Discussing Retirement Bucket Strategies with Fritz Gilbert – SWR Series Part 55

January 25, 2023

Welcome to another part of my Safe Withdrawal Rate Series. Today’s topic: Bucket Strategies in retirement. As you know, my blogging buddy Fritz Gilbert has written extensively on this topic at his Retirement Manifesto blog, for example:

And likewise, I have written about my skepticism of bucket strategies in Part 48 of the series: “Retirement Bucket Strategies: Cheap Gimmick or the Solution to Sequence Risk?

Fritz’s most recent post on the Bucket Strategy started a lively back-and-forth on Twitter, and it seemed appropriate to pursue a more detailed discussion with more than 280 characters per answer in a “fight of the titans” blog post. So if you haven’t done so already, please check out our awesome discussion over on Fritz’s blog:

Is The Bucket Strategy A Cheap Gimmick?

The response was overwhelmingly positive, and we decided to craft a follow-up post here on my blog. We came up with two new questions, and we also need to address two major themes from the comments section in Part 1, specifically, the role of simplicity and behavioral biases in retirement planning.

So, let’s take a look…

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Who’s afraid of a housing crash?

November 16, 2022

After the big jump in the stock market last week, everybody’s worries should be over, right? Well, maybe not. Real estate looks a bit shaky now! Prices have come down just a notch, but is there more to follow? Are the wheels coming off? Is the market going to crash? What’s the impact of the much higher mortgage interest rates? Are we going to see a replay of the 2008 housing crash? How did interest hikes impact the housing market back in the 1970s and 80s?

Lots of interesting questions! Let’s take a look…

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Hedging Against Inflation and Monetary Policy Risk

July 5, 2022

Over the last few decades, we’ve become accustomed to a negative correlation between stocks and U.S. Treasury bonds. Bonds used to serve as a great diversifier against macroeconomic risk. Specifically, the last four downturns in 1991, 2001, 2007-2009, and 2020 were all so-called “demand-side” recessions where the drop in GDP went hand-in-hand with lower inflation because a drop in demand also lowered price pressures. The Federal Reserve then lowered interest rates, which lifted bonds. This helped tremendously with hedging against the sharp declines in your stock portfolio. And in the last two recessions, central banks even deployed asset purchase programs to further bolster the returns of long-duration nominal government bonds. Sweet!

Well, just when people start treating a statistical artifact as the next Law of Thermodynamics, the whole correlation collapses. Bonds got hammered in 2022, right around the time when stocks dropped! At one point, intermediate (10Y) Treasury bonds had a worse drawdown than even the S&P 500 index. So much for diversification!

So, is the worst over now for bonds? Maybe not. The future for nominal bonds looks uncertain. We are supposed to believe that with relatively modest rate hikes, to 3.4% by the end of this year and 3.8% by the end of 2023, as predicted by the median FOMC member at the June 14/15, 2022 meeting, inflation will miraculously come under control. As I wrote in my last post, that doesn’t quite pass the smell test because it violates the Taylor Principle. The Wall Street Journal quipped “The Cost of Wishful Thinking on Inflation Is Going Up Too“. I’m not saying that it’s impossible for inflation to easily subside, but at least we should be prepared for some significant upside risk on inflation and interest rates. Watch out for the July 13 CPI release, everybody!

So, trying to avoid nominal bonds, how do we accomplish derisking and diversification? Here are ten suggestions…

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The Ultimate Tax Hack: We Are Moving To Monaco! (No we’re not! Happy April Fool’s Day!)

April 1, 2020

Despite the postponement of the deadline this year, April is still tax season for us! Oh, how much I dread this part of the year! And it’s not even the paperwork! If I could do twice the paperwork to cut my taxes in half, I’d gladly do so. So, certainly, for me, the problem is not the filing of my taxes! The discomfort of tax season is 100% due to paying income taxes. Sure, we moved to Washington State to eliminate the state income tax – a big plus compared to California – but that still leaves that pesky federal tax. Last year, we still ended up in the 22% federal tax bracket for ordinary income and 15% for long-term capital gains and qualified dividends. I still don’t the final, final tally yet but it looks like our total federal tax bill will be about $23,000. That hurts! And it hurts more having to pay taxes for the blockbuster year 2019, right around the time the market is melting down this year!

So we developed the ultimate tax hack! Move to a location without any(!!!) income taxes! At all! That location is Monaco, a tiny sovereign nation on the Mediterranean coast surrounded by Southern France. It has no income tax, no capital gains tax and no property tax, how awesome is that?

We did a reconnaissance visit to the Cote d’Azur last year, including Monaco, and we absolutely fell in love with the place! I mean, where else in the world can you watch a Formula One race looking out of your apartment window?

Monaco-HairPinCurve
Yup, that’s the hairpin curve you’ve seen in the Formula One races!

It’s sunny and warm year-round and the food and wine are outstanding.

Let’s look at the numbers in more detail… Continue reading “The Ultimate Tax Hack: We Are Moving To Monaco! (No we’re not! Happy April Fool’s Day!)”

