Baseline income options for early retirees?

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mortal
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Baseline income options for early retirees?

Post by mortal »

So, I plan on using a variable percentage withdrawal, or a constant percentage withdrawal style retirement. The only problem is that such methods can have *wild* swings in what they allow one to withdraw in a major downturn. The standard advice around this if one is 62 or older is to simply draw social security.

What of the early retiree? What options do they have? If one retires at 45, it's about 20 years until they're eligible for SS. SPIA aren't really attractive (or often even available) at that age. What's the best bet for establishing a baseline for your must have expenses? A tips ladder? Forgive me but recent rates have been pretty terrible.

I'm interested in what suggestions you may have.
Last edited by mortal on Wed Sep 11, 2019 6:13 am, edited 1 time in total.
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FiveK
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Re: Baseline income options for early retirees?

Post by FiveK »

One option, described in the article referenced in Long-time member Nords profiled in Forbes, is to hold a significant amount (2 years was Nords' amount) in cash.

Somewhere between that and the wild swings a 100% stock portfolio can have are the various amounts of bond holdings. See threads such as A " Bond Tent" During the "Retirement Red Zone?" - Bogleheads.org.
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Summit111
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Re: Baseline income options for early retirees?

Post by Summit111 »

What is VPW / CPW? Acronym definition will help us help you...

Summit
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JoMoney
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Re: Baseline income options for early retirees?

Post by JoMoney »

I would expect that the return on TIPS and nominal bonds would be pretty similar.
As dismal as it may be, the payout on a SPIA is likely fair based on current interest rates amortized out over actuarial life expectancy.
The rates are what they are. We can complain that we want a higher return, but there's no rule that having money entitles one to earn any particular rate on it.
If the "early retiree" can't afford to get by at current rates, they're going to have to cut their spending or get a job to earn more income.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Horton
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Re: Baseline income options for early retirees?

Post by Horton »

mortal wrote: Tue Sep 10, 2019 11:04 pm What of the early retiree? What options do they have?
Keep working! :beer
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Re: Baseline income options for early retirees?

Post by mhalley »

Retiring early isn’t for the faint of heart. You need big bucks, probably going with a 3% withdrawal rate. Some recommend a bucket strategy of several years of cash in case of a huge down turn. Going back to work or working part time is often mentioned on the early retirement sites.
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Re: Baseline income options for early retirees?

Post by sharx »

Summit111 wrote: Tue Sep 10, 2019 11:20 pm What is VPW / CPW? Acronym definition will help us help you...

Summit
variable percentage withdrawal and constant percentage withdrawal.
bhsince87
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Re: Baseline income options for early retirees?

Post by bhsince87 »

I retired at 53 last year and plan to delay SS till 70 (unless things change between now and then). DW will probably claim spousal at 62.

I put 20 years of base income needs in short and medium term treasury funds.

And I didn't retire until I felt a traditional type SWR of 2.5% would meet our basic needs.

I seriously considered a chain of 5 or 10 year period-certain annuities. I still might do that at some point.

It took me a few years to comfortably transition (mentally) from a "maximize return" approach to "preserve capital" . But I'm still not quite ready to make the jump to "start consuming capital". But I know it has to happen at some point.
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Re: Baseline income options for early retirees?

Post by randomguy »

FiveK wrote: Tue Sep 10, 2019 11:15 pm One option, described in the article referenced in Long-time member Nords profiled in Forbes, is to hold a significant amount (2 years was Nords' amount) in cash.

Somewhere between that and the wild swings a 100% stock portfolio can have are the various amounts of bond holdings. See threads such as A " Bond Tent" During the "Retirement Red Zone?" - Bogleheads.org.
The problem is that this stuff does basically nothing other than maybe help you sleep at night. If you look at the SWR or portfolio survivability of buckets, bond ladders, tents, rising glide paths and so on, you are getting anything.

What helps in the bad cases (10-15 years of 0% returns) is
a) low SWR
b) cutting spending for long periods of time (i.e.not skipping 1 trip. Skipping 1 trip for a decade).

