Going Completely To Cash


I admit that I’m a fan of unconventional ideas.  Whether it’s tiny houses, financial independence, no-car living, or any of the other unconventional lifestyles gaining popularity in recent years.  They all interest me.

To be clear — I’m not necessarily going to dive off the deep-end and fully commit to another alternative lifestyle, but I do like how these unconventional ideas make me think.

Unconventional thinking is what helped me reach financial independence by the time I was 38.  There’s lessons to be learned and freedom to be found in doing things differently.

Recently, I had one of these unconventional ideas I wanted to share  — What if I said “screw the market!” and completely sold off all our assets?  Effectively going 100% to cash…

 

Un-Investing

Crazy idea right?  This idea happened because I’ve been considering all manner of strategies to protect myself from the  next inevitable down market.  A downturn is going to happen at some point — stock returns have just been too good for too long!

There are a number of popular strategies I’ve seen people moving to, in order to “smooth out the ride” — Some are pivoting to bonds, while others are moving assets into real estate crowdfunding.  All of these are good strategies, but they change the risk profile by exposing the investor to different areas of the economy.

The risk profiles are simply different, and not necessarily “risk free”.

So this crazy idea hit me — What if I completely uninvested every dollar from the market?

If we moved 100% of our liquid assets into cash and lived completely disconnected from the stock market, that’s about as “risk free” as I could possibly get.

Obviously being 100% in cash would protect us from a falling market… but would we have enough money?

 

How Long?

Most ‘experts’ state that financial independence requires a portfolio 25 times your annual spending before you can call yourself financially independent.  (25x is simply the 4% rule inverted.)

Let’s run my numbers, just to make sure I’m actually FI:

$73,000 annual spending / .04 = $1,825,000 million required for FI

By all the “conventional” definitions of financial independence, using our 2.6 million in liquid assets we could safely call ourselves ‘FI’.  We have 36 times our annual spending in assets.

This means if the Tako family we went 100% into cash we would have 36 years worth of spending.  Seeing how I’m 40 years old right now, this would get me to age 76.  In days long past, that was considered a nice ripe old age.

But it’s no longer 1850.  People are living much longer, and it’s very possible I could end-up living well past that age.  In fact, I just had a relative die at age 102.  It’s a possibile I could live that long.

As technology has improved, so have people’s life spans.  I see no reason why this trend won’t continue over the next 30-50 years.  Medical science is almost certain to improve while I live out my life.

Based on historical improvements, it’s rational to conclude that someone my age could expect a life span of 80+ years.

But wait a minute!  We’re forgetting some important facts!  $27,240 of our annual spending is actually the cost of daycare.  That expense will drop in-half once our oldest son starts kindergarten this fall, and then disappear entirely in two more years when our youngest starts school.

So really, our annual spending is going to look more like this:

2018 — $73,000

2019 — $59,380

2020 — $45,760

2021 — $45,760

Without the cost of daycare, our annual expenses drop to $45,760 in 2020.  Considering this lower level of spending after two years, we’ll have enough cash to last us 56 years.

I’d be 96 years old before we ran out of cash!  Most of my relatives haven’t lived longer than this, so it’s possible we could go to cash and live out the rest of our natural lives without stock market risk!

 

Problem #1: Inflation

If only life was that simple!  As safe as this plan sounds, isn’t entirely perfect — I’ve completely ignored the fact that when our dollars are not invested they’re not keeping up with inflation.

Inflation has been relatively benign the last decade, averaging 1-2% annually in the United States.  Just because inflation is low, doesn’t mean it should be ignored entirely.  Inflation has a powerful compounding effect too — in the wrong direction!

us historical inflation rates
U.S. inflation rates have historically been higher than the small 2% rate we enjoy today. It’s possible we’ll see higher rates again in the future. (source: Multpl.com)

 

If after I factor in inflation (at a constant 2% rate) our 2.6 million cash pile would only last 39 years.  Not nearly long enough!

This terrible result is only with 2% inflation!  If I consider higher historical inflation rates, there have been times in the past where inflation was MUCH higher.  It’s very possible (at some point in the next 50 years) we’ll see inflation rise again.

 

Problem #2: Healthcare

The second big issue with this scheme is healthcare.  Currently our healthcare costs are pretty non-existent.  We’re healthy people, and spend very little on healthcare annually.

