Question about glide path into FIRE

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dboeger1
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Question about glide path into FIRE

Post by dboeger1 »

I apologize if this is in the wrong category. I'm looking for more general sort of theory on things to consider, but I will provide some personal details for context, so I guess it counts as personal investments.

2 working spouses, ages 29 and 28
1st baby due later this year

Recent post with approximate portfolio:
viewtopic.php?f=1&t=346742

Relevant AA:
Cash: currently up to $50k, plan to buy $20k of I bonds later this month and let cash hover around $30k for 2-tiered emergency fund
Bonds: currently none
Stocks: A bit over $400k now across various account types
Mortgage: A bit over $500k now @ 2.625% 30-year
Net Worth: About $750k now, including $300k of home a car value (I include it for convenience just because Mint does, not because I consider the car an investment)

FIRE target:

$60k annual expenses after taxes, including $25k in mortgage payments
25x expenses = $1.5m net worth target after taxes
Relocation from HCOL is likely in long term but no intentions of doing so for next 20ish years with kid(s) unless forced
Ideally would like to achieve FI some time over next decade when I turn 40

Thoughts:

I'm wondering how to prioritize between stocks and/or paying off the mortgage over the next 10 years. The way I see it, there are essentially 3 reasonable glide paths ahead of us:
  • Just keep buying stocks and making minimum mortgage payments. This is obviously the high-risk/high-reward strategy.
  • Start paying off the mortgage early. This is the conservative approach. I think aside from the I Bond EF tier, it doesn't really make sense to hold bonds given that paying off the mortgage gives a guaranteed higher return.
  • Blend both approaches. I'm not sure what exactly the right blend would be or how to determine it, since the debt and portfolio size should move in opposite directions, so it's not quite the same as determining a stock/bond AA split.
My understanding is that deciding how to adjust risk tolerance upon approaching one's financial goals (FI by 40 in my case) is mostly a personal decision. Some people keep the same AA, some people get more aggressive (may as well take risk since you're rich), and still others get more conservative (stop playing if you've won the game). I haven't totally nailed down where I stand on that spectrum. On the one hand, I always felt like I logically fell in the more aggressive camp. After all, we're quite capable of reducing our spending, moving somewhere cheaper, etc. Our expenses were more like $30k-$40k for many years while renting, and only went up after buying our house and feeling like it was time to ease up on saving for a bit. We're also still young enough to feel pretty secure in our ability to generate future income. I think given enough net worth, we could be totally content at 100% stocks in perpetuity. However, I also recognize that being over-exposed to risky assets upon approach could be snatching defeat from the jaws of victory, in a sense. I'd hate to be approaching FI, have a huge market downturn, and suffer a prolonged job loss at the same time, setting us far back.

I understand that's essentially the exact same risk we have been and are taking by being aggressive up to this point, so at this point, some of you reading are probably like, "Well, why the heck didn't you figure this out before?!" But in a way, I feel like getting near a financial goal and then having to postpone it for many years is worse than just failing and having to postpone it early on. As a young pup in my early 20s, I was at peace with the idea that it would take however long it would take, and that 30+ year careers were actually normal. However, with a kid on the way and aspirations outside of my day job, I'm feeling less willing to risk that FI milestone for lifestyle reasons, even though I would be totally comfortable taking on more risk with substantially more wealth. Does that make any sense? I feel like it might be some kind of emotion timing, almost like an ugly cousin of market timing, and maybe it has no place in Boglehead investing. But surely, there's a place for emotional changes seeing as how they are the basis for AA decisions in the first place. I feel fairly confident that 100% stocks and minimum mortgage payments is the optimal path forward in terms of total return given our flexibility to cut expenses and/or continue working, but I also know it would be pretty heart-breaking to get close and suffer a setback.

Question:

What are your thoughts on this weird FIRE glide path concept of high risk tolerance early, followed by lower risk tolerance into FI, and then high risk tolerance again if/when the portfolio grows well beyond one's needs? I guess it's not all that different from full-age retirement considerations, except that full-age retirees often don't have the option of continuing to work, whereas younger ones do, so it's kind of a roller coast versus a cliff. Is paying off the mortgage early too conservative in my case? Should I just buck up and accept that a market downturn in the next 10 years may delay our FIRE goals?
KlangFool
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Re: Question about glide path into FIRE

Post by KlangFool »

OP,

A) What is your annual savings?

