I want a book. I really want a book.
But mainly I want to learn. We are both the engineer types who feel like we need to understand this stuff and be able to do the calculations in order to feel confident enough to pull the trigger, if that makes sense. So as a first pass I want to self educate and then use professionals as a double check.
@ysette9, speaking as a recovering engineer, I think that once in a while it’s all right to buy a power tool. You’ve already built most of your FI by hand (or with free tools), and you’ve certainly earned this tool.
I’d buy the book. Go hog-wild, full-retail, no-discount-code Amazon. I’d suggest expedited shipping, too, but I might feel guilty about that and have trouble sleeping at night.
If you showed this thread to the head librarian at *my* local branch, she'd smile and order it from Amazon right away. And then we'd go surfing.
Ah yes, part 19 on thé glidepath is like a bible to me until I read part 21 and now everything is in flux in my mind. I haven’t figured out how to analyze the glidepath asset allocation and my mortgage. (If you look at the comments section on part 21 you may recognize my screen name). :)
I’m glad I read Karsten’s 4% SWR series on the ground floor of my house, because it still made me want to throw myself out of a window. I generally agree with his analysis, yet it didn’t make me want to go earn a paycheck or even buy (another) annuity.
By the time you’re tweaking glidepaths, you’re probably overoptimizing. Your Number has a high probability of already being good enough for the 4% SWR. Your hyper-awareness of all the 4% SWR’s flaws (thanks to Karsten) means that you’re not going to obliviously lurch through life as a blindly-spending 4% SWR robot.
Each of the tactics to get through a prolonged bear market or a recession will not cure the problem by itself. But the aggregation of those techniques (variable spending, part-time income, annuity income, glide slopes) will avoid portfolio failure. It’s just awfully darn hard to build a quantitative computer model to prove it.
I think it’s still worth doing the glidepath and mortgage analyses if you find them challenging & fulfilling, but I think you’ll enjoy that project much more after you’ve declared your financial independence and started the next phase of your life.
I don’t have a good idea on modeling risk for sequence of returns and asset allocation.
I don’t think there is a good model.
If you keep a couple years’ expenses in cash for the first decade of FI, then you’ll be able to avoid spending down your portfolio during most recessions. Not *all* recessions (as Karsten has shown) but most of them (as I’ve learned). You’ll also sleep better at night. After the first decade your portfolio will have grown faster than inflation (and faster than your spending) and you’ll have reached Karsten’s 3%-3.5% happy place. See more details at the bottom of this post.
Anecdotally, your spending in FI will lag inflation and will probably even drop. It’s the “retirement spending smile” phenomenon, and for people who can spell SWR it’s also a keen understanding of variable spending during FI.
I don’t want to start another thread on paying off the mortgage early or not, but I am very interested in ideas about how to think about mortgage and bonds in a portfolio. In Part 21 hr flat out says it doesn’t make sense to have a large bond allocation while also holding a large mortgage. So....
I think it does not make sense to pay a higher interest rate on a mortgage than the total return you’re earning from bonds (or any other asset). Either get a cheaper mortgage or buy higher-yielding assets.
If the whole analysis is frustrating (and messing with your sleep at night) then pay off the mortgage and choose your ideal asset allocation with the rest of the portfolio. The optimization of mortgage arbitrage does not pay enough money to compensate you for the stress.
If the mortgage payoff is keeping you in the workforce for “just one more year”, then you might still be able to declare your FI. When your net worth (which accounts for the mortgage debt) is still 25x your annual spending then you should still have a high success rate from declaring FI and paying off the mortgage as part of your annual expenses (instead of with employment income). This has a high success rate because the mortgage is a fixed expense for 30 years, not an expense which grows with inflation for the rest of your life.
Run the different numbers (with and without a mortgage) through cFIREsim or FIRECalc and see how you feel about the results.
Which brings me to my emotional point about longevity and financial behavioral psychology. In 2011 I lost a good friend to a cerebral hemorrhage while he was at work (during his Wednesday-morning department meeting). He’d been working “just one more year” for over six years because he really wanted to pay off the mortgage. He died only six months away from his self-imposed goal, and his widow paid off the mortgage with his life insurance.
We’ve done mortgage arbitrage for 15 years (on an asset allocation of >90% equities) and our annualized total return is 8%/year... on a 3.5% fixed-rate mortgage. (During 2008-09 that annualized total return was only 2%/year, it's recovered nicely since then, and it'll probably settle around 7%.) But I sleep well at night because I have an inflation-adjusted annuity from the federal government, not because I’m getting rich from mortgage arbitrage. Would an extra $3500/year from a $100K mortgage be worth it to you?
I’ll add the Root of Good ACA reading to my list.
If you decide that you want more power tools, then Justin offers one-on-one consulting. We’ve known each other for over a decade, and he’s very good at it.
We are getting closer to The Number and my husband is asking good questions about logistics of how we will actually live off of our investments. I have vague ideas (Live off of taxable investments first/spend down the cash/bonds initially to protect against sequence of returns risk) but I have no clue how to do it in the nitty-gritty.
If your spouse wants a detailed spending plan for sequence-of-returns risk, then I'd suggest keeping two years' expenses in cash. (Put the other 92% of your portfolio in whatever you want, with or without the mortgage.) Give yourself a paycheck of automated withdrawals from the first year of cash (monthly, quarterly, whatever) and put the second year of cash in a money-market fund or in CDs.
At the end of the first year, if the market's annual return is >0% then sell off enough of your portfolio to have two years' expenses in cash. You'll have a better idea of your expenses and you'll know how much cash you want to raise.
If the market's annual return is 0% or negative then don't sell from your portfolio, and start spending the second year of cash. Pay the early-redemption penalties on the CDs if you have to, but keep spending your cash.
If the market's annual return is up at the end of the second year then replenish your stash by selling enough of your portfolio to have two years' expenses in cash.
If the market's annual return is <0 again at the end of the second year of a bear market or a recession, then you'll start spending from the rest of your portfolio. By then, however, you've also probably cut your spending or even decided to earn part-time income. You've done enough to get through all bear markets and most economic apocalypses. More importantly, you'll be happy that you've enjoyed two years of FI with many more to come.
At the end of the decade of keeping two years' expenses in cash, your portfolio has probably grown enough (and your expenses have lagged inflation enough) for your SWR to drop below 3.5%-- low enough to be immune from sequence of returns risk. Then you can spend down the cash stash and just sell enough of your portfolio each year for your expenses (or the 4% SWR).
Now you have a nitty-gritty example to work with, and you can mess with these criteria to fit your preferences.
