FIRE - Psychology of investment once retired

[Gan020]

I thought I would share a few thoughts of my experience. I hope someone might find this helpful.

My conclusion is that portfolio management once retired has proved to be far harder than I anticipated. Like many people as I’ve got older I’ve become more and more risk adverse and worry more, mostly about stuff I really don’t need to worry about. What I’d really like interest rates to go up so I can buy an annuity with say half my pot and not have to think about the stock market but that’s clearly not going to happen. Read on…

Some background first. I FIRE’d 3 years ago at the age of 50, not that I’d even heard of FIRE then, but I fit the profile reasonably well. I spent my working life spending less than I was earning and the stock market was very good to me. This part of FIRE I found easy to implement. I didn’t have a target age to retire. I just kept putting money away and knew at some point my retirement date would arrive, in the end far sooner than I expected mostly because the very generous Chancellor has allowed me to ISA away 2x£20k a year increasing my disposable income and my tax has reduced.

Now the more challenging part at least for me. The management of my pot, which at the age of 50 was going to have to last me a very long time. At all times I hold about 2 years of cash (meaning cash, a few 1 year and 2 year building society bonds). Not because I subscribe to this as capital management or to defray selling into a falling market but you never know when an opportunity might arise or you might want to indulge in something expensive.

3 years ago at my retirement point, my portfolio was 100% in equities, which was fine at that time as if my investments turned down I could work a couple more years. However, with no income from employment coming in I knew I wanted to shift the balance more towards bonds, so I could sleep easier. Up until last week I had moved my portfolio to 8% in bonds and another 4% in bond funds.
I had wanted to move far more into bonds but anything fixed income looked overpriced to me so I largely stayed in equities, despite having that feeling in the pit of my stomach day after day that I should be doing more about it. The challenge was no matter how hard I looked everything fixed income it continued to look overpriced. I was targeting not lower than 4.75% from my bonds which does not seem unreasonable given that over most of this time you could get somewhere around 2.5-3.0% on a 5 year building society bond.

The recent market down-turn has clarified in my own mind what I knew all along is that I was running too much risk for my own mindset. It’s been brought home to me that I’m happy to accept a far lower return, because psychologically I am not able to manage very large moves in my portfolio value. I always look at the downside rather than upside and what is the maximum level of loss I’m able to incur.
As of now my portfolio is 11% in bonds, 18% in cash and the rest in equities (not forgetting I’ve got 2 years cash as well). Regrettably although it looks like my bond percentage has gone up it hasn’t, it’s more that my portfolio value has fallen. I’ve sold my bond funds too as I think the credit risk in them isn’t being priced in by the market.

The next chapter begins, which is the timing of the investment of the 18% cash. For the first time in a very long time, psychologically I’m in a good place. I’m happy enough my equity investments will be ok long term as I’ve sold the stocks where I didn’t have a high level of conviction. I don’t like the look of the bond markets at all and am happy to leave it as cash for a year or two if necessary. I might be right and I might be wrong but I’d like to see how things pan out over the next few months before I make any significant investment decisions with the bond element of my portfolio.

[richfool]

I also find with time on my hands I tinker too much, even buying something and then later selling, or vica versa, because of a change of thinking. I have a new (financial) year's resolution not to touch and allow a max of one trade per month or even per quarter if I can manage it.

I have been moving more and more into IT's with the intention of reducing risk and the need to follow my holdings.

[dealtn]

What I’d really like interest rates to go up ... However, with no income from employment coming in I knew I wanted to shift the balance more towards bonds...

Not sure I would want to be buying bonds and hoping interest rates go up.

[Dod101]

I retired at 53 and have a small number of bond funds amounting to about 7.5% or so of my assets. I also have about 3 years expenditure in cash but that is more asset allocation than anything else. I have never in the last 20 odd years since I retired come near to thinking that I would need to call on it. I do not count that cash as part of my investment portfolio. I remain fully invested otherwise at all times. I have no pension and live entirely off my dividends.

Over the course of last week my entire portfolio dropped by around 7.5% but that only took it back to where it was in October 2019 so I have been unfazed by that. It was not more because I think I am fairly conservative in my investments and the bond funds and some of my investments did not move much.

I would say relax and let time do its work. The stockmarket does not go up all the time but over a longish period it does. In fact having spent a lot of money and capital over the time since my retirement I am much better off today than I have ever been.

I can understand the feeling of no new money coming into the enterprise (which is you) but give time a chance to work and I would not at your stage do other than remain mostly in equities. I actually started off mostly in ITs having made a few expensive mistakes early on with individual shares and they give an instant diversification. I am mostly into income shares, including ITs but have some growth shares as well which, if all is going well, I will top slice and buy more income shares.