B) In general, we do not use net worth to determine whether someone can FI. We use the portfolio value. Hence, you are FI when your portfolio is equal to 1.5 million with 60K per year of expense.

C) If you can achieve your FI goal at 40 years old, you are less than 10 years from FI. Hence, you cannot afford to be 100% stock. You do not have the TIME to wait for recovery.

KlangFool
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abracadabra11
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Re: Question about glide path into FIRE

Post by abracadabra11 »

A few quick notes:
1. Recommend you reduce your safe withdrawal rate (i.e. increase your net worth target) from 4% for retirement >30 years.
dboeger1 wrote: Wed May 05, 2021 8:06 pm 25x expenses = $1.5m net worth target after taxes
2. Not sure what's implied by 'target after taxes'. But I don't think it's worthwhile to try and estimate what your portfolio value is post-tax. You'll be able to use lots of options (i.e. tax gain harvesting, ROTH conversions, etc.) to keep your taxes low once your wage income disappears.
3. You will also need to revisit your expenses as parents. Our expenses ballooned by nearly 50% after having kids (with >90% of that increase coming from daycare costs).
4. We had originally planned on an equity glidepath prior to and after retirement, but opted to stick with a static allocation that's shown to align with our risk tolerance over our investing careers. The plan was to reduce our asset allocation from 80/20 -> 60/40 starting 5 years prior to retirement and then increase it from 60/40->80/20 over the first 10 years after retirement. After some deliberation, we decided that this change didn't seem to meaningfully reduce SORR and that we would be better served by curtailing our discretionary expenses or working part-time during those first 10 years.
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dboeger1
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Re: Question about glide path into FIRE

Post by dboeger1 »

KlangFool wrote: Wed May 05, 2021 8:44 pm A) What is your annual savings?
I didn't include annual savings because I was more looking for feedback specifically on how to balance paying off the mortgage vs. adding to stocks, as I'm finding it harder to judge mortgage/stock vs. bond/stock. Bond/stock is pretty straightforward, at least in my mind, but mortgage goes in the opposite direction and has somewhat different characteristics. We also don't maintain a strict budget so savings rate definitely fluctuates, but I would say $100k annually is a decent ballpark figure.
KlangFool wrote: Wed May 05, 2021 8:44 pm B) In general, we do not use net worth to determine whether someone can FI. We use the portfolio value. Hence, you are FI when your portfolio is equal to 1.5 million with 60K per year of expense.
I get why, I just don't think it seems very appropriate for us. Housing-related expenses add up to well over 50% of even our expanded spending this year, and a significant portion of those could be wiped out simply by relocating or paying it off. Alternatively, the home could become a rental. It'd be one thing if it was a starter home in a cheap area and downgrading was not an option, but it's a SFH in a HCOL area where most new construction is MFH. After all, people with multi-million dollar rental portfolios don't say they're not FI just because they don't have stocks. Therefore, I think it's fair to consider it part of the portfolio, or perhaps reduce the expense estimate by the mortgage amount under the assumption that the house would be paid off (which is one of the possibilities I'm exploring with this topic).
KlangFool wrote: Wed May 05, 2021 8:44 pm C) If you can achieve your FI goal at 40 years old, you are less than 10 years from FI. Hence, you cannot afford to be 100% stock. You do not have the TIME to wait for recovery.
"Cannot" is a strong word. We're young enough that we could recover. The source of my angst on this decision is that as FI gets closer, I feel less willing to risk missing that arbitrary age-40 "deadline", mostly for lifestyle reasons. I'm not particularly happy with my career, and unlike many people, I know exactly what I would be "retiring" to because I have a huge list of passion projects that I struggle to devote time and energy to because of my day job. My hope is to eventually turn these passion projects into income-generating businesses, but that is a longer-term goal that I do not feel comfortable relying on for building wealth until I reach FI. Having a baby on the way just adds to the list of things I'd much rather be doing than my day job. Basically, I'm at kind of a crossroads where I need to start defining how negotiable those aspirations are. So far, I've been operating under the assumption that if my investments don't play out how I'd hope in the short/medium terms, I could just work longer. I'm starting to think that's just not the life I want to live, and in order to secure my ability to pursue those passion projects, I should just be paying off the mortgage, even if it is at such a low rate. You're right that being 100% stock definitely puts my plans at risk.
Wannaretireearly
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Re: Question about glide path into FIRE

Post by Wannaretireearly »

OP we took a risk moving to an aggressive 10 year mortgage, only once we determined we would never move. That was 9 years ago & I'm now 42. The peace of mind of now almost being done with the mortgage is great. There is a good chance we would have spent, or at least not invested, the delta if we had stuck to a longer term mortgage. Ymmv.

