I appreciate everyones input, even if I didn't get to replying to it in this post. Some of the posts were getting at the same thing, so I cut down to only replying to one.
mrspock wrote: ↑Thu May 13, 2021 1:09 am
Here's the deal. This what the math says: you stick your money in the market today, at whatever AA you think you can sleep at night with. 50/50, 60/40, 75/25 ...whatever. Since you are young, use a SWR between 3-3.5%, confirm with various Firecalc like tools, and then just spend that money each year. That's it. Done. Finished. It really doesn't matter if a Great Depression happens, or a 2008 happens....it doesn't. It's irrelevant unless you do something foolish like mess with your portfolio during such events -- see my original points. All of these tools take these events into account.
Again, and I can't stress this enough. This is an easy
call, take door #2, have equities in your portfolio. It's completely irrelevant what the market does after you begin withdrawing money per your SWR. If you are a bit worried in the moment, just cut back on some spending, but you don't really need to do this.
I'm now with you. I do have a few questions for you though.
1. If you believe in the cold hard data and thats it, why are you in any bonds at all? 100% stock allocation always ends up better in all circumstances according to history. There is more volatility, but since we are only taking out the SWR at any one time, volatility shouldn't matter as long as it comes back. Unless I am missing something, it sounds like it's diversifications for the purpose of something novel happening in an unpredictable way. Which isn't too far from some of the feelings I was suggesting.
2. I am attempting to decide allocations and I am having a tough time coming to terms with if bonds are really the "lower risk" asset class right now. When you combine their reward (low) with the fact that there isn't much room for govt interest rates to go down (consequentially raising bond value), it seems like a bad deal. I was thinking 30%, but not sure that is even right.
I will be making a post on this thread immediately after this post that talks about my future allocations and would appreciate your opinion on it.
tomsense76 wrote: ↑Thu May 13, 2021 2:34 am
Certainly if one knew we were "after" a bull market, it would be better to stick the money in "once" it crashed. However here's the problem. No one knows it is after. And anyone who says they do is either lying or crazy (maybe both
). So watch out for anyone giving you guarantees.
Could the longest bull market ever run another decade? Sure. It's hard to imagine maybe, but it could happen. In fact in the run up after the 80s looking at the early 90s, wouldn't have been surprised to hear people say surely the crash is coming. Yet the 90s were a roaring time with the US stock market up 500% at the end of the decade
. IOW "after" is terribly challenging to pinpoint.
This really got me and was one of the posts that kicked me out of "timing the market" mode. I've looked at the s&p500 graph throughout the years, but your post pushed me to take another look at the inflation adjusted graph here
. I tried to put myself in the 80/90's and you are completely right. In the early 90s I would think that there is no way the market should keep going. I would say we are already past the last highs. Then I would miss the ROAR of the tech boom.
snailderby wrote: ↑Thu May 13, 2021 5:31 am
With the understanding that the past doesn't always predict the future, check out the heat maps and safe withdrawal rates for different portfolios at https://portfoliocharts.com/
. You certainly don't have to be 100% stocks if a lower stock allocation will generate enough growth for your needs. Some investors also use TIPS, gold, and/or commodities to hedge against inflation, although there are mixed views on this forum about the latter two asset classes.
This was a massively helpful link. Thank you
smitcat wrote: ↑Thu May 13, 2021 8:34 am
Please confirm a few important data points for future planning....
- you desire a budget for expenses of $220K per year
- does that budget already include growing health care costs for the family?
- when you model your current fed and state taxes what draw amount do you need to support $220K after taxes?
barneycat wrote: ↑Thu May 13, 2021 1:04 pm
You've received some great advice here. The only thing I can offer is to think carefully and honestly about your spending. Coming from personal experience, it's much easier to say, "ah I can cut back if I need to" than to actually follow through with doing so. Lifestyle creep is very real. And actually cutting back spending is likely much harder when you have $10 million (maybe $7 million after a market fall) sitting the in the bank and your family questions why you need to cut back on things they are used to.
You say your current spend is $160-220k per year with a planned increase to a maximum of $250k for kids' private schools. I live in a MCOL area and private schools range from $8k to $22k per kid for elementary school. Private school isn't the only cost to plan for as your kids age: activities, camps, family vacations with four or five plane tickets versus two. Kids are expensive, but totally worth it. You've presumably worked hard for your money and should feel total joy for providing for them. But that goes back to my first point of "cutting back." Are you really going to cut back on these things?
Just be honest with yourself. Great work and keep us informed of what you decide to do!