If you want to take 10-20 years of bonds, give them some fancy name, and spend them down, great. You just need to make sure you are maintaining enough equity exposure. Instead of holding say 50/50 in your portfolio, you might need to hold 90/10 to get those same level of returns.
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Re: Baseline income options for early retirees?

Post by dwickenh »

bhsince87 wrote: Wed Sep 11, 2019 2:11 pm I retired at 53 last year and plan to delay SS till 70 (unless things change between now and then). DW will probably claim spousal at 62.

I put 20 years of base income needs in short and medium term treasury funds.

And I didn't retire until I felt a traditional type SWR of 2.5% would meet our basic needs.

I seriously considered a chain of 5 or 10 year period-certain annuities. I still might do that at some point.

It took me a few years to comfortably transition (mentally) from a "maximize return" approach to "preserve capital" . But I'm still not quite ready to make the jump to "start consuming capital". But I know it has to happen at some point.

/quote]

Remember that DW can't claim spousal until you claim your benefit. Even if you wait to 70, she will get a reduced about 35% of your PIA
(primary Insurance amount) at age 62. This may be the best choice, but she will need to be 8 years younger than you
to make the plan work.

Dan
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett
bhsince87
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Re: Baseline income options for early retirees?

Post by bhsince87 »

dwickenh wrote: Wed Sep 11, 2019 3:27 pm



Remember that DW can't claim spousal until you claim your benefit. Even if you wait to 70, she will get a reduced about 35% of your PIA
(primary Insurance amount) at age 62. This may be the best choice, but she will need to be 8 years younger than you
to make the plan work.

Dan
Hmmm, I was just using https://opensocialsecurity.com/ a few days ago, and it told me that was the optimum strategy. I don't think she files for spousal though, but for full benefit. So that wording was a mistake on my part.
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dwickenh
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Re: Baseline income options for early retirees?

Post by dwickenh »

It does make sense for her to take her own benefit at 62 and then wait to take spousal when you take yours at 70.
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett
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FiveK
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Re: Baseline income options for early retirees?

Post by FiveK »

randomguy wrote: Wed Sep 11, 2019 2:38 pm
FiveK wrote: Tue Sep 10, 2019 11:15 pm One option, described in the article referenced in Long-time member Nords profiled in Forbes, is to hold a significant amount (2 years was Nords' amount) in cash.

Somewhere between that and the wild swings a 100% stock portfolio can have are the various amounts of bond holdings. See threads such as A " Bond Tent" During the "Retirement Red Zone?" - Bogleheads.org.
The problem is that this stuff does basically nothing other than maybe help you sleep at night. If you look at the SWR or portfolio survivability of buckets, bond ladders, tents, rising glide paths and so on, you are getting anything.

What helps in the bad cases (10-15 years of 0% returns) is
a) low SWR
b) cutting spending for long periods of time (i.e.not skipping 1 trip. Skipping 1 trip for a decade).

If you want to take 10-20 years of bonds, give them some fancy name, and spend them down, great. You just need to make sure you are maintaining enough equity exposure. Instead of holding say 50/50 in your portfolio, you might need to hold 90/10 to get those same level of returns.
One can always imagine ever worse cases. E.g., picture Topper from Dilbert saying "that's nothing - I'm preparing for 25 years of -5% returns," or Monte Carlo simulations that overlay 1929-1932 stock losses with 1970s inflation, etc.

Things that help people sleep at night - thus avoid selling in a panic - have a real value, as does cutting spending (aka Stay flexible my friend!) instead of panic selling.
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mortal
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Re: Baseline income options for early retirees?

Post by mortal »

A lot of you are suggesting a lower SWR / higher savings. What you don't realize is just *how much* higher one's savings has to be in order to use a variable percentage withdrawal. If you want to cover all your expenses this way, you have to salt away 50 times your annual expenses to handle something like the 1960s.

See a previous thread here: viewtopic.php?p=4515766

TLDR: If you want to use VPW for early retirement, your planning rate had better be 2%, not 4%.