I'd go with the blended route given who knows what the future holds. Good luck, your on a solid path.
“At some point you are trading time you will never get back for money you will never spend.“ | “How do you want to spend the best remaining year of your life?“
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dboeger1
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Re: Question about glide path into FIRE

Post by dboeger1 »

abracadabra11 wrote: Wed May 05, 2021 10:36 pm A few quick notes:
1. Recommend you reduce your safe withdrawal rate (i.e. increase your net worth target) from 4% for retirement >30 years.
Yes, sorry, I left out key information. For starters, I think I'm much more likely to "retire early" than my wife, in large part because I have concrete passion projects that I aspire to turn into a business, so my hope would be to supplement the portfolio with additional income. However, that is a longer-term aspiration and I would like to have some margin built into the portfolio. A large part of that is just the fact that our discretionary expenses would likely drop significantly if at least one of us became a stay-at-home parent. We love to cook and have access to shockingly cheap groceries for our area, but we also eat out a lot just because of extended work hours and not wanting prepare meals. In times when work is less busy, our spending drops pretty dramatically as a result of us cooking more.
abracadabra11 wrote: Wed May 05, 2021 10:36 pm 2. Not sure what's implied by 'target after taxes'. But I don't think it's worthwhile to try and estimate what your portfolio value is post-tax. You'll be able to use lots of options (i.e. tax gain harvesting, ROTH conversions, etc.) to keep your taxes low once your wage income disappears.
Correct, I generally don't estimate the impact of taxes, I just wanted to throw that in there for clarity.
abracadabra11 wrote: Wed May 05, 2021 10:36 pm 3. You will also need to revisit your expenses as parents. Our expenses ballooned by nearly 50% after having kids (with >90% of that increase coming from daycare costs).
That could very well be. I don't have a very precise way of estimating how our expenses will change as parents and beyond. Long-term, I would like to have a paid-off home, so that should help offset any increases to a degree, which is why I'm just kind of sticking with the $60k estimate for now.
abracadabra11 wrote: Wed May 05, 2021 10:36 pm 4. We had originally planned on an equity glidepath prior to and after retirement, but opted to stick with a static allocation that's shown to align with our risk tolerance over our investing careers. The plan was to reduce our asset allocation from 80/20 -> 60/40 starting 5 years prior to retirement and then increase it from 60/40->80/20 over the first 10 years after retirement. After some deliberation, we decided that this change didn't seem to meaningfully reduce SORR and that we would be better served by curtailing our discretionary expenses or working part-time during those first 10 years.
Wow, so you actually planned to do the roller coaster thing I'm talking about? Okay, so I'm not the only person in the world who has thought of this crazy idea, lol. I definitely appreciate the feedback. Come to think of it, I think that idea is a variant of another one I see tossed around here quite a bit, which is having a set number of years worth of expenses in bonds from which to draw on at the start of retirement. That more or less effectively reproduces the glide path roller coaster thing. Oddly enough, I always thought that was a silly, pointless idea when put in terms of number of years worth of bonds, and yet here I am now essentially saying the same thing in a different way. Go figure. Maybe the answer is I just need to do what you did, get back to basics and reevaluate my desired asset allocation based on risk tolerance. If that's the case, I think maybe the sensible thing to do is to pay off the mortgage early. It just seems like such a waste of cheap leverage, but I guess if it doesn't serve much of a purpose in reaching our goals, there's not much reason to keep it around. You know, it's funny, we always talk about how long-term investing is supposed to be boring, but compared to total stock market funds, paying off a mortgage early seems like watching paint dry. It's hard to get excited about it, especially if there isn't a huge reward for doing so at 2.625%.
Topic Author
dboeger1
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Re: Question about glide path into FIRE

Post by dboeger1 »

Wannaretireearly wrote: Thu May 06, 2021 12:49 am OP we took a risk moving to an aggressive 10 year mortgage, only once we determined we would never move. That was 9 years ago & I'm now 42. The peace of mind of now almost being done with the mortgage is great. There is a good chance we would have spent, or at least not invested, the delta if we had stuck to a longer term mortgage. Ymmv.

