Mini retirement then back to work...how to invest?

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banker22
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Mini retirement then back to work...how to invest?

Post by banker22 »

Hello all

I have slowly been surely educating myself in the ways of sensible investing, and have a somewhat unique situation that I was hoping to hear your opinion on.

I am 32yo and c.4-5y away from having my F-you money. After I reach this point I want to go back to school to train for a more rewarding / enjoyable / relaxing job.

In the current accumulation phase of 3-5y it seems like I should invest like someone 3-5y from retirement, so almost all bonds.

Then I will have 5-7y where I won't be earning so will need to draw 4-6% per year to support my family. I would like to not eat into the nest egg too much but am aware that with this WR I will be exposed to sequence of returns risk.

Eating into the principal isn't too big of a deal, however, as when I start earning again, after the 5-7y period, I will have another 20-25y career so will again be able to invest aggressively and look for maximal real returns.

I would love to hear all of your thoughts on what exactly you would do in my situation.

I'm also UK based, if that helps / matters.

Thanks all!

J

George the original one
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Re: Mini retirement then back to work...how to invest?

Post by George the original one »

banker22 wrote:
Wed Apr 25, 2018 11:26 am
In the current accumulation phase of 3-5y it seems like I should invest like someone 3-5y from retirement, so almost all bonds.

Then I will have 5-7y where I won't be earning so will need to draw 4-6% per year to support my family. I would like to not eat into the nest egg too much but am aware that with this WR I will be exposed to sequence of returns risk.
Retirement investing theory doesn't even recommend almost all bonds these days, so I see no reason for you to go that route.

I can see, at the time of your mini-retirement, putting a significant portion you need for survival during the 5-7 years into bonds. In other words, 20%-30% of total available capital in bonds to ensure family needs are met during the gap years until you're employed.

banker22
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Re: Mini retirement then back to work...how to invest?

Post by banker22 »

@george

Thanks, makes sense. I'm guessing you mean short term bonds? And that would be money I'd never get back?

J

banker22
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Re: Mini retirement then back to work...how to invest?

Post by banker22 »

There's also the issue of the next 3-5y. A big dip could delay my FIRE significantly. You recommend starting full equities and gradually shifting to a bond tent over the next 4-5y, or should I start now with 25-40% bonds in preparation?

jacob
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Re: Mini retirement then back to work...how to invest?

Post by jacob »

I was thinking the same thing as GTOO. So, for actual implementation, and presuming that your username implies what I think it implies, I would suggest DIYing your own portfolio of corporate bonds with a 7 yearish maturity (so in 2025). As you know this is a trade-off between yield and risk of losing much or everything if a particular company fails. But---going back to your username---you can make an informed decision here.

In the US you could get 3-6% out of that depending on what credit rating you're willing to tolerate. I don't follow UK numbers.

(Obviously you should just go invest in the US because you'd be subject to significant currency risk, so ... )

The easy solution is an ETF ... however, those trade continuously (to abide their prospectus), so those are more of an interest rate play and that's probably NOT what you want! I dunno where the UK is currently, but in the US rates are going up which means that principal (continuously rolled) is going down. Not cool if you make $3000 in interest on an investment of $100,000 with a duration of 10 years but lost $3,000 because rates went up by 0.3%. By DIYing, you control duration. This is banker101 stuff, so you can do a spreadsheet.

More advanced .. if interest rates are rising in the UK as they are here, a barbell strat is better (the above proposal is a bullet strat). In that case, you'd have some of the portfolio in long term bonds (near 30 years) and the other in very short term (<1yr) holdings. If rates are rising, you lose a lot on the long term arm (cf. the medium term bullet) but avoid loses for short arm and as they mature, you roll into the long arm. This requires a lot more management compared to the bullet which you only have to set up once and then cash out 7 years from now.

banker22
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Re: Mini retirement then back to work...how to invest?

Post by banker22 »

@jacob

Very interesting, thanks. I suppose you mean to do this right when I start school? Say 7 year bonds starting in 2022. So take my full allocation of 'F you' money and 'guarantee' 3-5% yield + return of full capital upon maturity (minus effects of inflation)? Then invest as normal?

I work in M&A so a little less technical than most!

thrifty++
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Re: Mini retirement then back to work...how to invest?

Post by thrifty++ »

What do you mean FU money? Do you mean financial independence? 100% on bonds sounds very risk averse and high risk of inflation erosion. Cant you hedge your bets a bit and put something like 30% to 40% in equities?

banker22
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Re: Mini retirement then back to work...how to invest?

Post by banker22 »

@thrify yes that's what I mean. is the inflation risk that big over 7y and then back in equities again.

@jacob assuming what I said above is what you meant (for the bullet scenario at least)...how about for next 4-5y while accumulating?

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Re: Mini retirement then back to work...how to invest?

Post by jacob »

banker22 wrote:
Wed Apr 25, 2018 2:29 pm
Very interesting, thanks. I suppose you mean to do this right when I start school? Say 7 year bonds starting in 2022. So take my full allocation of 'F you' money and 'guarantee' 3-5% yield + return of full capital upon maturity (minus effects of inflation)? Then invest as normal?
Yes, yes (and also minus the risk of individual company default), and yes (whatever normal is :mrgreen: ).

That was the bullet strategy.

