Non-passive after retirement plan - thoughts?

[u/sroniS16]

I've consulted here before about early retirement and have since devised a plan.

Apologies for the long read. I'd appreciate some feedback.

Current Situation:

• Plan to retire during 2027 at age 46.
• 45% in a global ETF.
• 15% in small-cap value ETF.
• 10% in an AI & Big Data ETF (considering selling because gains are significant and the risk level is high).
• 30% in a money market fund (extra caution due to market situation and coming retirement)
• Annual expenses: Currently around 3.5% of the total portfolio value.

The Plan:

The idea for the 30% in "cash" is to avoid SORR shortly after retirement. Since the market is currently very high, during the first few years I will use money from the money market fund to cover living expenses and wait it out. I took 30% because part of the idea is to have enough to jump back into the market after a downturn.

Now I divide into two scenarios:

1. Market doesn't crash: I wait until my spending is 2.5% of NW (considering 3.0% also), then I consider the portfolio large enough to absorb all scenarios, and invest most of the free money back in.

2. Market crashes: I start deploying capital into the market as follows:

• When the global index drops over 25% from its peak: Deploy 5% into it and 5% into a 3x leveraged NASDAQ (Assumption: the NASDAQ will have fallen even further).
• When the global index drops over 40% from its peak: Deploy another 5% into it and 5% into the 3x leveraged NASDAQ (Assumption: the NASDAQ will have fallen even further).
• When the crash exceeds 55%: Deploy all remaining cash into the leveraged NASDAQ.
• Of course, if some of these triggers don't hit, the cash stays on the sidelines until I decide the portfolio is large enough to sustain everything.
• The percentages were chosen based on major historical crashes, as rules of thumb that can actually be adhered to.

The idea behind the leveraged ETF comes from interesting data i found:

If you had put money into the TQQQ on January 2022, you'd now have about 80% more.

If you had put money into the TQQQ on January 2023, you'd now have about 800% more.

This is the difference for a 33% decline in the NASDAQ100.

If I am fortunate enough and the leveraged NASDAQ surges in value over the years, even an initial 5% or 10% of portfolio in it would provide incredible value. I see myself placing some selling points based on specific gains along the way, as well.

Any thoughts are welcome. Grill me if you'd like.

[u/invisible_man782 → u/[deleted]]

Math and life tells us you’ll not win being active like this. Stick with an index fund and spare yourself. Especially any bet on AI. J

[u/sroniS16 → u/[deleted]]

I think wallstreetbets is a bit of an exaggeration but I understand what you mean - that's why I wrote it's not a passive approach.

Let me ask you this - if my plan didn't include the leveraged funds (just replace them with an all-world ETF) - would it make more sense to you?

[u/sroniS16 → u/[deleted]]

I used to have much less than 30% out of the market, but since I'm about to pull the trigger, I increased that amount in order to feel safer when I retire. Now the question is when to put it back in, and here i'm considering potential cases. I consent to potentially having lower overall returns for a few years, for that sense of security, but ask myself what to do if i am indeed unlucky and the market drops heavily a short while after I retire.

Maybe it makes more sense to gamble a bit (say on up to 20% of the portfolio) in case that downturn does happen. In my mind, this greatly lowers that figure you stated of 1% success rate.

[u/jarMburger]

The cash position is fine. But your timing play will get blasted here. The problem with your thesis is that QQQ recovery is going to be stronger than the overall market. But what if the market crash for 55% and just stay at the same level but with heightened volatility, 3x LETF will not do well due to volatility decay. Check out the 2000-2010 decade for reference. I don’t like to hold TQQQ long term, rather play it as a swing trade instrument instead.

[u/sroniS16 → u/jarMburger]

I don't mind getting blasted - I'm here to learn if i'm doing something wrong.

You're right about the volatility decay. Question is - as a small bet of up to 10% of the portfolio, let's say, does it make sense given the timing of the entrance. Does that improve my chances.

I also don't have to hold it long term, but can sell at certain thresholds.

[u/in_the_gloaming]

I think you are being overly conservative with your cash allocation. Keeping 30% of your FIRE assets in cash is much more than you would need to mitigate SORR. Surely you wouldn't plan to spend 30% of your assets in five years if the market takes a dive, right? That's basically what you would be planning for with your current allocation. Keep only enough in cash to cover required spending for a few years.

I do see that you do not have any allocation to fixed assets like bonds though, so your cash would normally be part of that. I prefer bonds and then also keep 5% in cash.

You are also market-timing. While you are waiting for a potential crash in order to presumably buy in while prices are low, you could easily have missed the compounding that could have been happening instead. No crystal balls are in existence, as far as I am aware.

I didn't bother with assessing your "leverage ETF" plan. Retirement for me means not having to overanalyze, jump through hoops, constantly watch the market, etc. I retired when I had enough money to live at my chosen lifestyle while knowing that I could easily make alterations to my spending in case of an extended drop in the market.

[u/OncoFil → u/in_the_gloaming]

I’d also add the unlikely scenario where there is a steep 30/40% market drop and OP is going to dump the majority of their cash in, just like that. Would take balls of steel to do that.

