Official Shiny Things thread Episode V, The Empire Strikes Back

celtosaxon

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Question


Should I tilt more towards growth such as SPYG ( holds 250 of S&P500 companies) dca for a good 20-30 years

Then 5-10 years before retirement to slowly shift the assets to index dividend such as VHYD (all world 1,500 companies). Collect dividends to live off


perfect strategy!??
No, absolutely not. That just adds risk, both pre and post retirement.

Dividends are not as important as capital gains during retirement in terms of supporting a safe withdrawal rate. In fact, adding small caps (even lower dividend yields) has been shown to support an extra one half of one percent in safe withdrawal rate without adding risk of portfolio depletion. Bengen himself is the one who made this discovery in his extended research post-Trinity study (which is where we got the 4% safe withdrawal rate from).
 

Shiny Things

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Would like to hear your opinoin on buying deep in the money leaps on the SPY as a form of leverage. Say SPY now 450, buy ITM call strike 225 expire nov 2023.

"Downpayment" 225, "loan" 225. effectively leveraging 50%.
I get what you're getting at, but these particular LEAPs aren't a great trade either. Less bad than leveraged ETFs, but options have their own quirks that will trip you up and cost you money.

"Interest" = extrinsic value, spread and lost dividends which isnt much since its too deep, decent spread due to liquidy and spy has low dividends. Probably matches ibkr llc 1.58%pa

Isnt't this better than a margin loan because
1) no margin call resulting in force selling
You don't get force-sold through margin calls, but you could certainly get "force-sold" if the stock ends up below the strike.

I see this better in every way than a straight margin loan. Is there anything im missing.

Couple of things:
1) Liquidity: the spread in the options is about three bucks (that's $300 a contract). Even if you have the time to work a bid and get filled closer to the mid, you'll still be paying a lot more to get into the trade than you would if you just bought leveraged SPY;
2) Time decay: there's about five dollars of extrinsic value in that option, which you're going to be bleeding away over the course of the next two years. It might not sound like much, but that's a couple of percent a year, which is a HUGE amount of drag.
3) There's a big problem with this particular strike: missing out on the dividends. For a deep-in-the-money option, there comes a point where the dividends are worth more than the extrinsic value of the option, and you'd rather just be long the stock. SPY pays about $5.20 a year of dividends; by buying the options instead of the stock, you're giving up on that.

A professional trader, if they found themselves long those SPY options that you're thinking of buying, would immediately exercise them because they'd rather own the stock instead. That should give you a clue how much you don't want to own these.
 

Calpha K

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Can anyone explain the FIRE chart? How many years does the fund last for? is it assuming only 25 years (4% rule)? So if I expect to live till the average age of 80, I must have the desired amount by 55?

Or is the desired amount able to last forever in perpetuity? I don't think it can last forever, but why does the chart not say how long it can last?

 

arowana9

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Can anyone explain the FIRE chart? How many years does the fund last for? is it assuming only 25 years (4% rule)? So if I expect to live till the average age of 80, I must have the desired amount by 55?

Or is the desired amount able to last forever in perpetuity? I don't think it can last forever, but why does the chart not say how long it can last?


Not sure about that chart but i am planning my money to last till 99 yrs old which i believe is more than enough buffer.
 

d5dude

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https://amp-scmp-com.cdn.ampproject...moves-step-closer-delisting-chinese-companies
A few articles reported that US is getting closer to delist Chinese firms. Is this a concern if we are holding ETFs like MCHI / 3067 / CNYA? Does anyone knows if these ETFs invest in the HK or US listing of Chinese firms? Thanks in adv!

Its usually a mix, but they will hold the HK listing (if available) instead of the adr equivalent 99% of the time. I too wonder what will happen to stocks like NIO (which has no HKSE listing) in EIMI should it be delisted.
 

celtosaxon

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Can anyone explain the FIRE chart? How many years does the fund last for? is it assuming only 25 years (4% rule)? So if I expect to live till the average age of 80, I must have the desired amount by 55?

Or is the desired amount able to last forever in perpetuity? I don't think it can last forever, but why does the chart not say how long it can last?



The 4% safe withdrawal rate is based on the Trinity study. It determined that 4% was the sweet spot that could be sustained even in the worst case scenario historically, leaving you with at least $1 after 30 years. Since it is the worst case, in most cases you end the 30 years with more than you started with.

The chart is just showing how much you need to generate a particular withdrawal amount. The 25 is just the reverse calculation, annual withdrawal x 25 = target investment amount.
 

Shiny Things

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The 4% safe withdrawal rate is based on the Trinity study. It determined that 4% was the sweet spot that could be sustained even in the worst case scenario historically, leaving you with at least $1 after 30 years. Since it is the worst case, in most cases you end the 30 years with more than you started with.
One point of caution: the Trinity Study was run in 1998, when long bond yields were a lot higher than they are right now. It's easy to sustain a 4% withdrawal rate if 30-year government bonds are yielding 5%!

But bond yields are a lot lower now, so you're looking at lower sustainable withdrawal rates. Despite the cringey domain name, that ThePoorSwiss article has pretty good math: 3% is a much better rate, going forward, than the old 4% rule.
 

revhappy

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One point of caution: the Trinity Study was run in 1998, when long bond yields were a lot higher than they are right now. It's easy to sustain a 4% withdrawal rate if 30-year government bonds are yielding 5%!