Every time I bring up VPW's wild spending swings, the answer I get is 'Well, you should have baseline income to cover necessities'. I made this thread to try and get a productive conversation going as to what those options are for early retirees. There doesn't appear to be much beyond work *much* longer and save *much* more than is usually advised.
RubyTuesday
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Re: Baseline income options for early retirees?

Post by RubyTuesday »

TIPS ladder or bond ladder combined with cash reserves.

Perhaps have a year of cash expenses, a CD ladder for years 2-10 and TIPS ladder for years 10-delayed SS.

YMMV
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Horton
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Re: Baseline income options for early retirees?

Post by Horton »

mortal wrote: Wed Sep 11, 2019 6:39 pm A lot of you are suggesting a lower SWR / higher savings. What you don't realize is just *how much* higher one's savings has to be in order to use a variable percentage withdrawal. If you want to cover all your expenses this way, you have to salt away 50 times your annual expenses to handle something like the 1960s.

See a previous thread here: viewtopic.php?p=4515766

TLDR: If you want to use VPW for early retirement, your planning rate had better be 2%, not 4%.

Every time I bring up VPW's wild spending swings, the answer I get is 'Well, you should have baseline income to cover necessities'. I made this thread to try and get a productive conversation going as to what those options are for early retirees. There doesn't appear to be much beyond work *much* longer and save *much* more than is usually advised.
The point made on the linked thread though is that it is advisable to have a secure source of retirement income in place for your nondiscretionary spending needs and use VPW for your discretionary spending needs (floor and upside).

Another approach, outlined by Michael Zwecher in Retirement Portfolios (Chapter 9), might be to derive your retirement spending "liability" and then, rather than purchase a TIPS ladder or SPIA, hold an asset allocation such that your fixed income plus stocks less a X% drawdown (e.g., 50%) still exceed the liability. For example, say your liability is $2m and your portfolio is $3m, then you would hold $1m in fixed income and $2m in stocks ($1m + 50% x $2m = $2m liability). The kicker though is that if your portfolio ever drops near the $2m liability - due to an equity decline - then you have to purchase a TIPS ladder or SPIA to secure your retirement spending needs (the liability or floor). So, you retain some upside, but you also have some significant downside compared to just outright securing the $2m floor and using the $1m upside with the VPW formula from the start.
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Re: Baseline income options for early retirees?

Post by ryman554 »

Horton wrote: Thu Sep 12, 2019 8:22 am
mortal wrote: Wed Sep 11, 2019 6:39 pm A lot of you are suggesting a lower SWR / higher savings. What you don't realize is just *how much* higher one's savings has to be in order to use a variable percentage withdrawal. If you want to cover all your expenses this way, you have to salt away 50 times your annual expenses to handle something like the 1960s.

See a previous thread here: viewtopic.php?p=4515766

TLDR: If you want to use VPW for early retirement, your planning rate had better be 2%, not 4%.

Every time I bring up VPW's wild spending swings, the answer I get is 'Well, you should have baseline income to cover necessities'. I made this thread to try and get a productive conversation going as to what those options are for early retirees. There doesn't appear to be much beyond work *much* longer and save *much* more than is usually advised.
The point made on the linked thread though is that it is advisable to have a secure source of retirement income in place for your nondiscretionary spending needs and use VPW for your discretionary spending needs (floor and upside).

Another approach, outlined by Michael Zwecher in Retirement Portfolios (Chapter 9), might be to derive your retirement spending "liability" and then, rather than purchase a TIPS ladder or SPIA, hold an asset allocation such that your fixed income plus stocks less a X% drawdown (e.g., 50%) still exceed the liability. For example, say your liability is $2m and your portfolio is $3m, then you would hold $1m in fixed income and $2m in stocks ($1m + 50% x $2m = $2m liability). The kicker though is that if your portfolio ever drops near the $2m liability - due to an equity decline - then you have to purchase a TIPS ladder or SPIA to secure your retirement spending needs (the liability or floor). So, you retain some upside, but you also have some significant downside compared to just outright securing the $2m floor and using the $1m upside with the VPW formula from the start.
Secure source of retirement income != fixed income unless you want it to be. You'll pay (save) more for that privilege.

