I messed up my FIRE plans

Hopefully I can deliver this message in the hopes that it will benefit those Fools aspiring to FIRE.

Last fall, circa October of 2021, I “technically” reached my FIRE “number”…

But instead of simmering down the heat, building up my cash position and transitioning a portion of my “growth stocks” into a mix of index funds/bonds, I let it ride…

and in a matter of 6 months, my investments have been cut in half…

I am estimating that I have delayed my “retirement” by 5 years un-necessarily…

I wish I had more foresight about the “planning” piece, instead of just focusing on “maximizing” returns…

Chalk this one up as an costly learning experience…The expenses were both time and money…

Hopefully, if I get the 2nd chance, I’ll make better decisions…

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Last fall, circa October of 2021, I “technically” reached my FIRE “number”…

But instead of simmering down the heat, building up my cash position and transitioning a portion of my “growth stocks” into a mix of index funds/bonds, I let it ride…

and in a matter of 6 months, my investments have been cut in half…

I wasn’t in “growth stocks”, just stocks, but same thing happened to us in 08/09. Reached our FI number, net worth quickly got cut in half. Took until 2012 to get back.

Lesson: stocks can get cut in half anytime. Plan accordingly.

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Hi darrellquock,

Are you starting to accumulate an expense cash cushion? I can’t tell you how important this was to us particularly through the 2007 to 2010 recession. Having the expense cash available cuts the direct link to your portfolio for ongoing living expenses.

While I don’t like seeing our portfolio shrink, I know we have enough needed cash for 3 years or more. Right now, it is down over 39% since November 9th. Our cash cushion is nearly full and I have the cash to finish building our house. We need nothing from our portfolio.

If you are considering changes to your portfolio, you might look at the dual purpose model I use:

  1. Dividend/interest portion. Lower volatility.
  2. Growth portion. Much higher volatility.

The beauty of part #1 above is the cash production. If push comes to shove in a few years, I can withdraw cash without needing to sell securities.

Whatever you do, sketch out a plan first. Get it straight in you mind:

  1. What the end product will look like.
  2. You expectations of how it will work for you.

Be careful with bond funds for a while. They do not do well in a rising interest environment because of churn that they must do as people sell shares of the fund.

Holding individual bonds is Ok as long as you hold to maturity. Sell early and you might get $900 for a $1,000 bond.

Does that help you?

Gene
All holdings and some statistics on my Fool profile page
http://my.fool.com/profile/gdett2/info.aspx

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Hey Gene,

Thanks for the suggestions…

Are you starting to accumulate an expense cash cushion?

Most of my free cash went to pay capital gains taxes last year. I admit…I need to build up my emergency funds of 3-6 months of living expenses. :slight_smile:

I am not sure if I am ready to rebalance to Dividend/Interest positions when everything is so far down. Growth Stocks has been great from 2009-2021, and think they might be the source of propelling my portfolio back up…

I am probably over-stressing. I am fortunate that I still have a very stable job that has allowed me to work from home and will have access to have a nice pension when I “officially” retire from my day job. Each year I work, I’ll get 2.5% of my yearly income…Work 30 years and I’ll get 75% of my highest 3 year average salary…However, this kicks in at 55…I am only 43 now…

Hi darrellquock,

“I am probably over-stressing.”

Oh, maybe but as long as it spurs your thoughts and helps you plan for your future, it is Ok.

“I am not sure if I am ready to rebalance to Dividend/Interest positions”

This is not something I would do slam-bang.

You are working. Are you doing occasional deposits/contributions to your portfolio? Consider adding something like AEP, KMB, KO, O, etc with some of that cash. If you have a few years before retiring, have the dividends auto-reinvest. You quietly build the positions through DCA. It won’t be fast, but it is steady.

“I need to build up my emergency funds of 3-6 months of living expenses.”

Guess what this is a start of. Right, cash cushion. This is protection against job loss.

When you retire, you have “guaranteed income” like SSA and pension. Your portfolio is to provide the rest.

The cash cushion replaces the emergency fund. When retired, you can’t be laid-off or fired. Having the cushion just breaks the direct link between your portfolio and your expenses.

