Hey folks,
As my own FIRE date approaches (January 2017), I'm putting the finishing touches on my SuperPlan.
With relatively poor returns on the horizon* the biggest risk to my early retirement plan is the Sequence of Return Risk**.
Yes, the Mad Fientist has shown us how we can simply adjust our withdrawal rate*** to account for the Shiller CAPE, but I've got cash coming in soon, so I could just spend that instead of selling depreciated shares. I'll be doing a Roth Conversion at the end of year 1 of RE, so those basis dollars will be available to withdraw at the start of year 6, so the question remains
what's the best way for me to fund years 1-5? Here's what I'm thinking:
Years 1-5The current dividend yield of my taxable account is about 1/2 ($15k) of my projected early retirement budget. Having a cash reserve to fund the other half would allow me to get through years 1-5 without selling any principal, which significantly reduces the Sequence of Return Risk.
Ideally I’d hold $75k to cover five years of $15k supplements. Adjusted for inflation, this is $80k-ish. During Q4 of 2016, I’ll instruct Vanguard to send all dividends to my checking account. Q4’s dividends will pay for 2017 Q1’s spending, and be supplemented with cash. Q1’s dividends + cash for Q2’s spending, etc.
I anticipate being able to have at least $60k in cash by 2017. This will put me mostly through years 1-4. I may need to sell shares doing years 4-5 to supplement dividends, but I’m willing to do that as necessary for a little while while I wait for my Roth IRA Conversion to become available.
Years 6-10Paid for via dividends and Roth conversion basis dollars.
Pros: Reducing sequence of return risk.
Cons: losing a bit of cash due to inflation, and opportunity cost of the cash sitting idle and not invested.
Feel free to poke and prod this idea, but I also want to know for you recently retired or about-to-retire folks,
what are your own plans for reducing Sequence of Return Risk?Will you just sell from the taxable account or do something different? What other pros/cons do you see with this?
*
https://www.kitces.com/blog/should-equity-return-assumptions-in-retirement-projections-be-reduced-for-todays-high-shiller-cape-valuation/**
https://www.kitces.com/blog/understanding-sequence-of-return-risk-safe-withdrawal-rates-bear-market-crashes-and-bad-decades/.
***
http://www.madfientist.com/safe-withdrawal-rate/