A perpetual portfolio WR of 3.0-3.5% or so (not into the 2's) with a moderately aggressive AA will allow an "income" in a SWR-like fashion. This is exactly the kind of thing (known, fixed expenses) that SWR is designed to predict. So use it. It lasts, well, in perpetuity. I believe in the math, so I would sleep well at night. You mileage may vary. Just be darn sure you know what "expenses" are.

So, I vehemently disagree that VPW for early retirement requires anything close to a 2%, even for early retirement. It's 3-3.5% for the "secure part". Then more for the VPW part, but I admit I have no idea about that side.
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Re: Baseline income options for early retirees?

Post by mortal »

ryman554 wrote: Thu Sep 12, 2019 8:46 am So, I vehemently disagree that VPW for early retirement requires anything close to a 2%, even for early retirement. It's 3-3.5% for the "secure part". Then more for the VPW part, but I admit I have no idea about that side.
Check out the first graph I linked in my 50x expenses post:
viewtopic.php?p=4513956#p4513956

If one intends to use the VPW method to support oneself in retirement, you *have* to be prepared for the worst case. In the worst case you're living off about 2% of your original starting balance. This isn't in contention, I've pulled it directly from the VPW spreadsheet itself. Check out the numbers for 1906, 1914, 1966 etc. 1M supports ~ 20k inflation adjusted income at the depths of the drawdown. The only way you get around this is by having either social security, a pension, or a SPIA ( all either unavailable or unattractive to an early retiree ).

Believe me, I've been coming at this from a lot of different ways. Nothing magically makes this better.

Edit: In that thread, I did attempt to use the normal SWR and VPW in a mixed strategy to dampen the volatility. That is pretty much spot on with your 3% comment

viewtopic.php?p=4515766#p4515766
StealthRabbit
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Re: Baseline income options for early retirees?

Post by StealthRabbit »

If you have a lot of dough and can live on paltry TIPS or CD returns in ER... DO IT!

I left employment at age 49 (Hourly night shift worker, single income family... i.e. no windfalls / minimal wealth)

Primarily, I took variable withdrawals (based on up years)
Considered 72t, but... decided I would rather keep fully invested in existing retirement accts,
Became stressful 'wondering' if I had enough for 40+ yrs retirement..

so... (I live in a no income tax state)
1) Did more active trading to generate income (~5 hrs / week can win you $20k / yr using a 'small' portion of your investment)
2) Re-positioned assets to get better cash flows (invested more assets into 'Cash Flowing' income properties (NNN Commercial)
3) Did a couple land deals - deferred as Primary Residence ($500k income tax free growth every 24 months)
4) Took some part-time 'international gigs' (being Paid to travel + I really enjoy that + family was able to come for free + lots of free mileage and hotel perks)
5) Started some LLC's (business entities) for better taxation / cost benefits + a little income (benefit)
6) Did a lot of volunteering with 'smart / retired' people (to get ideas on retirement spending / saving / investing)
7) Drastically reduced costs (Peanuts when Property taxes and HC insurance each climbed 300%)
8) Drive a 40+ year old car that gets 50 mpg on free fuel (home brew) as I have for 40+ yrs (Peanuts too)

Find 'NO-income-required' ways to do what you used to PAY for..
1) gleaning
2) volunteer ushering at venues
3) barter
4) senior discounts (like college tuition)
5) help others in exchange for benefits.
6) Volunteer at a food bank and homeless shelter (lots of perks)

Current Firecalc = 99% probability of success @ ~ 150% draws of my highest ever wage for next 40 yrs.
Will probably survive, but I have a few other things up my sleeve. (Patents / products / downsizing the fleet and tangible assets / downsizing Casa Grande, 1031 into more NNN commercial with high cash flows / move out of USA (cheaper medical and housing and food, Die...and Spouse has a HUGE estate auction!)...
AlohaJoe
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Re: Baseline income options for early retirees?

Post by AlohaJoe »

FiveK wrote: Tue Sep 10, 2019 11:15 pm One option, described in the article referenced in Long-time member Nords profiled in Forbes, is to hold a significant amount (2 years was Nords' amount) in cash.

