- Reader Case: Future Empty Nesters - September 25, 2023
- Full Circle - September 11, 2023
- Yield To Maturity Might Be Indicating a Bottom in the Bond Market - August 21, 2023
(Click here for Part 1 to see how much we spent this year.)
Alright! 2020 is finally over! We made it! Just barely, but we made it!
At the beginning of this year, we were hanging out in Chiang Mai, Thailand. We were riding high off the surprisingly strong stock market performance of 2019 that saw our 60/40 portfolio return a stunning 16%. And I was sitting in a cafe answering emails from readers asking how I could justify putting money into the stock market when valuations were at such nosebleed levels?
My answer to them turned out to be oddly prescient given what was about to happen. It never, I explained, feels like the right time to invest. Either the stock market’s too expensive, or it’s crashing and scary. If you have the money, just invest.
And then the pandemic hit. From January to March the S&P 500 plummeted a stunning 32%. Only months after I wrote that reply, the first scenario was rapidly and violently replaced with the second. Once again, screaming headlines filled my news feed as stock markets experienced one-day drops the like of which we haven’t seen since 2008. Here we go again, I thought.
FIRECracker and I are known as one of the more conservative people in the FIRE movement. Rather than just going all into equities, we put a great deal of thought into what could possibly go wrong. What would we do if there was a sudden crash in the stock market? And in answering that question, we built a multi-layered system of backups designed to whether any storm we could possibly think of. We had our Yield Shield. We had our Cash Cushion. And we had digital nomadism that we could use to lower our living expenses if the need arose.
So when the stock markets started crashing in February, this was literally the moment we had been preparing for.
Now at the end of 2020, the dust settled, we can look back and ask the question: Did it work? Did our defenses hold, or did they crumble and fall?
The Yield Shield/Cash Cusion
Our Yield Shield strategy, in a nutshell, involves using alternative higher-yielding assets like Preferred Shares, REITs, and high-dividend stocks in order to raise our portfolio’s dividend yield. By doing this, it reduces the likelihood that you’ll need to sell during a downturn which would crystallize the losses. Instead, you could simply harvest the yield, and combine that with the Cash Cushion you left outside the portfolio in order to fund your living expenses. This works because while the stock market’s capital value might swing wildly in a downturn, dividends are far less likely to be cut and are therefore more dependable to rely on.
Did this turn out to be true?
I have to admit, as the pandemic raged across the globe I was a little nervous about this part of my backup plan. I had done copious amounts of research when we wrote about this a few years ago, showing that even during the disaster that was 2008/2009, dividends from the Yield Shield portfolio only went down about 10%, and then recovered fully the year after.
But that was a financial crisis. This was a pandemic. And as horrible as 2008/2009 was to so many people, people weren’t literally dying in the street. Large swaths of the economy weren’t forcibly locked down. Would this time be different?
At the beginning of 2020, our models projected that our portfolio would generate a total yield of about $40,000, or exactly our annual budget. Now that 2020 is offically over, how much did we end up receiving?
$38,284, or a whopping 96% of what we were expecting. In fact, it performed even better than in 2008/2009, when yields dropped more than twice as much.
The Yield Shield worked.
Despite the widespread economic shutdowns occuring all over the world, despite the daily news of yet another corner store or restaurant going bankrupt, despite all the emergency support being handed out by governments with the explicit restriction against using any of it to pay dividends, dividends of the major stock indices did not experience a major cut.
Why is that?
Remember that index funds are market-cap weighted, meaning they own companies in order of their total company value. That means they own more shares of larger companies and less shares of smaller companies. And that also means that the majority of their dividends are coming from huge, multi-national corporations like financials, utilities, and consumer goods producers. Think Bank of America and Johnson & Johnson.
Each recession is different, and this one was unique in that while it took out a huge chunk of the workforce and resulted in massve unemployment, the bulk of that impact was in small businesses. Restaurants, retailers, and local mom-and-pop outfits got decimated. But because those types of businesses weren’t large publicy traded corporations, those companies going out of business didn’t affect dividends coming from index funds since they were never part of of the index to begin with.
If anything, that lost business actually went towards the large multi-nationals, with Amazon and Walmart actually going up. And while some corporations did cut their dividends, on balance the fact that most of the impact was felt by small businesses and the positive effect of that lost income being diverted to big multi-national corporations ended up blunting their effect on overall dividend yield.
