a planter's garden

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plantingtheseed
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Re: a planter's garden

Post by plantingtheseed »

If I were to do it over again

No theoretical models are perfect, and ERE is by no means an exception. The shortcomings of the popular ERE model of using the stock market as the sole income source is that it's not sustainable. This particularly hits ERE hard precisely because that ERE model starts out the retirement with insufficiently small nest egg. It also violates the golden rule of not putting all your eggs in one basket. And the inflation will be the biggest worry looking ahead.

Staring out with a small nest egg in the market is like playing poker short stacked. The popular SWR model is heavily exposed to market risk. In practice, one must diversify income sources so that failure risk between the income sources are much independent as possible.

Having done the ERE for almost 7 years now, if I were to do it over again as someone starting in college, this is how I would try to enhance the application of ERE in real life. In a nutshell:

1. Choose a major with an above average income potential - i.e. health care, engineering, computer science, etc. This is self explanatory.
2. The best part of ERE and this is where ERE theory shines - start saving immediately, at a high savings rate, i.e. > 50% of net income or higher.
3. Choose a job that includes social safety net along with high income potential. i.e. get a job that pays above average income WITH pension and social security.
4. Continue working until AT LEAST minimum social security eligible credits are achieved. (https://www.ssa.gov/pubs/EN-05-10072.pdf)

This will achieve the following: 1. Savings 2. Pension 3. Social Security, as separate income sources in retirement. Not only that, the income sources 2 and 3 will be annuities, that pays for life. Even better, income source 3 will be fully indexed for inflation for life. Therefore, maximizing income source 3 is highly desirable.

In addition, I would purchase a modest house at the earliest market opportunity and pay it off as soon as possible . This will add a 4th independent potential income source, should one need it.

plantingtheseed
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Re: a planter's garden

Post by plantingtheseed »

Strategy moving forward

The pandemic trigged a stay-at-home order which persisted for several months, providing a valuable time for decompression. In the middle of preparing for one of life's pivotal moments, I was forced to stop and wait. And it was the waiting that brought forth clarity. I realized the value of what I was walking away from.

Had I moved forward with the original plan for early retirement, I would have probably gotten by but there would have been regrets and likely some form of financial hardship later for not thinking things through and rushing to decision based largely on emotion. I dare say, that this was not a coincidence. The strategy moving forward is based on maximizing this value. It will also attempt to increase my small nest egg as much as possible.

1. Create largest savings possible for investing / trading leverage.

Prior to zero commissions, there used to be a rule for purchasing stocks, and it was to keep the cost of the commission to 2% or lower. This was because commissions were immediate losses and this kept drawdowns in check. This can also be applied in risk taking. If the risk taking is kept to 2% or lower, then it will also keep the losses in check from ruin. But this also implies profits will be lower as well. Therefore, one must have a large overall savings to increase the leverage of that 2%. 1% of 1M is 10k. This should be a good goal to target. Per the drawdown table, about 5-8% of risk can be taken without significant drawdown risk. For a 1M, that is 50k - 80k of risk that can be taken at any one time.

2. Maximize the pension value

This was the major mistake that almost happened but was prevented thanks to the pandemic intervention. Depending on the pension, the degree of exposed risk to the stock market can vary the solvency risk because in addition to investment returns, there is also cashflow from pension contributions. In my case, there was adequate funding for sustained payments of 8-9 years with assets alone. The calculations showed that higher pension benefit decreased the break-even period fairly significantly. The combined total period to maximize the benefit and to minimize the break-even still came out much favorably than retiring early with minimum benefit. Factoring in the recent raises, the life time total to life expectancy came out to well over 200k per year delayed. This just for sitting down and working while saving additional income without single market risk. And the additional time increases social security benefits. This was a trifecta that I almost gave away.


So in sum, there are two broad accumulation fronts that are being worked simultaneously.


1. For accumulation strategies dealing with savings and investing/trading:

-Maximum savings will be continuously pursued in the following order: first max out pre-tax, then tax-free, then after-tax.
In addition, inflation protected savings will be added.

