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Recently I was watching the NFL draft and several commentators were describing various NFL prospects as either having a high ceiling or a high floor.
A high ceiling candidate meant that that particular NFL prospect had the chance to be an elite, potentially pro-bowl type player.
Some high-ceiling prospects were described as boom or bust type candidates, depending on known injury history or other potential detrimental issues that could effect play.
Those NFL candidates that were deemed high floor type prospects were individuals who did not have the potential to become elite but their downside was far less than the boom or bust players.
So if you were the general manager of an NFL team would you fill your team roster with players that potentially can become best at their position with a higher chance that they may indeed be a bust or would you fill your roster with players guaranteed to have a productive, but not elite, long NFL career?
So why am I discussing the NFL in a personal finance blog?
I would venture to say that all of us are the general managers of our own financial home team and we are tasked with filling the team with various assets that hopefully allow us to win a championship, aka a golden retirement.
Sure there are assets that may have the potential to have a stratospheric rise in value with pro-bowl/hall of fame worthy numbers but also carry greater risk (such as Bitcoin/cryptocurrency).
Other assets can be considered as tried and true “blue collar type” players that bring their lunch pail to work every day and put in a full day’s work without the glitz and glamor of a prima donna athlete (index funds would be my nominee for this role).
Raising the floor.
For me what trumps everything in my retirement planning is establishing a high enough income floor during retirement that I do not have to worry about having my needs and desires met.
If I can have a reliable income floor that can provide for basic living expenses no matter what part of the market cycle I am in, then I know no matter what I will not have to make drastic sacrifices in my golden years to make ends meet.
My first decision point was exactly what was the income floor I was striving for.
For me there were several major income tier floors out there.
The first tier is what I called the bare bones floor.
Having an income floor at this level would allow me to cover all the basic needs of life:
- The ability to have a roof over my head.
- The ability to pay for all utility expenses.
- The ability to pay for basic food expenses/groceries.
- The ability to meet my tax obligations.
- The ability to cover medical expenses.
This amount of course can vary from individual to individual and is very location dependent, but it should be the bare minimum you strive to achieve in order to have a worry-free retirement.
I figure in order to continue to live where I currently am situated without any of the frills I currently enjoy, I need to aim at pulling in a retirement income of $40-60k.
The next tier can be called a carpeted floor.
In addition to the above needs met, I can loosen up the purse strings a bit more and start adding more perks to daily living:
- The ability to enjoy more fine dining experiences.
- The ability to add modest vacations throughout the year.
- Shopping and doing groceries at higher level locales.
- Adding entertainment expenses such as concerts and going to the movies more often.
This level is what I consider entry into a truly “golden retirement.”
Cost cutting maneuvers are infrequently needed and you now have the ability to enjoy some of the finer things in life.
I think a good target income point to hit this level is what psychologists have pegged as the income that produces the maximum happiness, $95k/year.
The last tier in my hierarchy of income floors is the exotic hardwood one.
No we are really cooking with gas (how apropos given the FIRE theme).
Even though the previously referenced article mentions that the bang for your buck (amount of happiness for income) diminishes rapidly after hitting the $95k level, I still wanted to get to this income floor level (who doesn’t love hardwood?).
Entry into this tier starts getting you into the “price is no object level,” and gives additional perks beyond the lower tiers:
- Order off the menu without regards to price.
- Ability to have 5 figure luxury vacations throughout the year.
- Updated/latest tech for home and personal use.
- Vehicles tend to be later models.
So what income floor level makes you achieve this tier (what is typically called FAT FIRE)?
Searching the web has income numbers all over the place, but they do share one thing in common, you need at least a 6 figure annual retirement income.
Again what is a FAT FIRE level for you might not be for someone else.
Physician on FIRE mentions that $100k would be FAT FIRE for his family.
I personally am going to up it a bit more because $100k really is not that much more than the level I placed for having a carpeted floor in my model.
So for me I am putting the barrier to entry into this tier at greater than $125k/year of retirement income.
How I designed my financial asset team.
Now that I had the income floor I was targeting, it was time to invest in assets that I thought would best get be there.
Now what assets are considered high floor can be open to interpretation by anyone.
Certainly no one can predict the future and an asset that currently has a high floor may have that floor dropped in the future.
But I do think you can make intelligent guesses and design an asset allocation that has the best chance of having a high income floor during retirement.
I will share my thought process but bear in mind that this is just one person’s view and you have to make your own calculated moves to design a portfolio that may be more suitable.
Although I initially started investing solely in index funds I began tilting my portfolio towards real estate.
As of today I would say that my real estate investments compromise about 60% of my overall portfolio.
Why did I choose real estate and feel like it was a high floor asset?
I personally think real estate is an evergreen asset which, if chosen carefully, can provide fairly reliable cash flow.
Of course the key phrase is carefully chosen, which requires a lot of due diligence.
Buying property in the wrong location can be disastrous and could be a financial curse rather than a financial boon.
But with the right asset you can have a great source of cash flow that can keep up with any future inflation (as inflation increases rents can also be increased to compensate).
Real estate is considered evergreen because there will always be a need for shelter.
I do not anticipate any disruptive technology to come about that would obviate the need for housing.
Another thing I love about real estate is the cash flow I am receiving is not consuming the original capital invested.
This is contrast to investing in equities and using the 4% safe withdrawal rule (SWR) to project future retirement income.
Take for example that the S&P 500 index fund yield is less than 1.5%.
That means in order to reach the 4% SWR amount needed you would have to make up the difference (2.5%) by selling shares/consuming capital.
This is not to say that investing in the stock market does not have its place in my portfolio.
I definitely have a large component of investments in the market which come to around 35% of my overall portfolio.
I feel total market index funds have a high floor and can also keep up with any potential increases in inflation (as inflation increases, goods cost more keeping company profits on a level trajectory).
Plus diversification is always a good thing so that if one asset class is depressed the other might be able to compensate for it.
Too often we fall for the latest darling of the investing world that touts great returns in a short period of time.
However when we start chasing returns we subject ourselves to more risk, potentially dropping the floor out from under us.
The philosophy that has served me well is to build a strong floor/foundation of future retirement income with tried and true assets that can weather various economic cycles.
For the past two years my non-retirement account investments have indeed met my desired income floor which gives me more confidence that I am indeed financially independent and capable of retiring.
On top of that, although I do not include it in my calculations, I also know that when I am retired and hit the appropriate age, I should also get an additional boost from Social Security benefits, as well as an Ohio Pension I have qualified for, that likely will add $20-30k/year to the pot (fingers crossed).
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Even a steadfast DIY’er can sometimes gain benefit from the occasional professional input.
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