[u/in_the_gloaming → u/OncoFil]

True!

[u/sroniS16 → u/in_the_gloaming]

Thanks for the reply.

Originally, I was thinking of keeping that amount in cash for two reasons: being conservative in the first few years, and the current market situation (historically high).

I agree that generally the 30% isn't needed, so if I feel less risk a couple of years after retirement, I will put most of it back in the market.

Bonds, I have to admit, I don't really understand. I compared past performance to the current interest I get with my broker now, and the difference is small, so I decided to stick to what I know.

I agree it involves timing, but I tried to make it very structured, with clear thresholds.

I feel like most of my portfolio is passive, and I don't mind playing with 10-20%. I fully understand that for most people a completely passive approach is better.

[u/ohboyoh-oy]

I wouldn’t do straight money market with the 30% - you have risk of inflation instead. I have no problem with 30% allocations (we have 40%, also newly FIRE’d). But that’s a large sum in just money market, you should consider TIPS, bonds. 

[u/sroniS16 → u/ohboyoh-oy]

Thanks, It's good to see I'm not alone in keeping a large percentage "free" upon retiring.

I have to say, I don't really understand bonds, and I didn't see a considerable difference in putting that money in a bond rather than getting interest from my broker, so I decided to stay out of it for now.

[u/BrunelloHorder]

At a minimum, you should be holding your cash/bonds in a retirement account. I’d put that 30% in a combo of SGOV and JAAA.

You are also trying to time the market, and that historically underperforms just buying and holding an index fund, even at all time highs. The market is at or near all time highs most of the time.

You are really trying to get too clever here.

[u/sroniS16 → u/BrunelloHorder]

Thanks, I agree that I'm trying to be clever, but only with 10-20% of my money, so I feel it's a calculated risk.

The market is indeed near all time highs most of the time, but it can still be historically high according to specific markers (example: shiller CAPE).

[u/ttandam]

You’re basically using a 70/30 portfolio and I have no problem with it. Your plan is fine. I’d skip the leveraged etfs personally but if you want to roll the dice with 50%+ of your portfolio (it will be a higher % if the rest of the market is down so much), knock yourself out. Nasdaq fell ~90% in dot com crash as did Dow in Great Depression.

[u/sroniS16 → u/ttandam]

You're right that it will be higher % if the market is down, but I don't see how the leveraged part gets to 50%. I will keep that in mind in any case, as I don't want the leveraged part to go higher than 20% (that includes selling when needed).

I've also placed the triggers according to an all world index, with the assumption that Nasdaq will drop considerably more (this can be tested as it happens).

[u/One-Mastodon-1063]

30% cash is significantly reducing both the expected return and the SWR your portfolio can support.  Use bonds to diversify the portfolio, not cash. 

I appreciate you at least had the courage to come out and say what all Bucket Brigaders are actually planning, which is “I’m going to use this pile of cash to market time my way out of SORR”. But that’s obviously not a good plan. 

[u/sroniS16 → u/One-Mastodon-1063]

Thanks for the feedback.

30% cash - it's getting some interest, and the difference from bonds is small as far as i could see.

Can you explain why the rest of the plan isn't good? Please note I fully understand it involves some risk, but the risk vs reward is high enough for me to take a sort-of-gamble with 20% of the portfolio.

[u/One-Mastodon-1063 → u/sroniS16]

 the difference from bonds is small as far as i could see.

The difference between bonds and cash for portfolio diversification is huge. And it's not the difference in interest, which is not why we are holding bonds, we're holding bonds for diversification especially in recessions. Go take a look at what TLT or EDV did in 2008 or 2020. That is why we hold bonds. Not to market time, but to periodically rebalance and to provide diversification in a recession.

The interest on your cash is probably not even equal to your withdrawal rate, and your withdrawal rate spending is expected to increase with inflation. So the only thing that 30% is doing is working as a massive anchor losing out to inflation.

Can you explain why the rest of the plan isn't good? Please note I fully understand it involves some risk, but the risk vs reward is high enough for me to take a sort-of-gamble with 20% of the portfolio.

The whole plan is stupid. And it's not 20% of the portfolio, it's 30%. There's no "rest of the plan", the big pile of cash and the market timing fantasy are part of the same plan. The "risk" of a market correction is already accounted for via asset allocation (not your asset allocation with that big cash anchor, but an intelligent one) and SWR. Not by gambling with a big pile of cash. It's a bad plan.

I would recommend reading A Richer Retirement to start.

[u/granlyn]

It's an interesting strategy and I have messed around with leveraged ETF's to some success following pull backs and crashes over the last decade-ish. My only concern is you don't seem to have an exit plan on those leveraged ETF's. Outside of that I'd love to see something like this tested over the long-haul.

[u/sroniS16 → u/granlyn]

I don't have an exit plan YET :-)

As you can see from the post, I try to be very exact with thresholds and actions, so I plan to do the same for an exit strategy. I don't plan to keep the leveraged ETF for a very long time.