Digital Nomadism
The other leg of our backup plan that looked like it was in danger of failing was our reliance on digital nomadism. In short, “if shit hit the fan, we’re going to Thailand.” The thinking was that if stock markets plummetted and our income took a major hit, we could always move to a low-cost country like Vietnam or Thailand to reduce our living costs. But of course during the pandemic, those countries were the first to throw up border restrictions. We were forced to scramble to book a flight back to Canada in February before we were completely trapped, and we’ve been stuck here ever since.
So did this backup plan completely fail?
Surprisingly, no!
I had forgotten about this, but during a really bad recession rents tend to fall. As job losses mount, people get behind on their rent and, unfortunately, get evicted. This creates a situation where rental stocks rise as units empty out. And because there are now less people who still have jobs and can afford to move in, this causes prices to decline. I remember this happening (along with rampant foreclosures) all over the place last time during 2008/2009.
This time, the impact on rents was even more pronounced because of two new factors.
First, many rental units in major cities are now being taken up by short-term AirBnb units, which didn’t exist back in 2008. Once borders got shut down and tourism all but stopped, these AirBnb’s all became vacant. Their owners panicked, first by drastically cutting prices, and then by moving them onto the long-term (month-to-month) market.
Second, fear of the virus and lock-down measures caused people to question why they were paying top dollar to live in the downtown core where everything was closed. Instead, many chose to flee for the suburbs, ex-urbs, and neighboring cities. There was no need to commute anymore, so why not get a bigger place out in the burbs?
Both of these effects caused apartments and condos, specifically in the downtown areas of many cities, to drop rapidly in price. As of the time of this writing, rents in Toronto have dropped on average around 20%, with our own experience even more because FIRECracker was able to negotiate with desperate landlords and extract even more price concessions.
Global arbitrage didn’t work, but by replacing it with local arbitrage, and counter-intuively choosing to live in the units and areas where everyone was fleeing from, we managed to live in one of the most expensive cities in Canada while paying SE Asia prices!
At the end of the year, as detailed in FIRECracker’s last post, out of our $40k budget, we managed to spend only $34k.
Put that together with a dividend income of $38k and that means our backup plans managed to work perfectly with each other! In fact, it worked so well that we saved money and don’t even have to take out a full withdrawal for 2021!
Verdict: The defenses held.
Portfolio A
So in the end, how did Portfolio A, which is the retirement portfolio we actually live on, do? Note that at the beginning of 2020, we shifted from a 60% equity/40% fixed income allocation to a 70% equity/30% fixed income allocation.
Beginning of 2020 balance: $1,175,000
End of 2020 balance: $1,268,000
ROI: 7.9%
That’s right, in a year of a pandemic, a tumultuous (and still ongoing) US presidential election, and a global recession, our portfolio still made about 8%.
This is because buried in all the crazy headlines of the year was a pretty significant bit of financial trivia: 2020 experienced the shortest bear market on record.
A bull market is defined as a trough-to-peak gain of 20% on a stock market, and a bear market is the opposite. In March, the S&P 500 officially broke over a decade bull run and officially entered a bear market. Then in April, it roared into bull territory again. Why?
The reason is that central banks have gotten very good at fighting stock market crashes. When the 2008/2009 recession happened, then-Federal Reserve Chair Ben Bernanke responded by gradually dropping interest rates to near 0%, and then when he ran out of room to keep going he instituted a policy known as quantitative easing where the bank printed money and then used it to buy government bonds. This worked like a charm and was a big reason that the 2008 recession eventually recovered.
In 2020, now-Federal Reserve Chair Jerome Powell did all that again, minus the gradual part. He threw everything Ben Bernanke did at 2020, and he did it all at once.
The result is the fastest, sharpest rebound from a bear market ever. That’s why our portfolio recovered so fast even though the job market is still in the shitter.
This is now the 5th full year of retirement, and even though we’ve now experienced a correction and then a recession, our retirement portfolio is now significantly higher than when we started, even though we’ve been living off of it this whole time. In fact, not only have we not experienced any inflation from our original $40k budget, we’ve actually gone in reverse, with our spending deflating down to $34k! While I’m not expecting our spending to remain this low forever, I am predicting it will take a few years just to get back to our original $40k target.
Inflation? What inflation?
And in our yearly check-in of the overall health of our retirement, if we plug in our spending of $34k into a portfolio of $1,268,000, FIRECalc predicts a…
…100% success rate! In fact, even if we restore our original $40k budget, we still get a 100% success rate. I think we can officially declare sequence of return risk a thing of the past, and as a result we have eliminated one more Yield Shield asset: our REIT positions.
The last Yield Shield asset remaining is our dividend stock ETF, and in all likelihood we will get rid of this at the end of next year as well, which will bring our portfolio back in line with a purely indexed portfolio.
