My 300K portfolio to retire early. Feasible?

[amenradio]

Hi, I’m someone at 33 who can’t work well and unfortunately highly sensitive to any stress, so I’m willing to live in a low cost of living place to reduce the time to work. Lucky I have a passport in east Asia. The cost of living is like Japan.

I think with a combination of stock, bond, and REITs, it’s not so difficult to get 10% yearly with max drawdown bellows 50%.

Portfolio will be something like these, (with symbols and yearly returns)

20% REITs: O 6%

20% BDC: ARCC 10%

40% Stock: QQQ 15%, SPY 12%

20% Bond: I haven’t really looked into which bond to buy, but probably treasury with cooperation bonds around 5%-8%

It’s just a rough idea to show it seems possible and the ratio can be changed. Do you guys think it feasible? That means 30k yearly cost. 2.5 k monthly cost (including rent and everything).

p.s Assuming one person only. I may accidentally get a family but I don’t want to make this estimation too complicated.

Any feedback is greatly appreciated, especially my portfolio. I know most people are overly confident in their ability to beat the market, so I thought better to ask here to ensure I don't overestimate myself and end up on the streets. Thanks

 

[mbmzldt]

@amenradio Just want to say "I may accidentally get a family" is hilarious

 

[randalthor1604]

@mbmzldt What do you mean? You've never returned home from the grocery store only to find out you accidentally picked up a family on the parking lot and now you have a family?

 

[normalguy0930]

@randalthor1604 Happended to me last Saturday! Crazy weekend

 

[fiollent]

@randalthor1604 Lots of Americans accidentally get a family in Asia.

 

[jayamashey]

@fiollent $300k US in bank? High chance of accident.

 

[iammelchizedek]

@randalthor1604 I mean, OP says they’re living in someplace like Japan. You do know FamilyMart is one of the biggest convenience stores there…

 

[jessaking]

@randalthor1604 Is that how that happens!

 

[jblavenderrose44]

@amenradio I have to admit that's the first time I've seen a post where japan was referred to as low cost of living....

 

[jblavenderrose44]

There's one consideration you need to factor into your calculation, inflation.

If 2500 is your current monthly requirement for rent and everything, assuming a 4% inflation rate (made it a bit high) ... in 10 years, you would need 3700 a month ...in 20 years 5477 a month... 40 years 12,002 a month.

Even at 3% inflation rate... the range is from 3360 to 8155 a month (10 yrs -40 yrs). This also does not factor funds for emergencies like medical,etc. Tax is also another issue that needs to be noted for increased costs.

 

[jblavenderrose44]

I'm not clear on these details, and you would need to check it out.. but remitting money into Japan from your US account...

Will likely put you in the category of 20% tax. Plus, you would likely have to pay a 4% prefecture tax and 6% municipal tax.. so about 30% will needed to be set aside each year.. so 2500 x 12 = 30,000 usd a year (after tax would be 21k)

 

[jehu22]

@jblavenderrose44 Investment returns are typically given with inflation factored in.So his "real" 10% would mean 14% when 4% inflation is happening.

I think that's where the 3-4% rule comes from as that is the historic inflation adjusted rate of return for the S&P500 since 1880.

 

[jblavenderrose44]

@jehu22 Yeah, that makes sense about the 4% rule... however, I think OP did not factor it at all... he seems to have calculated 2500 x 12 =30k ...so must have 300k to yield 10%... basically, the proftolio may work for 1 year, and even then, with his picks, he still won't get 10% this year.

 

[wes40]

@jehu22 I'm fairly sure none of this is true.

The 10% the stock market number is pre tax and pre inflation. There is nothing "real" about this figure.

Additionally, the 4% SWR from the Trinity Study was for level payouts and was also pre tax and pre inflation. Adjusting for inflation was investigated in this study as well, and it drops the "safe" SWR below 4%.

This 4% SWR is not based on how much stocks gain over time and it is not meant to ensure asset values are firmly in place such that you are "living off the gains".

Instead, this figure assumes the "worst case scenario" for actual stock market returns over the time period covered by the data. That means the study authors believe you can do level payouts 4% even if there is a bear market on day 1 of your retirement and you are already eating into your principal with early withdrawals.

I should point out that, if you just kept your money in cash with zero returns, a 4% level payouts would still get you through a 25 year retirement.

That means there is a 30 year block of time during the study period with near zero return. The returns over the stretch only bought 5 more years with the assets fully invested.