As far as actual health insurance coverage goes, Mrs. Tako’s employer covers our family… right now.

At some point, Mrs. Tako will eventually quit her job.  Maybe in 5 years, maybe in 10… it will eventually happen.  This means we’ll have to start purchasing health insurance.  Our expenses will grow beyond the $45k point as a result.

(I explored this idea last year, just to determine what a health plan off the exchange would cost us.)

For the purposes of this blog post, let’s assume Mrs. Tako quits her job in 5 years.  At that point, we’ll purchase health insurance on a exchange. and it might costs us $1000 per month (which is insanely high… but whatever… this is a thought exercise).

Our annual expenses would then grow to $57,760.

When inflation, healthcare (and the lack of daycare) are factored in, our cash pile only lasts 34 years.  Technically that’s still considered financially independent using the 4% rule, but it doesn’t sound long enough to me.

 

Problem #3: Life Happens

The next big problem with the plan, is that life can be completely random.  Big things can change.  I have no idea if my expenses are going to be $45k or $73k in the next 20 years.

What if our roof needs replacing?  That’s a huge expense (probably over $10,000) that would blow our estimated annual expenses in any given year.  The same goes for the cost of a new car, or even emergency medical treatment.

Emergency Room
Random life events can happen at any time.  You never know when emergency medical treatment is going to be necessary.

I can’t predict when and where these random expenses are going to happen, but they will!  So we saved extra to deal with it.

This, plus inflation and the cost of healthcare has us looking at only 30-ish years of expenses when living off cash.

That isn’t nearly enough if I consider the longevity advantages of financial independence

So, I’m calling this “all cash” idea a bit of a bust!

 

What About Alternatives?

The point of exploring unconventional ideas like these, is really about learning.  Under most circumstances I would never move my family into a 200 square foot ‘tiny’ house, completely give up our cars, or try to live out the rest of our lives with only cash.

But these kinds of questions lead to interesting possibilities — What if we moved into a smaller house?  What if we sold one car?  Or, what if we sold all of our stock investments and moved into a ‘safe’ asset class like bonds?

Bonds are touted as a safe alternative, and could be a good place to store our assets.  Holding one of Vanguard’s bond funds for the next 30-50 years would probably earn us average annual returns in the range of 2%-4%.  This might cover the devastating effects of inflation on our portfolio performance.  But would it be enough?

Under most circumstances a low cost bond fund would probably get us close to 50 years worth of living expenses.  That’s probably enough for most lifetimes.

After age 90, I don’t expect we’ll be spending a lot of money on travel, clothes, or even our kids.  Life really slows down at that age.

 

Conclusion

While this thought exercise has been fun, I doubt we’ll shift our assets completely to cash.   Despite having significantly more than the 4% rule requires, we probably don’t have enough assets to live out our lives without investment returns…

Even at 36 times our annual spending, our financial independence requires returns.  They don’t need to be big returns, but they should exceed inflation.  Will the stock market do that?

Most experts (including Jack Bogle) expect future stock market returns to be significantly lower than in past decades.  (And let’s not forget that the past is where the 4% rule was written)  These experts believe stock market returns of 4% are likely, which doesn’t leave a lot of room for compounding if you live off the 4% rule.

This is one of the reasons why I typically espouse withdrawal rates lower than 3%.  Even if the market crashes tomorrow, as long as we can find a way to generate returns close to or exceeding our target withdraw rate of 3%, we’ll be able to live a comfortable life well into our 90’s.

What do you think?  Is an all cash portfolio a viable way to cut market risk?

 

[Image Credit: Flickr]

49 thoughts on “Going Completely To Cash

  • January 27, 2018 at 4:09 AM
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    Interesting math experiment. While the all-cash option is obviously not gonna work, it’s clear that you can move decent amounts of your portfolio to long term bonds and still at least probably match inflation or beat it. And since you have such a huge cushion you’d be taking away tons of risk while still having enough.

    As for healthcare, the cost of surgery to have a squid removed from your head is only going to keep going up, so you have to plan for that 🙂

    Reply
      • January 28, 2018 at 2:03 PM
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        That happened to me once. Damn octopus got me the one time I wasn’t wearing my diving mask. Sigh…

        Appreciate the thought and number crunching that went into this post. The thing that sticks out to me is how far monetary policy has come over the last 100 years or so, to limit and control the volatility of inflation. Man that helps.