The market seems to decided it went a bit overboard last week and is recovering a bit today. It tends to over react like that.

Good luck.

Dod

[Gerry557]

Congratulations on being FIRE'd

Markets rise and fall and there are often corrections and recessions along the road.

Not sure if you have watched the market fall and then sold to reduce risk and if you sold at a loss. Any selling will also have a knock on effect with your income.

Are/were you in a position of needing the full amount of your dividends to live on. If not could you keep adding more income shares over time?

A correction seems to be the time to be adding a few more to up the income going forward rather than selling. Strangely most markets recover eventually. I read an article, cant remember where, about the worst investor who bought at the high of a few of the peaks just before market corrections/recessions. Over time with divi reinvestment he still did quite well over time.

The income tends to remain a lot steadier than the share prices and "buy low, sell high" should be remembered. The sell doesn't have to be all the shares just collecting the dividends in cash is effectively selling a percentage. Put some of this in your reservoir to top up on the next market fall.

Markets rising a bit now there seems to be a planned and coordinated response. Feb and Aug seem to have dips and Xmas and May peaks. Try and time accordingly or get off the internet and let your investments just do their thing in ignorant bliss.

My spreadsheet that was all red the other day is now all green today, possibly a lighter shade green but I did add some more income shares last week so its either capital or dividend increases going forward. I had been holding back hoping for such an event.

[JohnB]

I think you need to be Bullish and heavily in equities in your 50s, because you need their heavy lifting and have time for the marker to recover from corrections. I don't believe in market timing, so I buy each quarter with excess dividends, and sell each March to get money for ISA transfers and gifts to relatives (and diffuse capital gains). You get different outcomes each time, but I certainly don't want to spend my time poring over market valuations or pick shares, as I'm no gambler.

So I'm in fully in index trackers, apart from a civil service pension, and my huge mistake of p2p. My cash buffer is minimal.

[Dod101]

I don't think that the OP has said whether or not he has a pension, but I agree with much of what JohnB has said except for the no cash buffer. Of course he can afford that because he has the so called 'gold plated' civil service pension but if you do not have that as a base, some cash buffer is desirable although as I have said, I have never used mine and do not expect to at my stage of life.

There are a number of general bits of advice that apply to most people but a lot depends on individual circumstances. I often wonder what all you planners and spread sheet addicts would have done in my position. I am not really much of a planner and do not have detailed spread sheets. What I did do when I was given early retirement at about three months' notice was took advice about asset allocation and found that to be invaluable, but apart from that I just got on with things as best I could. It took the tech bubble in 2000 to let me settle down my investment pattern and that was after 6 years of retirement and some rather expensive trial and error.

Dod

[JohnB]

Not sure why I'd think that a small regular income from 60 would affect my investment choices at 51. Like many people I was only in public service for a fraction of my career, and certainly not the best paid part.

And I never understand with cash buffers, how much do you allow them to change, down to 1 year, up to 3?. If you keep them at 2 years, then you are still selling with the market.

[kempiejon]

Not sure why I'd think that a small regular income from 60 would affect my investment choices at 51. Like many people I was only in public service for a fraction of my career, and certainly not the best paid part.

And I never understand with cash buffers, how much do you allow them to change, down to 1 year, up to 3?. If you keep them at 2 years, then you are still selling with the market.

Here's my understanding of a cash buffer. Say I would plan to live on my investment income, when the natural yield offers a cash level I wanted - say expected annual expenses with 15% excess. With 3 years of expenses in the cash buffer, and my only income the yield I'd spend the cash buffer in years that the dividend income didn't meet my set level hoping to see a return to higher income levels before the cash buffer was spent. During any down turn in dividend income I'd look to re-position the portfolio if necessary to regain the required income or find work or reduce my spending or probably a blend of those three. In good times I'd buy either more income producing assets or buffer and so increase my safety above my needed amount.

[Gan020]

It might be helpful to add context and reply to a few points

I have no pension other than my SIPP and am 3 years short of a full pension from the state. My wife is about 5 years short and her income is less than £2k a year. We still support 2 children for another few years until they finish University. Many of the posters on Lemon Fool who have retired early have defined benefit pensions which I think places a completely different psychology on retiring early. If you know you are going to get a certain amount of money every year regardless of the stock market, risk has already been mitigated and it’s more about bridging a gap until that defined benefit pension kicks in. Thus my comment about wishing interest rates would go up so I could buy an annuity with half my pot. Regrettably, it’s a pipe dream. I can wish all I want but interest rates seem unlikely to rise in any meaningful manner in the near future.

