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Conversation Starter
Vtsax vs fxaix?
What are the best cities to live in for FIRE?
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Mentor
We FIRE'd 2 years ago in our late 30s as family of 4 with 2 kids below 3. We continue to hold about 2+ years worth of household expenses in cash / near cash as we don't want to have to worry in case of market dips and also ensure we have enough to maintain current lifestyles without having to cut back.
Subject Expert
6 months of cash can’t meaningfully protect you from SORR. A flash crash 20% won’t harm your retirement plan, but 5-10 years of poor returns might.
Some things that can protect you is a large bond allocation (perhaps 30%+) and a low withdrawal rate, or being willing to lower it.
Subject Expert
If these are all stock funds there is a lot of correlation in a market crash. In a bear market these could all be down for 5-10 years
SORR isn’t about protecting against what’s likely to happen, it’s about the risk that you retire into that once in a generation bear market
Mentor
I think this depends a lot on your obligation and fixed vs. variable nature of your costs. Single renter now with location flexibility? I’d go low. Don’t miss returns by too much fixed. Even if you draw, you try to limit how much. Family of 5, kids in schools, can’t cut back without significant disruption? Then I would hold maybe a year. The other q is what prevents you from working again if things go south? How hard would it be for you to get a position and to what degree would it replace income. I would consider all of those things.
Subject Expert
Using a cash bucket to "protect" against SORR is market timing. Doesn't work.
Why are you holding individual stocks?
Why aren't you holding some fixed income in your asset allocation and rebalancing?
What is your WR?
How old are you?
Mentor
Conceptually, a fixed income annuity (yes, a dirty word around here) would possibly protect better than a cash hoard. In my situation, I have a defined benefit pension (which you could create via a fixed income annuity) that I am using as my SORR protection. It would allow me to "tighten my belt" if down years were experienced immediately after FIRE. I do also have some long term laddered CDs that I locked up over the past few years when rates were higher. My FIRE date is next year, and I have money locked up through 2030, which will keep being reinvested once CDs come due. I'd suggest looking into alternate vehicles like annuities, as well as CDs and bonds to build up that stream of income to protect against an unlucky SORR sequence diluting returns in the first few years of FIRE.
Mentor
6 months is usually fine. In most cases, you’d have some sort of severance, would get some sort of unemployment (although in some states, the amount you receive is pitiful), and many people can cut expenses if a layoff actually happened to help extend the runway or any funds you have set aside.
Mentor
In that case, I’d plan for 9 to 12 months in low risk investments (bonds / CD’s / money market acccount, or HYSA).
Stocks are pretty near ATH’s. If you have investments that would qualify for LT cap gains, I’d probably switch some of those to lower risk options at least for the next 6 to 9 months.
Two years minimum if you are conservative.
“March 2011: Two years after the nadir of the crisis, many stock market indices were 75% above their lows set in March 2009.”
Haven’t Fired yet but plan to hold 2 yrs min when I retire in case of market downturn
The general advice is to have money you'll need in the next three years, that is not covered by salary or other fixed or passive income, in mmf/hysa/CD/tbill etc and also another 3-6 months in emergency fund in case that income doesn't come in or there are unexpected expenses. I think that still applies to FIREd individuals even though the "need" is monthly living expenses instead of the typical saving for a house while expenses are covered by wages.
I'm not sure that materially impacts your sequence of returns risk given you'll still be regularly refilling your cash bucket but I suppose if the economy did take a dive you could reduce discretionary expenses temporarily and not have to pull as much out to refill.