Time flies! I had my first anniversary in my new “job” already last month! June 1, 2018, was my last day at the office! I even got some social media notifications from people congratulating me on the “one year early retired work anniversary,” how awesome is that? I did write a post on the eight lessons after eight weeks of retirement, but I thought I should write an update about what I learned after reaching the one-year mark. So, let’s take a look at my eight new lessons after one year of FIRE…
Wow, did you see the big stock market move in October? The worst monthly S&P 500 performance since 2011! When you’re still working and contributing to your retirement savings it’s easy to lean back and relax: you can buy equities at discount prices and you buy more shares for the same amount of savings when prices are down, a.k.a. dollar-cost-averaging. Now that we’re retired things are different. Sequence Risk creates the opposite effect of dollar-cost-averaging: you deplete your money faster while the portfolio is down. I have been writing about this theme for almost two years now and now it looks like I might become my very own poster child of Sequence Risk.
So, are we worried having retired at (or close to) the peak of the market? Well, take a look at the title image: an ERN family selfie while vacationing in Angkor Wat (Siem Reap, Cambodia) in October. It doesn’t look like we’re too concerned about the stock market! And here are a few reasons why…
Eight weeks of retirement already! Actually, a little bit more by the time this goes online, but it was exactly eight weeks when I started writing this. Early retirement is a lot more than number crunching and safe withdrawal simulations, so today it’s time to reflect on the first two months of Early Retirement. Everybody’s experience will be different and here’s what have I learned, what surprised me and what didn’t surprise me…
Actually, not one ETF, but two! Or more! How can there be a need for a new ETF? Aren’t there enough already? Earlier this year, Motley Fool argued there are too many ETFs (1,929 at that time, probably over 2,000 by now) and they are covering pretty much every thinkable (and unthinkable) benchmark. Soon we might have more ETFs than publicly traded equities in the U.S., how crazy is that??? Why would I propose a new ETF that doesn’t already exist?
Here’s some background. I’m an index investor at heart and I like tax optimization. For so many years now, I’ve held equity index ETFs and Mutual Funds in both taxable accounts and tax-deferred accounts (both retirement and deferred compensation at work). It’s so painful to see the dividend payments in the taxable accounts getting taxed every year. Sure, it’s only about 1.9% dividend yield in the S&P500 right now but for us, that’s taxed at 15% federal, 10+% state (California!) and 3.8% Obamacare tax, for a total of almost 30% marginal tax! Isn’t there a better way? Sure! Simply put the taxable equity allocation into stocks that pay zero (or close to zero) dividends and keep the high-dividend stocks in the tax-deferred account where they can compound in peace and be taxed only once upon withdrawal rather than every year along the way! So, the two ETFs that I wish existed would exactly replicate the S&P500 if held in equal shares. But individually they’d have non-index weights and one would hold the equities with the lowest dividend yield and the other with the high-yield equities!
Notice that most folks already do this tax optimization across asset classes: Hold the tax-inefficient asset classes (bonds, REITs, etc.) in tax-deferred accounts and equities in taxable accounts. So, why not do this within the equity asset class as well for additional tax efficiency? How much extra after-tax return would we get out of this? Let’s look at the numbers…
Well, the day has come! I have finally announced at work that I will be retiring! We have talked to family and friends about our plans. No turning back now! One way I ensured that I’m not going to get cold feet was to do the ChooseFI podcast that I knew will broadcast on March 12. Since I spilled the beans there I might as well do so here on the blog as well! Continue reading “Meet the ERN family!”
Update: We posted the results from parts 1 through 8 as a Social Science Research Network (SSRN) working paper in pdf format:
Welcome back to our safe withdrawal rate series! Over the last two weeks, we already posted part 1 (intro and pitfalls of going beyond a 30-year horizon) and part 2 (capital preservation vs. capital depletion). Today’s post deals with yet another early retirement pet peeve: safe withdrawal rates are likely overestimated given today’s expensive equity valuations. We wrote a similar piece about this issue before, but that was based on cFIREsim external simulation data. We prefer to run our own simulations to be able to dig much deeper into this issue.
So, the point we like to make today is that looking at long-term average equity returns to compute safe withdrawal rates might overstate the success probabilities considering that today’s equity valuations are much less attractive than the average during the 1926-current period (Trinity Study) and/or the period going back to 1871 that we use in our SWR study.
