JAFO writes,
intercst — mschmit was not asking about real estate!
Thanks for that. “Rent vs. buy” with respect to real estate has been such a controversial topic, I didn’t get the reference.
intercst
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I didn’t get the reference.
So is your position softening on this topic? It was kind of strange to see the words “optimal retirement plan” in your reply.
PSU
So is your position softening on this topic? It was kind of strange to see the words “optimal retirement plan” in your reply.
Which topic? “Rent vs. Buy”, marriage, or something else?
I think ariechert was the original practitioner on the board of early retirement based on a wife who works with full health insurance. Whatever works for you.
My interest has always been on optimizing the arithmetic of early retirement. And contrary to popular belief, it easier for a married couple without kids to retire early than someone who’s single, since you have 2 incomes and only need to fund the expenses of one household.
intercst
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We’ve turned cooking into a date of sorts. Both work on the recipe together, often while listening to jazz and sipping on wine. Makes the chore of cooking a lot more fun.
Mostly we can’t do that. She is a very intuitive cook. She can open the fridge/pantry/spice cabinet, and just pick stuff…and it’s great. Me? I have to have a recipe. She always makes fun of me when I drag out measuring cups and spoons. If I don’t do that, it will be a mess. She doesn’t need them. Of course, we never have the same recipe twice. She literally doesn’t remember what she did, so when we ask her to “do it again”, she can’t.
Our styles are incompatible. At most, she can work on an entree on her own, and I can work on a side dish on my own. The only coordinating between would be “will this side go with your entree?”. After that, we do our own thing.
1pg
If you can’t handle a down-market, then you aren’t financially ready for retirement. Because down markets will happen, and you can’t predict when. So you need to be in a position that it doesn’t matter to you (i.e. won’t affect your survivability).
1poorguy (not happy about the downturn, but have enough of a cushion that we can ride it out)
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Mostly we can’t do that. She is a very intuitive cook. She can open the fridge/pantry/spice cabinet, and just pick stuff…and it’s great. Me? I have to have a recipe. She always makes fun of me when I drag out measuring cups and spoons. If I don’t do that, it will be a mess. She doesn’t need them. Of course, we never have the same recipe twice. She literally doesn’t remember what she did, so when we ask her to “do it again”, she can’t.
I hear ya. Am most proficient when cooking by the seat of my pants and the contents of the refrigerator, much like your wife. But every so often I compromise and follow a recipe, or DH takes direction and preps this or that. I usually follow a recipe the first time I make something anyway.
The wine makes compromise easier to swallow either way.
IP,
who has learned to STFU when DH makes dinner all on his own, at least until it comes to giving compliments to the chef, otherwise letting him do things as he pleases
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Our styles are incompatible. At most, she can work on an entree on her own, and I can work on a side dish on my own.
This is reminding me of an old girlfriend I had where we could not cook together because our styles drove each other nuts.
Interestingly, she was an artist, but she was the one insisting on being absolutely precise in measurements. Me, the accountant, was the one playing loosey-goosey. Go figure.
(My sister taught me as a young boy that “the mark of a good cook is they never measure the salt with a measuring spoon”. You just pour a little in your hand, estimate, and in it goes. I took that to heart.)
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“I have some dividend paying stocks but the yield would only pay ~20% of my regular annual expenses so I would need to take strategic capital gains.”
Or you could purchase more dividend paying companies (not stocks) and obtain say 30 to 40%
of your regular annual expenses and use social security payments to make up the additional
income needed.
Or you could adjust regular annual expenses down.
Or you could purchase a bond portfolio to provide added income.
Howie52
Individuals have different approaches - and just about all approaches can work - just as
all approaches can fail miserably.
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Thanks, Gene.
It’s good to read about what a retiree actually do rather than speaking about something in general. I appreciate your patient answers.
I understand the 4% rule is for a ‘diversified’ portfolio (and I read the studies). I wanted to see how any retiree would divert from that. You mentioned you initially followed the 4% rule but your retirement portfolio is not in a market index, and you have put yourself in a position where you do not need to go to the market if it is not favorable by the use of a cash cushion that give you time.
I am not so much hang up on the naming of any method to be followed mechanically or blindly but more interested to hear what the retiree actually do and about their strategies.
You have provided context and the descriptions of some of your actions. That I find very useful to consider for a soon-to-be retiree.
tj
That’s interesting. So which of those portfolio have you maintained since 1994?
and do you have any preference or are you choosing when you draw from the market i.e. when during a year?
tj
“Rent vs. buy” didn’t favor buying for me until 2012 when I bought my current home for 70%-off it’s 2008 value.
When making the comparison calculations, did you include the cost of renting you residence?
