Initial Spending $40,185
With the mortgage the Max Initial Spending increases by 1.7%

* Seems a bit high? I got it from Bankrate.com.

[CanuckExpat]

Bill Bernstein: "...the best "annuity purchase" you can make is to delay beginning Social Security until age 70".

Is there a reference for that quote, and more background?

I would have thought it was calculated to be actuarially equal, so unless you happen to know something the actuarial tables don't (heavy smoker, or family history of living to 120, etc) that it was a crapshoot either way.

I think you are reading it as "it's better to delay than take it" (and arguing it's a wash either way), where as he's saying "it's a better annuity than you can buy."

That is, he's not comparing taking it early to late, he's comparing delaying it to purchasing an annuity.  If you want an annuity, delaying SS is more efficient, money wise, because most annuities are such bad deals.  Does that make more sense?

It's from "The Investor's Manifesto". I believe you are correct that SS start dates are calculated to be actuarially equal. Bernstein's idea is to delay so you get higher payments when your human capital (ability to earn) is low or non-existent. It's about risk-reduction more than being financially optimal.

On page 145 he says: "This calculates out to a guaranteed real return from waiting of 8 percent per year, which is hard to beat anywhere in the capital markets. Should you "live too long", the bigger monthly check will come in very handy indeed."

Those both clarify a bit, thanks. Seems more reasonable, or at least on the face less objectionable :)

[Interest Compound]

This is a fascinating thread.  In theory, I believe this is the way to go for someone like me with a lot of flexibility (43, single, no kids, no mortgage, etc.).

My issue is this:  I have over saved (good problem to have I know) as I knew nothing about the mechanics of ER/RE/FIRE a few years ago.  My portfolio is currently $1.4M and I'm still accumulating (easy money in my current gig) for another 6 months or so.  My current annual spend is only $30k.  That being said, I'd like to responsibly expand my lifestyle (spending) as much as my portfolio warrants moving forward (blasphemy around here I know).

Given the above, I'm really struggling selecting an appropriate A.A.  I feel like I've "made it" for the lack of a better term.  And that's the one issue I have with a 100% stock A.A. at this point with a CAPE sitting around 26.  Having a great depression like event and leaving me with $200k would be a disaster.  If I had a smaller stache, I believe the 100% stock/vpw is the way to go, hands down.  Just not sure it's worth the risk at this point for me.  I'm about 65/15/20 at this point (stock/bond/cash - still working on allocating my cash). 

On the other hand, I'm comfortable with a $30k spend if necessary which could be supported strictly by dividends in a 100% stock portfolio even in a downturn).  I feel I have the flexibility to use the VPW and 100% Stock AA method.  Given that I'm only 43, it just feels like this approach is the way to go.

I know it's a thread hijack, but I'm really struggling with this - would be a great help if some of you on this thread would comment on what you would do in this situation?  Thanks.

You answered the question yourself. You aren't comfortable with 100% stocks, so under no circumstances should you be 100% stocks. Looking at the worst-case scenario, a 65/35 stocks/bonds $1.4 million portfolio never went below a $30k withdrawal with VPW, and had a median withdrawal of $65k a year.

A more typical scenario has a median withdrawal of about $100k a year.

The rule: Your asset allocation should be based on your unique ability, willingness, and need to take financial risk.  You have the willingness, but it seems you don't have the ability, and you definitely don't have the need. If 65/35 is what you're comfortable with, you'll be fine :)

Thanks for the response I.C.  I guess I've always been a value person.  If the market had a CAPE below 17 right now, I'd be 100% stocks.  Not trying to time anything, but historically, this market seems frothy.  But I'm curious, what would you do in the same situation I'm in - I'm interested?  Thanks.

If I were in your shoes, I wouldn't delude myself into thinking my knowledge of a single publicly-available metric (CAPE) allows me to predict future returns better than those who have access to that same information (and more).

I'm not too far off from your situation, and my answer is 100% world cap-weighted stocks, with a VPW withdrawal. Volatility is only temporary, but you can permanently cripple your portfolio trying to avoid it.