 

[jehu22]

@wes40

The 10% the stock market number is pre tax and pre inflation. There is nothing "real" about this figure.

so exactly what I said

 

[wes40]

@jehu22 I don't believe OP meant their "it's easy to get 10% blah blah blah" number as an after tax after inflation number nor do I assume that anyone else meant after tax and after inflation when they estimated 10% per year returns on diversified stock portfolios.

Especially given that the OP wants to diversify into bonds and things, I have to assume that 10% returns is pre tax pre inflation, because I don't see how any reasonable person could assume 10% CAGR on a portfolio with a bunch of bonds is an after tax after inflation figure.

It reinforces my assumption that OP is talking about limiting max drawdowns, so OP is probably not talking about buying a bunch of junk bonds. They did also mention treasuries at one point, and treasury yields haven't been 10%+ for quite a long time if I am not mistaken.

 

[annidon]

@wes40

The 10% the stock market number is pre tax and pre inflation. There is nothing "real" about this figure.

I'm not sure I'm interpreting your comment properly. If my investment idea or even an investment product had an advertised historical CAGR of 10%, then 10% is what I'm gonna use in my projection. So it's "real" as far as I'm concerned (for this experiment I'm not judging how REALISTIC 10% YoY is, I'm just using it cuz that's what OP offered up) and I'd factor in taxes, inflation and SWR elsewhere. But now I'm confused, maybe I'm wrong.

Ok so,
If I were to model this retirement plan as my own to see how feasible it was over X years, starting tmrw, in real-world with real-time actions, I'd have to convert some things to a monthly rate and keep others annual.

I feel this is crucial and can't see it being guessed on an annual basis, due to the nature of expenses being monthly, and no one withdraws their year of expenses in one day.

So this is how I would factor in the:
- 10% CAGR -->> as 0.80% CMGR
- Monthly expenses for 12mo, 2500/month, or 30k/yr
- Annual cap gains tax, let's say 20%
- Inflation rate per year 4% increase on my expenses.

Ofc these are numbers assuming everything is constant just for illustration:

Begin balance, month 1, $300K @ 0.80% Growth - $2500 for expenses = $299,892 end balance.

Begin balance month 2, $299,892 @ 0.80% growth - $2500 for expenses = $299,783 end balance.
....and so on..

I'd repeat this for 12 months. But on the 12th month I'd withdraw an extra $X on top of the $2500 to cover my 20% tax burden. And since I would be tax loss harvesting as efficiently as possible, let's say that of the $30k total draw for the year, only $20K came from realized gains, and $10k was from my principle (which is just semantics). But my tax burden would only be calculated based on my Net Profit/divys for the year, not any part of my $300k.

So 20% of $20k = $4k in taxes owed, sent to IRS.

My balance at the end of month 12, after growth, minus my $30k withdraw, minus taxes would be $294,648.

Which btw is a net draw of 1.78% (SWR. By year 2 it would be ~3.1% FYI)

Then, this is where I'd factor in inflation. I would increase my projected expenses by 4%. So $30k becomes $31.2k or a monthly expense of $2600.

Month 13, Beginning of Year 2, my starting balance is as noted above, $294,648.

And I would repeat the whole process again, and take the extra withdrawal end of the year for taxes and increase my expenses for inflation, and so on..

But I would not change my CAGR of 10% aka my CMGR of 0.8% at any point, if that's what my projection or goal is for the life of the investment account.

Ofc, my projection could be way off, but then I would dynamically try to adjust allocation, reduce expenses, whatever I had to do to make this $300k jump off work as I went along.

Because you can never know until it's in hindsight how your plan worked out. But I couldn't imagine not running the numbers this way as just a starting point, factoring in constants for CAGR, TAX, INFL, EXP etc. Then if it looked like I was cutting it close I could futz with numbers till it felt realistic.

Anyhow, sorry for the granular detail but my question is:

Have I accounted for inflation and taxes properly? (Assuming 4% and 20% were correct rates)

And is it correct that I consider my "real return" rate for this exercise as 10% CAGR? Like if my "investment product" had a historical 30 yr CAGR of 10%, I'm going to assume THAT'S the rate, and the number I'd use for a Forward projection. And deal with taxes and inflation on the back end.

Again, sorry for the length. But it's really something that isn't easy to explain and I'd appreciate any feedback or errors in my thinking pointed out. Thx

Cheers

 

[wes40]

@annidon All the times I have heard "real returns" it meant after inflation and after taxes. This 10% top line gain might be an actual gain of 4% in purchasing power. Then, if one spends 4% of the portfolio, the cash pile remaining is the same as it was before.

I would assume regular rebalancing and withdrawing pro rata from each category in the AA and not a lot of TLH going on is how most retirees are operating.

The ending portfolio value would be up but it would have embedded liabilities for inflation and tax in it.

