Losing your FI to the markets

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bridgebetween
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Losing your FI to the markets

Post by bridgebetween »

This has been worrying me recently.
I fired over 2 years ago, everything has been going well.
Now I am feeling under attack from 2 sides...
Increased cost of living, weak markets affecting my equities / bond holdings.
It seems the lower cost food items I buy, they are increasing by double digit %.
I have about 25K income from the portfolio, expenses in the range of 7K / year.
Portfolio is 500K and 150K cash, no debt.
As i say, its more a feeling of, loss of control.
What do people think?
I have a possible inheritance coming soon, but I dont want to bank on it yet.

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Seppia
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Re: Losing your FI to the markets

Post by Seppia »

You have a 5% net yield?
The only thing that would worry me if this is coming from dividends is their sustainability long term.
Otherwise you earn 4x what you spend, you have a fairly large buffer

IlliniDave
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Re: Losing your FI to the markets

Post by IlliniDave »

I retired about 20 months ago and am observing the same situation. One difference in our situations is that I was very conservative in my assumptions plus I hung on to my corporate minion status a few extra years to supersize my stash relative to even my conservative assumptions of of what my spend rate would be and what it would take to cover them. The reason I did that was having seen significant financial market uncertainty occur at times that were arguably the worst of times for me in my situations at the time, and it sucked for me on an emotional well being level. I'm also pushing 59 y.o. so unless the biohacking I am doing to reverse the accumulation of chronic Western aging diseases work, and also somehow boomerang into unexpected longevity, my horizon is pretty limited at this stage.

That said, it's frustrating to see what could turn out to be the early stages of the undoing of a plan one bet a lot on. Having control over a large number of external factors is an illusion and so I just try to focus on what I can control. I've also thought through contingency options when it comes to paring back my lifestyle in response to financial misfortune.

My personal thoughts are that I'm in a pretty resilient position financially, and I think the overall "system" still has more resiliency than many believe, and 20-30 years down the road, while things may progress less rosy than simple extrapolation of the past would suggest, they'll be good enough that my needs will be met.

bridgebetween
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Re: Losing your FI to the markets

Post by bridgebetween »

I am not exposed to any one company dividend.
I have ETFs that cover global companies.
My thinking is... if things get bad, and companies start cutting dividends wholesale, there will be bigger problems out there.
I am becoming a prepper in my spare time.. fully stocked and tooled up.

mathiverse
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Re: Losing your FI to the markets

Post by mathiverse »

If you are worried about your financial capital, you have a lot of options.

One big part of ERE is spending time building up non-financial capital. Your spend is already pretty low, so perhaps you are already at a high Wheaton level, but if not, you could build up more skills to replace spending money with other means of obtaining what you want. Rather than buying the cheap food at higher prices, maybe you can find a volunteer position where you get it for free in addition to the feeling of contributing and a chance to meet new people? That's just one idea. The specific context of your life is what you have to use to generate ideas appropriate for your situation. To some extent, your prepping is along these lines.

Your spend is low enough that a part time job would make a pretty big dent in reducing your need to live off of investment income. Maybe it's worth getting a one day a week job, so you are less worried? You'd be taking a clear step to bring things back into your control that way.

bridgebetween
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Re: Losing your FI to the markets

Post by bridgebetween »

Thanks for the above advice.

jacob
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Re: Losing your FI to the markets

Post by jacob »

bridgebetween wrote:
Wed Mar 29, 2023 10:26 am
My thinking is... if things get bad, and companies start cutting dividends wholesale, there will be bigger problems out there.
No, that's semi-normal during recessions. Especially for high-yielding securities. 5% in the current environment is still pretty high.

OTOH, if you have 25k in dividends but only spend 7k, you have quite a bit of headroom insofar the ceiling comes down. To sleep well at night (SWAN) maybe consider giving up some yield in return for a lower payout ratio. Such are less likely to cut dividends for the same reason---more headroom.

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Bankai
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Re: Losing your FI to the markets

Post by Bankai »

1.08% WR has historically been bulletproof. If you're already diversified globally, you don't even have to worry about home bias working against you, and your time is better spent on leveling up skills and your web of pleasant distractions. Markets fluctuate. Many here, including Jacob, retired on much less than you (both in absolute and relative terms).

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Seppia
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Re: Losing your FI to the markets

Post by Seppia »

I would assume that the op has a fairly strong country bias and/or is unbalanced between sectors.
He claims he is in indexes and has a 5% net yield: global world equities yield around 2.5%, usa around 2.something, Europe around 3%.
to go for high yield one has to go to the UK (4.something IIRC), HK etc or concentrate in the high dividend payers (oil majors, financials).

