birdog wrote:
It's scary for me to walk from a very high paying job at age 47, especially given current market valuations, unless I feel like I'm a bit over-prepared. Plus, switching to another job would delay my targeted retirement due to the certain decrease in salary.
A 2% - 2.5% withdrawal rate even given today's generous valuations and zero interest rates should not be a problem. I retired at 50 with 100% equity and planned on a market return of 7% real, which at the time in 1997 in the go-go dot com bubble after 15 years of exuberant bull market didn't seem like too much of a stretch for me. I planed at that time a 7% expected real return so that my portfolio value would not drop over time. I have since then learned a bit about risk and I had to make some tough choices along the way. Overall, however, it has worked out very well, the last 23 years have been the best of my life and my portfolio which has always been heavily tilted to equity is larger now than it was the day I retired 23 years ago.
A couple of pieces of advice. First, keep a very substantial allocation to equity regardless of what you think the market is going to do. Don't let fear push you into age in bonds or anything close to it. That worked 20 years ago when bonds yielded 6%+, but not today. If inflation and rising rates are in our future, a heavy portfolio exposure to bonds will produce the opposite of safety.
I do not believe we will ever return to long term average PE1 or PE10. Those numbers may be useful in a sense to know how severely the market may be over or under valued, but both have been systematically rising for more than a decade. There is so much wealth concentrated now in the investing class that with bonds yielding expected zero real or less, stocks even at current generous valuations are a relative bargain. The equity risk premium is alive and well. All that money has to be invested somewhere and there is likely to be persistent inflation in investment assets. People say inflation is dead, and in most areas of the economy that appears to be true. But all investment assets, bonds most so, but also stocks, real estate, gold, etc., continue to be richly valued. There is massive demand from investment dollars and limited supply of what look like attractive investment opportunities relative to what existed 3 decades ago. Prices of all investment opportunities have gone up and will likely continue to do so, interrupted from time to time by bear markets. Bull markets last longer historically than bear markets and they are more vigorous. Time is on the side of equity investors in general as long as they don't panic.
The second point that I will make is about an emergency fund. I know a lot of people on the Forum argue against having one. But when you're retired and have no pension and must come up with generous living expenses every year, IMO it's money well spent. I keep a lot of equity still at age 73 (>70% at present) which means that my portfolio continues to be volatile. I therefore keep 2 - 3 years of living expenses in either MMF or very short term quality bonds in my personal account so that sales be access considerable money without generating any taxes at all for as long as 3 years. What I am doing with this is buying time. Given 34 years to thing about a problem I'll come up with a solution. Bear markets may be severe but typically there is a substantial rebound sooner than that. So the problem usually solves itself. This is especially so now as we saw with the Covid-19 bear market. There was so much money sitting in bonds and MMF yielding long term expected returns of nothing real. When equity prices dropped sufficiently, investors swooped in the same way they did in 2009 shortly after it looked like the entire global financial system was on the verge of collapse.
So I hold a substantial emergency fund in non-tax-deferred account which allows me to tolerate more risk on the equity side and still sleep at night. It also allows me to hold onto my longer duration quality bonds which during equity disasters tend to appreciate in value, buffering portfolio losses. It's hard to sell your only appreciating asset when your high allocation to equity is tanking. Also, MMF tolerate inflation better than longer duration bonds which may be important if the emergency crisis turns out to be stagflation.
Garland Whizzer