-Several methods will be employed for investing/trading - value investing, dividend growth, and trading strategies using options or other (will get into more details at later)


2. For accumulation strategies dealing with maximizing value that are independent of market risk

-Continue working to maximize the pension, in the following incremental goals (gross):
2022: $4000 per month
2023: $4500 per month
2024: $5300 per month
2025: $6000 per month

-Continue to accumulate other savings (i.e. vacation etc.)

-Continue to maximize social security credits.
This is a rather imporant point. The way social security is calculated, it takes the highest 35 years in income to calculate the benefits. In any missing years, '0' is entered. Not necessarily advocating working 35 years, but this is a relevant information.
https://www.ssa.gov/pubs/EN-05-10070-1956.pdf

-Purchase a modest house
With 3 trillion dollars set loose and probably more to come, inflation will tick up significantly in the coming years. It is likely that those who have retired with 2020 ERE money will be looking for jobs when this happens.

This will be another protection measure to guard against coming inflation. Depending on the severity of the inflation, even the monthly pension may not be sufficient to guard against it.

jacob
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Re: a planter's garden

Post by jacob »

You're confusing ERE with E-ER from standard one-dimensional FIRE. The problem of retiring in 2020 with a consumerist mindset under the 4% rule does exist---indeed it's hard to swing a dead cat in the FIRE movement w/o hitting one of those optimists---but I believe it's rare here.

I believe the danger-zone is found at level 4, that is, people who have learned enough to know about the 4% rule but not enough to know about its limitations. Ditto life in general, that is, enough to life-hack and geo-arbitrage a consumer lifestyle, but again not enough to realize the limits of that as they get older/life happens.

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plantingtheseed
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Re: a planter's garden

Post by plantingtheseed »

Correct, the problem is that life is dynamic, and one must look ahead and forecast in order to guard against. It is probably better to over-forecast and build a margin of safety so that even if the forecast was wrong in a good way, presumably, life can continue without much glitch.

It's a boyscout thing - "be prepared".

RockyMtnLiving
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Re: a planter's garden

Post by RockyMtnLiving »

plantingtheseed wrote:
Sat Jun 27, 2020 2:17 pm

-Continue to maximize social security credits.
This is a rather imporant point. The way social security is calculated, it takes the highest 35 years in income to calculate the benefits. In any missing years, '0' is entered. Not necessarily advocating working 35 years, but this is a relevant information.
https://www.ssa.gov/pubs/EN-05-10070-1956.pdf
For an interesting analysis of SS for early retirees, see https://thefinancebuff.com/early-retire ... efits.html. Apologies if the same or similar analysis is posted here somewhere.

The bend points are interesting. This is too flippant of a generalization, but at some point -- actually, when you reach the second bend point -- exiting the work force doesn't have a significant impact on future benefits.

I think the greater risk for younger folks -- e.g., those 30 or younger, say -- is that the SS rules may change in the decades ahead, given the financial situation of the trust fund and recent societal financial stresses (2008/9 and the ongoing pandemic). I expect (read: "hope") that older folks -- e.g., those 50 and older when the changes are made -- will be grandfathered in such a scenario. I could be wrong, of course. And depending too much on programs such as SS is always risky, I suppose.

plantingtheseed
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Re: a planter's garden

Post by plantingtheseed »

Life is short and you can easily spend a couple of your prime decades on some idealized idea of what FI is.
I don't know... there are an aweful lot of working stiffs sacrificing to raise families and missing out in life. Might as well have the money too :lol:
Still trading options?

plantingtheseed
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Re: a planter's garden

Post by plantingtheseed »

@ RockyMtnLiving

Thanks for the link, it explains bend points very clearly and also mentions https://opensocialsecurity.com/ which I was going to recommend to you. Very well written, excellent find.

There was also a discussion on viewtopic.php?p=218585#p218585 from J+G regarding social security, ACA and taxes as related to semi-ERE, which may be of some use.

I share the same concern on social security and the current view is that the problem maybe more political than fiscal.

