I guess we should talk about that Safe Withdrawal Rate(SWR) of $18,509 I included in there… :) But first notice we are almost at 1/2 a million dollars! and in year 10 we were making every year about what we are living on!
Does this mean we could retire in year 11, with that $18,991 we made that year? Maybe.. But if you haven’t figured it out yet, TSM funds like VTSAX are very volatile, they go up and down A LOT, but over time, they always go up by about 9.6%/year.
In fact, VTSAX can have some really long bad years where they lose money for a few years, or don’t really make any money at all for a decade. This would be bad if we had a decade of no earnings starting in year 11 when we decided to cash out early.
There has been some academic research about this, and that is where the SWR of 4% came from.
Safe withdrawal rates¶
The Trinity Study and others since have determined that from an investment portfolio of X dollars, one could pull 4% year out the first year, and then for every year after that, pull out that amount + inflation and have a 98% chance of success. Obviously the future is unknown, and we aren’t saying this is a guaranteed 4% forever, but it’s a reasonable assumption. In the math above, we are using a 4% withdraw rate. But let us speak about reality here for a minute.
So 15 years ago in January you started down this path, and now it’s January 15 years later and you instantly tell your boss to shove it, then you can start pulling $1,465/month from your portfolio to keep your standard of living, but chances are after a few months of laying on the couch and catching up on your Netflix, you will suddently get bored, and you will decide that maybe I should work after all.. So you go find a new job, or you create your own business or whatever. We are not suggesting you actually retire in 15 years, we are suggesting that in 15 years if you decide to take a break for a while, it won’t affect your finances AT ALL.
If your boss gets stupid, you can tell them to shove it, quit on the spot, and take your time finding something else to do. That’s the point of having F-You money. Or you decide you know what, living on $1,465/month kind of sucks.
That’s fine also, go make more money. In fact chances are in those 15 years you would have gotten at least a few raises, and if you invested according to plan and lived on 1 paycheck and invested the next one, you would be even better off than above.
You now have the rest of your life to do whatever you want, which might(and probably would) include raising your standard of living, so you can afford the fancy new car, etc.
Asset Alloction, or adding in some safety to lower the craziness of VTSAX.¶
Whenever you do retire, you will probably want to buy some bonds to lower volatility and maybe some international investments if you feel so inclined. There is a 3 fund portfolio built just for that. My recommendation, while the US is still roughly 60% of the global economic market, there is little reason to get worked up about going crazy with international, but it’s quite likely that over time the US dominance will slow down or diminish, and that is when you definitely want some International investments. Since we are talking about Vanguard funds , see VTIAX. Hold between 20% and market cap weight of your stocks in international.
Also around bond allocation, you don’t really need any during your accumulation phase(here 15 years), but if during that 15 years you suddenly lost your job for a while, then moving a good healthy chunk of your investments into bonds makes sense.
I’d suggest when you get more than a few years of expenses imvested(so when you get around $100k in VTSAX) you then move a year or three worth of expenses into bonds, and you keep somewhere between 1 and 6 years back in bonds(or other safe investments)
Historically a TSM fund like VTSAX has dropped 50-80% on occasion, but has always made the money it lost back in about 5 years.
If you have won the game, or are old/disabled enough that you can’t really work anymore, then you certainly want lots of safe assets, so 60/40 or even 30/70 makes some sense. But if you can work, or are still accumulating, then I’d worry less about AA and worry more about putting money into VTSAX. When you are accumulating you almost want the market to crash 50-80%, so that $1,465/month you are investing will earn you a lot more down the road(since you will get a nice 50-80% discount!)… provided you have a job :)
Keeping more than 6 years in bonds is totally pointless(while working) and really keeping more than 2 years is probably pointless.
While you still have human capital and could work, then there is little point in keeping more than a year or two in a safer asset. If the market crashes and after the first 6 months or year, if things are not starting to look better, then you should be working and cutting back your expenses to the bone, not spending more from your nest egg.
But really only you can figure out your risk tolerance, but I think you should approach your AA by worst-case scenario and how much human capital(how much you are able to work) you have. Once you have won the game, or you are old/disabled enough to not really work anymore, then focusing a lot more on a convservative 60/40 AA portfolio makes a lot more sense.
Until then, worry less about VTSAX drops and worry more about feeding VTSAX your earnings and keeping your expenses low.
Is this the end-all for investing and/or retiring, of course not. Bogleheads.org is a great resource and community for learning more about investing and retiring, and questions should probably be directed there, if the wiki can’t answer it for you. If you are female identified, then I’d recommend the reddit group FireyFemmes.
How I implemented this¶
I actually use Fidelity as a one-stop shop, to include my banking and credit carding as well.
I am a govt/non-profit employee, so I have a 403b, but you corporate types would have a 401k. You almost certainly want a traditional IRA, not a Roth version, but either work. The Roth version is generally only great for people with large pensions or very high levels of income.
You set either one up through your employer. They likely are terrible at knowing what’s available and how it all works, so you will have a lot of legwork probably. The good news is, you only need 1 TSM fund in your IRA account and can usually be found by lookng for the words “Total Market” or “Total Index” and the Expense Ratio(ER) will be the lowest possible number on the list(probably) If you can’t find a TSM fund, then look for a S&P 500 fund, that is 98% correlated to the TSM fund and is close enough for our needs and is also usually very cheap.
If you have more than 1 403b/401k provider, find out what their fees are for having the account and find out what their fees are for the TSM/S&P 500 fund. Open an account with the cheapest total fees. Everything else will be equal, since this is all heavily regulated and your investments will be safe even if they go bankrupt, do not worry about buying from the cheapest vendor, YOU WANT THE CHEAPEST VENDOR
This will probably be one of the big 3, Vanguard, Fidelity or Charles Schwab, but there are a plethora of other vendors out to take a % of your money.
Open your account, direct 100% of your funding into your TSM fund. and send it as much of your paycheck as you can. If you can’t afford 50%, it will just take a lot longer to get there. Then login once or twice a year, update a little spreadsheet you made that does the above math, showing how you are doing with your investments, and download all the statements since your last login and save them someplace safe.
Otherwise you can just ignore the market and how your investments are doing, you know you will do OK, so don’t worry. Just keep making money and feeding your TSM fund.
The funds that matter:
@ Vanguard:
TSM fund: VTSAX (or VTI the ETF version)
International Fund: VTIAX ( or VXUS the ETF version)
Bond Fund: VBTLX (or BND the ETF version)
@ Fidelity:
TSM fund: FSKAX
International: FTIHX
Bond Fund: FXNAX
@ Schwab:
TSM fund: SWTSX
International: SWISX
Bond fund: SCHZ