When we were looking at retiring, I started setting aside cash a couple of years early for two reasons:

  1. We were moving and building a house for cash.
  2. Being less than 59.5, I chose to make cash for living expenses and use our taxable brokerage account initially rather than mess with 72t schedules/payments or other shenanigans.

When our old house sold, I added the cash to the cushion. Two years later we started the slide into the 2007-2010 recession.

So, build that cash cushion/emergency fund. When you get closer to retiring, add to it. When you retire, the recommendation is to have 3 to 5 years of your needed cash on hand. I keep mine completely separate from our portfolio.

Oops, a slight lie. Right now I have a bunch of our building cash still in our portfolio. I sold stock in Nov/Dec 2020 and still have about one half in the portfolio, in my Roth IRA. If I don’t need all of it, it will just stay in the Roth.

Now is the time to start thinking all this stuff through, since you have time to make and adjust plans. Don’t hurry.

Does that help you?

Gene
All holdings and some statistics on my Fool profile page
http://my.fool.com/profile/gdett2/info.aspx

2 Likes

Last fall, circa October of 2021, I “technically” reached my FIRE “number”…
But instead of simmering down the heat, building up my cash position and transitioning a portion of my “growth stocks” into a mix of index funds/bonds, I let it ride…
and in a matter of 6 months, my investments have been cut in half…

At age 55 I didn’t quite have “my number,” but I could see that I might get there by age ~62. However, due to the “sequence of return risk,” I started moving money out of stocks into other less volatile assets. So, it was a little painful to watch my remaining stock funds grow like crazy while my “safe” stuff went nowhere. But, the remaining portion was growing well. Then at age 60, I had “enough” and got offered a package to retire. For me, I “backed into” a best case scenario.

The operative sentiment here is: Once you’ve won the game, quit playing.

5 Likes

Hi darrellquock:

I am a bit in the same situation as you are although I don’t follow FIRE but I do have a minimum portfolio value target I want to reach before subsequently derive my income from it rather than from a salary. This minimum is somewhat higher than the basic 25X I guess FIRE is suggesting(?).

At any rate, in the past 6 months this portfolio has been down 44%. So I am not feeling as confident to leave on such a journey just yet. If I need to double the value of this portfolio, it might take several years. 5 years is already quite aggressive (14% per annum). It is crazy to think this portfolio has almost tripled from the March 2020 bottom in about 20 months. But a great deal of that paper gain has been lost in the past 6 months.
I guess what stock investing is all about. I can come like a flood and leave like a torrent even faster. You might be able to accumulate only after several years of meandering.
I don’t quite get the talks about the marvels of compounding. You may have to start again many times before it actually takes hold into some sort of real accumulation. Some may never hit that escape velocity and will keep on fretting.

so what do you do? resign yourself to work for a salary for another few years?

tj

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Hi Gene-

You may have told me this before but for your dividend part of your portfolio how do you decide how much dividends your portfolio could give you?
What is the percentage of dividend cash you obtain from your portfolio as a percentage of the total value of it?

I saw the pictures of the house you are building. It looks like a big project. So when you want to do big projects like that, you have to accumulate enough dividends and sell some of your stocks to fund the project? assuming your income only comes from your stock portfolio(?). Your decision to do this must have been predicated from a previous good return period of your stocks?

tj

Hi thejusticier,

“I don’t quite get the talks about the marvels of compounding. You may have to start again many times before it actually takes hold into some sort of real accumulation. Some may never hit that escape velocity and will keep on fretting.”

Compounding, in this sense, is simply accumulating value over time. Each year of increase is piled on top of the previous.

In the classic sense, compounding is adding the payments (interest and dividends) back into the investment each time they are paid. Think about savings accounts and auto-investing dividends.

Your 2nd sentence above, “You may have to start again many times before it actually takes hold”, sounds like capitulation, selling everything to try something else for a while.

This is a sign of a lack of conviction in your investments. The person has doubts about the future and their investments.