PBS documentary "When I'm 65" talks about the SS problem (See: 35m12s - 40m30s) https://www.pbs.org/video/dptv-document ... m-65-full/ and shows SS could easily be fixed, for example by raising FICA from 7.5% to 9%, it can go for another 75 years.

Couldn't agree more on being not too dependent on SS however. If people themselves don't have the will to defend what they've already paid for, then I suppose there isn't much more left to be said.

jacob
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Re: a planter's garden

Post by jacob »

plantingtheseed wrote:
Sat Jun 27, 2020 9:55 pm
PBS documentary "When I'm 65" talks about the SS problem (See: 35m12s - 40m30s) https://www.pbs.org/video/dptv-document ... m-65-full/ and shows SS could easily be fixed, for example by raising FICA from 7.5% to 9%, it can go for another 75 years.
SS is one of those systems where massive outflows are finely balanced with massive inflows so a small change on the dial has big consequences to the behavior of the system. A small percentage in taxing will change it but a significant fraction of politicians will howl about that as they actively working to get rid of SS entirely.

Other countries have mostly taken the road of slowly increasing the retirement age so as to make less people collect/people collect less before they die. For example, my Danish nephew will not be able to collect before he is 72. In the US this would probably be considered highly unfair given the wide span in life expectancy between different counties with some of the richest pushing ~86 years and some of the poorest at ~66 years.

plantingtheseed
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Re: a planter's garden

Post by plantingtheseed »

@bigato

I hear you about the taxes (with options), I cringe as tax time approaches every year. It's an interesting game, but there are certainly better ways to skin a cat with much less effort, probably a good choice. :D

plantingtheseed
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Re: a planter's garden

Post by plantingtheseed »

@jacob

Yes I think we may see a combination of remedies including increasing the age limit, changing the FICA and increasing the contribution cap so long as there is a political will displayed by the people. (Which the Baby Boomers have managed thus far)

But seeing how divisive people have become, so deeply saturated in self-obsession and being ridigidly intolerant of others' views, this disease that is rotting away at the civility between people today, will not only bring down social security but eventually the fabric of society itself.

But this, fortunately, is not my problem :D (j/k)

The kidding aside, I think the best way is being aware and helping others to be ware to clarify many of the misinformation and misconceptions.

So that when the time comes, this will help the upcoming generation to be able to make an informed choice for themselves.

plantingtheseed
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Re: a planter's garden

Post by plantingtheseed »

Watching the market with interest. Getting some popcorn. :shock:

plantingtheseed
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Re: a planter's garden

Post by plantingtheseed »

a full moon.. and bette davis eyes https://www.youtube.com/watch?v=GVIrsFe2Ks8

a toast to two of the best decades ever.

plantingtheseed
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Re: a planter's garden

Post by plantingtheseed »

There isn't isn't much left to do except to wait and continued the course.

The configuration of the current strategy is such that the only way to lose is through loss incurred by participating in the market.

Not only is the market relatively uncertain, there is no reason to take a broad market risk, as this market isn't offering any superior upside.

The continued savings and accrual of pension benefits each year risk free will easily outpace what the market is offering. This is an easy choice to make.


If there are some modifications that could be made, it is that I could still retire early and delay taking the benefits until higher accrual later.

But this is a compromising solution that forgoes the incoming cashflow while awaiting accrual and it would diminish, rather than increase, the net savings while waiting.

It would also shift the healthcare to ACA, which I would rather not do. The choice will always be available, and I can decide to exercise my FU money privileges at any time if desired. Fortunately, I really enjoy my job and work with many great people.


There is, however, a reason to take narrow specific risk in the market. There are couple of ideas that I will be setting up in the near future, to see if they will come to fruition.

plantingtheseed
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Re: a planter's garden

Post by plantingtheseed »

These are certainly interesting times. Another savings opportunity is on the horizon and it appears we're headed that way.
It costs 78 cents on the dollar and on top of that, there's a compounding schedule for up to 6.5% in the next couple of years.
Even though everything was set for retirement, with complete pension, healthcare, along with fairly decent amount of savings, glad I didn't pull the trigger because this would have been a tough one to walk away from. There are some rare anomalies that exist in life, such as the bay area real estate and this could probably qualify as another. It just wasn't meant to be.