I'd go with the blended route given who knows what the future holds. Good luck, your on a solid path.
That's really cool. I'm curious, why was the 10-year-mortgage idea predicated on never moving? Wouldn't mortgage payoff reduce your debt regardless? I suppose the obvious answer would be if going 30-year made it affordable to move in and then you waited to be sure before refinancing in order to justify the new loan costs. The thing is, I'm not sure how certain we are of staying put here or if we would need to redirect funds in the future, so I'd like to maintain the flexibility of our 30-year with the payments where they are, but making extra payments would still produce a similar result. It's interesting to hear that you are having a positive experience with that approach so far. We're pretty good about investing most of our new money, but even so, I'm starting to question our actual risk tolerance with respect to our FIRE plans. Staying as exposed to stocks as we are means there's a good chance we may just not reach FI by anywhere near 40 if things go really bad in the markets, and that's kind of a bummer.
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Ben Mathew
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Re: Question about glide path into FIRE

Post by Ben Mathew »

dboeger1 wrote: Wed May 05, 2021 8:06 pm [*]Just keep buying stocks and making minimum mortgage payments. This is obviously the high-risk/high-reward strategy.
[*]Start paying off the mortgage early. This is the conservative approach.
Not necessarily. Per the lifecycle investing model, having high stock exposure early can allow you to reduce stock exposure closer to retirement, leading to less risk for the same expected return.

A way to evaluate whether you have sufficient stock exposure now (relative to later) is to ask: Will a 50% stock market crash (without recovery) hurt your retirement income more if it happens today vs if it happens right around retirement? If it hurts more around retirement, reduce stock exposure at retirement and increase it now.

A well designed glidepath might look something like this:

- If current stock exposure is below target, then keep the mortgage and stay 100% stocks.
- Once you reach target, redirect additional savings towards paying off the mortgage.
- Once you've paid off mortgage, redirect towards bonds.
- Maintain a fixed AA in retirement in retirement if (a) pension is insignificant, or (b) pension is significant and starts at retirement (latter unlikely for early retiree). If pension is significant and starts late, then either (a) fill in gaps with TIPS and maintain fixed AA or (b) use the total portfolio allocation and withdrawal (TPAW) calculator to adjust the AA. Adjusting with TPAW will usually yield a glidepath that slopes downwards in retirement before pension starts and then turns approximately flat after an inflation indexed pension starts.
dboeger1 wrote: Wed May 05, 2021 8:06 pm I think aside from the I Bond EF tier, it doesn't really make sense to hold bonds given that paying off the mortgage gives a guaranteed higher return.
Agree.
dboeger1 wrote: Wed May 05, 2021 8:06 pm [*]Blend both approaches. I'm not sure what exactly the right blend would be or how to determine it, since the debt and portfolio size should move in opposite directions, so it's not quite the same as determining a stock/bond AA split.
Easier to wrap our heads around target stock exposure. Stay 100% stocks till you achieve target exposure. Turn to mortgage payoffs and bonds after.
dboeger1 wrote: Wed May 05, 2021 8:06 pm What are your thoughts on this weird FIRE glide path concept of high risk tolerance early, followed by lower risk tolerance into FI, and then high risk tolerance again if/when the portfolio grows well beyond one's needs?
Useful to separate two things: increasing stock exposure because of wealth and increasing stock exposure because of age. It's fine for someone with decreasing relative risk aversion ("may as well take risk since you're rich") to increase stock exposure if wealth (lifetime wealth) increases. Increasing stock exposure purely because of age is harder to justify.
Total Portfolio Allocation and Withdrawal (TPAW)
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dboeger1
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Re: Question about glide path into FIRE

Post by dboeger1 »

Ben Mathew wrote: Thu May 06, 2021 1:37 am
dboeger1 wrote: Wed May 05, 2021 8:06 pm [*]Just keep buying stocks and making minimum mortgage payments. This is obviously the high-risk/high-reward strategy.
[*]Start paying off the mortgage early. This is the conservative approach.
Not necessarily. Per the lifecycle investing model, having high stock exposure early can allow you to reduce stock exposure closer to retirement, leading to less risk for the same expected return.

