FIRE at 5% return per year

[rayzzzz82]

Keep hearing that the FIRErs aim to return with a 5% return annually. How is this possible with minimum risk? Other than putting money into CPF which is non-withdrawable, what other venues can we place our fund into?

Lets discuss!

 

[sglandscape]

What are your sources for these numbers? What level of FIRE are you referring to?

The standard rule of thumb is 4% withdrawal rate, with portfolio mainly focused on a diversified global ETF that returns at least 7%.

 

[limster]

Keep hearing that the FIRErs aim to return with a 5% return annually. How is this possible with minimum risk? Other than putting money into CPF which is non-withdrawable, what other venues can we place our fund into?

5% annual growth over a typical wealth accumulation period for FIRE (10-20 years depending on your FIRE plan) is considered quite bad portfolio performance if the investor is in the wealth accumulation stage.

 

[rayzzzz82]

so if the portfolio mainly focused on a global ETF with a return of 7%, what if there is a global crisis?

VT has a max DD of 46% in 2008. How many can stomach a paper loss of 46% to their account?

https://ibb.co/L9jxYWX

In year 2015, 2019 and 2022, the annual returns are negative. So how does one withdraw 4% if the return is negative for that year?

https://ibb.co/bgvxLRT

Afterall one must be able to FIRE with a peaceful mind, if the portfolio dips to about 50% of the initial value, it is very stressful. So is there any venues where one can go to have a stable return of 5% annually with a max drawdown of less than 5%

 

[rayzzzz82]

5% annual growth over a typical wealth accumulation period for FIRE (10-20 years depending on your FIRE plan) is considered quite bad portfolio performance if the investor is in the wealth accumulation stage.

5% is a conservative return rate. The last 10 years return of more than 10% annual return is an exceptional return rate as we won't know if we still can get another 10 more years of more than 10% return.

 

[sglandscape]

That is why portfolio construction (or asset allocation matters). As you approach into the withdrawal stage, an allocation between equity and bonds (emphasis required, bonds, not bonds funds) would matter.

The bond coupons would generate some cash flows, and during a crisis bonds typically would outperform given rate cuts.

What works for you really depends on your expenses, how much cash you plan to hold on an ongoing basis, do you have income from other sources.

 

[d5dude]

so if the portfolio mainly focused on a global ETF with a return of 7%, what if there is a global crisis.

VT has a max DD of 46% in 2008. How many can stomach a paper loss of 46% to their account?

https://ibb.co/L9jxYWX

In year 2015, 2019 and 2022, the annual returns are negative? So how does one withdraw 4% if the return is negative for that year?

https://ibb.co/bgvxLRT

Afterall one must be able to FIRE with a peaceful mind, if the portfolio dips to about 50% of the initial value, it is very stressful. So is there any venues where one can go to have a stable return of 5% annually with a max drawdown of less than 5%

This is why you hold a diversified portfolio. I think bonds are a good counterweight to stocks, although I am not so sure that its possible to limit the DD to less than 5% in any given year even with a diversified portfolio.

Also 5% SWR is quite risky unless you are already in your 60s, but retiring in your 60s wouldnt be considered FIRE so its moot. I would think thrice about retiring at say 45 with an SWR of 5% for sure.

 

[rayzzzz82]

so the consensus is to hold a diversified portfolio comprising of bonds and stocks. Can I know what is the ratio of stock to bond that one can approportionate to his portfolio? it would be good if you can also advise what bonds and stocks ETF can include in this portfolio.

Is it possible to approportionate this portfolio such that the ratio of annual return to max DD for a period of 10 years or more is 1:1 or better? I don't mind if the return is less when the risk is kept to a minimum so that I can have a good night sleep