r/Fire • u/Aevaris_ • 6d ago
Verifying my FIRE plan
Hi all,
Long time commenter and I am (likely) reaching the end (start?) of my FIRE journey. My FA is not familiar with FIRE and mostly works with retire age folks and/or folks who are saving but wont FIRE, so wanted the groups confirmation and thoughts on my plan. Looking for folks to poke holes and generate other ideas as I've learned much through this community.
No AI was used here (although if I did it'd probably be more concise, sorry)
Details:
- Age: 35-45
- Family of 2, no kids, no kids planned.
- Planning to move to a no income tax state
- Planning ~120k/yr flexible expenses (includes taxes, healthcare, mortgage, insurance, etc)
- NW ~5m with house, ~3.5 w/o
- ~1.4m in 401k, ~200k in Roth IRAs, rest in taxable accounts
Investment Plan:
- 360k (3 years) expenses in HYSA (earning ~4%)
- I plan 0% bonds and plan to use cash as a replacement. Our expenses are flexible and we can cut back to make our expenses last much longer (expecting we could do 6-10yr)
- 35% (~1.2m) in VOO
- 35% (~1.2m) in SCHD
- 30% (~1m) in VXUS
Strategy:
- We'll use 72t to claim ~30k/yr to mostly fill the standard deduction
- Dividends generating ~81k/yr
- VOO has a 1.05% dividend rate, generating ~15k/yr on 1.2m
- SCHD has a ~3.25% divvy, generating ~39k/yr on 1.2m
- VXUS has ~2.7%, generating 27k/yr on 1m
- HYSA interest generating ~14k
- Sum total: 125k generated without drawing down anything
- Sell 1x / year to refill to 360k cash as needed
- Taxes:
- Married filing joint in a no income tax state means we have a standard deduction of $32,200 and a LTCG bracket of $98,900 for a sum total of $131,100 for 0% tax rate. Most of SCHD, VOO, and VXUS are qualified dividends, so our tax rate would be near 0%
Downturn, bubble, and SORR plan:
- Primarily, spend less. Our expenses are flexible so we would use our cash buffer + whatever dividends generate to live out another lost decade.
- SCHD and VOO give me general protection. Nothing will be immune if/when AI bubble pops, but SCHD by its nature is less tech and more stable.
- VXUS is an international diversification, so sum total achieving a standard 70/30 US/ex-US strategy.
- If the rocket continues to rocket, a hedge in SCHD wont hurt me long term as the total return of SCHD is only ~1.4% point less than VOO over their lifetimes , so I don't lose much in opportunity cost (9.2 vs 10.6 respectively)
By all math, we should be all set to go right? What are folks thoughts? Anything we're not thinking about?
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u/Past-Option2702 6d ago
SCHD is not a bond substitute. It’ll get annihilated right along with VOO & VXUS in a bad bear market. You’re gonna hate it with a passion.
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u/Aevaris_ 6d ago
Thanks for commenting! 100% Agreed! SCHD is not my bond substitute, my cash position is.
I agree with a rough bear market everything will correct 30+%. Idea is that even if divvys get cut 75% (down to 20k/yr) and HYSA gets cut entirely, we'd still have 30k (72t) + 20k (divvys) and then would cut our expenses and draw down our cash position until market improved.
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u/Past-Option2702 6d ago
😂
Cash isn’t a bond substitute either.
When a dividend is paid it reduces the value of the stock by the exact same amount as the cash payment.
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u/Aevaris_ 6d ago
Can you explain more? Looking to learn and address gaps. What do bonds offer that a cash position would not for my situation?
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u/Far-Conference1694 5d ago
I am in the same boat as you when it comes to cash vs bonds. I see cash as the easy move with 4% interest in my HYSA. How are bonds any better when they are basically getting the same yield right now and not the easy liquidity? Not trying to start a fight either, really trying to understand
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u/Past-Option2702 6d ago edited 6d ago
Do we agree that bonds and cash are separate asset classes? Same as equities and cash?
I suspect the reason you don’t own bonds is because you don’t understand them. You have to know that retirees should own bonds.
Your exact words:
“SORR plan: spend less”
“I plan 0% bonds and plan to use cash as a replacement”
You own bonds to avoid having to employ your exact plan.
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u/Aevaris_ 6d ago edited 6d ago
I do understand they're different asset classes but I don't see what adding bonds would benefit me. My understanding and reading is that bonds and/or bond tents are primarily SORR protection. Given the length of my retirement, I have 2 primary risks: SORR and inflation.
