Bear market effect on FI number

[Yoho]

Greetings to this wonderful community

I am trying to determine if I should reduce or eliminate my disability insurance and my stumbling block right now is the FI number. I did not even consider this topic until I stumbled recently upon the WCI and the Physician on Fire. I just took for granted that I will pay the disability premiums till the end of my career.

So my question is: when you calculate the FI number, do you cut your current savings in half in order to account for a future bear market ?  Assuming a generous 170K in annual expenses, I have 70K after tax covered by dividends and distributions from my portfolio. I also have exactly 100K in annual disability insurance coverage. However, dividends can be cut or halted. I am not sure how to approach this. Is my number just 170K x 25 ?  I am 37 years old.

Thank you

[Hatton]

Have you considered that some expenses will go away with retirement.  Well you would not need disability insurance or need to continue saving for retirement.  If you need 170k/year you will need 5.6 mill. If part of the 170k is paying student loans or a mortgage you could pay them off and need a smaller nest egg. I used 33x expenses to get to 5.6 since you are young. The 25x is for people nearer traditional retirement age.

[PhysicianOnFIRE]

Safe withdrawal rates are based upon the worst-case scenario from years past. No need to cut your retirement savings in half to calculate it. This podcast with Michael Kitces is a great listen, and I've shared my thoughts on the topic, too.

Can a Bear Take Away Your Financial Independence?

[Donnie]

FI includes bear market as others have said.  I probably wouldn't get rid of disability or life insurance until I was close to actually retiring though.  It is pretty inexpensive relative to your stated $170k in annual expenses.

[Yoho]

Thanks !  I will listen to the podcast.  My expenses will indeed decrease at least by half in retirement.  The premiums are not too bad, around 230$ per month.

[Hank]

Rather than getting your portfolio to the point where it can sustain a 50% cut and still kick off enough to live off of (say 4% draw), may I suggest an alternative approach?

Get your ongoing needs (not wants) as low as possible by retirement.  Starting about 5 years prior to retirement, sock away 2 to 5 years worth of necessary living expenses in risk free saving (internet saving accounts, money market, or laddered CDs).  The average bear market lasts only 18 months.

 

[PhysicianOnFIRE]

Hank wrote:

Starting about 5 years prior to retirement, sock away 2 to 5 years worth of necessary living expenses in risk free saving (internet saving accounts, money market, or laddered CDs).  The average bear market lasts only 18 months.

Click to expand...

WCI and I just discussed the concept for a podcast due to go live next month.

Personally, I'm not a fan of the cash bucket. I love the idea of it -- spending money that I can use to survive a bear market without selling stocks, but I also have read a number of articles that demonstrate how the cash drag over time is more powerful than the benefit of the cash during a typical bear market.

Early Retirement Now does a good job in this post exploring the topic.

My plan is to have about five years' worth of bonds that could be spent down in a prolonged bear market without selling stocks. I also plan to have additional income streams and won't be relying solely on stock returns to fund retirement.

Of course, personal finance is personal. Do what works for you.

Cheers!

-PoF

[q-school]

PhysicianOnFIRE wrote:

Hank wrote:

Starting about 5 years prior to retirement, sock away 2 to 5 years worth of necessary living expenses in risk free saving (internet saving accounts, money market, or laddered CDs).  The average bear market lasts only 18 months. 

Click to expand…

WCI and I just discussed the concept for a podcast due to go live next month.

Personally, I’m not a fan of the cash bucket. I love the idea of it — spending money that I can use to survive a bear market without selling stocks, but I also have read a number of articles that demonstrate how the cash drag over time is more powerful than the benefit of the cash during a typical bear market.

Early Retirement Now does a good job in this post exploring the topic.

My plan is to have about five years’ worth of bonds that could be spent down in a prolonged bear market without selling stocks. I also plan to have additional income streams and won’t be relying solely on stock returns to fund retirement.

Of course, personal finance is personal. Do what works for you.

Cheers!

-PoF

Click to expand...

what return are you getting on bonds?  I agree the constant cash is a drag if the market is rising, but if your stash is big enough, you can get back in the market following corrections.  some may call this timing the market.  I'm proposing that whatever you call it, it is okay to have some drag if you are truly FI and the emotional pain of watching net worth shrink dramatically is significant.  if you are FI, then your return of 1% versus even potential 20% may be viewed as icing on the cake.

 

[PhysicianOnFIRE]

q-school wrote:

I’m proposing that whatever you call it, it is okay to have some drag if you are truly FI and the emotional pain of watching net worth shrink dramatically is significant.  if you are FI, then your return of 1% versus even potential 20% may be viewed as icing on the cake.

Click to expand...

Right. The emotional / behavioral aspect will favor the cash cushion, but the math generally speaks against it. There' a lengthy discussion on Bogleheads regarding a Kitces article advocating against the cash cushion, too. To each his own.

[Zaphod]

PhysicianOnFIRE wrote:

q-school wrote:

I’m proposing that whatever you call it, it is okay to have some drag if you are truly FI and the emotional pain of watching net worth shrink dramatically is significant.  if you are FI, then your return of 1% versus even potential 20% may be viewed as icing on the cake. 

Click to expand…

Right. The emotional / behavioral aspect will favor the cash cushion, but the math generally speaks against it. There’ a lengthy discussion on Bogleheads regarding a Kitces article advocating against the cash cushion, too. To each his own.

Click to expand...

Same thing with an overly large efund, etc....the good times are far far longer than the bad. Most people, especially doctors given our job security and high cash flow would be better off with most of these vehicles in the market. Could be short term bonds, etc...but something other than cash. Even TIPS are yielding something now.

[Wiscoblue]

I have some significant money in cash which is piling up with the rising market. What is your opinion on putting the ‘bond’ portion in a Muni money market? There’s one at Schwab which has a higher yield SWOXX than regular money market sweep SWVXX?