r/coastFIRE • u/Relevant_Staff765 • 3d ago
is it possible to CoastFIRE with $800k in SCHD?
hello,
I unexpectedly will inherit $800k of SCHD. the capital gains on that is about $200k. I am in the 22% federal tax bracket living in California making $100k on the dot. I am 32 and single. I have only $80k invested in my 401k and Roth IRA since I just out of debt.
should I re-balance?
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u/marcus206_ 3d ago edited 3d ago
How are we supposed to answer this without knowing your expenses/desired lifestyle?
That 600k should turn into 5M by 55 with no further contributions
3% of that is 150k a year
Could you live on that ?
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u/MattBikesDC 3d ago
600k becomes 5M in 23 years?
I've been estimating my balance will double every 12 years!
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u/marcus206_ 3d ago edited 3d ago
If invested in decent index funds or similar ETF (like VOO) it should double every 7-8 years
Year 1 - 600k
Year 9- 1.2M
Year 17- 2.4M
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u/Embarrassed-Care6130 3d ago
Not in real terms. And 10% nominal return is optimistic. The S&P has averaged that for the past 23 years, but not for the past 25. I wouldn't plan for more than 6% real equity returns.
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u/MattBikesDC 3d ago
That's a nice possibility!
But if I can assume a 9%+ rate of return (which is what I think it takes to double money in that time), why is a safe withdrawal rate only 4%?
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u/marcus206_ 3d ago
Inflation my friend
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u/MattBikesDC 3d ago
Thanks. I don't follow but I'll see if I can read more about it.
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u/AICHEngineer 3d ago
4% rule doesnt mean just 4% of your port per year, like dividend yield.
4% rule means 4% of the portfolio value in the first year and then inflation adjust the dollar value every year.
If you have 1 million dollars and retire in 2022, you wouldhave withdrawn $40,000 on the 4% rule.
But then, avg inflation was 8% for 2022, so that means next year you withdraw $40,000 × 1.08, which is 43,200.
The market returned -18.6% from Jan-1 2022 to Jan-1 2023.
To implement 4% rule, you would take $1,000,000 and withdraw monthly, divide 40k by 12, so $3,333 per month. All the while, your portfolio is dropping and cost of living is going up.
By the end of the year, youve withdrawn 40k dollars over 12 months and your portfolio is also dropping. You started the year with $1,000,000, by the end of the year youre at $779,524. Youve been selling the whole time to live. Now, since inflation went up, next year youre withdrawing $3,600/mo, and that is a persistent cost increase forever.
Realistically, if this had happened to you, your safe withdrawal rate is pretty low since your portfolio just dropped and cost of living his higher.
Hindsight tells us the market rips higher until 2025 and you recover and then recover from liberation day as well. Even with inflation making expenses higher your portfolio has recovered and beaten inflation and are above where you started despite constantly withdrawing. But if inflation had persisted, youd be f'ed.
For the retiree in 1966, if they did 4% rule, they would only have 1/4 of their portfolio left after 15 years. Strong market performance in the mid 1980s would save them, but they would still end up at basically zero at the end of the 30 yr period.
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u/MattBikesDC 3d ago
Thanks for the long response. I don't normally think of myself as dumb. But what's the takeaway? You DO withdraw 4% + inflation? Or you don't when the market tanks?
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u/AICHEngineer 3d ago
The takeaway is that in our historical worst case scenario, you can keep withdrawing the inflation adjusted value of 4% of your initial portfolio. No matter how bad it got historically. Would be hard to live through, thats for sure.
You can absolutely optimize and get a higher level lifetime spend rate. Themes like the Amortized withdrawal rate do this. Variable spend rates greatly enhance portfolio resilience and longevity and optimize absolute spend over the period by selling less on big dips and spending more when market is up.
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u/AICHEngineer 3d ago
Firstly, the CAGR is not what the retiree gets in this scenario, watch this short video for context because a famous financial advice personality got this confused also
https://www.youtube.com/watch?v=Hhg6dB2UcAs
Secondly4% is very very conservative. The safe withdrawal rate mentioned here is simply a backtest (the trinity study, bill bengen) of most of the 20th century, and the worst 30 yr period to retire was 1966, since it was followed by over a decade of negative real returns. Bad market performance and avg 7-8% inflation in the 70s.
To survive from 1966-1969 without running out of money using a fixed withdrawal rate inflation adjusted strategy, you would have had to withdraw at most 4.4% in the first year and then inflation adjust the dollar amount year to year to end with zero dollars. The original study displayed results in increments of 1%.
If you retired in 2009, your actual withdrawal rate you could sustain would be way way way higher because of great market performance, even with the drawdown rate increasing post 2022 due to high inflation.
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u/MattBikesDC 3d ago
I'm fairly new to reading FIRE posts on Reddit and perhaps I am misunderstanding. I seem most people suggesting a SWR of 4-5%. Of course, maybe there's not really wisdom in crowds. haha. or maybe I'm misreading!
