FIRE is an acronym for Financial Independence Retire Early, and of course it’s all the rage these days. Good luck to everyone on this front. Those old enough will remember those Freedom 55 commercials from London Life. It was a very successful ad campaign in which the current stressed out ‘worker you’ was transported into the future to meet the ‘retired you’ at age 55. The future guys and gals were living the good life. Have a look at this classic commercial.
This might have been the precursor to the current FIRE movement. Problem is, that Freedom 55 stuff went up in smoke. In reality that retire at 55 dream just did not pan out for many London Life clients. The company mostly could not deliver on its promise. Certainly I’d think the high fees would have more than got in the way – dream killers are those high fees. As per those Questrade commercials if anyone did reach Freedom 55 it was likely the salespersons and executives at London Life.
Here’s a Globe and Mail article from 2012 on the death of that campaign and promise. From that article …
A survey by Ipsos Reid, conducted for Sun Life Financial of Canada and released last year, indicated that Canadians have not seen age 55 as a realistic retirement benchmark for some time, and that the age they feel it will be possible to retire is drawing further away. In the first year the research was conducted, in 2008, 51 per cent of Canadian workers surveyed over the age of 30 said they “expected to be fully retired, not working for money,” by age 66. In 2010, the number of respondents who had that expectation was nearly cut in half: only 28 per cent expected to attain “freedom” at 66.
Will the current FIRE movement also go up in smoke?
That question was addressed in a great post on milliondollarjourney, here’s The Biggest Risk of Super Early Retirement (FIRE) – Sequence of Returns.
That post shows tables for a few scenarios and demonstrates how a few bad years of stock market returns, early in the retirement stage, can knock the stuffing out of those early retirement dreams. A summary of one scenario that starts with a negative year for stocks …
Notice that a $1M equity portfolio would have dropped to $650,000, then another $40,000 withdrawn to fund retirement. Even with a healthy 6% return that follows annually, it’s not enough to recover from the damage. This portfolio would have run out of money by year 25.
So, if one had embraced FIRE at age 40 that ambitious early retiree would have been sent back to work by 65 (ironically just as many begin with that conservative retirement start date). But never mind age 40, many are planning to retire in their 30’s and even early 30’s. They’ve certainly taken that Freedom 55 and bested it by a decade or two.
That milliondollarjourney post goes on to show how a balanced portfolio can increase the odds of portfolio success. That said the success rates are not all that inspiring. Of course the longer you are in retirement the greater the failure rates of portfolios for the traditional 4% rule spending rates.
Bucketing your monies.
One can also take a bucketing approach for assets that would include a cash bucket. With a cash bucket that might cover one or two years of retirement needs a retiree might not need to raid the stock portfolio during a year or two of negative stock market returns.
Another way to address the sequence or returns risk is to simply de-risk; to largely remove the stock market risk. Sell those risky stocks. This week in a guest post for Boomer and Echo I offered Retirees Can Sell Most of Their Stocks As They Approach Retirement.
Living off of the portfolio income.
Another strategy that can eliminate or reduce the risk is to live off of the portfolio income. There is no plan to sell any of the stock and bond assets, but to live off of the dividends and other income sources. If there is no plan to sell stocks there is hypothetically no sequence of returns risk, that retiree is not selling stocks into a down market. That approach would trade stock market price risk for dividend health or ‘safety’ risk. Of course dividends can get cut or reduced or held steady. And while this may be a more cautious approach in retirement one potential downfall is that it will leave a lot of money on the table, trapped in those share prices. When the time comes I would guess that many of these investors will see that value and the potential to harvest shares to create additional income.
The popular living off of the dividends approach is embraced by Mark Seed of myownadvisor. Here’s a post for Mark and his wife’s Financial Freedom Target at age 50.
There are several Canadian bloggers that offer a look under the hood, that allow us to track their success. They use the dividend approach in the accumulation stage with the plan to harvest the dividends in retirement.
Rob from passivecanadianincome recently posted his June Dividend Update.
We can see that impressive dividend growth trend.
And here’s a June dividend update from Jordan Maas at moneymaaster.
Other reads for the week.
On findependencehub Steve Lawrie looks at how much you might need for retirement.
Rob Carrick asks if it’s better to buy or lease a car? I take great interest in that article as
I had had enough of our two older cars that had me at wit’s end with car repairs. We traded perpetual trips to the garage for a perpetual lease strategy. I had discussed that in this post.
Many of my readers are heading that way and report a very positive experience.
And in attempt to get back to the top of the rankings, and more importantly deliver a better customer experience, BMO is revamping InvesorLine.
And Wealthsimple shakes things up with free trades for stocks and ETFs with Wealthsimple trade.
Robb Engen offers weekend reads and this report from Ireland.
For many great reads and points of discussion here is the weekend reads from myownadvisor.
And lastly, on Seeking Alpha I offered The More ‘Complete’ US and International Stock and REIT Portfolio.
Enjoy the reads. Have a great weekend.