Hi intercst,
to go back to that cash cushion and how you replenish it. Do you draw mainly on your portfolio that 1% to cover your expenses?
If you do, then do you have a systematic way or guidelines on how you do to replenish your cushion?
tj
thejusticier asks,
Hi intercst,
to go back to that cash cushion and how you replenish it. Do you draw mainly on your portfolio that 1% to cover your expenses?
If you do, then do you have a systematic way or guidelines on how you do to replenish your cushion?
My dividend income is currently well in excess of my annual spending (e.g., no reason for me to get on a commercial airliner or cruise ship with the COVID risk.) So the “5-years of living expenses” in fixed income is just sitting there untouched. If I had to replenish it, I would just sell some stock in whichever combination would result in the lowest Federal income tax liability to me.
intercst
JonathanRoth asks,
<<“Rent vs. buy” didn’t favor buying for me until 2012 when I bought my current home for 70%-off it’s 2008 value.>>
When making the comparison calculations, did you include the cost of renting you residence?
Of course, the whole reason to do a “rent vs. buy” calculation is to see which is cheaper in the long run.
Let’s say I can rent an apartment that meets my needs for $1,000/month all-in.
There are condos for sale in the neighborhood with the same amenities. How much would I be willing to pay to buy one?
https://www.thebalance.com/using-price-to-rent-ratio-to-deci…
One convenient rule of thumb is that 1% of market value is a fair price for monthly rent. So a $1,000/month rent is fair for a $100,000 condo. (That’s a ratio of 8.3 to 1 on an annual basis. The article I linked above says buy at 15 to 1 or less.)
So then I just total up the cost of buying,(i.e., mortgage payment, property taxes, insurance, maintenance & repairs, etc., plus the exorbitant cost of selling a piece of real estate if I decide to move) and compare that to the $1,000 rental price.
I’ll likely want to make a down payment large enough to not pay private mortgage insurance. So that’s a down payment of 10% to 20% of the purchase price that I’ll be moving from the stock market at an 8% plus inflation return to real estate with an average less than 1% return plus inflation per Robert Shiller’s Case-Shiller Housing Index.
https://fred.stlouisfed.org/series/CSUSHPINSA
Over time, that 7% to 8% difference in returns makes it very hard to justify real estate as an investment.
When I bought my current suburban Portland home in 2012 for 70%-off it’s 2008 value, the purchase price was 6.3 times rental rates at the time. That’s the kind of unicorn you need to find to get anything close to an S&P500-like return on an owner occupied piece of residential real estate. The home has nearly quadrupled in price over the past ten years, slightly beating the S&P 500 over that space of time.
In general, I prefer to rent, but I’m willing to buy if I have some prospect of getting an S&P 500 return on my money.
intercst
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One convenient rule of thumb is that 1% of market value is a fair price for monthly rent. So a $1,000/month rent is fair for a $100,000 condo.
Several decades ago I validated the 1% rule of thumb as being fairly accurate. I was taught and verified the 1% is the all-in cost, opportunity cost (equity only), mortgage, property tax, maintenance, utilities, insurance, etc. So it’s possible you double counted some ownership expenses.
The home has nearly quadrupled in price over the past ten years, slightly beating the S&P 500 over that space of time.
Just being redundant, when making this calculation, was the savings due to not having a rent payment, with appropriate rent increases added in to your return? You got to live somewhere.
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JonathanRoth asks,
<<The home has nearly quadrupled in price over the past ten years, slightly beating the S&P 500 over that space of time.>>
Just being redundant, when making this calculation, was the savings due to not having a rent payment, with appropriate rent increases added in to your return? You got to live somewhere.
I don’t have a rent payment, but I’m still paying property taxes, HOA fees, and maintenance inside the condo which would be covered by the landlord in a rental apartment. (I paid cash for the property so I don’t have a mortgage.)
Rents in the area have exploded, increasing by about 250% in 10 years (vs. 300% in price appreciation.) So yeah, when I add up my monthly expenses as an owner in a mortgage-free home, I’m paying about 40% of the current monthly rental rate (i.e., I’m getting a 60% discount.) So you could add that 60% monthly rent savings to the 300% price appreciation.
At current home value and market monthly rental rate, the Purchase Price to Annual Rental Cost Ratio is about 10. (The benchmark “monthly rent as 1% of the purchase price” would give you a Purchase Price to Annual Rental Cost Ratio of 8.33.)
intercst
“So the “5-years of living expenses” in fixed income is just sitting there untouched. If I had to replenish it, I would just sell some stock in whichever combination would result in the lowest Federal income tax liability to me.”