Portfolio B
And how did Portfolio B, which contains all our post-retirement income, do?
Beginning of 2020 balance: $210,000
End of 2020 balance: $281,000
ROI: 33.8%
Not too shabby at all. But don’t get too excited by that eye-popping ROI. As usual, most of the gains on Portfolio B are from us adding blog/book earnings into the account.
So, after 5 years of retirement, our total net worth is: $1,549,000.
How much exactly did we earn from passion projects in 2020? Great question! FIRECracker is working on that summary right now, and we’ll be ready to share that in the next article.
How about you? How did your portfolio do in 2020? Let’s hear it in the comments below!
Hi there. Thanks for stopping by. We use affiliate links to keep this site free, so if you believe in what we're trying to do here, consider supporting us by clicking! Thx ;)
Build a Portfolio Like Ours: Check out our FREE Investment Workshop!
Travel the World: Get covid-19 coverage for only $45.08 USD/month with SafetyWing Nomad Insurance
Multi-currency Travel Card: Get a multi-currency debit card when travelling to minimize forex fees! Read our review here, or Click here to get started!
Travel for Free with Home Exchange: Read Our Review or Click here to get started.
Not bad at all! I like how you guys have two portfolios to help differentiate returns and living.
My portfolio returns were solid due to surprising gains in big tech. It was total luck the pandemic accelerated tech adoption.
But I’d gladly cut my portfolio performance in half for life to go back to normal!
Just 1 more year of this I’m guessing!
Sam
Initially, the whole Portfolio A/B thing was for blog transparency reasons, but an unexpected advantage was that I can easily see at a glance how our actual portfolio is doing because I’m not adding any new money to Portfolio A.
Portfolio B, you can already tell that I can’t easily see how it’s doing because I’m adding money to it. Kristy’s still trying to figure out our actual gains on that one right now.
I can only imagine how well yours did last year, since you’re probably be US and tech centric. The NASDAQ went up friggin 40%!
Yeah, it’s just luck. I’ve lived in San Francisco since 2001, so I’ve been buying tech stocks since 2001. I basically bought a lot of companies that my firm worked on to take public or companies I used or that rejected me when I applied for a job.
There’s no way you CAN’T buy some tech stocks if you live in San Francisco, especially if you didn’t work in tech!
I doubt there will be as much luck in 2021. Gotta protect the gains.
I’ll probably separate my portfolios out as well b/c I have a bunch, especially now that I have my kids’ portfolios to manage.
Sam
Thank you for sharing this. My wife and I finished the year with a portfolio of $313k and a ROI of 16.2%. My portfolio, which is only 20% of our total savings, is 100% S&P, whereas my wife’s portfolio is much larger but runs around 80% S&P/total stock and 20% bonds. But we’re happy with our returns! We’re 6-8 years out from FI. Love your stuff!
Wow, 16%! Make sure you celebrate by…actually nobody can do anything because of the goddamned pandemic. Sigh.
Your summary of the actions of Bernanke and Powell is nice and straightforward, and that surface treatment is as much as I care to absorb. Six years ago I wrote a tidy advice email to some friends who weren’t aware of the power of compounding interest and the market and tax-advantaged savings; I threw in stuff about how “the second-best time is now” and “the only losing move is not to play” and all that… but the last year or so has really driven home how little I really know, and it’s kind of relaxing to just accept that and go where the market takes us.
To wit: Jan 1 2019 to Jan 1 2020 our net worth went up more than 25%, to just over $900k.
Granted we’re still in the accumulation phase but it’s the first year savings + earnings outpaced our entire pre-tax household income. Eye-opening AF.
And just in the span of last week, as all manner of insurrectional nonsense was taking place an hour’s jog from our house, it somehow skyrocketed another $17k.
I have given up all hope of the market ever making sense. And I’m fine with that.
Ugh. 2020-2021, not 2019-2020. Brain’s fried.
No way I would have guessed that stock markets would have advanced this year either. No friggin way.
Pretty good! 2020 was a test case for many of us in the FIRE community. Fortunately, the stock market did really well. Our portfolio grew by about 18%. That’s insane, but I’ll take it. My blog income dropped about 20%. That’s not good, but it’s just a side hustle. We’ll survive.
Good luck in 2021. Hopefully, things will open up soon.
How did your portfolio go up by 18%? The S&P 500 went up 16%.
If he’s indexed to SPY and reinvesting all dividends then 18% would be about right (depending on trading expenses). S&P 500 Total Return for 2020 was 18.4%.