A way to evaluate whether you have sufficient stock exposure now (relative to later) is to ask. Will a 50% stock market crash (without recovery) hurt your retirement income more if it happens today vs if it happens right around retirement? If it hurts more around retirement, reduce stock exposure at retirement and increase it now.

A well designed glidepath might look something like this:

- If current stock exposure is below target, then keep the mortgage and stay 100% stocks.
- Once you reach target, redirect additional savings towards paying off the mortgage.
- Once you've paid off mortgage, redirect towards bonds.
- Maintain a fixed AA in retirement in retirement if (a) pension is insignificant, or (b) pension is significant and starts at retirement (latter unlikely for early retiree). If pension is significant and starts late, then either (a) fill in gaps with TIPS and maintain fixed AA or (b) use the total portfolio allocation and withdrawal (TPAW) calculator to adjust the AA. Adjusting with TPAW will usually yield a glidepath that slopes downwards in retirement before pension starts and then turns approximately flat after an inflation indexed pension starts.
dboeger1 wrote: Wed May 05, 2021 8:06 pm I think aside from the I Bond EF tier, it doesn't really make sense to hold bonds given that paying off the mortgage gives a guaranteed higher return.
Agree.
dboeger1 wrote: Wed May 05, 2021 8:06 pm [*]Blend both approaches. I'm not sure what exactly the right blend would be or how to determine it, since the debt and portfolio size should move in opposite directions, so it's not quite the same as determining a stock/bond AA split.
Easier to wrap our heads around target stock exposure. Stay 100% stocks till you achieve target exposure. Turn to mortgage payoffs and bonds after.
dboeger1 wrote: Wed May 05, 2021 8:06 pm What are your thoughts on this weird FIRE glide path concept of high risk tolerance early, followed by lower risk tolerance into FI, and then high risk tolerance again if/when the portfolio grows well beyond one's needs?
Useful to separate two things: increasing stock exposure because of wealth and increasing stock exposure because of age. It's fine for someone with decreasing relative risk aversion ("may as well take risk since you're rich") to increase stock exposure if wealth (PV of lifetime wealth) increases. Increasing stock exposure purely because of age is harder to justify.
I was hoping you'd reply, because I like the TPAW and your posts are always very informative, haha. You're right, it is easier to wrap one's head around target stock exposure and let that inform where one should direct new income, but doesn't it also ignore the relative value of different milestones, including those influenced by age? Just to throw out a somewhat contrived example, let's say a person works 2 jobs, and would like to reach a certain portfolio size that would sustain a hobby without having to work the 2nd job, and the hobby is physically demanding so there is more value to the person earlier in life than at full retirement age. If this person wanted to prioritize the hobby-supporting portfolio equally to their main retirement portfolio, I believe they would need to define 2 tiers of retirement essentially, 1 for the 1st job, 1 for the 2nd. They would use TPAW to construct a target portfolio that would support the hobby, and upon reaching that point, quit the 2nd job and use TPAW again with the 1st job to work up to their retirement goal. This would produce a fluctuating total asset allocation over time, but would ensure that a sub-portion of the total portfolio was managed appropriately ini order to support the hobby, independently of how the retirement progress was going.

I realize I've been throwing around the phrase "early retirement", but I don't think it's quite that simply in reality. Maybe I'm just trying to have my cake and eat it too, but I feel like long term, I will have other sources of income, and my wife may very well wait till much later to retire. I feel like a better description of what I'm trying to do is assign equal priority to this mid-life transition goal as my longer-term retirement, so in a way, I feel like I need 2 portfolios, 1 for supporting this goal, and 1 for full retirement age. The goal bucket would be sized according to the needs of the passion project business idea (more precisely, the bare minimum level of living expenses I would need covered to justify transitioning to it full time), while everything else would go towards actual retirement (although I suppose using TPAW for that would be questionable if it meant giving up my main source of regular income and the predictability that comes with it). Am I making sense? Am I correct that this would result in a somewhat oddly shaped AA curve over time as a byproduct of the competing goals, and that prioritized per-goal buckets would be a more intuitive way of assembling the overall portfolio rather than targeting a single asset allocation?