Thus, following the Trinity Study too religiously and ignoring equity valuations is a little bit like traveling to Minneapolis, MN and dressing for the average annual temperature (55F high and 37F low, see source, which is 13 and 3 degrees Celsius, respectively). That may work out just fine in April and October when the average temperature is indeed pretty close to that annual average. But if we already know that we’ll visit in January and wear only long sleeves and a light jacket we should be prepared to freeze our butt off because the average low is 8F =-13C! Likewise, be prepared to work with lower withdrawal rates considering that we’re now 7+ years into the post-GFC-recovery with pretty lofty equity valuations. Continue reading “The Ultimate Guide to Safe Withdrawal Rates – Part 3: Equity Valuation”
The other day, my wife asked me to take out the trash. My response: “Yeah, I’ll do that when I’m retired!” We both got a pretty good laugh out of that one. After I took out the trash (pre-retirement, obviously), we realized that our planned retirement date, hopefully in early 2018, creates all sorts of inefficiencies; I catch us procrastinating already! YIDTWIR=”Yeah, I’ll do that when I’m retired!” Are they the seven most dangerous words for the approaching-FIRE crowd?
Procrastination is as old as humanity and if there weren’t enough temptations to postpone stuff already, a retirement date in the near future is the mother of all reasons: Procrastination-palooza! Think about how much procrastination an absolutely arbitrary date like January 1 creates: “I’ll quit smoking/go to the gym/work less/work more/etc. in the New Year!” The main reason for New Year’s resolutions is that they give you cover – a guilt-free, chain-smoking, TV-binge-watching couch potato existence between late October and December 31. There is absolutely nothing magical about January 1 but it still creates New Year’s resolutions. And, of course, resolutions are never broken but just postponed to January 1 of the next-next year.
But an upcoming retirement date is different in that you will actually have more time on your hands. Continue reading “The dangers of getting close to retirement: “Yeah, I’ll do that when I’m retired!””
All Parts of this series:
- Part 1: Intro
- Part 2: The strategy as implemented in 2016
- Part 3: Some updates on the strategy as I’m currently running it as of 2019
* * *
On the path to early retirement (and most likely in early retirement as well), the ERN family will be writing options to generate passive income (in addition to equity and real estate investments, of course). This may be something that people either haven’t heard before or even if they did, they might be turned off by the involvement of derivatives. After we got over our initial aversion against trading exotic instruments like options we found that it’s actually a reliable and profitable strategy to generate passive income. We mentioned this strategy already in a previous post on trading derivatives on the path to FIRE and thought that others might find this interesting too.
Today, in Part 1, we will do a quick intro to cover mostly the conceptual aspects of this strategy. Part 2 will go into how we actually implement our strategy. As a warm up, though, let’s start with a …
Since 2000, the SPY ETF (S&P500 index fund from iShares) returned about 101% (Dec 1999 to August 2016, dividends reinvested), or about 4.3% p.a. What would the return have been if we had participated only when the market went up, i.e., if we had avoided every single down month and received a 0% return during that time?
A: 386% total, 10.0% annualized
B: 1,039% total, 15.7% annualized
C: 2,497% total, 21.6% annualized
D: 3,891% total, 24.8% annualized
We are on the home stretch to early retirement and in about 18 months or so – if everything goes well – we will sell our expensive condo, pay off the mortgage and move to a less expensive location. We might rent a house there or pay for a modest home with cash. One way or another, we should be completely mortgage-free!
Or will we still have a mortgage? How about the “mortgage payments” in the form of our future living expenses in retirement? They increase by the rate of inflation every year! That’s the mother of all mortgage payments! Mortgage mayhem! How do we treat a “mortgage” like that on our balance sheet? Continue reading “We just went from millionaire to dead-broke with one simple accounting maneuver”
This is a follow up from our post last week when we couldn’t fit debunking all the arguments for emergency funds into one post. This is also good place the point out some of the great work other bloggers have done on this topic:
- The Green Swan: Emergency Fund Alternatives
- BeNetWorthy: HELOC as an Emergency Fund option
- Unchained55 thinks Emergency Funds are a scam
- (we must have forgotten some, please let me know if you see an obvious omission!)
Here are our reasons 6-10. Enjoy! Continue reading “Top 10 reasons for having an emergency fund – debunked (Part 2)”