Amazing job guys. While I am not an advocate for a yield shield, I’m very happy to see your portfolio hold up during these crazy times! A 100% success rate sure sounds good to me! Major kudos on getting to this point where sequence of returns risks is no longer a silent threat!
Admittedly, our Yield Shield stuff did make managing our portfolio more complicated, but it worked for us so we’re happy.
I bet! You guys timed it all great (of course looking in hindsight now when there’s no way you could have predicted what these first few retirement years would look like). Sure helps when old man market continues to chug along.
Government getting good at fighting stock market crashes = screwing over young investors still building up capital. I get why they do it, but it’s frustrating looking forward to buying opportunities while regularly investing and each time there’s a dip it just bounces back to expensive territory!
You could set up your buys on a weekly schedule if you want more chances to catch those dips.
Yeah don’t try to time the dips, it’ll drive you nuts. Just DCA.
I understand why you put your yield shield in place and see how it did it’s job in 2020. So why are you tearing it down after it worked so well? I understand that based on historical info your sequence of return risk has been eliminated but why not continue to protect yourself from the unexpected?
We built a yield shield too, however we have no plans to take it down only to make it stronger over time. This way we can live off the yield why the rest of invested capital continues to grow.
I’d be interested to hear your thoughts.
I believe it’s because they’re at a point where dividends from their equities are already covering a significant portion of their annual expenses. Their overall portfolio is a net 25% higher than when they started retirement while their expenses haven’t gone up with inflation (actually they happened to experience deflation with geographical arbitrage and the hit on Toronto rents during this pandemic).
To me it seems logical to slowly reduce their fixed income portion. 60/40 is pretty conservative to begin with (although their fixed income portion is higher risk than your traditional fixed incomes – they’ve acknowledged that in some earlier posts). Now that they’re out of the 5 year sequence of return risk period, they can breathe a little more and also get out of the fixed incomes that were higher risk (eg REITs, preferred shares, etc.)
The yield shield approach carries some risk (so I wouldn’t rely on that for the long term), however, in these last 5 years it worked out for them really well with the 5 year sequence of return risk. The last 5 years had continuous falling interest rates and huge gains in real estate so it’s not like this is guaranteed and always reproducible . I think they recognize this.
Rod,
The yield shield is a drag on returns and adds some complexity. During the early years of withdrawals, the first 5 -7 years of withdrawals, we need some protection from a bad sequence of returns ruining our plans. But once the portfolio rises above that tipping point, there is no longer a benefit, only downside.
I use a CD ladder instead of a yield shield and look forward to the day when I can do the same, empty out the CD ladder because I no longer am in danger of running out of money.
Yield Shield assets like Preferreds and REITs trade off higher current yield for lower longer-term capital gains. As our portfolio grows, our yield needs (as a percentage) go down, so I don’t need to make that tradeoff as time goes on.
Hey, great post as usual… We are literally following your path (we FIRE’d in December 2020.
Quick question, are the numbers in this post USD or CAD?
Thank you!
Their portfolio numbers are in CAD.
Thanks Ishan.
CAD.
Excellent post, congratulations to both of you on the resilence of your plan. Wishing you an even more successful 2021.
Thanks! And yes, let’s all hope for a better 2021. Yeesh.
Dig the 2 portfolio approach – now need to dig your yield shield posts.
Thanks for sharing numbers, and congrats.
Hi I am building my Yield Shield with the idea of retiring in the next 24-48 months. Would you consider a S&P/TSX Preferred stock index etc like i shares XPF in stead of individual securities?
Yes, definitely index preferreds instead of individual securities. Preferred shares are more complicated than regular shares, so I don’t recommend owning those directly.
XPF and CPD were the two ETFs I used when I owned preferreds. Both are fine, and are yielding about 5% these days. Enjoy!
Thanks Wanderer I pulled the trigger on XPF. Loved the book and blog and have passed it on to my 17 year old son for his first step to FIRE… Cheers
great news for you two … .
once the pandemic hit i sold all my safe stuff . bonds etc ..
and invested in March . crazy year 2020 was , i made so much money in a pandemic !!
i am 100% equities with a very large dividend to live off
and i always keep cash instead of bonds now .. ( bonds dropped also in March . so much for the opposite of equities theory )
the rich get richer … sad how true that is , really . .
Jesus, that is some cowboy moves buddy. Giant oversized hats off to you!
Beginning of 2020 balance: $1,151,000
End of 2020 balance: $1,395,000
2020 was a good year. Looking forward to receiving the vaccine in 2021.
