Looking at Shiller PE ratios, which are cyclically adjusted price to earnings ratios, we are looking at scary indicators too.\u00a0 The Shiller P\/E ratio is currently at 34.72<\/a> which is past the Black Tuesday (Great Depression) value of ~30.\u00a0 The only other point in which we’ve seen the Shiller P\/E Ratio this high was during the Dot Com crash where it reached 44.19.\u00a0 Essentially this value is coming up with the price to earnings ratio that is based on average inflation-adjusted earnings from the previous 10 years.\u00a0 If this is gibberish, you can read more here<\/a>.<\/p>\n The main reason why this is important is because of it’s correlation to determining safe withdrawal rates.\u00a0 When the Shiller CAPE is high, the lower your safe withdrawal rate and vice versa.\u00a0 Granted we are also in low interest rate territory which helps, but I still do not like these numbers at all<\/span>.<\/p>\n Now, does this mean to sell everything and run for the woods?\u00a0 Sash your portfolio in cash, bonds, real estate, gold, or crypto instead?\u00a0 These aren’t bad ways to diversify, but no that’s not what I’m saying.\u00a0 Just something to be aware of.<\/p>\n Will we continue to see some market volatility in the near term?\u00a0 Likely.\u00a0 That’s inherently what the stock market is all about… volatility and risk!\u00a0 The point, as always, is to ignore the noise.\u00a0 Understand your risk tolerance and invest for the LONG TERM and do not obsess over the day to day blips.<\/p>\n Speaking of withdrawal rates, for those who haven’t seen it – Bill Bengen (the author of the report titled “Determining Withdrawal Rates Using Historical Data<\/a>” which is what the Trinity Study was based off of and where the ‘4% Rule’ was coined) recently provided an updated report in Financial Advisor Magazine titled “Choosing The Highest Safe Withdrawal Rate At Retirement<\/a>” with a more rosy outlook in withdrawal rates.<\/p>\n Based off this recent report, with the current market structure of being in a low inflation regime (where CPI is between 0-2.5%) and where the beginning Schiller CAPE range is 23 or >, then the report states a safe withdrawal of 5%.<\/p>\n Does this mean we are bumping up our withdrawal rate plans?\u00a0 Absolutely not.\u00a0 But a worthwhile read nonetheless.<\/p>\n Just like in our\u00a0previous quarterly updates<\/a>, we are going to break down exactly where our current investments live for our Q4 2020 update.<\/p>\n As of December 30, 2020\u00a0here is a breakdown of our liquid assets (home and car not included as these are illiquid!):<\/p>\n Back in October we paid off our mortgage on our townhouse, which we are currently renting out, but also purchased another home so our mortgage liability is currently $314,379 at a 2.04% fixed interest rate for these first 5 years.\u00a0 So here\u2019s the total amount of our passive net worth:<\/p>\n We are focusing on the top green number (without the mortgage) as the plan is to sell the townhouse and pay off our mortgage with those proceeds prior to retiring early.\u00a0 Here’s a pie chart for my visual learners.<\/span><\/span><\/p>\n We now have ~$85,000 sitting in cash \u2013 woohoo!?\u00a0 Of that, ~$35,000 will be going towards investments in Q1 2021 (TFSA, RRSP, RESP) leaving us with ~$50,000 in cash.<\/p>\n We will deplete about $30,000\/year from our annual expenses while we have our mortgage in place.\u00a0 The majority of the mortgage at our new place will be covered by the rental but we will be left with about $2,000 per year to come up with the difference.\u00a0 Thank you house hacking for continuing to keep this expense low.<\/p>\n We will bring in about $47,000 after-tax income from my part time job (plus any sort of bonus which I do no include here).\u00a0 Our current thought\/plan is to get our cash bucket to the ~$85,000-$100,000 range before pulling the plug on the job.<\/p>\n We were originally planning to have this figure in the $125,000-$150,000 range which would equate to $25,000-$30,000 withdrawals per year for 5 years.\u00a0 However, we will not need to be withdrawing this amount to start with thanks to Canada’s generous benefits that we will be receiving once I leave my employer.