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Do you live off your portfolio? How?

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samwise:
Standard advice is to balance your portfolio (usually 60% stocks and 40% fixed income ) and withdraw a certain percentage (usually 4%) every year.

But people on this board pick stocks. So how should one structure their finances? Or how do you, if you are comfortable sharing.

Some non-standard planning (which worked out ) seemed to be built on high alpha assumptions. Buffett had 174k saved and 12k annual expenses when he first retired at age 26. I assume he was 100% in stocks. Of course he had been compounding at 60%, which I assume no one here is banking on. (All from page 200 in the snowball ).
https://books.google.ca/books?id=cyCB5X-Xk50C&pg=PA945&dq=buffett+retirement+snowball+26&hl=en&sa=X&ved=0ahUKEwiWz9Twu4nmAhWmV98KHevuC2QQ6AEIJjAA#v=snippet&q=Retire%20rented&f=false

The other bit of non standard advice which is very popular on SeekingAlpha, is to live off dividends. Theoretically these should be more stable than prices, so you won’t be forced to sell in a downturn to fund expenses.


Edit: how does the value investor think of this problem? Do you use look-through earnings? But they are not available for expenses unless you get dividends or sell (hopefully) appreciated stock.
Do you think you can withdraw less than 4% since you are being more risky by picking individual stocks? Or do you think you can withdraw even more since you can buy companies with 8-10% earnings yield? Is that gap between the earnings yield and the withdrawal rate the margin of safety? What about growth of earnings or portfolio versus inflation?
How does the standard advice look from a valuation framework? Does it still work when bonds yield 2%?


Thoughts from value investors?

DooDiligence:

--- Quote from: samwise on November 26, 2019, 07:55:07 PM ---Standard advice is to balance your portfolio (usually 60% stocks and 40% fixed income ) and withdraw a certain percentage (usually 4%) every year.

But people on this board pick stocks. So how should one structure their finances? Or how do you, if you are comfortable sharing.

Some non-standard planning (which worked out ) seemed to be built on high alpha assumptions. Buffett had 174k saved and 12k annual expenses when he first retired at age 26. I assume he was 100% in stocks. Of course he had been compounding at 60%, which I assume no one here is banking on. (All from page 200 in the snowball ).
https://books.google.ca/books?id=cyCB5X-Xk50C&pg=PA945&dq=buffett+retirement+snowball+26&hl=en&sa=X&ved=0ahUKEwiWz9Twu4nmAhWmV98KHevuC2QQ6AEIJjAA#v=snippet&q=Retire%20rented&f=false

The other bit of non standard advice which is very popular on SeekingAlpha, is to live off dividends. Theoretically these should be more stable than prices, so you won’t be forced to sell in a downturn to fund expenses.


Thoughts?

--- End quote ---

I've been dealing with this for nearly 3 years now.

I deduct a years worth of recurring expenses + misc from QuickBooks checking.
When the balance turns red, I add cash.

I like having cash & no debt.
I'm inefficient like that.

Trying to think in terms of when I'll need to sell what.

I'm a mix of equity / home & cash.

---

I plan on working again after graduation & intend to use a small chunk
for travel & home improvements.

---

edit: I may AirBnB my place to do some travel.
I think that if you own a great piece of real estate,
you can AirBnB & minimize draw downs significantly.

writser:
I think the optimal solution depends on a lot of variables. Your life expectancy, your tax regime, your health care regime, your family situation (do you have kids, do you have a partner, does he/she have a job), your mortgage, etc. I would personally not feel comfortable with a withdrawal rate larger than ~3% to ~4%. I think more would be asking for trouble in some negative scenarios. Especially in the US where there might be some health care tail risks to consider as well (?), which you'd have to have a good think about.