This is why I always plan before I invest:

  1. What is my goal?
  2. What do I expect to happen?
  3. Why does this specific investment work toward my goal?
  4. What are the downsides of this investment?
  5. Why would I sell this investment?

Every time I invest cash, as a minimum I do this short list. It makes me more careful when I invest. It provides a focus for the long term. My expectations are “spelled out.”

Then I monitor the companies.

I had a couple of earnings disappointments recently. That may trigger a reduction in a position. The current downturn does not violate my sales guidelines since it would be for business reasons, not stock price.

As mentioned upstream, I manage our portfolio with 2 goals:

  1. Income
  2. Growth

The 2 groups of stock identify the portions with higher volatility and possibility of loss and the portion that is more protected.

Basically, if the growth portion drops 90%, we are still fine. The income side will continue to provide for our needs.

As of Friday’s close, our portfolio is:
Portfolio vs All Time High (11/09/2021): -45.15%

But our annualized (XIRR) return for the last 17 years is still above 20%:
XIRR since 2005: 20.58%

That is compounding.

Over that period, I maintained a long-term investment strategy. We had a few ups and downs but did not sell-out and switch investments.

Changing investment direction is quite often a ticket to disaster.

Does that help you?

Gene
All holdings and some statistics on my Fool profile page
http://my.fool.com/profile/gdett2/info.aspx

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Don’t underestimate the power of compounding…

Let’s say your portfolio rallies 40% in the next six months…Then it takes a 3 month break and rallies 40% again to the middle of 2023…1.4 x 1.4 and you are back/close (96%) to your ATH’s…

Think back to your investing career…How many times has your entire stock portfolio gone up 30-40% in a given time frame…

We just have to be patient and be able to endure…

Hi thejusticier,

"You may have told me this before but for your dividend part of your portfolio how do you decide how much dividends your portfolio could give you?
What is the percentage of dividend cash you obtain from your portfolio as a percentage of the total value of it"

To get the dividend amount our portfolio will provide:

  1. Calculate the annual dividend for each holding. If a company pays the same dividend each period, I use the last value ans annualize it. If the dividend varies or they occasionally pay a special dividend, I use the TTM payments.

  2. Then I calculate the annual dividend payment for each position: (Ann Div X Shares = Ann Payout)

  3. Our annuities pay 4.5% APR: (.045 X Acct Total = Ann Payout)

  4. Add them all up.

From my Fool profile page:

Portfolio Yield as of Sat Apr 30 12:44:34 2022:
Dividend Core 4.32%
ETFs 2.99%
Annuities 4.50%
Combined Div/Int Yield: 4.32%
Portfolio Yield: 1.36%

“I saw the pictures of the house you are building. It looks like a big project. So when you want to do big projects like that, you have to accumulate enough dividends and sell some of your stocks to fund the project? assuming your income only comes from your stock portfolio(?). Your decision to do this must have been predicated from a previous good return period of your stocks?”

In October 2020, our portfolio was up 70% YTD. We decided to use some of the gain to move and build a new place. I started slowly selling to build cash. Our portfolio peaked on Dec 22 at 114.84% YTD with our long-term return (XIRR) at 23.05%. By January, we had all the cash available plus the 20% that went to charity.

Some of the cash is still in our Roth IRA’s. The rest minus what has been paid is in our passbook savings account.

Our normal dividend “mode” is cash, not auto-reinvest. The annuities are cash and it compounds daily.

In the 1980’s and 90’s, I had dividends auto-reinvest. Over the years it added a bunch of shares although I gave up tracking them long ago. As stock splits happened, it made tracking all the little pieces harder, so …

Does that help you?

Gene
All holdings and some statistics on my Fool profile page
http://my.fool.com/profile/gdett2/info.aspx

General photos of the land and maps:
https://photos.app.goo.gl/3NC9sbPMxjzUZBc76

Construction: From bare grass on October 17, 2021 to current.
https://photos.app.goo.gl/YdH6e5w4rwz5rknG9

Shop Construction
https://photos.app.goo.gl/rpaeujz6VqhrpZ2z7

1 Like

yes wrong use of words. I think I meant it more in ‘it feels like that doesn’t work…’ but of course it does when you look at the numbers. If one put money in sound investments and does not capitulate, value would tend to accumulate and compound.