Wow, that is a 21% rise. I’m assuming some of that is new capital in, right?
Index fund investing made sense to me when the market was dominated by active investors who could determine fair security pricing. That’s not the case anymore though. Do you feel any need to protect your portfolio from valuation risk on market “darlings” that reach earnings multiples of 1600+? (Looking at you, Tesla.) https://www.cnbc.com/2019/06/28/80percent-of-the-stock-market-is-now-on-autopilot.html
Bonds are the traditional way to protect the down side. Although with interest rates being at near zero, a position in bonds vs cash isn’t that different. As a result investments into assets like stocks, commodities, real estate are going up like crazy. Will there be a correction? Probably. When will it happen? I don’t think anyone has an Earthly clue.
Market crashes are to be expected. You can try to time the market but the odds of performing better than a “buy and hold for the long term” index fund investor are stacked against you.
No matter what – if you want your money to grow you have to take some risk otherwise inflation will just eat away at your savings.
I’ve been reading about the death of active investors for some time now, yet this year the frenzied activity from retail investors and people on Robin Hood (who, amusingly, are referred to as “hoodies” now) on IPOs like AirBnb and stocks like Tesla and Amazon suggest that there are still WAY too many people day trading from their phones while sitting on the toilet.
Let them play. I’ll be here collecting my dividends thank you very much.
I think you are dead wrong Wanderer. Many of the Merry Men are so much more sophisticated than you give them credit for. Your investing strategy is from a bygone era. Investing in S&P index funds for the majority of your portfolio is ill advised. Why buy into companies that are linked to oil and other “value”trap companies? You are wasting money by not thinking for yourself. Tesla, Amazon, Apple, Google and Square are the type of companies you should be invested in. If you can’t do your own homework then buy into funds like ARK Invest. The disruption is real and this is the decade to put your money in high growth companies that use and consume data.
I retired at 40, I have a paid off rental property for my “yield shield” and a 6 million dollar portfolio by investing wisely -buy and hold- in quality companies that will change the world as we know it. If you can’t see Tesla as an Energy storage company that is disrupting the entire energy sector then that’s too bad. Buy into the company, not the fund. My personal portfolio has zero bonds and is up 54% 2019-20. I’ve been retired since 40 (52 now) and my brokerage of choice is Vanguard not Robinhood.
By the way, congratulations on being retired and living the life that you want.
I’m new to the FIRE community, just read JL Collins and Kristy Shen’s books and started investing 50% of my income this year. @Court, you said you don’t recommend the yield shield. What other options are there to buffer you during your first 5 years of retirement. Also, I can’t seem to find a calculator I trust to find out when exactly I’m going to be able to retire. I’m a teacher and my income goes up every year. Thanks!
That’s excellent! Welcome to FI community!
So the yield shield that Kristy and Bryce used at the beginning of their retirement involved a lot of higher risk fixed income sources like REITs, preferred shares and riskier corporate bonds. They pay more but that’s at the cost of increasing risk. So even though they had a 60/40 portfolio, their risk exposure probably ended being equivalent to someone with a traditional 70/30 or maybe even 80/20 portfolio (kinda hard to do the math but they increased their risk exposure without getting the kind of returns someone with a 70/30 or 80/20 portfolio would have).
Unfortunately everything comes with a price I’m afraid. Higher yielding fixed incomes means higher risks. Focusing on dividend paying stocks usually means you are less diversified and more exposed to risk (plus dividends are not free money – they get paid out at the expense of the share price – it feels like free money but it really isn’t).
JL Collins’ simple approach is pretty much the way to go. If you want to bring down your risk, just increase your bond exposure – but with traditional bond index funds to bring down the risk (eg VAB if you’re Canadian).
As for how to calculate your retirement date – I’d recommend you check out Kristy and Bryce’s investor series posts to do the calculations on Excel. The calculations are obviously going to be based on assumptions about future returns – so it’s best to create your own spreadsheet and play around with optimistic and pessimistic numbers.
That’s actually a pretty good assessment of the pros/cons of the Yield Shield strategy. Someone’s been doing their homework 🙂
Haha. Thanks Wanderer!
I’m also an engineer from the GTA and coincidentally born in the same calendar year as you and FIRECracker – so I can completely relate with your journey to FI (I am Canadian born of South Asian heritage and grew up with childhood friends that are mostly Canadian born of HK Chinese background – so everything you guys talk about with our cultures’ obsession with housing totally rings true to me).
