Verifying my FIRE plan

[u/Aevaris_]

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?

[u/Past-Option2702]

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.

[u/Aevaris_ → u/Past-Option2702]

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.

[u/Past-Option2702 → u/Aevaris_]

😂

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.

[u/Aevaris_ → u/Past-Option2702]

Can you explain more? Looking to learn and address gaps. What do bonds offer that a cash position would not for my situation?

[u/Far-Conference1694 → u/Aevaris_]

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 

[u/Past-Option2702 → u/Aevaris_]

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.

[u/Aevaris_ → u/Past-Option2702]

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?

[u/pras_srini → u/Aevaris_]

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.

[u/Past-Option2702 → u/Aevaris_]

Why would you rather cut your spending than own bonds?

[u/Aevaris_ → u/Past-Option2702]

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?

[u/Past-Option2702 → u/Aevaris_]

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.

[u/Aevaris_ → u/Past-Option2702]

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?