If so, I kind of feel like I might be coming up on a high-priority, age-specific goal that might suggest I pay off the mortgage early. Perhaps a better example than the nebulous passion project business idea that I keep hand-waving over would be becoming a stay-at-home parent (which is not totally out of the question for me either, and obviously many parents do, so it's a very real-world example). Let's say I decided that it was just as important for me to stay at home to raise my kids over the next 5 years as it is for me to fund retirement, and let's ignore my wife's income for simplicity and just pretend that all of our household expenses had to come from my portfolio. I don't think it would make sense to say, "Well, I ran the numbers through TPAW and it said I should still be buying stocks because I haven't reached my full-retirement-age target stock holdings yet." Instead, I should be really cognizant of the fact that this stay-at-home parent thing is high priority as well, and I need the money much sooner, so I should maybe reduce my risk until the kids grow up enough for me to go back to work, and then I can go back to buying stocks again because it's just back to worrying about retirement.

I obviously haven't done a deep analysis so it's very possible that I'm wrong, and the relative safety of early withdrawals from a more conservative asset allocation is offset by the opportunity cost of missing out on average stock gains over that time, which will ultimately impact the total portfolio. I'd be curious if anyone has any evidence on the impacts of withdrawing early from a total portfolio during the accumulation phase. For example, if someone intends to pay for a child's education from a portfolio, does it make sense to set the AA based on full retirement age time horizon and glide path and simply withdraw as time goes by, or should the money for those obligations be set aside or invested more conservatively?
KlangFool
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Re: Question about glide path into FIRE

Post by KlangFool »

dboeger1 wrote: Thu May 06, 2021 12:32 am
KlangFool wrote: Wed May 05, 2021 8:44 pm A) What is your annual savings?
I didn't include annual savings because I was more looking for feedback specifically on how to balance paying off the mortgage vs. adding to stocks, as I'm finding it harder to judge mortgage/stock vs. bond/stock. Bond/stock is pretty straightforward, at least in my mind, but mortgage goes in the opposite direction and has somewhat different characteristics. We also don't maintain a strict budget so savings rate definitely fluctuates, but I would say $100k annually is a decent ballpark figure.
dboeger1,

<<I didn't include annual savings because I was more looking for feedback specifically on how to balance paying off the mortgage vs. adding to stocks,>>

We cannot answer your question without knowing your annual savings.

A) If your annual savings is high enough, you can pay off your mortgage and still reach your goal.

B) If your annual savings is not high enough, you would need more stock/return to reach your goal.

So, it is the key factor in determining whether to pay off the mortgage or adding to the stock.

<<I get why, I just don't think it seems very appropriate for us. Housing-related expenses add up to well over 50% of even our expanded spending this year, and a significant portion of those could be wiped out simply by relocating or paying it off. Alternatively, the home could become a rental. It'd be one thing if it was a starter home in a cheap area and downgrading was not an option, but it's a SFH in a HCOL area where most new construction is MFH.>>

I disagreed. Your planning assume that it can only go right. Counting on luck is not a good planning strategy.

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dboeger1
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Re: Question about glide path into FIRE

Post by dboeger1 »

KlangFool wrote: Thu May 06, 2021 8:21 am
dboeger1 wrote: Thu May 06, 2021 12:32 am
KlangFool wrote: Wed May 05, 2021 8:44 pm A) What is your annual savings?
I didn't include annual savings because I was more looking for feedback specifically on how to balance paying off the mortgage vs. adding to stocks, as I'm finding it harder to judge mortgage/stock vs. bond/stock. Bond/stock is pretty straightforward, at least in my mind, but mortgage goes in the opposite direction and has somewhat different characteristics. We also don't maintain a strict budget so savings rate definitely fluctuates, but I would say $100k annually is a decent ballpark figure.
dboeger1,

<<I didn't include annual savings because I was more looking for feedback specifically on how to balance paying off the mortgage vs. adding to stocks,>>

We cannot answer your question without knowing your annual savings.

A) If your annual savings is high enough, you can pay off your mortgage and still reach your goal.

B) If your annual savings is not high enough, you would need more stock/return to reach your goal.

So, it is the key factor in determining whether to pay off the mortgage or adding to the stock.

<<I get why, I just don't think it seems very appropriate for us. Housing-related expenses add up to well over 50% of even our expanded spending this year, and a significant portion of those could be wiped out simply by relocating or paying it off. Alternatively, the home could become a rental. It'd be one thing if it was a starter home in a cheap area and downgrading was not an option, but it's a SFH in a HCOL area where most new construction is MFH.>>

I disagreed. Your planning assume that it can only go right. Counting on luck is not a good planning strategy.

