Maybe Retiring At 35 Was A Bad Idea

Yahoo has an article up about FIRE proponents going back to work because of rough market conditions and the recent increases in price inflation. FIRE of course stands for Financial Independence/Retire Early. It's an old concept but became more popular 13 or 14 years ago, shortly after the Financial Crisis bear market ended. 

If the Yahoo article is calling it correctly, then the first serious bear market to come along has seriously dented the movement. That didn't take long, it failed its first real top down test, again I am assuming Yahoo has it right. Sure, someone in their 30's with a couple of million in the bank and a passive income stream or two that covers their expenses could call themselves retired and probably be able to stay retired but having done a lot of reading, that scenario is not applicable to the majority of people who pulled the FIRE trigger. 

Of course many FIRE advocates, those living FIRE are not retired at all. They did what they needed to to have passive income, make money writing and other things, essentially cobbled together some side hustles. There is nothing negative about that, I feel like I am in that category for the most part. It's just not retirement. 

I've been writing about FIRE in various places for quite a few years, pretty much saying the same thing the whole time. The 4% rule should not be relied on for a 50 or 60 year time horizon.  The psychology of wanting to check out from doing anything at such a young age is very sad to me. I don't know how many people who have FIREd or who aspire to FIRE want to check out in that manner but some do and some who maybe don't could very realistically end up falling into unhealthy ruts with bad diets, playing video games all day. That shouldn't be too controversial of a take because a large portion of the population have already fallen into unhealthy ruts, working or not. And of course you pretty much give up any sort of future optionality from a Social Security benefit.

People who consider doing this are probably aggressive savers and have more financial acumen than most people which likely leads to their being nicely ahead of where the need to be at that age in the context of some sort of normal retirement age. Then they "retire" and pretty much giveaway that optionality they created for themselves. 

Time is precious. Health is precious. Optionality is precious. The work anyone has done to give themselves those attributes should not be so casually discarded. The focus here as always been on the first half of that equation, Financial Independence. 

Where I personally prioritize time, health, optionality and while we're at it, simplicity, I took part of the FIRE process that I needed to own my time to make sure I always have time for my health and have the optionality to do what I enjoy. This all happened long before I'd ever head of FIRE but regardless of labels, there are no new ideas here. The too clever by half adaptation became retiring at 35 or 40.

We have a new firefighter who is about 30 and already understands the importance of owning your own time. I don't know too much other than what he's said but he doesn't have a job, he owns investment property, sells things online (not entirely sure what that is about but self-improvement Twitter is big on it) and I believe he has trade training as an electrician as a backup and although I don't think he plans to this summer, he could go out with our engine for out of area fire assignments. He has impressively cobbled together side hustles and optionality to make his way. 

This will be a harsh point to close on but it is astounding how many people come to embrace a really bad idea like thinking they are actually retired before 40. Financial independence and all that goes with it, yes! Retired, like checked out, at 40, no. Arguably, retired, like checked out, at any age, no.

Sunday Retirement Reading

The Atlantic had what I would describe as a very left leaning article about lowering the retirement age in the US while increasing payroll taxes to pay for it and to cover the expected shortfall in Social Security due to hit in 10-12 years. For the record, I am very centrist. Some conservative ideas appeal to me as do some liberal ideas. It is not logical to me to agree with everything one political ideology believes in.

I shared that article on Facebook noting that the prevailing wind is an increase in the retirement age and other "fixes" that might adversely effect a lot of people. It's on us at this point if we get blindsided by some change that hurts us individually. No one should be surprised that something bad might happen so prepare accordingly. 

The Atlantic also noted that the more common talking point of raising the retirement age disproportionately hurts blue collar workers because the body usually can't do the same work at 60 that it could at younger ages and raising the retirement age also hurts people who have less money, less economic opportunity. Those folks tend to need their SS checks at younger ages. That makes intuitive sense to me, at least I think that is a reasonable conclusion. I'm not saying I am in favor of lowering or raising the retirement age, just agreeing with who is more damaged if they do it. 

Contrast that with a kind of long read from the Wall Street Journal. It was short anecdotes from older white collar workers who are planning to never retire. It supports the Atlantic's idea that wealthier white collar workers have more optionality when it comes to continuing to work. Wealthier white collar workers probably makes up a larger portion of the WSJ's reader base so writing from that perspective, for their audience makes sense. 

Many of the anecdotes focused on similar points of needing to use it so you don't lose it as a big driver to continuing to work as opposed to financial need. I've been very transparent over almost 20 years of blogging that I don't want to retire in any sort of traditional sense. Staying physically active, mentally engaged, seeking purpose are all components of successful aging. Some sort of work or vocation seems like the best way to get at least two of those, maybe you need to budget time for working out and (for me) hiking. 

I'm not even sure my thoughts on what's best for me are even evolving, I don't plan to disengage from markets ever. That's how I felt 20 years ago and still do. 

I have become more interested in trying to inoculate against the unexpected which has nothing to do with career enjoyment. This was a vague concept, something unexpected could happen but I had a brush with that very thing earlier this year when the partners at the firm I've been with since 2004 each got in different types of trouble. This was a personal black swan. 

If you are comfortable in your situation like maybe you're on track with having enough money, you love what you do and you have your health, then maybe like me, the biggest risk you face is something totally unexpected. 