Apart from that I'd say keep it very simple. Have a savings account with at least one year worth of living expenses. Top up the savings account every now and then and you're good to go. I'd advise not to go overboard with leverage and concentration in your portfolio. When you are young and have a career the majority of your 'personal capital' is probably in your future paychecks and having a high-risk, high-reward portfolio is fine or even desirable in the grand scheme of things. But when you are retired your portfolio is basically all you have so I'd be much more conservative, as there is no way to recover when you go broke.

I feel that any specific advice is basically useless because the answer would be totally different depending on, for example, if you are 1) a single 30-year old Finland resident who hit the jackpot with cryptocurrencies or 2) a 70 year-old couple living in the US with a disabled kid. It also depends on your wealth: if you have $20m you can afford to (and probably should) take some risk. If you have $3m you should be a bit more careful, because losing 75% would be terrible while the difference between gaining 100% or 150% over the next decade is probably not very meaningful for the way you live your life.

scorpioncapital:
https://www.trustnet.com/news/7460768/how-you-could-have-drawn-10-a-year-without-shrinking-your-initial-investment

Alot depends on where you live, and the returns on your investments. Where you live can make a drawdown difference. In a big capital in Eastern Europe you can rent an apartment , brand new furnished for maybe $300-$400 usd a month. In USA/Canada in center this would cost maybe $1500 to $2000 all in. That's a pretty big difference. Add in Uber rides for say $2 euro vs $10 euro in NA and things add up quick, etc..
But this is probably only a small factor. After all, even if the incremental difference was $5k a year it probably isn't the major issue.

Return on investment is the key factor. That article says US market and small caps - at least right now...but it doesn't even consider intelligent equity selection.

The younger you start the better of course as time is a key ingredient. If you start later, I think you either a) need a part-time job - say like a digital nomad perhaps? or b) extreme focus and attention on opportunity, investment, and business selection/ownership/startup. B) could be risky and you can go the wrong way but if you want to live off investments you need a combination of A+B I think.

Cigarbutt:

--- Quote from: writser on November 27, 2019, 12:23:28 AM ---I think the optimal solution depends on a lot of variables. Your life expectancy, your tax regime, your health care regime, your family situation (do you have kids, do you have a partner, does he/she have a job), your mortgage, etc. I would personally not feel comfortable with a withdrawal rate larger than ~3% to ~4%. I think more would be asking for trouble in some negative scenarios. Especially in the US where there might be some health care tail risks to consider as well (?), which you'd have to have a good think about.

Apart from that I'd say keep it very simple. Have a savings account with at least one year worth of living expenses. Top up the savings account every now and then and you're good to go. I'd advise not to go overboard with leverage and concentration in your portfolio. When you are young and have a career the majority of your 'personal capital' is probably in your future paychecks and having a high-risk, high-reward portfolio is fine or even desirable in the grand scheme of things. But when you are retired your portfolio is basically all you have so I'd be much more conservative, as there is no way to recover when you go broke.

I feel that any specific advice is basically useless because the answer would be totally different depending on, for example, if you are 1) a single 30-year old Finland resident who hit the jackpot with cryptocurrencies or 2) a 70 year-old couple living in the US with a disabled kid. It also depends on your wealth: if you have $20m you can afford to (and probably should) take some risk. If you have $3m you should be a bit more careful, because losing 75% would be terrible while the difference between gaining 100% or 150% over the next decade is probably not very meaningful for the way you live your life.

--- End quote ---
1+   
Not much further to add.
If living in the US, you may want to decompose the healthcare risk into basic healthcare costs and long-term care (nursing home). It is a morbid topic but people vastly underestimate the odds and duration of long-term costs and tend to vastly underestimate their 'share' of the cost. And the cost environment (safety net aspect, productivity issues in nursing homes) is unlikely to change for the better. Also, if you are part of the group 'planning' to live off your portfolio, you are likely to be part of the group who will be deemed to be self-sufficient. It may be worthwhile to see how much it would cost per year and use the 3-4% rule to have an idea for the put-aside funds necessary only for that purpose.
So make sure you can enjoy life today and tomorrow. :)

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