I was never super materialistic (I definitely splurged on luxuries here and there but really have no regrets). I ended up saving and index investing as much as I could just because I thought that was the most sensible thing to do, especially when you never know what the employment market might be like in the future. I’ve been a renter all my life due to the contracting nature of my work where I’d move job sites a lot (in hindsight, I might have been a homeowner if I had a permanent job, so this contracting life was a blessing in disguise). I had to be a bit of a saver to comfortably take on the risks of annual contract terms year after year – always tried to have 1 or 2 years worth of expenses in savings back when I started off contracting as a junior engineer-in-training. I quickly saw that I made way more on my diversified investment portfolios than if I ever went into housing (not to mention the ownership headaches – I don’t envy my landlord). I used to tell my friends this but no one believed me or listened to me (this was back in 2011). I figured it was a hopeless cause trying to sway my fellow 1982 born cohorts (I felt they drank the kool aid way too early in life), so maybe the younger folk might perk their ears up (they seem to have more critical thinking skills since the internet existed when they were toddlers or earlier). Surprisingly, that has been more of an uphill battle than I anticipated. I’m not trying to force people to change their minds, but it would at least be nice if they were receptive to actual empirical math.
I never followed the details of FI (frankly never even heard of the term most of my working life). I didn’t realize I actually reached FI when I was 33 in 2015, until I looked at my historical investment portfolios in 2018 when I learned about this FI movement lol (kind of like JL Collins’ experience in 1989).
I started to seriously dig into FI articles, books, etc when I was trying to explain to my fellow junior engineers in the Toronto area that renting actually works really well if you invest properly. I went over Excel spreadsheets, taught them how to do honest home ownership calculations, etc. I mean we should have been talking about technical engineering topics, but financial discussions kept coming up (human nature I guess).
In 2018, I stumbled onto your 2016 CBC news feature article and then went to your blog – and forwarded the links to one of my junior engineers (happens to be of HK Chinese background so I thought it would be even more relatable to him). He was excited, showed it to his parents but his parents responded (paraphrasing)
“Your senior engineering mentor who is anti housing is smoking some crazy crack…how could you not invest in GTA real estate?” Mind you that the junior engineers’ HK parents are also avid index investors themselves, so even the halfway sensible investors (rare as they are) are brainwashed by this real estate frenzy.
Respectfully rebutting them with facts and figures is how I went down this deep deep FI rabbit hole. I’ve learned so much in these last 3 years, it’s simply insane.
Apologies for such a long winded post (I do that sometimes :)).
I just wanted to say what you and FIRECracker are doing is nothing short of amazing. You guys are so transparent and you make your journey so easy to follow.
While I don’t plan on retiring any time soon (my job thankfully gives me a great work life balance and I love the mentoring opportunities it affords me) I do love living vicariously through your experiences whenever you post. You guys really are my heroes and wish that the younger generation in particular can learn a thing or two from your real life experiences.
Sincerely,
Ishan
P.S. Regarding my criticism of the “yield shield”, I just wanted to make sure that the readers understood that there’s no such thing as free money. Everything comes at a price (e.g. increased price risk of the actual investment instruments) I am, however, super happy that the yield shield made your first 5 years of retirement worry free.
Hi Alec- this is a good calculator love by many in the FIRE community. It’s easy and can help you figure out your date by seeing how successfully your funds will last under different scenarios.
https://www.firecalc.com/
@Alec. Welcome to FIRE! My personal method is to go with a sub 4% withdrawal rate, we feel much safer with something in the 3% range instead which has a 100% success rate. Another option is to have more cash in a HISA on hand rather than living on yield + cash and a higher equities portfolio. So for example 80/20 instead of 60/40 with more cash for the first few years (we are doing this too as we are extra cautious/conservative). To me shifting into higher yielding funds just for the sale of their yields is not a safer route as yields are only 1 part of the picture (growth being the other). Hope this helps!
That works too, but it will require you to save 33% more money into your portfolio and therefore extend your FI date. Yield Shield + Cash Cushion requires far less money, but it does increase complexity (and to a certain extent, volatility).
Yep more money required but I sleep MUCH better that way. I’m also building in a lot of hedges for future unexpected expenses and maxing out RESPs so hopefully kid(s) are covered. We also have geo-arbritage in our favour too with ~75% of our portfolio in USD (with the plans to stay in Canada and live on CAD) but look at it all as one currency which builds in another ~1% less withdrawals of safety. And lastly, we don’t factor in any CCB coming in our way (which will be about ~$17k/year or about 1/2 of our annual withdrawals) into our calcs.