\u00a0 More to come on our reasoning here in a separate post dedicated to this topic.<\/p>\n Our overall cash\/bonds\/stocks breakdown is:<\/p>\n We went from 21.8% cash in Q2, to 10.7% cash for Q3, now to 8.8% in cash for Q4.\u00a0 It\u2019s all relative really as we decided to put it into housing instead.<\/p>\n Remember, during our wealth building phase we were NOT this heavy in cash. We are not financial advisors in any sense, but we would not recommend holding this much cash during your wealth accumulation phase unless you have a large purchase coming up such as a down payment for a home.<\/p>\n Research shows that being 100% invested is better than hoarding cash. This\u00a0Seeking Alpha article<\/a>\u00a0breaks down the numbers and shows how that works. Even though the math works (100% invested in the market), psychologically, I feel better having cash available and on hand.<\/p>\n It helps me sleep better at night since we are so close to our FIRE number and will help protect us against sequence of returns risk once we do FIRE (which I am very attuned to given the current Shiller P\/E ratios above).<\/p>\n Morgan Housel wrote it quite perfectly in his new book\u00a0The Psychology of Money<\/a>:<\/p>\n \u201cSay cash earns 1% and stocks earn 10% a year.\u00a0 That 9% gap will gnaw at you every day.\u201d<\/p>\n \u201cBut if that cash prevents you from having to sell your stocks during a bear market,\u00a0the actual return you earned on that cash is not 1% a year<\/strong>\u00a0\u2013 it could be many multiples of that, because preventing one desperate, ill-timed stock sale can do more for your lifetime returns than picking dozens of big-time winners.\u201d<\/p>\n This is probably the most eloquent articulation of why you need to have a sufficient cash balance on hand (especially when it comes time to withdrawing and not having any earned income anymore).\u00a0 It may feel like you are leaving money on the table, but the last thing you want is to be forced into a fire sale.<\/p>\n Our short term play is to be ~75% in stocks and our long term play is to be back at ~90% in stocks like we were for a majority of our wealth accumulation phase.\u00a0 The game plan is to transition via a glide path to a higher stock allocation over the next 5-10 years as we deplete our cash and bonds first during our withdrawal phase.<\/p>\n At the end of Q3 we were 68.3% in stocks and now we are at 76.3% due to our cash finding a new home (pun intended), shifting some bonds to stocks, and the stock market going on a tear this past quarter.\u00a0 As our cash bucket fills back up, this will likely shift the stock portion of the portfolio back down a bit but it could remain in this elevated state if stocks do well this next year again.\u00a0 We are OK if our stock allocation remains above 75% of the overall portfolio as the goal at this point is to build back up the cash reserve and pay off the new mortgage.\u00a0 I am totally fine if our stock allocation grows to become more than 75% of our portfolio by the time we retire.\u00a0 I just want to ensure we have enough cash on hand for the first 5 years to weather any early dips in the market.<\/p>\n I swear every update I say our goal is to retire in about a year from now!\u00a0 Clearly I’ve been pushing things off hah!\u00a0 One more year syndrome??<\/p>\n The original plan this time last year was to retire in March 2021 after receiving my annual bonus.\u00a0 While we could do that and it likely would all work more than fine, we’re in this really Zen spot where life is good so we might as well keep chugging along as is and keep adding buffer to the numbers.\u00a0 I feel like I’m retired with my current part-time shift-work setup yet we’re still able to save 50% of my salary<\/a>.<\/p>\n All that to say, we are flexible with the timing of when I leave the office. If I get a new crazy aggressive boss, I’m out.\u00a0 If we shuffle shift partners and I’m now with someone too intense or lazy, I’m out.\u00a0 If work becomes too stressful, I’m out.\u00a0 If my part-time setup no longer works for the company, I’m out.\u00a0 If I need to start coming in for day shifts, I’m out.\u00a0 If my schedule changes to something not conducive to us, I’m out.\u00a0 You get the idea.