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Hi Big ERN and others! I'm really enjoying the series on your options strategy, but I had a question about how that relates to SWR.
In retirement, how should we think about the income that we get from the options strategy and a 3.5% withdrawal rate? Assuming we can live solely off of a combined income of ~6%/year (from "safe" premium and interest from bonds held in our margin account), should any of this income "count" against a 3.5% safe withdrawal rate?
I've been thinking about it, and I'm of two minds:
1) This is income and (assuming things go to plan) then your principal was not drawn down, so you haven't withdrawn anything that year. You lost against inflation, but that was already accounted for in the 6-7% cited above.
2) By collecting this as income, you're paying an opportunity cost of compounded gains in the future, so we need to consider at least some of this is as a withdrawal since it's slowed future growth.
I would love any insight you have to share on this, and I apologize if this has already been answered elsewhere.
Thank you so much for all the content, insight, and "hard truths", ERN!
Good question. The income I budget from this strategy, about 9% p.a. nominal, 7% after inflation, certainly sounds like we can now go for a 7% SWR and even keep the principal alive.
But I wouldn't count on it. You can certainly lose money with this strategy. I've never lost from the options trading in any calendar year, but it's possible. If you have 2 years of -15% in a row you suffer from some of the same SoRR problems as everyone else.
I model the options strategy as a 60/40 portfolio with a little bit of an extra return in my personal SWR analysis.
That's helpful, thanks! Just to make sure I got it, I'm going to restate this another way:
The options strategy does not materially impact your SWR relative to a 60/40 split. It's just a means to collect a fixed income from your holdings as opposed to relying on dividends, stock sales, bond yields, etc.
Is that a fair summary?
@seejee I think that's a good summary. It has the potential to have lower SORR but is certainly not guaranteed.
The approach that I'd use, would be to start with a "normal" stock/bond SWR but consider doing a "reset" every 5 years or so if you happen to significantly out/under perform a 60/40 like portfolio. If you start with a 50 yr SWR such as 3.25%, 5 years later, "pretend" that you just retired that year and look up your new 45 year SWR which might be a bit different if your options portfolio did well compared to a 60/40 portfolio.
@seejee It will impact the SWR if you assume that the options+margin cash investments bring you the returns of 60/40 + 3%, maybe 4% extra. It would work as a negative "expense ratio" in the SWR Spreadsheet.
But to be ultra-conservative, I also check what happens if I use 60/40 +/-0% for the options trading. With our current net worth we can still withdraw more than our current budget.