I don't know why people can't just withdraw an entire year's worth of expenses from their portfolio in one day. I would imagine some people do that. Maybe it's less common than withdrawing as needed, but the idea seems like it might appeal to the spending envelope people.

I don't think I would try to calculate a CMGR. It seems unrealistic. The assets in an investment don't move linearly like that unless you are 100% TIPS or something.

Even if you did calculate it, it would be in hindsight with actuals. I don't know what use it would have for projections purposes.

It's strange to me to think of a 10% CAGR as a goal. There is only one asset class that regularly hits this figure (stocks) and the only way to angle toward it is by going 100% stocks, and that CAGR is very sensitive to withdrawal schedules. That would also reduce risk/reward and increase the SORR (IE portfolio implosion).

Even if statisticians calculated a 10% CAGR for the S&P, that's not factoring in regular withdrawals. With regular withdrawals, forcing one to cash out more assets in bear markets, the best case expectation for 100% stocks is well below 10% CAGR.

I don't want to say your numbers are wrong, but I have difficulty looking at the numbers from the same angle, at least.

10% is neither a safe retirement CAGR expectation nor a safe SWR expectation, so I wouldn't base any calculations on it

Eating into principal in a +10% year should be out of the question. Anyone doing that should assume that their assets will run out in 10 years.

It's simpler for me to think in terms of 3.25% SWR and make up that withdrawal amount in 12 equal withdrawal and send the IRS their cut regularly and whatever that withdrawal is on day 1 you can inflation adjust the withdraws every year after that.

 

[annidon]

@wes40 Thank you so much for your reply!

I used 10% just to keep the numbers from the OP, but yes, I too find it an unrealistic number.

However, I'm still struggling conceptually.

Let's say I used 5% CAGR instead. And the way I decided on 5% was by looking at the historical returns of Idk, 4 ETFs, and felt reasonably comfortable to project that the performance of these 4 ETFs would be that.

And I want to call this "real" as in, that's the historical return for the last 100 years, YoY of these 4 funds combined. And at this point I'm not yet thinking about "real return" as it relates to inflation and taxes. I am assuming I could factor that in later.

And finally, I convert this to a monthly return. Is the rest of my method of projection using a CMGR (of 0.41% in this case) still not a useful way of calculating this experiment out to 15 year time horizon??

The reason I am so interested in this is that I'm trying to reconcile my personal approach to this which I hope can be monthly and close enough in accuracy because I would want to have my principle exposed as long as possible to capture potential gains (and yes, willing to risk drawdowns as well).

And if I did this yearly and withdrew $30K at the top of the year to put into envelopes for each month, then that $30k is not working for me, in my 4 ETF "Personal Designed Portfolio" (lol) for 12 full months.

That feels unacceptable to me, but I'm willing of course to learn that monthly projections just aren't useful or realistic either! So pls don't hesitate to tell me where I'm flat wrong.

Also, since IRL my earned income is monthly, my expenses are monthly, my discretionary spending is pretty much monthly, it just makes more sense to me to see things monthly.

Tbh, it's the FV function in Excel. If I put in 5% as the rate, the period as 1, but yet I only want to withdraw 2500 monthly and not 30k in one shot, I don't know how to do that. I figured the input data all had to be in the same time frame. So I had no choice but to convert CAGR to CMGR.

I understand that I couldn't necessarily guarantee such a linear rate every month and that there would be more volatility in reality, but for projections which to me, are a way of "hindsight pretending", wouldn't I have to stick with a constant rate just so my 15 year experimental projection, on average would be in the ballpark and tell me how doable or not it was?

And finally, the way I factor in taxes once per year and factor in inflation by raising my expenses by 4% each year, does that work and allow me to not adjust my 5% return into a "real return" ?

Again, sorry for length! This has just been a thought experiment that has been bothering me for a long time. I very much appreciate any further input or feedback or referral to your previous comment if the same answer still applies.

Thanks!

 

[wes40]

@annidon Maybe it would be easier for me if instead of "real" you called it expected gross portfolio growth or something. This is probably just me being some kind of purist, but I understand what you mean.

If you are into min/maxing, you could probably do better with CWGR or CDGR. Could also factor in inflation similarly.

You might get a slap on the wrist from the IRS if you withdraw it all on DEC 31 rather than piecemeal.

I'm certainly not saying it's the best way to just withdraw 30k on Jan 1, but I bet there are people who do and wouldn't want to switch their plan.

The way you are accounting isn't wrong, it just has more assumptions than I am fine with. I can't argue that your math is bad for the assumptions you are making and based on the angle you approach the problem from.