\u00a0 We have more than enough F-U money that the job needs me more than we need the job.<\/p>\n As of now, we are thinking that I will take some time off in 2021 for baby 2’s hopeful arrival and then return to work until at least March 2022 so I can get two nice bonus checks (March 2021 and March 2022 granted the 2022 one would be significantly less if I’m gone for part of the year on parental leave).\u00a0 At that point, we can assess how the work-life balance is going as a hopeful family of 4.<\/p>\n We will be renting out our current townhouse<\/a> where we will be netting ~$1,200\/month after all expenses (thanks in part to not having a mortgage on it anymore) which covers 90% of our mortgage at our new place.<\/p>\n Whenever we do sell the townhouse, the proceeds will fund a large majority of the remaining mortgage balance for our new place (at least 95%, if not the whole thing depending on when the sale of the townhouse takes place and for what amount we net).\u00a0 So while that big red line item in the liabilities chart above may seem scary, we’re not too concerned about it at all.\u00a0 The goal has always been to be 100% debt free, including the mortgage<\/strong>, whenever we retire and that still remains the plan even in this low interest rate environment.<\/p>\n To dig even further, here is a breakdown of the different accounts we have our non-cash investments in:<\/p>\n That\u2019s it!\u00a0 Some acute FImily followers may realize that we made some changes to our allocation over the last quarter.\u00a0 What did we do?<\/p>\n Here\u2019s a chart with the breakdown:<\/p>\n We are big fans of Vanguard, index funds, ETFs, and low fees. If you are interested in learning more about any of the funds we invest in, click on the links below:<\/p>\n A large majority of our investments from stocks or bonds are in either US stock market index funds or US bond market index funds (a majority of the Vanguard Target 2045 fund is in US holdings). We made some adjustments this year to get ~10-20% of our portfolio in international funds.\u00a0 Last update we were at 10.2% international and now we are at 10.9% international so I\u2019m pretty happy here.<\/p>\n It can be argued that many of the companies in the US stock index have a significant amount of business taking place abroad. Again, we are not here to argue or tell you what to do, we are simply showing you our story and methodology.<\/p>\n For the sake of this exercise, we are keeping all currencies as is in their current currency denomination, but as we mentioned in a previous post outlining our FIRE number<\/a>, we are using currency arbitrage to keep our safe withdrawal rate below 4%.<\/p>\n As of this writing, 75% of our accounts are in USD and 25% are in CAD. If we converted all USD to CAD based on today\u2019s exchange rate of 1.28, we\u2019d be looking at a total of $1,184,879\u00a0CAD in our investment accounts.<\/p>\n <\/p>\n Assuming $35,000 CAD in annual expenses, this puts us at a 2.95% withdrawal rate.\u00a0 If we bumped up our expenses to $40,000 CAD it would be a 3.38% withdrawal rate.<\/p>\n We also have the Canadian Child Benefit (CCB) and some federal and provincial benefits working in our favor once we FIRE which brings our withdrawal rate down to 1.52% at $35,000 annual spend and 1.94% at $40,000 annual spend.\u00a0 This assumes the CCB supplements our child-related costs while we have kid(s) in the house and then both our income & expenses drop when the kid(s) are older\/out of the house and the associated CCB is gone.<\/p>\n For those who have been following along, you know that\u00a0our FIRE number is $875,000<\/a>. (We will be doing an update to our projected FIRE number here shortly since it’s been awhile and we decided to be even MORE cautious\/conservative.)<\/p>\n So let\u2019s do some simple math:<\/p>\n $979,139 – $314,379 = $664,760<\/p>\n While this may not look rosy, we are past our FIRE number.\u00a0 Weehee!\u00a0 This short term \u201cissue\u201d of having a mortgage will be gone once we sell our townhouse and wipe out the mortgage of our new home with the proceeds.\u00a0 Thus, I am mostly focused on the first number of the equation above.<\/p>\n It will be interesting to see what 2021 has in store for us.