The monthly expenses are so low that there really isn't much left to cut. The current savings rate is well over 80% at this point. There is diminishing returns in trying to reduce expenses further as it's fairly optimized. Given the opportunity, I will continue to refine the process. But more emphasis will be placed on leveraging the income, and keeping an eye out for trades with perceived positively biased outcome that provides high profit to loss ratio. Ideally, ratio of 5:1 is preferred for the risk taken, but 3:1 will suffice at this juncture.

It is likely that in a relatively short amount of time, we'll get to see what the market will reveal. An ideal progression will be a short term deflation for a year or two followed by a reasonable level of inflation. If it is too high, all bets are off.

CURRENT STATS: 98% cash@~3%, 1% Gold LEAPS, 1% {CVX @ 60, 8.5% div} NW: 775k

plantingtheseed
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Re: a planter's garden

Post by plantingtheseed »

If I were to do it over again - cont'd

Success will depend on being consistent. After the job/career is secured, the first and foremost task should be focusing on maintaining the high savings rate. The next step should be progressing in the career toward a higher income. When the high savings rate is combined with high income, the set will act as a multiplier toward the goal. In addition, as time passes, the significance of establishing separate income sources from pension and social security should slowly become visible and the realization will set in of their financial viability.

As some amount of nest egg is secured, there maybe several deviations from the strategy to address life. So long as the core implementation (high savings rate, high income) is routinely maintained, the progress will tend to track back once the consistency resumes. As every personal needs are unique, the paths will diverge to the finish line.

What is a good goal? Because life happens when one least expects it, having extra for contingency should be built-in to the goal. No clear answer here, but a simple rule of thumb is annual spending times life expectancy. If one spends 50k per year and has 40 years of life left, that translates to $2,000,000. One can try to project annual investment returns, the inflation, etc., etc., but these are projections. The core of it is that with 50k annual spending with 40 years left to live, one probably will need to start off with 2M, keeping it simple.

Again, the personal divergences take over from here, because clearly, one can argue that having lower annual spending means needing less than 2M under the given constraints. i.e. - If one does not depend on the society by foraging for food and not needing to pay rent living out of a van, etc. There are often trade offs to consider and questions and answers needed about sustainability. In addition, it is best not to discount the factors of aging and happiness in these calculations. Basically, it's linear programming that is optimizing essential variables for each case - with the variables being, time to quit, a set level of life comfort, a set level of financial security, etc., etc.

Chances are, after some nest egg is accumulated, the goal will evolve. As long as one remembers to keep the spending in control to maintain and simultaneously boost the income to accumulate, one can achieve the desired outcome irrespective of the chosen method.

Being the 100 year mortals that we are, there really is nothing new under the sun. :lol:
Last edited by plantingtheseed on Tue Jul 07, 2020 4:55 am, edited 1 time in total.

plantingtheseed
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Re: a planter's garden

Post by plantingtheseed »

Image

Some(one / thing?) is trying hard. :lol:

CURRENT STATS: 97% cash@~3%, 2% Gold LEAPS, 1% {CVX @ 60, 8.5% div} NW: 775k

plantingtheseed
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Re: a planter's garden

Post by plantingtheseed »

If I were to do it over again - cont'd


As the savings begin to accumulate to a respectable amount, one will inevitably face the question of investing, or risking loss for a chance to have higher savings.

The frequently promoted mantra for the masses is that a younger person can take higher risks as they have more time to recover.

It depends - as it's not a question of time but more a question of readiness. Can one afford to lose money? Can one afford to live after the loss?

If the loss represents bulk of one's savings, is one prepared to save again? Have the patience and the stamina to wait it out for unknown number of years for the market to come back?

Most people can't. When faced with the harsh reality of loss, most will take the loss. This is because of leverage - most bet too much and need the cash withdrawn to survive.