Friends who are professional firefighters know their are health risks related to duty-related cancers. Pretty sure, they all know about that. So not entirely unexpected even if still awful. The pension system for firefighters here has been woefully underfunded. I don't know if that is widely known or not. I don't know when it will matter, maybe never, maybe soon, but it looms out there as a threat, maybe a black swan for some retired firefighters or soon to be if benefits get cut. 

I'm a big believer in cultivating options over time as a form of resilience against the unexpected. 

Of course, some people, maybe the majority, do want to move on from their primary careers. Ok, but that doesn't do away with the need to have purpose and stay engaged somehow. I've quipped before that waking up on day one of retirement and saying to yourself "ok, now what am I going to do" is likely to end very badly. 

This gets talked about some but maybe not enough, retiring can be a psychologically difficult thing. Without any planning, I don't mean financial, retirement is more of an ending and yeah, that sounds difficult to me. When planned thoughtfully, retirement probably isn't even the best word. You're moving to the next chapter or transitioning to the next phase or maybe can give more time to extra curricular activities you've already been doing. 

Whether or not you get paid for giving more time to your extra curricular activities doesn't have to matter depending on how well you planned financially. Someone in the WSJ piece was quoted as saying about his wife "volunteering is not her thing, why work and not get paid?" If you know me at all through my blog posts, you might be able to guess what an awful, selfish sentiment I think that is.

Everyone should do whatever the hell they want to do of course but the big takeaway from this post is that people who are overly reliant on a singular outcome to make their futures work, like SS being there exactly as advertised, are making themselves vulnerable to their own black swan. I would encourage anyone to avoid that sort of plan. 

Barron's Takes A Look At Call Writing Funds

Call writing funds, or options strategy funds more broadly, is a space we've looked at quite a few times over the years. I used one call writing fund back around the Financial Crisis. For a short while, I've had a fund that sells out of the money puts, very far out of the money, for clients and personally. With the call writing funds I'm more of a follower of them than a user of them. There's one fund I've been test driving for possible use for clients since last summer and while it has done fine I have not added it in and I am not sure if I ever will. Here's the link to the Barron's article.

BXM is the S&P 500 Monthly BuyWrite Index and GSPC is the S&P 500. Almost 20 years is a good sample size. For much of the period studied, it was back and forth as to which one was the better performer. As the S&P 500 went parabolic for a bit to the right of the chart, BXM did not keep up. Play around with the chart yourself and you'll see some stretches where BXM outperformed by a lot. Whether BXM is outperforming or lagging, it seems to always be less volatile. That's pretty much the idea, covered call strategies are generally intended to reduce volatility and bring in some income. 

In 2022, BXM was down 11% versus about 19% for the S&P 500. If you look at decent sized sampling of funds in the space you'll see a wide range of results but every one of them that either tracks the S&P 500 with some sort of buywrite index or is actively managed was down less than the S&P 500 last year which is what the typical person buying one of these would hope for.

If you need normal stock market growth for your long term plan to work (that's most of us), based on the last 20 years, would you have gotten enough of the market effect if you owned a fund that tracked very closely to BXM? No wrong answer, it's up to you, would that have been enough. Would some sort of repeat over the next 20 years leave you with enough? 

Lower volatility is certainly appealing on some level especially with 2022 still fresh in our memory. For a lot of people, 2008 might still be fresh. 

A snippet from Barron's cited an objective of one of the funds as trying to capture 75% of the upside of the market and 65% of the downside. That might ring a bell for longtime readers as being similar to 75/50 that we've looked at many times before whereby a portfolio seeks 75% of the upside and 50% of the downside. That is hard to engineer, I would say liquid alternatives need to play a role to help by virtue that some of them are designed to go up when stocks go down.

Some covered call fund could do something like 75/50 or 75/65 or whatever in some random period but the variability of path dependency makes that difficult to rely on. More vaguely, being willing to accept less upside in order to have less downside is, I think, achievable even if specific numbers would be a matter of luck. 

 

For the last five years, BXM was quite a ways below 50% of the upside. In the Pandemic Crash of March 2020, BXM went down about as much as the S&P but couldn't get anywhere near the snap back. If the market crashes, a covered call strategy won't help, that's important to understand. When the crash snaps back as so many of them do, the calls sold might cut off that snap back as I think happened in 2020. An actively managed fund might be able to better participate in any sort of post crash snap back or depending on the constraints of the index underlying an ETF maybe that could fare better than BXM in that scenario.

That kind of paints a picture of the drawbacks of the strategy; can lag market cap weighting for long periods, not crash proof and the perfect storm crash scenario can mean it gets left far behind. That's not a reason to avoid them altogether though. BXM has years of outperforming and staying even with less volatility. I think that is an argument to not use them as the core equity holding though if you are in the majority of people who do need to capture the equity market's long term growth.

Could they play the same role as a minimum volatility or low volatility ETF? Yeah, maybe. That would come down to composition, rules and strategy and even then, no matter what someone might pick, no fund or strategy can always be best, they can be useful but there will be drawbacks. Don't tunnel vision on just the positives of whatever you do or choose, make sure you understand the negatives so you don't get blindsided or even worse, panic.