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  • January 27, 2018 at 4:20 AM
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    When I first saw this I assumed you meant going to cash now, then buying the dip when the dip comes.

    The only problem with that idea is that we don’t know when said dip will materialize.

    Given that the market went up 20-30% last year, if there is a 30% correction we’ll only ‘lose’ eight months or so of gains. Given momentum and whatever (Grantham’s ‘melt-up’?) we don’t know how much further it has to go.

    So I conclude continuing to invest (we are still DCAing every month) is the only sensible way to approach this. I am hoping to quit my job in 4.5 years time, so am hoping the crash will come sooner rather than later. We’ll see how things turn out 😉

    Reply
    • January 28, 2018 at 2:09 AM
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      Yeah, I seriously doubt I could jump out and then jump back in at the ‘right’ times. Timing the market isn’t really in my skill set.

      My thinking for this post was “what if I went to cash permanently?”

      Reply
    • February 2, 2018 at 4:06 PM
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      Minor point but if there’s a 30% correction, you lose more than your 30% gains.

      Start with 100. Gain 30% = 130. Lose 30% of 130 and you have … 91.

      Such is why big legs down are insidious. If the market drops 50%, you need a 100% gain just to get back to even.

      Reply
  • January 27, 2018 at 5:37 AM
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    Honesty I’ve felt the desire to shed stocks. I get very uncomfortable seeing our accounts go to record highs. In fact, I trimmed some last week and will likely sell more next week. For now, it will sit in cash but maybe used for a down payment later this year. This month somehow we generated a nearly 15% return on paper. Somethings got to give.

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    • January 28, 2018 at 2:10 AM
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      I agree. The valuations I’m seeing and the new daily record highs remind me of the .Com bubble back in 2000.

      Something’s gotta give.

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  • January 27, 2018 at 5:43 AM
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    Don’t forget capital gains tax. Liquidating in this up market could be quite expensive!

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    • January 28, 2018 at 2:12 AM
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      True, I didn’t discuss that in the post, but I would be on the hook for long term capital gains for most of it.

      Reply
  • January 27, 2018 at 6:55 AM
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    I couldn’t do it. I’d feel terrible when the stock market keeps going up. At this point in my life, I’d prefer to stick with my asset allocation. I’m okay with some volatility. Once we’re 65, I might be okay with going to way more cash.
    Cashing out seems like giving up somehow.

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    • January 28, 2018 at 2:15 AM
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      Interesting way to think about it. Obviously I’m NOT cashing out permanently OR giving up. Just thinking about the different options.

      Reply
  • January 27, 2018 at 7:36 AM
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    We are in the same boat, if we cashed out now we would not have enough to live off of after 30 or so years and certainly couldn’t afford the travel and others luxuries we would like in a few years.

    Also I would need to seriously think about the tax implications and it would destroy our healthcare tax premium, which is currently worth several hundred dollars a month.

    It feels like we need to do something, but maybe I’m overthinking. As we are trying to FIRE at under 3%, maybe it just means if there is a dip we need to economize for a couple of years or accept a FIRE at say 3.2% for a couple years while things pick up.

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    • January 28, 2018 at 2:17 AM
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      Yeah, everybody says “just economize during the dip” for a few years. But what if it lasts a lot longer than a few years? Historically, bear markets can last a very very long time….

      Reply
  • January 27, 2018 at 7:55 AM
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    I have been having a lot of the same thoughts about “playing some defense” now that we’re so close to FI. I’m not as interested in maximizing gains as I am in preserving capital at this stage in the game.

    At the other extreme you mention though, going all cash, it’s just a long slow march to defeat.

    Still, I am looking at our 75% stock, 25% bond AA right now (Bernstein’s Simpleton’s portfolio) and wondering if we’re being too aggressive…

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    • January 28, 2018 at 2:20 AM
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      I’m just letting the cash pile up in our accounts right now. We have our dividends, preferred share redemptions, and “emergency” cash just sitting around right now. Stock valuations are such that I’m hardly enthusiastic about buying anything.

      I’m uncertain if I’ll sell anything or not. We have a few “semi permanent” positions that I won’t sell, but a few others that I might “harvest” for the excessive gains.