Somewhere between that and the wild swings a 100% stock portfolio can have are the various amounts of bond holdings. See threads such as A " Bond Tent" During the "Retirement Red Zone?" - Bogleheads.org.
Cash buckets and Bond Tents don't really change the "wild swings" the OP is talking about, though. Here's an example comparison of the two:

Image

You can see that the rising equity glidepath drops by 25% (from $42,000 to $32,000) and the overall volatility of the two is pretty similar. You'll find the same thing if you look at the data using cash buckets.
mortal wrote: Tue Sep 10, 2019 11:04 pm The only problem is that such methods can have *wild* swings in what they allow one to withdraw in a major downturn.
There are three ways to look at the problem of volatility within a stream of VPW withdrawals:

0. Just accept it. Have a large amount of discretionary spending -- vacations, charitable giving, buying art -- that is easy to dial back when your portfolio hits a rough patch. Most people, though, are looking for answers beyond this....

1. Fundamentally, volatility of withdrawals is a reflection of volatility of the underlying portfolio. One strain of thought is "if your withdrawals are too volatile, you need to hold more bonds". Here is VPW with three different asset allocations 70/30, 50/50, and 30/70

Image

The standard deviation goes from $5,697 with 70/30 to $4,466 with 30/70, a 25% reduction.

2. If that's not enough then you can smooth the stream of withdrawals in some way. A simple thing is to just apply VPW to the rolling three-year average of portfolio values. (There are many other alternative smoothing strategies but I'll keep the discussion simple by focusing on rolling averages.) The idea has been discussed repeatedly. Here's a link I quickly Googled up: viewtopic.php?t=222480#p3433727

Keep in mind that whenever you smooth income you are making a kind of bet that future growth will "bail you out". One way to think about it is consider your retirement fund a personal pension. You know all those news stories about "unfunded pension liabilities"? When you smooth income you are essentially creating an "unfunded personal pension liability". You are introducing a kind of risk, the "markets don't bounce back" risk. How much depends on how much smoothing you are doing. I don't think this is necessarily a big risk to be taking. If we look at 1969 ("the worst year to retire")

Image

Taking the rolling average doesn't exactly help but it also doesn't appear to hurt much either. It smooths things slightly and it doesn't really lead to catastrophic consequences.

Looking at two more examples

Image
Image

the smoothing mostly works as we'd expect. We give up some upside in exchange for not having to cut spending much during the small corrections along the way. It isn't a panacea, though. If the markets crashes and stays down, you're eventually going to cut spending.
usagi
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Re: Baseline income options for early retirees?

Post by usagi »

mortal wrote: Wed Sep 11, 2019 6:39 pm A lot of you are suggesting a lower SWR / higher savings. What you don't realize is just *how much* higher one's savings has to be in order to use a variable percentage withdrawal. If you want to cover all your expenses this way, you have to salt away 50 times your annual expenses to handle something like the 1960s.

See a previous thread here: viewtopic.php?p=4515766

TLDR: If you want to use VPW for early retirement, your planning rate had better be 2%, not 4%.

Every time I bring up VPW's wild spending swings, the answer I get is 'Well, you should have baseline income to cover necessities'. I made this thread to try and get a productive conversation going as to what those options are for early retirees. There doesn't appear to be much beyond work *much* longer and save *much* more than is usually advised.
You may not like the bend the conversation has taken due to the message but reality is reality. The idea of retiring at 45 and relying on the cast offs of a bunch of entities you do not have controlling interest in to fund your lifestyle for the next 40-60 years is a bit...well...unusual. On a historic basis it is a strange notion, in fact our entire idea of retirement is a strange notion.

It really is strange and perhaps ultimately not sustainable to expect to be able to retire early in a world where you are relying on a multi-generational compact with no legal bindings to fund a portion of your retirement (SS) and expect boards of directors and CEOs to act in your own interest, when most of us a abjugate the one check we have on corporations by holding out interests in the form of mutual funds and etfs instead of voting out shares in our own interest.

