Even your friend Nords is hedging his bets by keeping the rental and juicing his stock returns by writing options. Their retirement is likely going to be "overfunded."
Here, let me put my own words in my mouth.
1. We have a rental property. We "acquired" it in 2000 by upgrading to our dream home. (In retrospect, that was the worst period in 15 years to be selling real estate-- but a fantastic time to upgrade.) We were both on active duty in 2000 and too busy to FSBO our old home in a buyer's market, so we rented it out for a few months while we waited for our lives to settle down and the market to recover. After eight months our military tenants moved out of our rental and into base housing.
Then my parents-in-law moved into our rental and stayed there for nearly six years. Hint for new landlords: this does not cashflow, and it will not enrich your net worth.
When they finally moved back to the Mainland, we put a great set of (military) tenants in there while we rehabbed the property to put it on the market. Then my spouse pointed out that it's a very elderly-friendly property (single level, one block from stores & doctor's offices) and that our daughter might someday want to take over our "dream house" (with its kid-friendly neighborhood and great schools) while we geezers could move into the rental to age in place.
Our cash-on-cash return is about 4%, which on Oahu is considered "studly". Our return is calculated on the money we'd have left after selling the place and paying off the mortgage, minus federal/state taxes and AMT and depreciation recapture. (Oahu's median price for a single-family home is over $650K and our neighborhood's market rents are about $2900/month.) Today we're happy to be beating CD rates, but in 2006 our rental property looked pretty sad alongside 6% CDs.
If you can help me craft a spouse-friendly exit strategy for this situation then I'm all eyeballs. However this was not even a glimmer in our ER planning, and I'm not hedging anything with it.
Of course my attitude is perhaps biased by the fact that I'm currently working on Schedule E. Or at least that's what I'm supposed to be doing instead of posting here...
2. I've been writing options since 2010. I've made $36K (before taxes) and been exercised once. My last batch of options expired in January and I haven't sold any since then.
The reason we write options is to minimize our perpetual debate about rebalancing. Our retirement portfolio is over 90% equities in Berkshire Hathaway and three ETFs, all of which have an options market (especially BRK and the small-cap value ETF IJS). When our asset allocation used to reach the limit of its bands then we'd debate the subject ad
nauseum infinitum: "But it might go up/down some more." "But we'll pay a lot in taxes." "But we LIKE that asset!" "But this is a TERRIBLE time to buy!" and so on. Now, when our AA reaches a limit, we simply sell a call option or a put option. We get a little money from the premium and raise a toast to all the reading & studying I did to figure out how to make this work. If we're exercised, then we're brilliant. If we're not exercised then we probably sell the same option all over again and keep waiting.
These days our assets are all sitting near the middle of their bands and there's no reason to rebalance. I might get a chance to sell some puts on the international value ETF (EFV) or to sell a few calls on BRK, but the options prices suck-- nobody thinks that either asset is moving any further.
In the last 12 years my military pension has received a cumulative 27% COLA (despite a couple of zeros in that series). However in the last 12 years we've refinanced our mortgages on our home and our rental and reduced our monthly P&I payments by 40%. When we bought our "dream home" in 2000 we were thrilled to get a 30-year fixed mortgage at "just" 8%. Today it's at 3.625% and it won't be paid off until I'm 80 years old.
My pension covers most of our expenses these days, and our portfolio dividends (Dow dividend ETF, DVY) are very nice too. But we still sell off a few stock or ETF shares every year to replenish our two-year cash stash, and so far we're staying within a 4% SWR. That's because we've really whittled our expenses down in ER, and partially because we have unexpected cash flow from an unplanned rental property. If you'd told me in 1999 what our asset allocation and finances would look like in 2014, I would not have believed it.
So, sure, income streams are great-- especially when you're happy to keep slaving away in a cubicle for however much longer it takes to reach that elevated level of the FI game. Or if you're hard-wired (or hard-taught) to be a landlord. Or own your business. Or love being in the military.
But 50 years of history & analysis (or whatever appropriate number of decades) has shown that a 95% probability of success tends to fund 19 out of 20 ERs. In 1999 I couldn't tell you what our net worth would be today, but I was 95% confident that it'd be positive. I was right, and by a honkin' big margin of error. I agree that the 4% SWR might be hard for many investors, and if they're stupid then it's impossible. But it's also reasonable to give responsible, informed investors a good set of thumbrules and guidelines, especially when they can consult their best anonymous Internet buddies to make sure they're on the right track.
By the way, my friend Brewer helped me figure out how to analyze stocks and where to learn about selling options. He seems pretty good with bonds, too, and he can even teach you how to build an indexed annuity at a very low cost. I am eagerly anticipating his "tell all" memoirs about his years of his financial career that he won't talk about. He's seen enough to be justifiably cynical & paranoid about the financial industry. DoubleDown is probably not selling anything, but Brewer and I have been posting to ER forums for years and have seen plenty of pitches which started out this way.