Thanks Gene.

In your other post you said: “When I was doing the planning to retire, I knew our portfolio would need to cover about 90% of our expenses with a small pension to cover the rest.”

So that 90% includes the cash you would generate from the stocks dividends and the sales of stocks, right?

You maintain a 3 years cash cushion so the dividends and proceeds from stock sale goes in that buffer and your current expenses comes out. I get that during times of highs in the market, you would take out more to replenish your cushion and/or to cover your extra expenses like this house.

But when you take out a large sum, you would be paying more taxes? In the FIRE or other retirement guidelines, they are talking about taking <4% of the portfolio/year. How do you decide to part from that guideline? I guess end of 2020 and 2021 were great times to take more money out from the stock market but I guess you didn’t see the market goes up and decide then that you have your funds to build a new house. If the market did not rise to its extent, would you have hold off on building your house?

In more ‘normal times’, how do you decide to sell when and what to replenish your cushion?
For example, do you tend more to sell some at the end of the fiscal year or at the beginning or are those time spread evenly over the year?

Thanks,

tj

Hi thejusticier,

"In your other post you said: “When I was doing the planning to retire, I knew our portfolio would need to cover about 90% of our expenses with a small pension to cover the rest.”

So that 90% includes the cash you would generate from the stocks dividends and the sales of stocks, right?"

My pension covered about 10% of our expenses and the portfolio was to supply the other 90%.

“You maintain a 3 years cash cushion so the dividends and proceeds from stock sale goes in that buffer and your current expenses comes out. I get that during times of highs in the market, you would take out more to replenish your cushion and/or to cover your extra expenses like this house.”

I will say no, not exactly. Everything stays in our portfolio until I decide to flow some cash to our cash cushion.

Here is something I just used in another post:

I think of our cash cushion as a water balloon. The balloon is connected to a “T” with 2 hoses on the “T”. One hose goes to a supply reservoir (portfolio) and the other connects to a usage point (our check book).

The supply side has a valve that is normally turned off. The usage side has a regulator (timer) that allows a steady flow of drops (dollars) to drip into the usage container (check book) over set periods of time. Normally, the balloon (cash cushion) provides the source of water (dollars).

When the reservoir (our portfolio) is full, I open the valve a little, allowing water (dollars) to flow into the balloon (cash cushion), expanding it. When it is full, I close the valve.

I may open the valve all the way or just let it trickle for a longer period. It is driven by the situation. If things are going well, I may top-off the balloon every month. At times like the present, the valve stays closed and the balloon shrinks a little every month.

When the balloon (cash cushion) is full, I close the valve. I only open it when the reservoir is full.

If push comes to shove, I can let the dividends flow through since they are not dependent on selling shares.

“But when you take out a large sum, you would be paying more taxes?”

From tonight’s update to my profile page:
Portfolio Makeup: _Indiv. Stock: 78.71% _Bond ETF: 0.81% _Bond Annuity: 6.98% __ Stock: 78.71% Bonds: 7.79% Cash: 12.93% _Options/Short: 0.57% __By Acct Type: Taxable: 2.65% _Trad IRA: 0.00% _Roth IRA: 97.35%

I do not pay tax on withdrawals. I started converting our trad IRA’s to Roth in 2010. I did annual conversions every year since. In January 2022, I took my first and only RMD then converted the remainder of my IRA. I finished DW’s IRA a few years ago.

My first draw to fund part of the land purchase and initial expenses was $480K. Coming out of a trad IRA would have been a big tax hit.

Doing annual conversion kept the numbers lower and in a lower tax bracket.

“In the FIRE or other retirement guidelines, they are talking about taking <4% of the portfolio/year.”

The 4% guideline is a planning guideline. That is it. Nothing more.

You can plan to take out 4% but if 3% is all that you need, just take 3%. Right now, our living expense shortfall, what the portfolio needs to provide, is about 1.4% of our portfolio. In 2005, it was about 4%.