Often, they underestimate the need for liquidity during a severe downturn. By then, it is too late.


It is better to be prepared for the downturn before it happens. For most of us, this means getting a job and working.

This is why taking care to examine and choosing a job that is capable of providing for the future is essential.

A careful selection in finding the right job isn't any different from choosing the right fund, etf or a stock. Why would this be any different?

Lest we forget, that a job is another asset class that brings forth appreciation through "having" it.

Whether by taking risks in running a business or in a carefully chosen career, given enough sweat equity, one can have an excellent potential to outperform the market as well as the inflation.

So if at all possible, find a job that is enjoyable, fulfilling, long term, with reasonably high income potential, pension, social security and 401k savings option. Such jobs do exist.


When I was entering the real world after grad school, I had multiple job offers from various well known high tech companies.

Fortunately, I had several working classmates from both the undergrad and the grad school that provided helpful insights into these companies which altered my decision making.

I gave the high tech industry a try for the first few years of my career to see if it would be a good fit for me. In the beginning, I enjoyed the fast pace and the innovative spirit but those wore out fairly quickly.

In the end, I chose the work-life balance, reasonable income, stability and long term benefits over high income, cut-throat work environment with high stress and instability. (I took 40% pay cut to make this change and that was interesting)

Though I didn't fully realize at the time, the choice made turned out very well decades later.


So rather than viewing a job as a piggy bank that must be endured, a better approach maybe to view it as an asset to invest one's self in. Find a job with a purpose that aligns with your beliefs and pays reasonably well with benefits.

I found out quickly that worrying about the company bottom line all the time wasn't enough of a motivator to stay with the company too long.

There had to be a purpose, a significance, that provided some meaning for either the self or for others, is what made continuing a worthwhile consideration. Otherwise, simply being, wasn't good enough.

In choosing the job carefully, it will lead to a higher chance of financial success - and more importantly, happiness.

plantingtheseed
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Re: a planter's garden

Post by plantingtheseed »

CURRENT STATS: 97% cash@~3%, 2% Gold LEAPS, 1% {CVX @ 60, 8.5% div} NW(c+p): 475k+1.3M

plantingtheseed
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Re: a planter's garden

Post by plantingtheseed »

The rational approach - (take the good bits and combine them)


The major difference between the market and work is that expected return in the market is not constant over time and there is no way to know which way it will change.

One can play with firecalc and asset allocation models all year long and this isn't going to change the fact that these models don't anticipate the future.

Our own projections of estimated future returns are so inept that it can be simply stated as dismal. Can we be so foolish as to bet our entire livelihood on this uncertainty?

To bet everything on the market is akin to sticking one's neck far out on the guillotine not knowing when the next blade fall will be.

The rational approach is to exert influence over variables that one can and not over variables that one can not.

For most people, this means work - lifetime earnings from work is the largest part of one's wealth.

Therefore, choosing the right job that one can devote to with built-in income protection contract (pension) and reducing the job risk by investing and excelling in the job will be a smarter and superior choice than with the market, which one has no control over.

It will also provide a guaranteed return - something which the market can not do.

This is where the foundation should be. A specialization and diversification within this foundation can bring in serious guaranteed returns over time.

The gift of ERE is the idea of high savings rate (this was the key for me). Combine this with the right job. And sustain the the two until the long term income contract becomes callable. I believe the outcome will be quite satisfactory.

Keep the savings safe and only deploy when the circumstances warrant it, for some extra kicks - https://www.youtube.com/watch?v=RYHPlLs ... .be&t=1960

With reasonable planning and some luck, one should be able to attain the position where market risk is taken only when the circumstances are favorable - and not because it is necessary for survival.

This is where a rational individual should be, even if it's for a better night's sleep. 8-)

plantingtheseed
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Re: a planter's garden

Post by plantingtheseed »

A good reminder - Just looking at the price is not investing (0:00 to 10:10)

https://www.youtube.com/watch?v=Qm0jktMIYlk

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