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      • January 28, 2018 at 6:11 PM
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        So rebalance into bonds (munis or Treasuries) using the loose cash, while letting the stocks themselves ride. Treat the bond position as “spare cash with better returns”.

        That’s worked well for me for the last few decades’ market peaks and valleys.

        Reply
  • January 27, 2018 at 8:14 AM
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    I’m a big fan of trailing stops. Predetermine your pain point and sidestep as appropriate.

    Also, I am human or cephalopod and have checked the appropriate box.

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    • January 28, 2018 at 2:22 AM
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      Good point! There are a few positions I should do this for. How far back do you set your trailing stops FV?

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      • January 28, 2018 at 5:35 PM
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        My default is 25%. I’ll tighten up to 15% if the yield curve inverts.

        Also, I am human or cephalopod and have checked the appropriate box.

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  • January 27, 2018 at 8:29 AM
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    Cash is tempting to think about. My withdrawal rate is zero because the side gigs I do for entertainment perversely refuse to pay me less than 100% of our family expenses. But if I quit them for some reason and had no income I’d still have over 60 times my expenses and being older I don’t have to plan for a future as long as yours, unfortunately. I do have a big chunk of cash but 50% of my holdings are in stocks and index funds. It just feels like it would be wrong to not grow the money even if I won’t be spending it.

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    • January 28, 2018 at 2:22 AM
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      I hear you Steve — I’ve spent my life growing money. It would feel weird with the balance going in the wrong direction!

      Reply
  • January 27, 2018 at 8:33 AM
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    It’s hard to remain optimistic about our lowly future when there’s new high everyday for the perpetual pessimist, ie me ! Even our lifespans are skyrocketing! Darn you Mr. Market, put on a sale already! Stop this crazy!

    But seriously, I would never go all cash. It would drive me crazy to have something flammable sitting there.

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    • January 28, 2018 at 2:23 AM
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      Haha! I didn’t mean physical cash Lily! Just cash sitting in a bank account somewhere.

      Keeping $2.6 million stashed in your house somewhere would be a recipe for diaster!

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  • January 27, 2018 at 8:56 AM
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    Theoretically, you can pay off your house, build a CD ladder covering the next 5 years or so of expenses and build a TIPs ladder for the subsequent 25 years. I am assuming that you can sell your assets without paying any tax.

    Do not forget that in approximately 20 – 30 years, you and/or your spouse will be eligible for claiming social security benefits. Those are similar to TIPs bonds in some shape and form. Though now you are overweight fixed income, issued by one government. Would they provide adequate inflation increases?

    Also, some would view the income generated from your wife as additional cash that de-risks your portfolio. If your family can live off her salary, and she keeps working, you can survive even a 90% decline in share prices.

    The issue with all cash, even if inflation is taken care of, is that you are missing out on all the potential upside, in order to protect the downside. I believe that it is highly likely that $100 invested in equities today will be worth two to three times as much in real terms in 2 – 3 decades ( I use a conservative 4% real return). So if I had to choose between being 100% in cash today or 100% in equities, I would choose the latter for a really long term investor type.

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    • January 28, 2018 at 2:26 AM
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      Yeah, it doesn’t really matter what the asset is — we just need to earn some kind of return!

      I think your right. In 20 to 30 years it’s quite likely that markets will be higher. I also believe there’s systemic reasons why a downturn might not last as long as some of the really ugly ones we’ve seen in the past.

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      • January 28, 2018 at 6:11 AM
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        I agree the downturn will not last as long as recent ones but i am preparing myself mentally for a 35% pullback as everybody should be. Our balances right now are not real in my mind, just kind of fluffy like a fluffy snow that needs a little time to settle down to a little more stable base.

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  • January 27, 2018 at 8:58 AM
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    Hard to say what life expectancy will be like. My theory (which has no scientific basis) is that our life expectancy will be shorter than that of our parents and grandparents because we were exposed to more pollutants, chemicals, etc. than previous generations because of our diet and environment. Sure we may live to 100 but we may also only live to 50 or 60 because of the higher rate of cancers and heart disease.

    $45,000 a year expenses would be great- and once you drop your mortgage your expenses will be even lower. But then there may be the added expense of post-secondary education and tuition, not sure if you guys plan to help with that.

    There are so many variables. I also agree that the 4% withdrawal rate is a bit risky, I would rather do the ‘never touch your principle’ route or have a 1-2% withdrawal rate.

