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You answered your own question.
Agreed. Personally I’d probably be looking at 3 years vs. 5 years, just because I hate having money out of the market.
5m is my number and I’m close. I plan to keep 10%, or two years of expenses, in a vanguard cash plus account that earns like 3% and another 15-20%, or 3-4 years of expenses, in a total bond fund that earns like 4% dividends and shouldn’t go down nearly as much if equities crash. The plan being, if there is a crash early in retirement I just first live off the cash and then if it’s still down pull out the bonds with minimum capital gains taxes, giving the market ample time to recover. The rest will be in US and international equity funds. No idea if this is a good plan or not.
Subject Expert
It’s risky, not optimal, and a form of market timing.
Effectively you would be increasing risk if there is a downturn, hoping to get lucky.
We haven’t had a prolonged downturn for decades, but it could happen, and people following this approach would be in huge problems.
I don’t blame you though, a lot of people espouse this approach. It will work about 98% of the time. It will fail spectacularly 2%.
Safer, is simply to stick to a relatively large bond allocation, perhaps 30%+ and start adjusting your spending down fairly early.
The bucket strategy is a potential way to address sequence of return risk/concerns.
Gsk1: care to explain why it's not?
Subject Expert
If a 10% downturn would keep you working, then you aren’t actually ready to retire now either.
Significant bond allocation is likely the way to go.
Or else accept you’re taking a risk to likely become significantly wealthier by staying in equities, if that’s more important to you than guaranteeing your retirement
Subject Expert
An important point to consider is that if it was truly safe to retire last year at $5 million, it is even safer to retire this year with $4 million.
After all, had you retired last year, the same drawdown would have occurred, and you would have withdrawn. Now, the drawdown was the same, but instead of withdrawing you have contributed. Your balance is larger now than it would have been if you had retired before, so it must be safer.
In reality, if your balance has gone down, it would probably be wise to trim your expenses a little. What kind of withdrawal method are you planning to use?
Subject Expert
Only you can say.
If you value the ability to retire at any point higher than the vs 3-5% annual risk premium you’d earn on average on equities, then it’s smart.
It seems reasonable to me though to shift heavily into fixed income - The marginal value of personal assets decreases significantly once you’ve hit a FIRE number.
I’m surprised no one has pointed out the obvious important detail. How old are you? How long do you plan to live? Lol. And of course how many dependents
Haha, yeah let’s just assume my number is well founded
Yep, I have 5 years’ living expenses in cash and CD ladder. I know it’s way too risk averse but peace of mind is worth everything.
Recent WSJ Op-ed that could be relevant for you - https://www.wsj.com/opinion/youre-probably-overinvested-in-bonds-1a498844?st=Fd1XaP. Personally, I’d keep a few years of expenses in a MMF for peace of mind and call it a day.
Guess it just depends how long you think it would take for a heavy downturn to resolve but 5 years feels safer to me. The market didn’t reach its October 2007 peak again until 2013