Safe Withdrawal Math with Real Estate Investments – SWR Series Part 36

Welcome to another installment of the Safe Withdrawal Rate Series. This one has been requested by a lot of folks: Let’s not restrict our safe withdrawal calculations to paper assets only, i.e., stocks, bonds, cash, etc. Lots of us in the early retirement community, yours truly included, have at least a portion of our portfolios allocated to real estate. What impact does that have on our safe withdrawal rate? How will I even model real estate investments in the context of Safe Withdrawal and Safe Consumption calculations? So many questions! So let’s take a look at how I like to tackle rental real estate investments and why I think they could play an important role in hedging against Sequence Risk and rasing our safe withdrawal rate…

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How To “Lie” With Personal Finance – Part 2 (Homeownership Edition)

Remember the blog post from a few months ago, How To “Lie” With Personal Finance? I got a fresh set of four new “lies” today! Again, just for the record, that other post and today’s post should be understood as a way to spot the lies and misunderstandings in the personal finance world, not a manual to manufacture those lies. Of course!

This one is about the rent vs. homeownership debate. Is homeownership a wise financial decision? I’m not going to answer this question here. It’s a calculation that’s highly dependent on personal factors. I lean toward homeownership over renting but that’s because of our idiosyncratic personal preferences – our ideal early retirement lifestyle involves having a stable home base in a good school district. For us personally, the monetary side of homeownership has also worked out pretty well (“My best investment ever: Homeownership?!”) and I like to hedge against Sequence Risk in early retirement by taking a small chunk of our net worth – just under 10% – and “investing” it in an asset that lowers our mandatory expenses because we don’t have to pay rent. But I can certainly see how some other folks, whether retired or not, would prefer to rent. I certainly don’t want to talk anyone out of renting. But on the web, you sometimes read pretty nonsensical arguments against homeownership. And just for balance, there’s also a prominent lie in favor of homeownership. This is going to be interesting; let’s take a look… Continue reading “How To “Lie” With Personal Finance – Part 2 (Homeownership Edition)”

Will FIRE turn into “Fake Independence Rapidly Evaporating?” Relax! We’re going to be fine, despite the recent stock market volatility!

Happy New Year! Geez, are you all glad that 2018 is over? What a rough fourth quarter! It started quite harmlessly with Suze Orman poking fun at the FIRE movement. Not a big deal, we hit back and even had some fun with it. But the quarter ended with Mr. Market taking our stock portfolio to the woodshed. The S&P500 Total Return Index (dividends reinvested) was down 19.36% at some point (closing value Oct 3 to closing on Dec 24, total return). Not only was the fourth quarter brutal on your stock portfolio, but the FIRE movement has also become the target of continued ridicule. It looks like FIRE critics have come up with some cool and creative new acronyms:

  • FIRE = Foolish Idealist Returns to Employer (MarketWatch)
  • DIRE = Delay Inherit Retire Expire (Financial Samurai)
  • And even I made up one, just for fun, see the title. Just to get everyone’s attention!

But how serious are the gloom and doom predictions? I posted two months ago why I’m not worried yet but that was before the precipitous drop in stocks. Has anything changed now? Readers have asked me that and I have asked myself what the recent equity plunge will do to the FIRE movement. So, that’s what I will do in today’s post. First, my take on the wild equity market moves and then why I think that this is obviously not the end of the FIRE movement. Continue reading “Will FIRE turn into “Fake Independence Rapidly Evaporating?” Relax! We’re going to be fine, despite the recent stock market volatility!”

We Are Homeowners Again!

Homeless no more: We just bought a house last month! Over the internet! Well, not entirely over the internet because we actually toured houses in person the old-fashioned way. With a real estate agent, more on that below. But we eventually closed the transaction while we were on our epic trip through Asia this Fall! All the “paperwork” was done electronically! One reason we were able to pull this off was that we paid for the house in full. Applying for a mortgage would have required a lot more paperwork and notarized signatures. Probably not something you can accomplish while traveling in Southeast Asia! And just in case you don’t remember, we outline the reasons for not getting a mortgage while in early retirement in Part 21 of the Safe Withdrawal Series!

In any case, where did we buy, what and why? Let’s take a look…

Picture credit: Pixabay (this is not our new home!)

Continue reading “We Are Homeowners Again!”

So what, we retired at the peak of the bull market? Here are seven reasons why we’re not yet worried…

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.

The 2018 calendar year gains were almost wiped out in October. Ouch!

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…

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Our Net Worth as of 3/31/2018

I wish the first quarter had ended on January 26 when the S&P500 peak reached the all-time high of 2,872! But in the end, the first quarter of 2018 was really nothing to write home about. And the second quarter is off to a volatile start as well! But I started with this series exactly a year ago and I might as well keep going! Besides, looking at the visitor stats, these posts are some of the most popular! I don’t blame you for being nosy because net worth updates are some of my favorites to read on other blogs, too! 🙂 Soooo, where do we stand as of 3/31/2018? Let’s take a look at the cold hard numbers…

Continue reading “Our Net Worth as of 3/31/2018”