Do you follow a benchmark that you try to follow over the long term? The benchmark you follow is determined by your long(your time horizon) term return expectation and cashflow needs. It has to provide enough growth in the long term (which could be highly volatile) and enough stability in the shorter term to extract income along the way.
The banchmark could be the S&P500? the MSCI World index or some other market cap weighted index?
If the benchmark is well constructed as are the two I mentioned above(?), the historical long term returns of these indexes can be used to set your return expectations. It would be used as a guide and you would try to have a portfolio asset allocation that would mimic the benchmark you choose, and re-balance if the returns diverge away from the long term historical returns.
I read somewhere that 70% of the portfolio long term returns are driven by asset allocation (stocks, bonds, cash) and 20% by sub-asset allocation of stocks (m.c.,sector, country, valuation) and bonds (duration, issue type, credit quality and if taxable), and only 10% by specific individual stocks, bonds or securities.
How do you approach asset allocation to provide you with the cashflow you need when you need it, and that over your full retirement period?
Do you use benchmarks? Do you use indexes and/or a collection of individual stocks?
tj
thejusticier asks,
Do you follow a benchmark that you try to follow over the long term?
Over the past 40+ years (since I bought my first share of stock at age 25 after I’d paid off my student loans), I’ve used either the DOW or the S&P 500 as my benchmark. So I compare my investment returns to that. The other broad based market indexes are going to be highly correlated with the DOW or S&P 500.
I read somewhere that 70% of the portfolio long term returns are driven by asset allocation (stocks, bonds, cash) and 20% by sub-asset allocation of stocks (m.c.,sector, country, valuation) and bonds (duration, issue type, credit quality and if taxable), and only 10% by specific individual stocks, bonds or securities.
That’s absolutely correct. Over the long-term, stocks tend to do better than fixed income securities or real estate.
I also think it’s easier to identify a promising sector in the economy than choose individual stocks. After I dumped my Exxon shares in 1985 and split the proceeds between drug and tech stocks, I had a couple of big winners over the years in DELL and Pfizer. (A $10,000 investment in DELL in 1992 was worth $2.4 million by the market peak in 2000. A $10,000 stake in Pfizer bought in 1989 is worth about $400,000 today and has paid out a substantial stream of dividends to boot.) But despite that success, I’d actually have twice as much money today if I’d just bought a drug/health care sector fund and a computer/tech sector fund instead of picking stocks. Not every stock you pick goes up. And most people are better at buying a stock than identifying when to sell. Thus, spreading your bet over 50 or 100 stocks in a sector fund is more likely to be successful.
I’m about 70% individual stocks, 30% indexes today and I’m slowly moving to more index funds and Berkshire Hathaway to the extent that I can do so without increasing my Federal income tax liability.
One thing I’ve done over the years is to match the fixed income portfolio of my portfolio to my spending. For example, about 2-1/2 years after I retired, my portfolio had doubled in value dropping my withdrawal rate from 4% to 2%. So instead of keeping it at say “60/40” with that 40% allocation to fixed income now at 20 years’ worth of spending, I went with an 80/20 portfolio. When the portfolio doubled again the next year dropping my withdrawal rate to 1%, I changed the asset allocation to 90/10. In effect, I still had the 60/40 portfolio to draw on at 4%, but kept the excess gains 100% invested in stocks.
When interest rates started getting close to zero after the 2008 mortgage debacle and the Fed’s response of “Quantitative Easing”, I figured 10 years worth of expenses in fixed income was overkill and cut it to 5 years. It was hurting my returns too much.
intercst
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In general, I prefer to rent, but I’m willing to buy if I have some prospect of getting an S&P 500 return on my money.
Why?
Everything in life doesn’t have to generate a return on your money. You’ve said multiple times that you have more money and more income than you need. What’s the point of dying with an extra zero on your net worth?
Maybe it’s a single guy thing. A wife would not be happy renting when a house could be afforded.
One thing about rent vs. buy is sure. Rent can go up, and it’s totally out of your control. A 30 yr fixed rate mortgage is, er, FIXED. The monthly payment won’t go up. RE tax & insurance can, but not the mortgage payment.
Indeed, thge payment can go down, if/when you refinance when rates go down. Ex: when we bought this house our rate was 7.5% and now it’s 2.5%.
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Everything in life doesn’t have to generate a return on your money. You’ve said multiple times that you have more money and more income than you need. What’s the point of dying with an extra zero on your net worth?
I was going to say something similar. He says he is living on a 1% withdrawal rate. He thought about selling a few months ago when the housing market was hot. I don’t know why he can’t say I just don’t like being a homeowner instead of I may sell because I’ll make “x” percent on the sale. Not every decision in life has be put in financial terms.
PSU
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