Dod kindly offered the information that his portfolio is down 7.5% since October due to the conservative nature of his portfolio and that would be the kind of risk I find palatable and enable me to sleep at night. My portfolio was up 36% last year and is down 14% YTD which tells a story about my portfolio and why I needed to act.

Buying bonds for me is about risk management i.e. building a base which provides the equivalent of a defined benefit pension. Whether this is the optimal financial strategy doesn’t really concern me. What concerns me is attaining a certain level of return even in a long term bear market even if this means forgoing long term better outcomes. And what I’ve found is it’s a lot harder to do than say (or write). Execution risk I think they call it.

[Dod101]

And I never understand with cash buffers, how much do you allow them to change, down to 1 year, up to 3?. If you keep them at 2 years, then you are still selling with the market.

My cash is in Index Linked N S & I certs and I extract some now and again when I want to change my car. Apart from that I just let it roll up and currently it is just over three years of my normal expenditure. It may increase or it may not because I have grandchildren coming up to age 21 when I will want to mark the occasion with something a bit more than a normal birthday. That seems to me to be the main benefit; the ability to find cash if you need it for whatever reason, without having to sell anything, unless you call cashing in an index linker a sale.

Sorry Gan020, what I said was that my portfolio dropped 7.5% last week and that took it back to its level in October 2019. In other words, I lost the gains made since October 2019 last week.

Dod

[Urbandreamer]

[Sorry Gan020, what I said was that my portfolio dropped 7.5% last week and that took it back to its level in October 2019. In other words, I lost the gains made since October 2019 last week.

Dod

Indeed. I would be hard pressed to say how much I lost last week on a YTD basis. This is because I work April to April. You may have a different year end. Last week I was down to a 2% loss since April, down 8% on the week, or as you say the same level as in October.

Re spreadsheets, I find them bloody useful. Sure my spreadsheet that attempts to predict my pension or pension cover suffers from the fact that, as Mark Twain said, predictions are difficult. My spreadsheet showing what I spent money on and how much I spent last year is however fact. It's a great starting point for estimating my income requirements when I cease earning.

Re Knowing that you get a certain amount regardless of the stock market, I believe that Dod here is an example of the someone who doesn't get that via state pension. Most currently saving into DC scheme's (ie SIPP's) are likely to get the state pension as well. Currently £8.5kpa if you pay NI class 1 or 2 for 30 years (or receive credit for child care etc). Will you be entitled to this when you retire Gan020?

[Dod101]

I do not need to acknowledge that I track my expenses via an Excel spreadsheet. I had forgotten that. They do not vary very much though from year to year although I am surprised how much they vary month to month.

I also of course track my dividend income and analyse it via a pivot table so I suppose come to think of it I do use spreadsheets, just like most other people.

Dod

[JohnW]

I had wanted to move far more into bonds but anything fixed income looked overpriced to me

What concerns me is attaining a certain level of return even in a long term bear market even if this means forgoing long term better outcomes

I was targeting not lower than 4.75% from my bonds

Those past tense verbs suggests my thinking aligns with yours. Truth is, the market has decided bond yields are low now making annuities expensive, and there's nothing we can do about it other than cut our spending, earn more personal exertion income, or take more risk (which you've indicated you won't do).
If you're too 'nervy' about your equity values declining, what about using some of your assets to build a non-rolling bond ladder with inflation linked Treasuries which will give you an almost guaranteed cost of living adjusted income for as many years as you want to buy. That'll help you sleep at night. The 'return' on those bonds won't be great, but we've already agreed we have to accept market rates whatever they are. And if bonds seem expensive because of low interest rates, hasn't this pushed up equity prices also?
As useful as cash is at this low inflation time, in the long term even modest inflation damages cash holdings.

[thebarns]

I retired two years ago at 52.

I have no final salary pension, all of my savings are SIPP/Isas/VCTs/cash.

My two in laws have very significant final salary pensions, albeit they have been retired for quite a long time now - they are, with respect, utterly clueless about finance but do not need to be with the amount of money coming in from index linked pensions - a couple of fairly senior teachers.

I think there is a very significant psychological difference in managing your investments when they are all you have versus having final salary pensions to fall back on.

To help me sleep at night - and it doesn’t always work ! - I have around 4-5 years of annual expenditure in cash/premium bonds - I missed out on NS&I Linkers else I would have used them. I don’t much care about the inflation aspect in relation to the cash as we have a mortgage free family house that could be downsized down the line, plus the state pension should kick in later. Also I am still paying school fees and University expenses that will also fall off in due course once the two children grow up, which more than compensates for any inflation impact on the cash reserves.

Aside from the cash reserves my investments are invested with asset allocations in mind, so some shares and some other stuff including bonds, reits, infrastructure etc.