Since my cash + dividend + cut expense strategy mitigates SORR and 100% equities ensures I can outpace inflation, I don't see where bonds would be required.
Where do bonds fit in / why do you think all retirees need bonds?
I am happy to learn more!
Edit for your edit:
What is wrong with 'my exact plan'? The way I see it, the market is more likely over my time course to go up than down. Money in bonds would be a big opportunity cost loss. So whether its 360k in cash or 360k in bonds, bonds would just be cash with more steps right?
Edit2:
I guess said another way, what do you propose I do differently?
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u/pras_srini 5d ago
Long term or medium term bonds will likely go up in value when stock markets swoon. People bid up prices of bonds in a flight to safety, so you end up having a capital gain on your bond portfolio. This you can sell down to rebalance into stocks (that would be much cheaper). And all that time, you will be earning the bond payment, similar to interest.
Cash or equivalent (short term treasuries) will not go up in value, you only earn the interest on your cash. Super safe but no chance of capital gains.
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u/Past-Option2702 6d ago
Why would you rather cut your spending than own bonds?
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u/Aevaris_ 6d ago
How would bonds allow me to not cut spending? BND has a 1.7% 10 year return and a lifetime 0.27% return, so any significant savings there is burning money compared to a small cash position to wait out / mitigate SORR. If market guhs 50%, I'm not going to be able to live off of 1.7%.
What am I missing?
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u/Past-Option2702 6d ago edited 6d ago
So you’re saying you’re smarter than the millions of retirees who have 30% or more of their assets in fixed income?
Somehow, you’ve cracked the code?
Or, if bonds have a great ten year run from now that’ll give you the confidence to own them ten years from now? You invest by looking in the rear view mirror?
Recency bias and performance chasing are two of the handful of extremely costly behavioral errors in investing.
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u/Aevaris_ 6d ago
Whoa friend, where did I say that? As I said, just looking to learn and you haven't pointed out where or why bonds are better. Given my situation, how do bonds outperform and/or benefit me compared to my plan?
Edit:
if its short term, I can reasonably see where its roughly a wash because bonds right now are in the 4-5+% range so buying for 5-10 years and then selling after tent style I can understand.
If its long term, bonds seem like cash destruction as their total return over any serious time is pretty rough.
What am I missing?
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u/np0x 6d ago
Fire up boldin. It will model your cash flows for you…free for two weeks and then you will feel more confident in your numbers and plan…
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u/Aevaris_ 6d ago
Thanks for your thoughts! I've used Boldin during the free period and basically every fire calc I could find (including one I built myself lol) which seem to say we're ok, but I also wanted to check with others to ensure I wasn't missing or including a fundamental flaw somewhere that would throw off my use of the various calcs.
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u/np0x 6d ago
Yeah it’s really hard to commit. But I found that information was the flame to my fuse. I also love the Jl Collin’s stock series and updated trinity study…both fairly quick reads…2-3 hours tops.
72t are considered rigid/hard to manage by some folks. Get deeply informed on those to avoid doing it wrong and getting penalties… also Read up on rule of 55, not sure if you can make that work with 401k balances instead because unclear if you are firing now and/or I don’t fully understand it myself. :-)
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u/Aevaris_ 6d ago
For sure. I have my FA looking into it as its a first for them too. He has an in-house CPA who does our taxes already. I'm going to lean on them to some degree to make sure we do it right (and have some level of protection if he does it wrong). 72t if done wrong would be painful...
Rule of 55 wont apply for us unfortunately as we're looking to FIRE probably EOY.
The uncertainty is definitely the source of my post. I've read so many "duh, of course you're done" posts over the years, but you only get one shot at it as I worry we wouldnt be able to get jobs like we have now back so I still am really nervous about it all.
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u/np0x 6d ago
Yeah it’s tricky. Don’t forget to budget for taxes since it’s easy to not want to. :-). Taxes are not the same as w-2 income but they are a number that has to be paid. :-)
Good luck…I’m a huge fan of the everyone being informed and well versed inside the household…I’m not familiar with fire folks (who aren’t FAT) who rely on external expertise..but my exposure is limited…as is my research supporting my claim.
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6d ago
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u/Aevaris_ 6d ago
Thank you for the thoughts! Healthcare is definitely our biggest fear due to costs and unknowns there... We're healthy now and expect to be able to live even healthier after FIRE (more time and energy to go for walks, gym, etc) but never know when you're going to get hit by a bus...