The key for us is that we’ve designed life to be pretty enjoyable with one of us retired and the other working part time (73 days a year), yet able to save 50% of that part time income. So for us it’s not a race, it’s more reaching this zen spot where life is good.
So you guys think you’re cautious, just know there are 3% enthusiasts who are much more cautious that you haha. Also going 100% equities during accumulation phase (which is what we did) will likely help get you to that 33x figure faster than a 60/40 split with a 25x goal.
Phew that was a lot of info but hopefully people realize there’s no cookie cutter way to FI!
This is so helpful! I’m new to FIRE and I want to get started with it. I’ve glanced at your Investment Workshop, and am wondering – are those details still as accurate today? I know the workshop started in 2016. Thanks so much!
Yup, I keep the screenshots updated so it still works. The only stuff that doesn’t apply is the stuff I wrote about Trump (THANK GOD).
I don’t really understand why the sequence of risk is only an issue in the first 5 years of retirement, is it because many of you in the FIRE community are younger? I’m shortly to retire at 52, does the extra caution in the first 5 years apply to me too, and if it does, why doesnt it also apply to you younger folk when you get to my age? hope my question makes sense!
The performance of the market during the first 5 years of retirement statistically has the biggest impact on the probability of running out of money or not at the end of your life. If there’s a major market crash in the first 5 years of retirement, it would have significant impact long term.
Younger retirees are more vulnerable, however, sequence of returns risk affects all retirees.
The two major ways of reducing this sequence of returns risk:
– have some exposure to bonds to reduce the negative impact of market crashes
– control spending (i.e. tighten the budget during a market crash and then increase spending after the market recovers)
To be honest, it’s because most people cut it too short and it’s not just for the first 5 years. They retire before they are financially secure and are crossing their fingers that nothing bad happens so their money can grow exponentially via a miracle. The perfect example is the lean FIRE many decide to take. Lean FIRE is the act of the desperate who then pray that nothing bad happens but of course, it does. Look at all the businesses that have gone under since covid hit. For the most part, they had little or no safety cushion (and potentially an inability to adapt) and they went bust. Lean FIRE is the exact same problem.
so in effect, if you have more cushion at retirement, e.g. a multiple of 30 times income, rather than 25, the 5 year sequence of returns risk will be less of an issue, because its unlikely to impact long term plans?
Mathematically yes, but I guess it comes down to how much are your projected expenses per year and if sh!t hits the fan can you reduce some of the expenses in some of the earlier years of retirement should the markets decline.That may be the better way to cope rather than having to delay your retirement.
If you can easily adjust your expenses in the first years of retirement (I’m not saying live off of cat food, it just means curb a little on some of the frills and luxuries) then 25x income should be fine. The 4% rule is merely a guide and it was based on 30 years of retirement and historical data that can never really be reproduced. With early retirement (that includes retiring in your early 50s), a consistent 4% draw has more risk of failing. However, realistically, retirees aren’t going to just blindly spent 4% of their portfolio every year – many years it’s probably going to be less. Let’s say we have another amazing year for the S&P 500 and your million dollar portfolio went up 18% – so now your portfolio is around 1,180,000…it’s unlikely that you will just decide to amp up your spending to 4%, so instead of spending 40,000 you’ll just automatically spend 47,200. If you stay at 40,000 spending, then your draw down ends up only being 3.4%. Kristy and Bryce spending 34,000 ended up being 2.9% of their initial 2020 portfolio.
In essence, variable spending is the key way to ensure close to 100% success with early retirement.
Hope that helps to put it into perspective.
Yes. I also considered 2 things before I knew I could be FIREd which I am now.
1 – I considered the 4% withdrawal rule for my expenses. Can it cover it 100%?
2 – I asked myself, can I generate my pre-FIRE pre-tax income with a 7.5% return on my portfolio?
If the answer is yes, then I’m good to go. As for why I chose 7.5%, it’s what made me comfortable.
If your retirement is going to fail, it happens because of a recession in the first 5 years. Those are the years in which it’s really important to NOT sell assets during a downturn and find ways of holding and waiting for the rebound.
I recalculate my retirement date every September, I was stunned when I did it in 2020 and realized that the market crash had not moved it at all – the March 2020 dip was offset by growth in late 2019 and recovery from mid-2020.
I was worried that the recovery was just a bubble, but Wanderer’s explanation is better I think
Yeah, this has been a weird recession.
Great job on the portfolio return guys and for keeping your spending in check!