I think as more of my generation come through, the issue may well be growing a pot that is large enough to generate a safe income, which includes the portfolio dampening down income impact of very low yielding bonds and low yielding growth shares/iTs/trackers/gold.

A safeish portfolio with appropriate chunks of all assets may not yield much more than 2%, whereas the majority of people, without final salary pensions, may need 4-6% plus yield to give them a desired level of income and thus be forced into high levels of high yielding equity proportions in their overall pots - I think your average layman will look at yield, not really get the total return aspect of a balanced portfolio, and be fairly incapable of deciding what and when to sell when looking to draw down on the pot.

These decisions are not easy, especially with a limited pot, and without the security of a final salary pension to fall back on. But this is what is coming down the road for most.

It is a different world to getting 5-6% off cash investments and a final salary pension.

[JohnW]

The stockmarket does not go up all the time but over a longish period it does

Indeed, but it's why some choose a broad diversification.
https://evergreensmallbusiness.com/rate ... ne-charts/

Have a look at France's stock market for the 65 years just ended; if this graph's right, there was no real (after inflation) increase in stock prices for six decades. Someone said the market can stay irrational longer than you can stay solvent.

[Dod101]

The stockmarket does not go up all the time but over a longish period it does

Indeed, but it's why some choose a broad diversification.
https://evergreensmallbusiness.com/rate ... ne-charts/

Have a look at France's stock market for the 65 years just ended; if this graph's right, there was no real (after inflation) increase in stock prices for six decades. Someone said the market can stay irrational longer than you can stay solvent.

I am not sure that studying such an academic thesis will do much for the average investor. It is experience in the real world that matters I have made my case for equities and if some feel uncomfortable with it then they will have to do something else but it has worked for me and I expect it to continue to do so, It has not made me rich but it has given me a very comfortable lifestyle, with of course occasional concerns, such as during the financial storm of 2008/9 which I came through without resorting to any reserves I may say.

Dod

[Wuffle]

Many on TLF have passed through this stage, but I bet plenty around the OP's age are heavily 'invested' in a parents property and are crossing fingers that they avoid a drawn out final stage.
I am and it is pretty common.
Final salary pension is another world of certainty.
W.

[77ss]

It might be helpful to add context and reply to a few points

I have no pension other than my SIPP and am 3 years short of a full pension from the state. My wife is about 5 years short and her income is less than £2k a year. We still support 2 children for another few years until they finish University. Many of the posters on Lemon Fool who have retired early have defined benefit pensions which I think places a completely different psychology on retiring early. If you know you are going to get a certain amount of money every year regardless of the stock market, risk has already been mitigated and it’s more about bridging a gap until that defined benefit pension kicks in. Thus my comment about wishing interest rates would go up so I could buy an annuity with half my pot. Regrettably, it’s a pipe dream. I can wish all I want but interest rates seem unlikely to rise in any meaningful manner in the near future.

Dod kindly offered the information that his portfolio is down 7.5% since October due to the conservative nature of his portfolio and that would be the kind of risk I find palatable and enable me to sleep at night. My portfolio was up 36% last year and is down 14% YTD which tells a story about my portfolio and why I needed to act.

Buying bonds for me is about risk management i.e. building a base which provides the equivalent of a defined benefit pension. Whether this is the optimal financial strategy doesn’t really concern me. What concerns me is attaining a certain level of return even in a long term bear market even if this means forgoing long term better outcomes. And what I’ve found is it’s a lot harder to do than say (or write). Execution risk I think they call it.

So much depends upon ones personal circumstances. Dependants, pensions etc. What is right for one doesn't necessarily work for all.

It looks to me as thought your portfolio is a bit volatile, which explains your concern. My 2019 return was 28% and I am only down 9% YTD. You talk about bonds, but have you looked into Investment Trusts? I am now about 34% in ITs, no bonds and 1% in cash (my DB pension helps here) with the rest in individual equities.

I started the move into ITs abut 10 years ago and it has served me well. Less volatile (up and down) than my equities and no disasters. Helps me sleep at night. Less certainty than bonds, but a viable half-way house perhaps. A number of ITs have huge unbroken records of uncut/rising dividends going back 30 years or more. For a list of those that have raised their dividend every year for the past 30 years, see:

https://www.moneyobserver.com/why-inves ... ng-streaks

Good luck, whatever you choose to do.

[SoBo65]

It is interesting to see that following the general fall last week, ‘quality’ shares and IT’s are recovering and some such as Personal Assets Trust are back to where they were. I would suggest it you want a ‘sleep well at night fund’ this is worth considering. Otherwise it is worth looking at the criteria you set for an investment- personally one of mine is that the managers/directors have “skin in the game” being shares bought with their own money, not free or subsidised by shareholders....