On to the numbers for April 2020!

After a disastrous March, AVI family NW has improved, much in line with the rise in markets. The NW is now back to levels we reached in Oct of 2019. The key numbers are:

• Net Worth (as fraction of FI number): 57.47
• Liquid Assets/ Debt Ratio: 1.337
• Cash balance/ Two Year Living Expense: 0.88

• Net worth has bounced back >10 % from the March lows. Still, we are about -11.6 % below the all time high value of 65.05, reached on Feb 22nd 2020.
• A massive drawn down in checking account. Two reasons (a) The draw down is in relation to last month, when I had injected cash into my checking account in preparation for the tax season and insurance payments. As it turns out, tax man has moved the goal post and taxes are not due until July 15th. (b) Rather than sitting on cash, I transferred some cash into equities. I continue to see a lot of value bargains out there and am seriously struggling to put a lid on equity purchases. The only thing that is allowing me to exhibit some control is my cash balance/two year living expense rule. I want this ratio to be at-least 1.0 and at present it sits at 0.88. So, until this ratio gets back to 1.0, I will resist any further equity exposure.
• Some liquid cash from checking was moved to high-yield savings account, hence the increase of 23 % in Savings. High-Yield accounts are not offering >2% returns anymore, but still at 1.55 % (from Marcus), the yield is way better than 0 % offered by traditional banks or about 0.3 % yield offered by robo-advisers.
• Equity investments (both in non-retirement and retirement accounts) saw healthy gains for the month. Even so, the investments are down about -14 % and -16 % respectively, from the peaks reached in Feb of 2020.
• For the first time in about a year, I did not make extra payments on AVI family home mortgage. Primary reason being, desire to increase cash reserves. Until the ratio of liquid cash/Two year expense reaches 1.0, I do not foresee making any extra payments.
• Rather surprisingly, our CC expenses grew by 14 % in the past month. This was unexpected given the fact that for better part of the month all of AVI family was stuck home. As it turns out, the biggest contributor to the bump up was insurance payment, which I put on CC.

And here’s the time-chart of NW  for 2020

Musing

It was fortuitous that last week, retirement was on my mind, and the topic of podcast on Rational Reminder was FIRE. Specifically, an interview with Scott Riekens, the producer and protagonist of the documentary Playing With Fire. Scott presents a concise summary of the central philosophy behind the FIRE movement  as a rational path towards maximizing health and happiness. A key idea discussed in the podcast was the so-called 4 % rule of retirement. For the uninitiated, have a look at  thebalance.com article for a primer on the 4 % rule and also have a look at my post on the topic of FIRE.

The 4 % rule is based on the famous Trinity Study, a research paper by three Professors from Trinity University, wherein the authors investigated the success (defined as, the withdrawal rate that can be maintained before the portfolio is exhausted in a given time-period of interest) for different investment portfolios for various periods with different withdrawal rates. The authors analyzed the data from 1926 through 1995 and the table below offers a concise summary of their findings for time-period of 30 years:

While there are several observations to be drawn from above table, 4 % rule is not one of those, at-least not directly. However, it is evident that at 4 % withdrawal rate, a portfolio with 50 % in stocks has very strong chance of lasting through retirement period of 30 years. As such, this idea has caught on in the FIRE community and is peddled as a reasonable baseline to thinking about the numbers that make sense for FIRE.

Big Urn (nickname for Karsten) of EarlyRetirementNow.com has an entire blog-series on the topic of Safe Withdrawal Rates, for folks who want to dig deep into this topic.

I found the following chart from his introduction blog on the topic, quite informative as an extension to the Trinity Study findings (time period involved Feb 1st 1871 through Dec 1st 2016).

Two key findings that I want to highlight

• The success at 4 % and 5 % withdrawal rates for 30 year time-period is roughly consistent with the findings from Trinity Study. Glad to see that the findings are consistent for a much longer duration of time-intervals analyzed
• 3 % withdrawal rate seems to be ideal for any portfolio with some exposure to stocks for pretty much any realistic time-period of retirement

The key to using 3 %  number is determining ones annual cost of living, which of course depends on a number of factors and is specific to each individual/family.

For the region of the country, Pacific North West, where AVI family lives, the annual cost of living for a family of four is around $66,000 after taxes (based on data from www.expatistan.com). With 15 %  tax rate (assuming all the income is derived from qualified-dividends and long-term capital gains), and a 20 % cost for health insurance the annual cost rises to approx $90,000, which means, a portfolio size of $3 Million  (3% of $3 Million = $90,000) would be ideal for a family of four in the Pacific North West to  consider themselves ready to be FIRE.

Video/Book/Article/Audio for the Week

• Video: As mentioned above, the documentary, Playing with FIRE, is quite inspirational to thinking about system for living.
• Article: A nice read on Bershire’s hoard of cash
• Article: Paul Singer’s April letter to Eliott investors
• Pocast: Infinite Loops interview with Morgan Housel of Collaborative Funds, discussing his recent book, titled, The Pscychology of Money: Timeless lessons on wealth, greed and happiness