I use 6% annual appreciation for planning. Yes, 6%!

But our XIRR from 2005 is just over 20%. You could say that is 14% additional growth each year, over plan.

“I guess end of 2020 and 2021 were great times to take more money out from the stock market but I guess you didn’t see the market goes up and decide then that you have your funds to build a new house. If the market did not rise to its extent, would you have hold off on building your house?”

Actually, the 2020 gains allowed us to decide on our change of plans. In November and December, I sold off stock to fully fund this build. The cash was in our portfolio and our expense cash cushion since. The funds still in our portfolio will stay there until needed (in Roth IRA’s). If I don’t need it, the money will just stay in the portfolio for use there.

"In more ‘normal times’, how do you decide to sell when and what to replenish your cushion?
For example, do you tend more to sell some at the end of the fiscal year or at the beginning or are those time spread evenly over the year?"

I don’t manage based on a calendar. I decided a long time ago that it is stupid for me to even try. The stock market does not follow a calendar.

Our portfolio has never set an all time high on Dec 31 of any year. For 2020, it was close at Dec 22. For 2021 it was Nov 9. For 2019 it was Aug 1! For 2018, it was Sep 13. Going back farther shows the same.

Using a Dec 31 number is arbitrary at best.

When our portfolio hits a new high, I know, in dollars, how much higher it is than the previous. I can decide right then on a plan of action which may be selling something, just taking cash or doing nothing.

Usually, I wait for a few day where I hit a series of new highs. Here are the last few from 2021 with the percentage higher than the previous:

281. 10/13/2021  2.39%
282. 10/14/2021  2.20%
283. 10/15/2021  0.53%
284. 10/18/2021  2.01%
285. 10/19/2021  0.58%
286. 10/21/2021  0.04%
287. 10/25/2021  0.52%
288. 10/26/2021  0.33%
289. 10/27/2021  0.58%
290. 10/29/2021  0.66%
291. 11/01/2021  0.36%
292. 11/02/2021  0.06%
293. 11/04/2021  0.10%
294. 11/05/2021  1.52%
295. 11/08/2021  1.64%
296. 11/09/2021  0.85%

(296 is the count of highs starting with 12/1/2012 and covers a 400+% rise in our portfolio.)

Usually there will be 3 to 5 or 6 in a row then a week or a few months to the next series.

In order to set a new high, any withdrawals need to be recouped. Example:

Our portfolio sets a high at $1,000. The next day I withdraw $100, leaving $900. It has to grow to $1,001 to set a new high.

So, the timing of withdrawals is at the whim of the markets. Our longest dry spell was July 2007 through Oct 2010 without selling stock and doing a full replenishment of our cash cushion.

That “water balloon” is a very nice thing …

Does that help you?

Gene
All holdings and some statistics on my Fool profile page
http://my.fool.com/profile/gdett2/info.aspx

3 Likes

Hi Gene:

in your hydraulic analogy, the balloon has to have enough pressure to push out some money to your passbook.

When do you decide your reservoir (portfolio) is full to open the valve? is that mainly on a need basis or you consider certain conditions when you would open more or less the valve? and do you ever pass money from your cash cushion to your portfolio?

On converting IRA to Roth, wouldn’t you have to pay taxes on your capital gains incurred when in the IRA, right?

when you left on this journey in 2005, did you use as you portfolio target to reach min 25X the revenue you thought you needed each year? and you left your job when you reached it?

tj

On converting IRA to Roth, wouldn’t you have to pay taxes on your capital gains incurred when in the IRA, right?

No, that’s not correct. Traditional IRAs are not taxed based on capital gains - they are taxed at ordinary income rates on the amount distributed, whether it’s distributed to a taxable account or converted to a Roth IRA. That’s because most, if not all, of the money in a Traditional IRA typically has not ever been taxed as income. (Note: if you have any after-tax contributions in your IRA, the percent of the distribution that is taxed will be adjusted. But since most IRA owners do not have after-tax contributions in their IRAs, in most cases, the entire distribution will be taxable.)