As for the next [pfffttt short-term] ... that depends on whether you adhere to the faith that "nobody can predict the market" or ... something else.

I'd say for that period, do the same as you'd do afterwards, like if you intend to index later, index now too---alternatively value, DGI, PP, GB, predict, sector, arrange, etc. The main reason is that a steady job income changes your investment risk profile, because inflation-adjusted income is like owning a big bond (much like my book royalty income can be considered as such). Think of it as job-allocation in the same way that some people think of asset-allocation. A steady job is an asset ... and it's part of the portfolio balance. Just like your home/rent. It's all best treated as a giant system of asset and risk flows.

Stahlmann
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Re: Mini retirement then back to work...how to invest?

Post by Stahlmann »

banker22 wrote:
Wed Apr 25, 2018 11:26 am

... however, as when I start earning again, after the 5-7y period, I will have another 20-25y career so will again be able to invest aggressively and look for maximal real returns.
r u sure bro?
how do you make such decision/bet?

Anyway, very interesting approach. Have luck!

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Mister Imperceptible
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Re: Mini retirement then back to work...how to invest?

Post by Mister Imperceptible »

Augustus wrote:
Wed Apr 25, 2018 7:24 pm
Why are you planning to work 20-25 years?

My advice is don't touch principal.”
Augustus on whether or not “money is a solved problem”:

https://m.youtube.com/watch?v=-rQc4uYnBe8

George the original one
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Re: Mini retirement then back to work...how to invest?

Post by George the original one »

banker22 wrote:
Wed Apr 25, 2018 2:36 pm
@thrify yes that's what I mean. is the inflation risk that big over 7y and then back in equities again.

@jacob assuming what I said above is what you meant (for the bullet scenario at least)...how about for next 4-5y while accumulating?
Can you predict what inflation will be in a decade? Especially inflation of a country that's making the biggest fiscal policy changes they've seen since decades ago (Brexit)? CPI for the USA says over the past 7 years, inflation totals 11.67% & 16.87% for a decade... these have been low inflation years compared to the '80s, where 7 year inflation (1981-1988) was 31.64% and decade inflation was 83.75% (1978-88). That's quite a range to predict, so it's prudent to have an inflation-fighting means at your disposal.

For the bonds, you could start buying some sort of ladder now or use certificates of deposit at the time you pull the trigger or whatever suits your temperment. The basic thing is you already acknowledge you can't predict when this mini retirement will begin, so I personally see little reason to start a ladder now unless it happens to fit in with your lifetime investment strategy.
Last edited by George the original one on Thu Apr 26, 2018 9:57 am, edited 1 time in total.

classical_Liberal
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Re: Mini retirement then back to work...how to invest?

Post by classical_Liberal »

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banker22
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Re: Mini retirement then back to work...how to invest?

Post by banker22 »

@George

Very true. The smart money would probably be expecting inflation coming soon. So I suppose we would also look to something like gold as an inflation hedge. So, with Jacobs barbell we are looking at long term bonds, short term bonds, gold...sounds familiar!

My initial thought actually was just PP from now until the end of school. This is probably still what I'm leaning towards.

@jacob would love to hear your thoughts on the inflation implications of your original plan and how any potential loss would compare to a loss from spending the 25% on school and keeping 75% equities.

banker22
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Re: Mini retirement then back to work...how to invest?

Post by banker22 »

@liberal, I like that approach. But hard to accept that my bucket for my 7y period would just be consumed. I suppose the remaining c75% of my portfolio would be exposed to high return equities however

classical_Liberal
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Re: Mini retirement then back to work...how to invest?

Post by classical_Liberal »

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jacob
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Re: Mini retirement then back to work...how to invest?

Post by jacob »

banker22 wrote:
Thu Apr 26, 2018 9:59 am
@jacob would love to hear your thoughts on the inflation implications of your original plan and how any potential loss would compare to a loss from spending the 25% on school and keeping 75% equities.
Inflation => Rapidly rising rates, so the bullet strategy would be hosed.

Stocks are kinda tricky to evaluate during high inflation because it's not certain that costs can be pushed onto consumers. E.g. If grain prices go up, a cereal maker might not be able to raise the price of cornflakes, so earnings will go down, so the stock will go down. Rising rates do send stocks down overall because of increased borrowing costs which again depress earnings.

I interpret your last suggestion as a barbell strategy. You can think of equity as VERY LONG bonds (infinite duration). Then you can keep the school money in very short bonds.

Hmm.. I'm beginning to get confused as to what the actual goal was here? Sequence of return risk from withdrawing equity during a crash for the school years, right ... but then again, why is this a concern if you're going back to work for another 2-3 decades afterwards? Your early years will buy more.

Otherwise the standard approach to reducing SOR-risk is to keep 1-2 years of money in cash. This of course reduces returns, etc. #TANSTAAFL

IlliniDave
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Re: Mini retirement then back to work...how to invest?

Post by IlliniDave »

I'd probably take whatever I thought I needed to spend while in school and park it in a money market or something and leave the rest invested per whatever the long-haul strategy is. But that's arguably too conservative and here in the US you would probably only get about -0.5% real on the parked money. I tend to be risk averse with my near-term spending money, and would segregate it rather then retooling my entire portfolio. I frequently get lectured on "the fungibility of money" but it never seems to sink in. :)

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