Take a look at Ben Franklin's life, his early retirement was a novel idea at the time. But also look at how he did it. Note, he drafted up partnership agreements in order to fund his lifestyle. He also simply moved onto new career interests since money was no longer a primary motivation.

In order for it to be somewhat prudent, unless you have some form of private equity, you are likely looking at somewhere in the neighborhood of 50 to 70 times expenses in the regulated common securities market. My children are all targeting retiring in their 40s and set bogeys of far greater than 50 times expenses. And I don't see any of them doing laying on the beach type retirement as much as retirement allowing them the financial freedom to move into new fields that offer new challenges and mental stimulation in an area that interests them.

I originally planned to retire with 75 times expenses and holding 15 years of expenses in short term principle stable forms (Cds, treasuries etc) and the rest in equities. I have worked well beyond that but I am slowly unwinding. I think it is fairly solid plan.
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FiveK
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Re: Baseline income options for early retirees?

Post by FiveK »

usagi wrote: Sat Sep 21, 2019 1:08 pm In order for it to be somewhat prudent, unless you have some form of private equity, you are likely looking at somewhere in the neighborhood of 50 to 70 times expenses in the regulated common securities market.
...
I originally planned to retire with 75 times expenses and holding 15 years of expenses in short term principle stable forms (Cds, treasuries etc) and the rest in equities. I have worked well beyond that but I am slowly unwinding. I think it is fairly solid plan.
One person's "fairly solid" is another's "grossly over-conservative."

Of course, both of those phrases are opinions whose validity will be known only in hindsight. And the "correct" approach can vary - even in hindsight - between people with different value systems.
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Re: Baseline income options for early retirees?

Post by usagi »

StealthRabbit wrote: Thu Sep 12, 2019 11:12 pm If you have a lot of dough and can live on paltry TIPS or CD returns in ER... DO IT!...

...Will probably survive, but I have a few other things up my sleeve. (Patents / products / downsizing the fleet and tangible assets / downsizing Casa Grande, 1031 into more NNN commercial with high cash flows / move out of USA (cheaper medical and housing and food, Die...and Spouse has a HUGE estate auction!)...
Dang, the stealth rabbit rules!
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Re: Baseline income options for early retirees?

Post by usagi »

FiveK wrote: Sat Sep 21, 2019 1:36 pm
usagi wrote: Sat Sep 21, 2019 1:08 pm In order for it to be somewhat prudent, unless you have some form of private equity, you are likely looking at somewhere in the neighborhood of 50 to 70 times expenses in the regulated common securities market.
...
I originally planned to retire with 75 times expenses and holding 15 years of expenses in short term principle stable forms (Cds, treasuries etc) and the rest in equities. I have worked well beyond that but I am slowly unwinding. I think it is fairly solid plan.
One person's "fairly solid" is another's "grossly over-conservative."

Of course, both of those phrases are opinions whose validity will be known only in hindsight. And the "correct" approach can vary - even in hindsight - between people with different value systems.
Agreed.
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Re: Baseline income options for early retirees?

Post by usagi »

OP, since you asked for other options..there are many I know of, but they are not totally passive. I now and then make signature loans to franchisees for forced remodels(this is my preferred way to lend as the interest rate is high and I can easily vet the borrower.) I have set of rules I put around this. The average loan is 250-500K and payback is usually 3-7 years. . The last ones I did were 6 years ago at 8%. It will be paid off next year for BK zees.

If you explore it, you will find out is a neato market niche. Once you understand the basics it is pretty secure returns. I have never had anything approaching a default but I know the industry as a whole.

If you want more expansion on the topic let me know, but I don't want to derail your thread.
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Re: Baseline income options for early retirees?

Post by AerialWombat »

mortal wrote: Tue Sep 10, 2019 11:04 pm So, I plan on using a variable percentage withdrawal, or a constant percentage withdrawal style retirement. The only problem is that such methods can have *wild* swings in what they allow one to withdraw in a major downturn. The standard advice around this if one is 62 or older is to simply draw social security.

What of the early retiree? What options do they have? If one retires at 45, it's about 20 years until they're eligible for SS. SPIA aren't really attractive (or often even available) at that age. What's the best bet for establishing a baseline for your must have expenses? A tips ladder? Forgive me but recent rates have been pretty terrible.