KlangFool
As long as the savings rate is high enough to meet the goal either way, then the question is more which way is best aligned with my risk tolerance. You're right that if our savings rate was just barely high enough that it depended on stock returns to reach the goal, then paying off the mortgage would fail to reach the goal. The reason I left it out is that I was fairly confident that wasn't the case. Let's say we put $500k towards wiping out the mortgage over the next 6 years to accept for interest drag and fluctuating expenses. That alone would reduce our expenses by around $25k, down to $35k with built-in flexibility to cut spending. 25x of that is $875k. Our liquid investments are $475k short of that today, so even if they didn't grow at all, we'd still have another 5 years to sock away that extra $475k, which is within our rate. Now granted, as mentioned in another reply, our expenses are difficult to predict at this time with a baby on the way, but again, I built no growth, savings increases, or spending reductions into those numbers whatsoever, so I'd like to think it's fairly realistic either way. It's more a question of how to prioritize stocks vs. mortgage payoff in that time, which admittedly is more of a personal risk tolerance question that I've been struggling to answer because of how a mortgage differs somewhat from stocks and bonds. I will say that replying in detail to the responses in this thread is helping to clarify in my mind the level of priority I feel the FIRE by 40 goal deserves.

As for the point about luck, I'm not sure how that's actionable. All future plans are inherently dependent on luck. I could get hit by a bus today. I'm not assuming anything, just trying to set some sensible guidelines for our finances so that we can make progress given the happy path while accounting for the risks of sad paths.
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Re: Question about glide path into FIRE

Post by KlangFool »

dboeger1 wrote: Thu May 06, 2021 9:08 am
KlangFool wrote: Thu May 06, 2021 8:21 am
dboeger1 wrote: Thu May 06, 2021 12:32 am
KlangFool wrote: Wed May 05, 2021 8:44 pm A) What is your annual savings?
I didn't include annual savings because I was more looking for feedback specifically on how to balance paying off the mortgage vs. adding to stocks, as I'm finding it harder to judge mortgage/stock vs. bond/stock. Bond/stock is pretty straightforward, at least in my mind, but mortgage goes in the opposite direction and has somewhat different characteristics. We also don't maintain a strict budget so savings rate definitely fluctuates, but I would say $100k annually is a decent ballpark figure.
dboeger1,

<<I didn't include annual savings because I was more looking for feedback specifically on how to balance paying off the mortgage vs. adding to stocks,>>

We cannot answer your question without knowing your annual savings.

A) If your annual savings is high enough, you can pay off your mortgage and still reach your goal.

B) If your annual savings is not high enough, you would need more stock/return to reach your goal.

So, it is the key factor in determining whether to pay off the mortgage or adding to the stock.

<<I get why, I just don't think it seems very appropriate for us. Housing-related expenses add up to well over 50% of even our expanded spending this year, and a significant portion of those could be wiped out simply by relocating or paying it off. Alternatively, the home could become a rental. It'd be one thing if it was a starter home in a cheap area and downgrading was not an option, but it's a SFH in a HCOL area where most new construction is MFH.>>

I disagreed. Your planning assume that it can only go right. Counting on luck is not a good planning strategy.

KlangFool
As long as the savings rate is high enough to meet the goal either way, then the question is more which way is best aligned with my risk tolerance. You're right that if our savings rate was just barely high enough that it depended on stock returns to reach the goal, then paying off the mortgage would fail to reach the goal. The reason I left it out is that I was fairly confident that wasn't the case. Let's say we put $500k towards wiping out the mortgage over the next 6 years to accept for interest drag and fluctuating expenses. That alone would reduce our expenses by around $25k, down to $35k with built-in flexibility to cut spending. 25x of that is $875k. Our liquid investments are $475k short of that today, so even if they didn't grow at all, we'd still have another 5 years to sock away that extra $475k, which is within our rate.
dboeger1,

A) This is assuming that everything goes well for 11 years. What if by not paying off the mortgage, you can get there in 8 years? Or 6 years? Do the calculation and then decide.

After you did the calculation, you would know the exact tradeoff.

B) The secondary problem is lack of diversification by paying off the mortgage. Close to 50% of your net worth is tied to the house. That is not necessary a good thing by having too much of your eggs in one basket. By not paying off the mortgage, you have more money outside the house.

