With the recent market rally in August, we saw our retirement savings jump 9.5% which is crazy. This led us to reach the mini milestone of being within approximately 5 years of reaching our financial independence (FI) plan savings goal. Both Mr BA and I thought this was pretty great, even if the stock market has since dropped in September. Ah Typical! With this mini milestone being reached, it’s time for FI plan adjustments! Plus, we need to take stock of where we are, where we are going, and what changes may be needed.
Where We Are – August 2020 Recap
- Networth percent change from prior month – up 9.51% compared to July
- Percent complete to goal – 62.39%
- Months ’till goal – 53 (4.4 years / February 2025) vs 64 (5.34 years / March 2026 set in July 2020)
- What drove the changes in July: Markets rebounding and almost overtaking the high since February 2020.
Asset Allocation
The portfolio is overall pretty simple right now during the wealth accumulation phase.
- 94% Total Stock Market or S&P 500 Index funds
- 6% cash
Normally we would not have that much cash on hand. But due to planning to diversify our portfolio this year and buy a rental property, we’ve been saving for a down payment. Additionally, I’ve liked knowing we have enough cash on hand to last us 2 years during this pandemic. Going into the pandemic when we refinanced our home my job pretty was secure. However, now things have changed a little bit. We’ve experienced a re-org which is necessary for our group to be successful, however there’s always some uncertainty when you go through changes like these. So, it’s been helpful to know we’d have a cushion if my job would be eliminated or impacted in other ways like a pay cut.
Where are we Going
Also as part of our FI plan once we were within 5 years of our goal, we said we’d start adding some bonds to help “smooth the ride” once in retirement. So I started looking back at my notes and consulted JL Collins, and my Simple Path to Wealth book.
I started looking into an intermediate-term bond index (VBTLX). However, in reading the product description I learned that now may not be the best time to buy bonds since the COVID-19 pandemic has pushed interest rates to near zero as the government has tried to stimulate the economy. This means the price of bonds will only head downward.
“As with other bond funds, one of the risks of the fund is that increases in interest rates may cause the price of the bonds in the portfolio to decrease—pricing the fund’s net asset value (NAV) lower.”
Vanguard.com
“Bonds have an inverse relationship to interest rates. When interest rates rise, bond prices fall, and vice-versa.”
investopedia.com
But what about the other part of bonds, the yield? Well, if we look at VBTLX as I write this post the 30-day SEC yield says it’s at 1.17% which when you adjust for inflation, or determine the real yield, it is below zero percent. Ugh. Yuck.
So why buy now? I’m still trying to answer that question. We will be holding off on any purchases until I can see a good reason. Further, the Fed has said last week that it will keep rates near zero until 2024 and has signaled it would allow inflation to increase beyond the typical 2%. This would could imply longer term inflation.
What Change May Need to Occur?
Additionally, I’ve learned that portfolios that need to last longer than the typical 30 year time period studied in the Trinity Study, do better with higher stock allocations when looking at success and failure rates and safe withdrawal rates over historical periods. Of course history is not a predictor of the future, but it’s certainly not something that can be ignored. Two informative posts on these topics can be found on Early Retirement Now (bond vs stock risk and the safe withdrawal rates Part 2 – capital preservation vs capital depletion). Check them out they’ve been helpful is making our FI Plan adjustments.
CAPE Ratio Impacts
The cyclically adjusted price to earnings (CAPE) ratio and the impact on our retirement portfolio is the other factor to consider. Early Retirement Now has great primer and post on this topic. This blog has been a positive influence on why our FI Plan adjustments lean more conservatively than the 25x rule of thumb noted from the Trinity Study. We plan more in line with saving roughly 33x our expenses or planning for a 3% safe withdrawal rate. Or at least we were.
This month, I noticed that in looking through the couple of spreadsheets that we use for planning that I had incorporated the additional cost of healthcare in our expense planning in one spreadsheet but not in the other. And, the other one helps us calculate our years to retirement. So, we are looking into possibly raising our goal amount needed to ensure we are accurately capturing the cost of health insurance and accurately planning for the higher equity valuations long term. Better to adjust for these things now while we have 5 years of runway.
Earning Money in Retirement
The last thing we’ve been thinking about is earning money in retirement. Originally, we said, of course we’d likely earn some money in retirement – we like to do things! However, I’m wondering if we should take that assumption out of our plans again to be on the safe side. We never set an amount we’d have to earn when we spoke about this assumption. We set up our savings to cover our known expenses, so that anything we made in retirement was more the icing on top. However, in thinking about the missing cost of healthcare in the early years of retirement in one of our spreadsheets, I don’t think we want to assume we’d earn enough to cover $25K a year after taxes. That sounds pretty ambitious given the current state of our side hustles and lack of rental property.
Hopefully we’ll have an update on these FI plan adjustments soon. Have you made any assumptions you’ve changed in your plans over time? Have you honed in on updates to one spreadsheet only to forget to make the same updates to another? Please tell me I’m not alone in the comments below 🙂
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