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    • January 28, 2018 at 2:32 AM
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      I generally believe that if an individual lives a healthy drug / toxin free life, they’re bound to live quite a long time.

      While there definitely is more packaged food available in society, we’ve also cleaned up some of the really nasty chemicals our parents were exposed to — asbestos, carcinogenic insecticides, cigarette smoke, alcohol, and others.

      Our environment is far cleaner than it used to be because of the Clean Air & Water Acts. I think it should contribute in a positive way toward longer lifespans.

      Reply
  • January 27, 2018 at 9:08 AM
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    I would think a better risk mitigation strategy for the extremely risk averse is to go to cash for the proportion equal to the longest gap between decline and increase in history once they are fi. I still wouldn’t suggest it but for the record that was 1929 at 20 years. Most times it’s closer to ten years. I still wouldn’t do it as it’s quite overkill. After all dividends and other things still pay out as well. But with a 66 bond 33 stock split your probably as risk averse as anyone would ever need to be.

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    • January 28, 2018 at 2:34 AM
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      20 years of no returns… yuck. I could stomach that if we went to cash today… but if the markets dropped by 75% tomorrow, it would be tough. I doubt most people could last that long.

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  • January 27, 2018 at 1:00 PM
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    I sometimes worry about different doomsday scenarios. What if the stock market crashes and commercial real estate rentals tank in my area at the same time? What if this happens after I retire and I will not be able to find our lifestyle with our reduced dividends and disappearing rents? It’s hard to plan for all possibilities – and it messes with your mind. So I will continue doing what I’m doing – trying to diversify as much as possible. If the shit hits the fan Mr SF and I will deal with it somehow 🙂

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    • January 28, 2018 at 2:38 AM
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      As we all will Mrs. SF. The Great Depression in America ruined a lot of people, but somehow they managed to keep going and “deal with it”.

      I’m sure we’ll find a way to manage too! 🙂

      Reply
  • January 27, 2018 at 3:02 PM
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    No government pension in the US? In Canada we get CPP (Canada Pension Plan) as early as 60 if we want to (assuming you worked) and OAS (Old Age Security) at 67. That should get you going for a few more years!:)
    Instead of all cash, you could invest in GIC’s to get some return (depending on institution and length of investment up to 3.2% return (1.75% is average).
    You could even buy rental properties for diversification??? lol

    Reply
    • January 28, 2018 at 2:41 AM
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      We do have social security in the United States. It doesn’t pay a lot, but it does pay a little depending upon how many credits you’ve generated over your working lifetime.

      I actually had to look-up what a GIC was — we don’t have them in the States. The closest thing we have is a certificate of deposit, often times called a CD.

      Reply
  • January 27, 2018 at 6:51 PM
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    The yield on my portfolio is 2.2%. I could start a 1-Year online CDs and earn 1.65%. Interest rates are definitely going up. 2.2% yield does not sound that convincing anymore. However, in the past 3 years that I have been investing. My portfolio has gone up 20% on an average. As some one in thirties I am definitely in growth mode. I did some calculations and I need 2.4 million dollars to be fully FI. If I had 2.4 millions dollars today. I would keep it simple 90% in S&P 500 ETF and 10% in Short-term bond (Buffet style). Using the current yields it would generate $38,080.00 in income. Nice article Mr. Tako.

    Reply
    • January 28, 2018 at 2:43 AM
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      Thanks Dividend Geek! I’m actually considering moving some of our spare funds into a bond fund. As long as we’re earning more than inflation, any investment would be sufficient long-term protection.

      Reply
  • January 27, 2018 at 7:57 PM
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    Things to note or ponder on the positive side and question marks … :
    If there were a down turn you could go back to work… ?
    Plus your wife will work for 5 to 10 more years … ? … so you can utilize that instead of your investments ….
    Plus you have maybe a little bit of blogging income… The Money Habit just disclosed she made around $62,000 this past year from blogging … she is retired but her husband still works for now too …
    So for at least the next 20…30 years you’re covered… ?
    Will you qualify for government pension plans? Many early retirees may not have worked the sufficient 15 to 20 years – varies by government – and applies to some non-resident international expats such as I … I will get zilch from the government …
    Your total net worth which is similar to mine … may not be available if it is like ours … tied up in real estate …
    Michael CPO, From the far side of the planet

    Reply
    • January 28, 2018 at 2:45 AM
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      Heh, I think I made a couple hundred dollars from blogging in 2017. Probably just enough to pay hosting fees!