You mentioned that you went from allocation 60/40 to 70/30, can you explain why the change? Was it due to the plunge in March? I personally did something similar starting with 70/30 and then 100% equity when the market lost about 30%. Of course, the market could of went down further or double dip but given my time horizon I am comfortable with 100% equity in the near future to ride out any further declines.
As our portfolio grows in size, our yield needs (as a percentage) decline because our spending hasn’t changed, but our denominator (the portfolio) has gone up. As we need less current income, we can afford to gradually pivot our equity up over time.
I don’t think we’ll ever go 100% equity, maybe 80% or 90% tops.
Your planning remains brilliant. I’m already retired, home paid for in full, so no mortgage. But if I was still young, I’d do exactly what you’re doing. In fact, I have followed some of your advice.
Since my wife and I are able to live comfortably on our Social Security income, plus my book royalties (I write thrillers and apocalyptic novels) my tolerance for risk is high. I’ve gone with 20% cash and 80% equities, much of it in VTI. My strongest gains came from buying Moderna when it was cheap and also from jumping on VTI with both feet when it slumped into the $120’s. I also have a few high dividend paying stocks. This past year my ROI on equities was 26% excluding dividends, which admittedly, is my best year since the dot com boom of the late 90’s.
I wish you continued prosperity and good health. In other words, live long and prosper.
Very nice! Also, high five on being a successful author! You must like pain 🙂
Well done maintaining your cool through the market crash; as always, you walked the talk!
Until I read this post I hadn’t bothered to look at our ROI. Our portfolio’s value was almost always increasing as we poured every dollar we could find into the accounts, and as someone who accepts that I can’t time the market, or do little more than guess/gamble on which stocks will do well, I fully embrace the index investing approach. So, I just went with the flow, accepting that our mix of globally diversified index funds will do whatever they will do, and there’s little that I can do to change that. And if I tried, the odds are that I’d screw something up. Anyway, after half a day of modifying my spreadsheet, I now see that our ROI (growth + dividends and interest +/- some currency fluctuations) for 2020 is 8.93%. Our asset allocation is approximately 70% equity/30% fixed income. In doing this exercise, I also discovered that although our portfolio was up by $100,000 in 2017, our ROI was actually minus 2%; ignorance can be bliss!
All the best to everyone for 2021.
Oops, I’d mixed up my year and percentage: 2018 was negative 2%
Thanks! And congrats on your own performace in 2020. I think 2018’s decline was caused by a government shutdown over Obamacare or the wall or something? The last 4 years have been a blur.
My portfolio also increased in 2020. I am about 80% in stocks. The March drop did not bother me – in fact I bought some more stocks then at a discount. Good luck to everyone in 2021 !!
That pic – you still have your Christmas tree up?
Oh God no, it’s a stock photo. We’re nomadic! We’re not going to decorate a Christmas tree.
Congrats on a successful financial year despite world-on-fire circumstances! Wonderful, easy-to-follow breakdown, too. Side note: I just had an unexpected finance conversation with a friend here in Bend, OR (who I didn’t think followed the FIRE movement), and she goes, “You should read this book, ‘How to Quit Like a Millionaire’!” Me: “OH MY GOD THEY’RE MY FAVORITE.” I then realized that I know a LOT about two people I’ve never met – all thanks to your badass candor and transparency on this blog!
Yours in superfandom,
Jules
Aahaha, that’s awesome. We are taking over the Bend, OR market apparently!
Thanks so much, as always! What spreadsheet did you use for the very fancy dividend yield history? Cheers.
Passiv! Check it out, it’s free to sign up for Questrade users: https://www.millennial-revolution.com/invest/workshop-invest/investment-workshop-60-should-questrade-users-sign-up-for-passiv/
Congrats on the returns. I did not know that Ben Bernanke did the exact same thing to prop up the economy from the recession in 2008/2009. If Jerome Powell did it so quickly I wonder if that accelerated growth in the stock market was too artificial and we should be in a cautionary state of mind. We shall see this year.
Oh it’s all artificial, but that’s the point. Right now, money is flooding into the stock market because there’s nowhere else for it to go, and as the job market recovers, they’ll ease up on these programs. The alternative is to just let the stock market collapse and take 3 years to recover.
Thanks for the info! I am working on creating a yield shield although I am confused about one thing. For our non-qualified, it makes sense that you can grab the yield/dividends as needed. But for us, we still have a lot of our money in qualified accounts that we are planning to access through the Roth conversion ladder up to the standard deduction starting at 5 years into FIRE. I don’t think we can get access to yield/dividends in those accounts, am I missing something? Our non-qualified money will be around 500K, so not sure if that’s enough to create a big enough yield shield. TIA!!!