But bond yields are a lot lower now, so you're looking at lower sustainable withdrawal rates. Despite the cringey domain name, that ThePoorSwiss article has pretty good math: 3% is a much better rate, going forward, than the old 4% rule.

Well, it is not about 1998 or low bond yields. As per Michael Kitces, this study was done for every 30 year period for which data was available, until then. I think they started from 1921 and what they did is took the absolute worst period of 30 years and found that for that worst period of return 4% withdrawal rate worked. I think that worst period was during the 1970s inflation shock period and the 1930s period, so there were 2 such 30 year periods. But other than that on average you could have much higher withdrawal rate like 7%, but if you retired in the worst year, then the safe withdrawal rate was 4%.

So I think if the study was done now also you will end up with the same 4% as the SWR.

The problem with this study is, it is backward looking and not forward looking, it looks at the past 100 years and then bases it on which was the absolutely worst starting year of 30 year period and then hopes that the year you retire, that wont be the worse than the worst year in terms of returns for the next 30 years. I am not too sure if that is a very sound strategy. So people like to build buffers around it and say 3.5% or 3% is safer.
 
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celtosaxon

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There are two scenarios where I would recommend taking less than 4% SWR.

1. You are retiring early.

Studies that have extended beyond 30 years eventually settle into something around 3.3% by the 50 year mark, with the same probability & risk. The longer you need to sustain a withdrawal rate, the harder it becomes to avoid the risk of portfolio depletion, because you are not always living on the income & gains - you also eat into the principle. So if you are retiring early, you should consider a lower withdrawal rate and a higher equity allocation… above 50% ends up being safer for > 30 year runs.

2. You have no wiggle room.

If you really must take the exact withdrawal rate to survive and also must take the full inflation increase each year without compromise… then you’d better use 3% just to be safe. However, just being able to skip the inflation increase when the market is down can make a huge difference and allow up to 50% higher SWR without increasing the risk of portfolio depletion. That means 4.5% can be just as safe as 3% if you have that flexibility - I think most here in Singapore are used to a variable wage component and tightening their belt when needed.
 
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highsulphur

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But these withdrawal rates are meant to last around 30 years? Meaning it's meant for retirement from around 50 years old?
 

revhappy

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But these withdrawal rates are meant to last around 30 years? Meaning it's meant for retirement from around 50 years old?
I think we should estimate to live until 90 just to be safe, as progress happens in the medical field, people are expected to live longer.

So 30 year retirement is for 60year olds.
 

zzTiny

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How do the safe withdrawal account for healthcare/nursing? From what I see, this invisible concern will soon be even more problematic as there are more aging people. And, I am unsure how to account for this.

I have read that people simply lump the insurance expense together with the withdrawal rate?
 

celtosaxon

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How do the safe withdrawal account for healthcare/nursing? From what I see, this invisible concern will soon be even more problematic as there are more aging people. And, I am unsure how to account for this.

Healthcare costs are a major factor that need to be planned for in your retirement expenses.

You can read up on something called the “retirement smile” - basically retirement expenses tend to be higher in early retirement as people have more travel and leisure expenses, then expenses slowly drop over time as you become less mobile. Finally, in late retirement, expenses increase again as healthcare expenses grow.
 

zoneguard

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How do the safe withdrawal account for healthcare/nursing? From what I see, this invisible concern will soon be even more problematic as there are more aging people. And, I am unsure how to account for this.
There are some data points to take reference from:

1. DOS/MAS's CPI data. Weight of 655 out of 10,000 is allocated to health care. You can also see the YOY inflation rate for different health care expenses.
2. This report. Table 3 has the figures for expenditure for different household structures.
 

Boglemoster

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Hello - after researching for some time and further to the helpful comments received from this community, below is the plan my spouse and I made for our portfolio. Would be grateful for your views on the same.

Age: 31 (both of us)
Loans / liabilities / debt: None
Location: Singapore
Nationality: Indian (also we are not Singapore PRs)
Retirement location: Unknown (highly unlikely to be in Singapore)
Financial objective - FIRE at 40
FIRE number: 2.5 million (we have just started our investment journey and have investments of about 100k as of now)
Broker: IBKR Singapore

Current portfolio:
1) VWRA (90%) (reason - globally diversified index fund with relatively low expense ratio; hold this in USD)
2) AGGG (10%) (reason - globally diversified index fund with relatively low expense ratio; hold this in USD)

We plan to keep this for the next 5 years until we hit about 1.5 million. Thereafter, we plan to gradually increase the bond component of the portfolio (up to 30%-35%).

Grateful for your feedback on the plan. Thank you very much.
 
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Calpha K

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The 4% safe withdrawal rate is based on the Trinity study. It determined that 4% was the sweet spot that could be sustained even in the worst case scenario historically, leaving you with at least $1 after 30 years. Since it is the worst case, in most cases you end the 30 years with more than you started with.

The chart is just showing how much you need to generate a particular withdrawal amount. The 25 is just the reverse calculation, annual withdrawal x 25 = target investment amount.
So my question is, the fund at this 4% withdrawal can last 30 years?
Looking at the chart, to lean fire with 40k annually, one needs 1 million.

If 1mil can last 30 years, 2 mil should last 60 years.
Then why do people in this thread say 2mil at age 40 is not enough to retire? This is the part I don't get.
 
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