Historically though US indexes (and I suspect global diversified to have done more or less the same) have seen their dividends fall MUCH less than prices in recessions.
IIRC in the 2008-9 GFC, where world equities plunged 50%, dividends were cut roughly 20% only.

If I had net dividends coming from a global ETF covering 150% of my annual cost of living, I would assume to not have cash flow issues (I would also want to have a fund for any emergency expense such as roof collapsing, car breaking down /stolen etc).

As others have said I think for the OP money is a solved problem (assuming costs will go up with inflation and not balloon exponentially due to marriage, multiple kids etc).
At that very low level of expenses what I (a very conservative planner) would do is probably find a part time job that pays 7k per year (should be very easy*) and just keep reinvesting the dividends.

*even in Italy that would mean working approx 10-12 hours per week at Mc Donald’s or similar

ertyu
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Re: Losing your FI to the markets

Post by ertyu »

Bankai wrote:
Wed Mar 29, 2023 1:42 pm
Many here, including Jacob, retired on much less than you (both in absolute and relative terms).
While your overall point stands, I don't think the experiences of those that caught one of history's greatest sustained bull markets (a 20+ year downward interest rate trend + QE) can generalize to those retiring now. Sequence of returns risk looks much differently for someone retiring now vs someone retiring in 2009.

xmj
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Re: Losing your FI to the markets

Post by xmj »

bridgebetween wrote:
Wed Mar 29, 2023 9:26 am
I have about 25K income from the portfolio, expenses in the range of 7K / year.
Portfolio is 500K and 150K cash, no debt.
As i say, its more a feeling of, loss of control.
What do people think?
See if you can monetize some fun activity you're already doing for cash flows, and reinvest all of the portfolio income.

That should make the loss of control go away real fast.

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Bankai
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Re: Losing your FI to the markets

Post by Bankai »

ertyu wrote:
Wed Mar 29, 2023 11:39 pm
Sequence of returns risk looks much differently for someone retiring now vs someone retiring in 2009.
Well of course it's hard to beat retiring at the bottom of a bear market at 55% real drawdown, but that's cherry-picking the best (tied with the internet bubble bottom) time to retire in the last half a century, so everything will look worse by comparison.

Today SP500 is c. 25% down from recent ATH (in real terms) which historically is a fantastic situation to retire as the bigger the drawdown, the higher SWR supported. Add to this finally meaningful yield on bonds and falling inflation plus interest rates likely peaking, and you have all the pieces of a puzzle to be comfortable with >3%, never mind 1%. Of course, nothing's guaranteed but as far as odds go, currently, they look better than in a long time.

ertyu
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Re: Losing your FI to the markets

Post by ertyu »

Bankai wrote:
Thu Mar 30, 2023 6:33 am
but that's cherry-picking the best
nope, that's jacob who you gave as an example of having pulled the plug on less. 4% swr in 2009 are his actual stats. that's why i was saying you can't exactly give him as an example

that doesn't invalidate the main point of the thread so far though, which is that there's no such thing as safety in financial assets only; to the extent there can be safety, it's in diversification is skills and forms of capital
Bankai wrote:
Thu Mar 30, 2023 6:33 am

Today SP500 is c. 25% down from recent ATH (in real terms) which historically is a fantastic situation to retire as the bigger the drawdown, the higher SWR supported.
for this you need to look at the shiller pe, not at the % drawdown from ath

Salathor
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Re: Losing your FI to the markets

Post by Salathor »

I retired about the same time as you and over the last year have also spent about 1% of my NW (in the form of dividends, not sales). Like you, I have been feeling nervous/pessimistic about future growth. I hope I'm wrong and things go up like gangbusters in the next few years. I'm responding by going back to work though--found a good opportunity that pays well and sounds interesting. Right now I'm looking forward to it. If times are great and our NW doubles over the next five years or whatever, I will reassess at that point.

My stuff is mostly yielding 3.3% on average though, split mostly between VYM and VYMI. Not sure where you're getting 5%--I would be a little concerned about those significantly-higher-than-average-yields.

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Bankai
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Re: Losing your FI to the markets

Post by Bankai »

ertyu wrote:
Thu Mar 30, 2023 8:10 am
for this you need to look at the shiller pe, not at the % drawdown from ath
From ERN:

Image

jacob
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Re: Losing your FI to the markets

Post by jacob »

@ertyu/Bankai -

You're arguing under two different kinds of assumptions:
ertuy using CAPE/Shiller presumes that return on equity ~ P/E are mean reverting (to CAPE values)
Bankai using historical data relative to peaks presumes that return on equity ~ P/E are trending (based on recent max P)

Figuring out whether data needs to be detrended or finding the actual mean (not necessarily equal to the median or the average) is one of the hardest problems when it comes to predictions of a potentially nonstationary distribution. The rest is just math.