      I have no idea how some bloggers manage to earn $62 from a blog, ads just don’t pay that much!

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  • January 27, 2018 at 8:07 PM
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    A friend of mine went 70% into cash about 6 weeks ago. He is almost 60, has been retired for 11 years with two young children below 5. His portfolio is just under $1M so he doesn’t want to suffer a draw down. He is predicting that in the next two years there will be a big enough correction so that he can come back in at lower prices. Is he right? I have no idea.

    I’d use this time to unload marginal positions and companies that you aren’t looking to hold for a long time, and then shore up your cash on hand position. I know that you are already holding substantial cash so that already smooths things out a lot.

    -Mike

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    • January 28, 2018 at 2:48 AM
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      Yeah, it will definitely smooth things out. I’m most worried about an extended downturn. Decade long bear markets.

      Ultimately, I don’t want to be forced to sell. Probably I need to setup some trailing stops on our “marginal positions”. The returns have just been too good for this to go on much longer! 🙂

      Reply
      • January 28, 2018 at 4:15 AM
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        A decade long bear market will be your friend if you have surplus cash flow coming in. It may come from your wife continuing to work, or you doing some part time paid work, plus the lowering of your expenses. Low valuations for an extended period plus reinvesting will set you up for a great period in the following bull market. However if the margin of safety on cash flow is too tight that will become a major drag and weigh on you during these years.

        I agree with you that the party will have to end at some point but I suspect we have a few more months to go. Probably some slightly higher than normal dividend increases followed by a strong sell off as reality wasn’t as good as expectations going in. After ABBV posted strong increased guidance the expectation gets raised on other companies but when they eventually disappoint then there is a big crash downward. Look at GE to get a sense of what happens eventually.

        -Mike

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  • January 28, 2018 at 3:47 PM
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    Interesting thought exercise!

    One more thing to add to the list is taxation. If you were to sell everything at once and move to cash, you’d be hit with a massive capital gains tax. However, if you stay invested and live off the dividends and sell off stocks slowly and you can get the gains out essentially free through tax-gain harvesting.

    All those other things you mentioned are equally important though, and that’s why we’ll never move into 100% cash.

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  • January 28, 2018 at 6:46 PM
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    Well, I don’t think interest rates will stay this low forever so you would earn some money, but in the abstract I would say that going to all cash is not a good idea unless it would be an extreme amount of money then that might be interesting just based upon where you want to spend your money. I like the thought experiment though. Makes me want to think of one myself.

    Reply
  • January 29, 2018 at 3:37 PM
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    Interesting. Having enough cash to get you to your 70s is amazing. If we have another crazy stock market year, you could probably do the switch next January and have enough to get you to your 80s. As a hedge against an even longer life, pick up extremely dangerous hobbies in your 70s. That’s my plan anyway. That way you can go out doing what you love and never worry about the stock market again.

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  • January 30, 2018 at 6:14 PM
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    No, to all cash living @ age 40. Retireby40 Joe and Financial Samurai Sam in your GenX demographic would agree. Some PF-ers have been contemplating pulling out now i.e. grizzlybearmomanddad but effectively that’s timing the market. I may be biased being a millennial with a longer time horizon and if all the genX-ers starting pulling out of the capital markets at the same time, that’s not a good thing for anyone younger still vested in the market of course – so there’s my personal bias.
    But even if I were a GenX I still would not go all cash for all the reasons you have stated already. I would avoid considering this possibility altogether and just keep myself preoccupied with some active tasks – fixing the shed, building a little project, take a side hustle/PT job/contract/gig, heck greet people at Walmart/drive uber for a few hrs, rent out the room and focus on bringing a bit of active income. Even a small amount of active income will ease your mind when lowering your withdrawal during the lower return years, and will keep you BUSY! Idle mind’s a devil workshop I say!!

    The greatest peace of mind is creating multiple income streams, so even in the apocalypse there are different streams to rely on and still help you get thru.

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    • January 30, 2018 at 9:51 PM
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      Yes, an idle mind *is* the devil’s workshop… and we have such wonderful things to build! Hahaha! 😀

      Reply

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