KlangFool
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HootingSloth
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Re: Question about glide path into FIRE

Post by HootingSloth »

dboeger,

It sounds like you are in a relatively similar situation to ours and that you are considering a somewhat similar approach to what we have done, so I thought I would share. For context, we are in our early to mid 30s, my wife has a very stable job that pays reasonably well, and she intends to stay in that job for the foreseeable future. My wife also has a pension and health benefits that will kick in her late 50s if she stays in her current job. I have a very high paying job, but I likely will change to pursue much lower-paying work that I am more interested in at some point in the future. I have no idea when I will (voluntarily or involuntarily) switch to this lower-paying work.

We started out by focusing on building up our stock holdings. We used an 80/20 stock/fixed income allocation, with our emergency fund counting as part of the 20%, which is probably not very different from 100% stocks plus an emergency fund early on. We have a certain target amount in mind that will support a reasonably comfortable, but not luxurious, retirement in our late 50s (even if the pension does not pan out). Once we reached half of this amount, we began to slowly make our allocation more conservative, following an automatic portfolio-size-based glidepath. We chose this point because we felt that it was "enough" that we would be OK even if we cannot make new contributions and the stock market performs quite poorly over the next few decades.

I use the following formula to make things precise and take the day-to-day decisionmaking out of the picture:
Percent in fixed income = 40% - ABS(LOG(portfolio/goal,2))
This has the effect of gliding from 80/20 at half of our goal to 60/40 at our goal and then back up to 80/20 at twice our goal (which would be a luxurious retirement).

As we started along this glidepath, we largely invested new contributions into municipal bonds in taxable. We did not make mortgage prepayments at that stage because we valued the additional liquidity more than the relatively small difference in interest rates between our mortgage and the municipal bonds (and because municipal bonds in taxable were very advantageous for our personal tax circumstances). At a certain point, we decided that we had sufficient liquidity. At that point we began making new fixed income contributions through mortgage principal prepayments. We maintain a notional asset that records the accumulated value of these prepayments so that we can continue to use the formula above.
Global Market Portfolio + modest tilt towards volatility (80/20->60/40 as approach FI) + modest tilt away from exchange rate risk (80% global+20% U.S. stocks; currency-hedge bonds) + tax optimization
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Ben Mathew
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Re: Question about glide path into FIRE

Post by Ben Mathew »

dboeger1 wrote: Thu May 06, 2021 2:38 am Am I correct that this would result in a somewhat oddly shaped AA curve over time as a byproduct of the competing goals, and that prioritized per-goal buckets would be a more intuitive way of assembling the overall portfolio rather than targeting a single asset allocation?
Yes, multiple goals can be thought of as having their own buckets with their own AA . So for example, if you have college expenses as goal 1, midcareer vacation as goal 2, and retirement expenses as goal 3, each can be thought of as a separate portfolio with its own fixed AA chosen to fit your risk/return preferences over that specific goal. Each bucket's glidepath would make sense, but the aggregate glidepath would look oddly shaped.

For example, suppose you have a portfolio that needs to support two goals: college expenses and retirement. AA on college funding depends on how flexible you are. If you don't want college funding to depend on market performance, AA can be 0/100. If you're flexible and willing to spend more or less depending on market performance, AA can be 50/50. Let's say you go with 50/50. And let's say AA on retirement is 30/70 reflecting its own risk/reward tradeoffs. If you have a $1 million portfolio, divided into $200K for college and $800K for retirement, AA on the total portfolio would be 34/64 now (weighted average of 50/50 and 30/70). That will change somewhat depending on market performance because the weights depend on market performance. But prior to college expenses being incurred, AA would be some weighted average of 50/50 and 30/70. Once college expenses are done, AA becomes 30/70 because only retirement spending is left. So the overall glidepath looks wonky, but it actually makes sense when considering each goal.

The TPAW accumulation spreadsheet can handle multiple goals through the extra expenses column. Currently the only built-in AA option for extra expenses is 0/100 (for expenses entered in the essential expenses column) and risk portfolio AA (for expenses entered in the discretionary expenses column). But it's possible to modify the spreadsheet to handle any AA. (Less elegantly, you can also split the extra expense between the essential expense and discretionary expense columns to get any AA between 0/100 and risk portfolio AA.)
Total Portfolio Allocation and Withdrawal (TPAW)
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