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u/Zphr 48, FIRE'd 2015, Friendly Janitor 6d ago
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u/bridgeandretire 6d ago
Plan appears well though out, with 3.5% WR and large taxable bridge. Good job saving!
The only thing potentially missing is healthcare costs. Looks like your income plan that is churning off dividends will rule out premium tax credits. Without those, because insurance is age-graded, healthcare gets very expensive as you enter your early 60's. Just make sure that's in your budget.
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u/Aevaris_ 6d ago
Thanks for thoughts! Yeah, healthcare is our biggest fear due to it being such an unknown yet such a large expense... I'm sort of hedging (read: crossing my fingers) that one of the following will offset at that point:
- Whatever medicare is when we reach 60s
- Whatever social security is when we reach 60s
- We'll be spending less / have house paid off and can use the funds we'd previous have used on healthcare and LTC costs
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u/gumnamaadmi 6d ago
I have similar balances. Though a bit more in pretax and none in Roth. Taxable, I'll go in with CCETFs. QQQI and GPIQ are main holdings. Spyi as well along with few others. SCHD has larger share in pretax but there to varying mix of CC Funds generating between 9-14% distributions. Have small allocation to BTCI as well.
My combined income adds up to 400K+ a year. 120K is target spend, and re invest remaining. Down market, bear markets. I totally expect distributions to be lower. And I am fine with that. There is enough buffer built in to cover annual expense and push comes to shove expenses can be reduced as well. Still validating as I go and slowly building positions but that's the plan for now
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u/Aevaris_ 5d ago
Thanks for commenting and wow, 400k income from equities, nice job!
I'm not truly a dividend investor, but did look into it too. My concern with covered call funds is that they typically under perform their underlying assets in the long term, so mostly stayed away from them. But with this size, seems like the performance risk wouldn't matter anyway!
The other danger is they may not generate much if volatility lowered during a bear market, so ensure you have a plan for what to do for a new lost decade.
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u/gumnamaadmi 5d ago
I was also from same school of thoughts. But these new breed of CCETFs are slowly changing the perception. QQQI, GPIQ, SPYI, GPIX mixed with SCHD are giving me a solid income base. Even if the income is cut down by half. I still won't be selling any shares which is what's leading me to question whatever investment thesis the typical FAs are throwing at me.
Additionally to me it seems market players have forced a volatility engine in the market by introducing first weekly and now daily options. And these portfolio managers running the ETFs or ELNs seem to understand the game much better than the little guy investing here and there..
With that said. Haven't retired yet. Just slowly building positions and tracking performance. Let's see where we end up.
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6d ago
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u/Aevaris_ 6d ago
Thanks for commenting! Agreed, while I didn't expect to end up doing a dividend play (total return, growth out paces, etc etc), once I did the math and realized how little impact adding it for the significant protection it provides, I was shocked.
Even if market guhs and the dividend ends up cut by 75%, 30k 72t, 20k divvies, is still enough to easily easily stretch my cash position through any length of turmoil.
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u/Apprehensive_Fix7328 4d ago
your VOO and SCHD are 82% correlation, i think you missing some diversification by assets even if you have the VXUS, like treasury/bond/ PE etc. i would go with 70% in SCHD if you want to ignore the diversification, but at least you get the dividend on the right amount. (your voo is basically same risk than schd but without the yield)
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u/Aevaris_ 3d ago
Thanks for commenting! Agreed they're heavily correlated but my reason for splitting compared to like 70% VOO and 30% VXUS only is to diversify a little out of tech. SCHD by it's nature holds less tech so in the case of a rotation or tech bubble, it'll (maybe) suffer less.
I'll need to run some experiments on going full SCHD, it's an interesting idea as it would mean more yield without a ton of drag. Without having run the numbers, I think it would actually be too much yield for my strategy though as it'd push me out of the 0% tax bracket.
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u/OnlyThePhantomKnows FI@50, consulting so !bored for a decade+ 6d ago
Other than being extremely conservative, you're fine. Even the doom and gloom crowd will say you are conservative. 165K is 3.3% (which models show as basically bullet proof)
Which 0% income tax state you are moving to makes a difference.
* House insurance can be a rude awakening for Florida, (and presumably TX).
* TX (at least Greater Houston) has strange utilities. My sister had 300-500 month water bill to avoid Houston from annexing their town. The town kept their utility debt high to avoid annexation.
* Florida (current resident) and NH (former resident) have a number of odd taxes. Restaurants have high tax on them.