On the other hand, under current law, tax rates are supposed to revert to the previous (higher) rates in 2026. So converting now could save money compared to waiting to take distributions later.

AJ

2 Likes

Hi thejusticier,

“in your hydraulic analogy, the balloon has to have enough pressure to push out some money to your passbook.”

It is a magic balloon (not like the one in the 1956 short film “The Red Balloon”). This balloon puts out a steady 45 psi from full to empty. So 5 gallons or 1 ounce in the balloon, 45 psi.

“When do you decide your reservoir (portfolio) is full to open the valve?”

Purely mechanical. If our last all time high was $563,701 and our close today is $571,332, a new high was set by $7,631 and I look through:

  1. Condition of cash cushion, percent of target amount.

  2. Available cash in the portfolio, percent of target amount.

If I believe I want to top off the cushion and I have cash available, I transfer cash to our savings account and log it as a withdrawal.

If I don’t have enough cash, I look at sale candidates for possible trimming.

It still boils down to a judgement call. I may not top it off. I might just send $20,000 instead of the $50,000 it is down and wait for the next all time high.

I balance the value of cash in the portfolio vs the need for the cash in the cushion.

If the cushion is low, like below 50%, I place more emphasis on getting more into it. If the cushion is at 90%, I might let it ride for a bit.

“do you ever pass money from your cash cushion to your portfolio?”

No.

When I get money, I usually use it to top off the cushion first. Depending on how much money remains after that, I may just add the remainder to the cushion, particularly if I have larger payments approaching like property taxes since it would be used shortly.

IIRC, over the last 10 years, our only larger cash income was 3 pipeline easements and 4 drilling/production 3 year leases and some 2 year extensions. In those cases, I topped off our cushion and put the remainder into our portfolio, logged as deposits.

“On converting IRA to Roth, wouldn’t you have to pay taxes on your capital gains incurred when in the IRA, right?”

There is no such thing as capital gains inside of a retirement account for taxes.

From traditional retirement accounts, all withdrawals are taxed as ordinary income. If the “account” has basis, tax paid contributions, then the withdrawals are partly tax free.

I say “account” above since each 401K/403B account is a separate entity, while every IRA account in your name is actually grouped as a single IRA. That is whole different discussion.

Retirement accounts are “black boxes” for taxes. Only one taxable event can occur inside a retirement account, UBIT, and it is rare since most people do not have sufficient assets to trigger it past the $1,000 threshold.

“when you left on this journey in 2005, did you use as you portfolio target to reach min 25X the revenue you thought you needed each year? and you left your job when you reached it?”

Kind of …

Using Quicken planner and a few online planners, I knew I had enough about 2 years before. I chose to wait a bit to pass the 55 threshold and get my little pension. And in 2004, DW had an all-expenses paid vacation to the garden spot of southern Iraq. When she got home, I was ready to leave …

Does that help you?

Gene
All holdings and some statistics on my Fool profile page
http://my.fool.com/profile/gdett2/info.aspx

1 Like

Retirement accounts are “black boxes” for taxes. Only one taxable event can occur inside a retirement account, UBIT, and it is rare since most people do not have sufficient assets to trigger it past the $1,000 threshold.

When holding MLPs (the most common trigger for UBTI) inside an IRA, that’s no longer correct. While UBTI generated annually may not pass the $1k limit for UBTI, the act of selling the MLP will often generate UBTI in excess of $1000. As long as the IRA could avoid selling the MLP, or moving it in-kind, generating that UBTI could be avoided. Now that IRAs must be fully disbursed, generally no later than 10 years after they pass to a non-spouse beneficiary, it’s no longer going to be possible to avoid that UBTI. So any IRA holding an MLP is likely to end up with a UBTI bill for the IRA at some point.

AJ

I have put already taxed money in the IRA. So I shouldn’t be taxed again on the principal, right?

I believe that’s correct… but there are caveats.

Ask your question on the Tax Strategies Board.

https://discussion.fool.com/tax-strategies-100155.aspx?mid=35108…

You’ll get superb answers there…

:alien:
ralph