I am looking at my expenses and still modeling my exact spend. It's hard to pin point because of the crazy times (pandemic lifestyle changes). I'm also young-ish and with that comes alot of life changing events one after another (new houses, new kids, etc)
I think it is safe to say that I spend between 140k-220k a year POST-tax. At current tax rates that would 160k-240k pre-tax. My budget already includes paying for health insurance. I could see how on a small budget, planning for rising costs with age is important .But with maximum out of pocket being 10-15k range, additional healthcare isn't really something I have to think about based on my budget. Again, I can adjust my spend accordingly.
BarneyCat, I definitely understand what you are saying. I don't think anyone likes to cut down on spending and your comment about family questioning the cuts with so much in assets sitting there is DEAD ON. That is definitely my wife
. The only good thing I got going for me in this regard is that we are both from middle class frugal families, so outside of a few upgrades that have creeped into our lives, we aren't too accustomed to upper class luxuries (first class flying, etc..)
Independent George wrote: ↑Thu May 13, 2021 8:36 am
1. It is mathematically sub-optimal, but dollar cost averaging your stock allocation over the course of the year offers some emotional protection from a bear market. I think this is perfectly justifiable with the large amount you are working with.
2. If you maintain a conservative allocation (40/60), a bear market will not come close to wiping you out, and rebalancing will likely benefit you in the long run.
3. A market crash followed by Japan-like lost decade is a small (but real) possibility; inflation is a certainty. At least some equity exposure is needed.
I will be DCA'ing for the reason you specified. I am just concerned that Bonds aren't giving the same hedge as they used to and also that #3 is a real possibility and can lead to a long time of me looking at a poor portfolio.
Eat33 wrote: ↑Thu May 13, 2021 12:25 pm
You are a young, bright, successful man with 30 years of traditional working life to go. If you try to live off your nest egg you will be bored and stressed.
You enjoy a nice life style: nice home, car, spending money without a second thought. This is a great feeling.
Do your homework and invest in a manner which makes you feel comfortable. Three fund portfolio is easy. Real estate is not easy. You achieved success by being good at a particular discipline. Don't turn your back on that knowledge going forward. Being good at your field makes you feel comfortable so why turn your back on it? It gives you security and you probably enjoy many aspects of your work.
Find another job. Not necessarily start another business but a challenging job. Something that allows you to take off for awhile if you want.
Thank you for your point of view. I am right back at it and already thinking of things I can do to build. I don't think this last business will be the last dollars I ever make, I just like to have the plan setup for the worst case scenario of if it is. Planning accordingly also allows me more room to maybe get into things that I find more enjoyable, even if they are less lucrative.
patrick013 wrote: ↑Thu May 13, 2021 12:29 pm
Monte Carlo Simulation
The Monte Carlo will take inputs and calc results based on stat data. This one
has come up with estimates that have 4605 portfolios out of 5000 simulated
portfolios (92.10%) survived all withdrawals.
If you adjusted your spending to $200,000/year 4952 portfolios out of 5000
simulated portfolios (99.04%) survived all withdrawals.
If you're more comfortable with less stock and less risk just adjust those figures
and your withdrawal amount downward and see where the Monte Carlo leads.
That website doesn't seem to be working right. It gives different numbers than other similar websites. It also only goes back to 1970s I think.
One immediately easy way to see something funky is going on is by just using a 100% cash allocation and it shows your money as growing
aj76er wrote: ↑Thu May 13, 2021 6:25 pm
You could take an approach inspired by William Bernstein:
- Keep 20 years of base expenses in safe, fixed income
- The rest put in a riskier market portfolio
He further says you can assume 50% of dividends (from diversified equities) as "safe". So, let's say 1% yield from a mixture of VTI and VXUS.
If you assume 220k/year as base living expenses, then 20X is 4.4mil. However, assume some dividends from equities (~50k), and you only need to draw 170k per year from the fixed income, which is 3.4mil @ 20X. So, this would leave your liquid portfolio of 8.4mil split as follows:
Fixed Income: 3.4mil
Equities (VTI+VXUS): 5mil
The 3.4 mil could be any combination of FDIC savings, money markets, Treasury bond ladder (STRIPS perhaps), CD ladder, TIPs ladder, etc. Personally, I'd put 2 years worth in FDIC savings and then do a Treasury and/or CD ladder for the rest.
Using this scheme, if equities have an amazing year, take all your living expenses from the equities and roll the rung of the ladder to extend it out, and maybe even add to the fixed-income pile. If equities take a dump one year, harvest living expenses for that year from fixed income. With so many years in fixed income, you can ride out a prolonged equity bear with no problem.
What interested is I was already thinking about having a similarly tiered approach as this before reading your reply. The problem with so much in Fixed Income is that right now all those things give almost literally no return. So the money is literally just being devoured away by inflation. 20 years is simultaneous too much (inflation eating away at alot of money) and too little (being young,20 only puts me into my 50s). The next post I make in this thread shows my idea for allocations.