I'm interested in what suggestions you may have.
This is not the “Boglehead” answer, but my baseline living expenses (roof over my head, pizza in the oven, beer in the fridge, gas in the bike) are to be covered by my rental properties. I made this decision in 2015 and started buying, and I now have the cash flow from the rentals to pull the rip cord.

Everything else I have is “plan B”.

I didn’t open my solo 401k until 2018, my Roth in 2019. $56k/yr into the 401k, backdoor $6k/yr into the Roth — it will never catch up to the cash I put into real estate. Never.

If the tech startup I founded has an exit, then that might catch up to the real estate equity, but I don’t bank on getting acquired.

I’m entering semi-retirement (gradual fade away from biz) at the end of this year. I am far from wealthy, and only 41, but my years on this rock are numbered, so I’m going to go enjoy them.

My business income, even in “4-hour workweek” mode, will sustain me for years to come, in high likelihood. But that rental income — that’s the back stop for me.
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Re: Baseline income options for early retirees?

Post by AlohaJoe »

AlohaJoe wrote: Sat Sep 21, 2019 9:55 am
mortal wrote: Tue Sep 10, 2019 11:04 pm The only problem is that such methods can have *wild* swings in what they allow one to withdraw in a major downturn.
2. If that's not enough then you can smooth the stream of withdrawals in some way.
Something that I meant to make explicit but didn't is: the whole concept of smoothing carries the implicit idea that there's nothing magical about the number spit out by VPW. You can withdraw more than that. Think of "stable income from a volatile portfolio" as a sliding scale, with something like "withdraw 5% of this year's portfolio value" at one extreme and "take 4% of the initial portfolio value and then adjust it for inflation" at the other extreme. There is a tradeoff between "constant income" and "risk building up".

Backtests rarely show that "risk building up" so let's look at an example comparing VPW and the 4% rule. We already know that, for income, the 4% rule provides stable income and VPW provides wildly varying income. But how about that hidden risk?

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Now we see the complete opposite. VPW has constant low risk (until the end of life when VPW's withdrawals ramp up considerably) but 4% withdrawals have risk varying all over the place. And think about what it would be like to be in the position of that 1910 retiree. 10 years into retirement and even though 4% withdrawals "work" in the end, you find yourself 10+ years into retirement and fancy mathematical models (like the one being charted above) say your retirement now has a 40% chance of blowing up. That kind of thing gets glossed over when people talk about 4% Rule "working" for a 30 year retirement. It ignores the reality of retiree stress when markets crash and your portfolio drops and stays down for a long time.

This theme is covered in more detail in a blog post here: https://medium.com/@justusjp/the-4-rule ... 59c6220d54

If you want to add a floor to VPW, go ahead and do it. You're just changing a dial and making a tradeoff between stable income & hidden risk building up.

At the end of the day, though, I think your argument has some merit -- an early retiree doesn't have some of the fallbacks a "normal" retiree can use to defease retirement risks. Age-related declines in spending aren't in our future. Mortality (i.e. early death) isn't going to "save" our portfolio. We are more limited in tapping home equity (via reverse mortgage or simply downsizing).

So an early retiree is faced with two choices: have a portfolio quite a bit larger than SWR research normally implies. If you want "truly safe" -- taking into account that "hidden risk" -- then I do agree that for an early retiree something like 2% is less crazy than it sounds.

A longer blog post making the case is https://medium.com/@justusjp/the-myopia ... 6f35a1c8eb

But I think you too easily discount an alternative solution: embracing risk and living with it. We can never completely remove risk from our retirement, something that spending studies can make us lose sight of. They can't take into account idiosyncratic risks that are likely to have far more impact on our retirement than the gyrations of the market. And I think that people underestimate their ability to adapt to circumstances.

If you are going to retire early then instead of padding our your retirement funds to 50x, I think it makes more sense to just say "Look, if things get really dire, then we will sell our house in California and move to Oklahoma or something because that is better than going back to work. Sometimes you have to make hard tradeoffs in life."
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