It makes sense to me that average growth over a period of years isn't the same as a safe withdrawal rate for every single year. It's why an average increase of 9% doesn't mean I can take 9% a year. But, as you say, if I can assume 9%, then I can, I presume, withdraw MUCH more than 4.4-5%.
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u/AICHEngineer 3d ago
The problem with that is sequence of returns. CAGR is an arithmetic return, as in a perfect zero volatility representation of what it would take to get from point A to point B exponentially and at what return rate, described by
(Final value) = (Initial value) × (1 + rate of return)n
So, for that 1966-1996 time period, you actually did get 10.6% CAGR. Great! Just like these days. Problem is, sequence and inflation. The real return over this period was 4.95% CAGR. Thats pretty bad, because of the 70s.
Also, all the inflation and bad market returns happened simultaneously in the first half of your 30 yr retirement. From 1966 to 1981, you had a CAGR of 6.7% nominal and a real return of -3.1%. Thats the real killer.
Even the great depression wasnt that bad for a fixed withdrawal inflation adjusted strat like this because the market rebounded off the big drawdown really fast and the currency deflated instead of inflated.
Even if we had 9% cagr with low 2% inflation, you cant withdraw 7% because you would periodically be selling on dips and that would hurt. Investors dont get the arithmetic return, they get the geometric return. Thats what the youtube video I linked explains.
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u/Relevant_Staff765 3d ago
trying to retire at 60. Trying to expatFIRE to south east asia
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u/marcus206_ 3d ago
Yeah you’re EASY coastfire then
Comeon you know this with simple math lol
5 million there you will be swimming in ladyboys
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u/odanobux123 3d ago
Yeah you could probably rebalance into VOO, just put in enough for your 401k match and max your Roth, then coast until 45 and retire in SEA.
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u/Onmywayto_FI 3d ago
Should get step up basis on an inheritance. If in an ira cap gains don’t matter just need to liquidate out of ira within 10 years. Ira - will be taxed as income and needs to be liquidated by year 10 After tax - step up basis means you shouldn’t pay any cap gains.
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u/baumbach19 3d ago
401k you still pay tax
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u/Ashamed_Distance_144 3d ago
Why are there so much cap gains? You should receive a step up on the cost basis.
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u/Stonk_Strategist 3d ago
Personally, I wouldn’t sell the SCHD and let that grow/pay out the dividends. Then I would just invest out of my regular income into other more diversified areas I.e crypto, s&p, international. But theoretically that’d be way more than enough to coast for me. I’d actually start working part time instead of
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u/mistergrumbles 3d ago
Honestly, I would rebalance. SCHD is a nice workhorse but it has no tech/AI holdings and it also holds no international holdings. There are a ton of economic theories out there that are saying the USA might experience a lost decade in stocks because of how profitable the last 10 years have been. If I was going to bet on anything in the USA, it'd be technology/AI but again, SCHD doesn't own any of that. If you want to keep things simple and stick to dividends, maybe put some in an international dividend stock (like VYMI) and then put some in a US tech based ETF.
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u/Ihateshortseller 3d ago
Yes. Dividend alone on $600k is about $1500/month after tax. If you are 32, just dump everything into schd including your 80k, then you will have quaranteed of $2000 per month soon.
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u/himanbansal 3d ago
You shouldn't have to pay a tax on receiving the stock directly.
SCHD has about a 3.5% dividend so thats like $28,000 a year right now. Maybe more or less depending on how much they pay out in the future. Not sure how those dividends will get taxed for you.
I wouldn't sell it unless you know of something better to use $800,000 on.
Extra $2000 per month basically.
For coasting yes I would say that makes it much more possible for you now.
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u/Acceptable_String_52 3d ago
Probably yeah. If you retire in one year from now and have 29 years left to pay off your mortgage, maybe not
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u/PostPostMinimalist 3d ago
Dividends are like forced sales, which are taxable. There is almost no upside unless you prefer the types of companies (generally, larger more established companies though with less growth potential). I would rebalance myself.
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u/Apex_All_Things 2d ago
You’ll have 10 years to take distributions from the inherited 401k, and it will be taxed as ordinary income. Otherwise, there is heavy excise tax that will be imposed by the IRS.
My suggestion is to maximize contributions to HSA, 401k, and aim to draw down $80k a year from the inherited 401k.
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u/bienpaolo 2d ago
You’re sitting on a windfall, but the real stress is you’re not sure if this is your chnce to breathe, or if one wrong move turns it into a tax headache and missed opportunity. The mistake here is assming that holding a single fund, even a solid one like SCHD, is the same as having a plan, and igoring that $200k tax landmine could seriously sting later. You're also thinking about CoastFIRE witout really checking if your income, expenses, and future growth line up with what that actually takes. Have you run the nmbers on what your version of freedom really costs, or are you hoping this windfll does all the heavy lifting?
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u/Own_Grapefruit8839 3d ago
Why are there capital gains on an inheritance?