Laura Ingalls
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Re: Losing your FI to the markets

Post by Laura Ingalls »

@bridgenbetween

I am curious as to your timeframe to FI. What kind of market downtowns have you been through before?

I am having a had time figuring out if you have an asset allocation issue? anxiety issue? Or just a first timer at market conditions that downturns did just recover quickly?

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Sclass
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Re: Losing your FI to the markets

Post by Sclass »

I worry about this happening to me.

If I read correctly the OP is already retired.

I think there is a limit to how low you can take the absolute values of these numbers before you’re living under an overpass. I salute the OP’s SWR and frugality. The ratios look good but the absolute value is scary. The implicit belief that these numbers are somewhat constant is also scary.

We live in a world of rising prices. We always have. although the talking heads have said we have had historically low inflation my reality has been steadily rising living costs for 40 years while I’ve been observing. A lot of things just cost more. Every year I spend more money for the same things. It’s just reality.

We can play this frugal game and avoid getting run over by rising energy, healthcare, education and housing costs up to a point. But I think counting on the OPs numbers long term is a fantasy. Luckily we are dynamic creatures and we can game the system in new ways as we come under pressure. I try to stay creative about conserving money even if my money buys less.

Nothing is static. Just as our assets can crater and expenses can balloon up, we can adapt.

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unemployable
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Re: Losing your FI to the markets

Post by unemployable »

I've gone from about a 6% withdrawal rate to 2% in 13 years, but ascribe the reasons for this as more form reducing expenses, developing creative and/or nonmonetary solutions to lifestyle needs and adjusting those needs than from market gains, although the latter didn't hurt. My nominal expenses, averaged over the year, are about half what they were in 2010.

I'd say the concerns over structural inflation are legit. No one under 50 or so remembers an environment like this. I remember only it as a kid and it was horrible back then too. It's different from the stock market puking its guts out, which can get lugubrious but tends to be brief and has always come with a bottom. The current Inflation has been persistent, omnipresent and unavoidable, and we all know once we hit a plateau prices won't go back down to 2019 levels so won't "go away" in that sense. There's little to substitute with that hasn't also inflated unless you figure out away to obtain the thing for free or go without. Also inflation is immediate: You have to buy groceries and gas and pay the rent or the building contractor now, whereas you can substantially ride out most stock market fluctuations and usually only need to sell a little bit of your portfolio at a time.

When combined with that other gradual and inevitable feature of life, aging, I've seen lot of things recede from what's possible in my life. Houses I'll never get to live in. Cars I'll never get to drive. Jobs and the benefits therefrom I'll never get to have. Relationships I'll never get to enjoy. Heartbreaking? You betcha. And not just towards myself, but the people putatively in charge who job was supposed to be not to let this happen. They ruined this and it can't be Control-Z'd.

Anyway, inflation is probably the most worrisome cause of typical ER strategies failing, as both stocks and nominal bonds lose real value. The way to inure against this is usually to own things that inflate along with the inflation: real estate, commodities and real-principal-protected debt instruments. Steering your entire portfolio now into this direction has the feel of locking the barn after the horse has been sold to the glue factory, however. I'm not helping OP a lot here, sorry to say. Put your "cash" allocation in medium-term bonds, I guess.

But I think this should serve as a warning to those in still the accumulation phase: Structrual inflation fucking SUCKS. Have some resiliency in your life and your portfolio when it happens. And it's happened twice in my life now, two more times than societal collapse has.

[Sidebar: You can earn 5%+ in current income from REITs, MLPs, tobacco, utilities, telecom services and B&M retail, most obviously. Not to mention bonds in the 1-5 year range. Most oil companies pay less than that now, although still shouldn't tank the average much. Naturally, most of these sectors have risk in an environment such as ours you need to be willing to accept. Note people thought Intel was a "dividend stock"... oops.]

ducknald_don
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Re: Losing your FI to the markets

Post by ducknald_don »

unemployable wrote:
Fri Mar 31, 2023 12:54 pm
The way to inure against this is usually to own things that inflate along with the inflation: real estate, commodities and real-principal-protected debt instruments.
I'm not sure about real estate, house prices are falling in the UK right now. Not that surprising when interest rates are increasing. High interest rates tend to dampen demand (which is their purpose) so I wouldn't count on commodities either.

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