\u00a0 I’m quite confident we will cross the $1,000,000 mark in investments this year.\u00a0 My true FatFIRE goal is to have over $1,000,000 in stocks and bonds PLUS 5 years of cash piled away (I view FatFIRE not on your spending level but on how low you can get your withdrawals and how much flexibility you add into your plans).\u00a0 We shall see if we can get to this point!<\/p>\n As for our total net worth, we would then add in the value of our illiquid assets like our home and cars. Our townhouse is valued at roughly $300,000, our new home is valued at around $400,000, and our two cars are valued at around $11,000.\u00a0 Of course, we will not know the true value of these illiquid assets until we actually sell them down the road.<\/p>\n Adding these three figures into our net passive investments of $664,760 above gets us to a total net worth estimate of:<\/p>\n $1,375,760<\/p>\n That\u2019s an overall increase in net worth of $56,828 from last quarter and I can tell you I make nothing close to that quarterly so compound interest and the market are definitely helping to bump up that figure from last quarter.<\/p>\n When looking at how we’ve done for the total year, our Q4 2019 report<\/a> showed us with a total net worth of $1,210,455.\u00a0 That’s an improvement of over $165,000 for the year.\u00a0 Just wild considering what a shit storm 2020 has been! (And that our real estate market is stagnant in our neck of the woods.)\u00a0 (And that our income is quite low, so the large<\/strong> majority of the figure came from the markets.)<\/p>\n We have a few other items in our portfolio that we like to hide behind the scenes as our true emergency fund such as my Health Savings Account (HSA), my pension from my previous employer, Nic’s 401k, our child\u2019s RESP, any CPP\/SS\/OAS\/GIS potentially coming our way in the future, and our future car fund so for the sake of this exercise we are not including them.<\/p>\n Voila! Stay tuned to see how our net worth has changed in 3 months when we check back in on this.\u00a0 Hopefully we will do a little celebration when we see our liquid investments (cash, stocks, bonds) cross the $1,000,000 mark!<\/p>\n What is your asset allocation and where are you at on your journey (i.e. paying off debt, wealth accumulation, retired early, etc.)? Do you calculate your net worth?\u00a0 If so, how often do you check in on your accounts? Thanks for tuning in and comment below If you liked this article and want more content like this, please support this blog by sharing it.\u00a0 Not only does it help spread the FIRE, but it lets me know what content you find beneficial.\u00a0 Writing is NOT my strong suit and it honestly takes me hours to write each post so the more encouragement the better!\u00a0 Engaging in the comments below keeps me motivated.\u00a0 You can also support this blog by subscribing to receive emails anytime a new post is published.\u00a0 Thank you FImily!<\/p>\n We believe in stacking up life hacks to keep your enjoyment levels to the max without depleting your bank account.\u00a0 Here are some ways to further educate yourself and save thousands of dollars over your lifetime by making some simple adjustments:<\/p>\n Wow 2020 you sure took us for one hell of a ride.\u00a0 If you were to ask me back in March 2020 if we’d be …<\/p>\nA Look Into Our Liquid Assets<\/h2>\n
![\"\"](\"https:\/\/i0.wp.com\/modernfimily.com\/wp-content\/uploads\/2021\/01\/Screen-Shot-2021-01-05-at-1.32.34-PM.png?resize=268%2C233&ssl=1\")
<\/span><\/span>\u00a0<\/span><\/p>\nAny Liabilities?<\/h2>\n
![\"\"](\"https:\/\/i0.wp.com\/modernfimily.com\/wp-content\/uploads\/2021\/01\/Screen-Shot-2021-01-05-at-2.01.09-PM.png?resize=265%2C295&ssl=1\")
<\/span><\/span><\/p>\n![\"\"](\"https:\/\/i0.wp.com\/modernfimily.com\/wp-content\/uploads\/2021\/01\/Screen-Shot-2021-01-05-at-2.07.09-PM.png?resize=458%2C353&ssl=1\")
<\/span><\/span><\/p>\nThe Cash Bucket<\/h2>\n
![\"\"](\"https:\/\/i0.wp.com\/modernfimily.com\/wp-content\/uploads\/2021\/01\/Screen-Shot-2021-01-05-at-2.13.31-PM.png?resize=163%2C71&ssl=1\")
<\/span><\/span><\/p>\n![\"\"](\"https:\/\/i0.wp.com\/modernfimily.com\/wp-content\/uploads\/2021\/01\/Screen-Shot-2021-01-05-at-2.30.46-PM.png?resize=471%2C301&ssl=1\")
<\/span><\/span><\/p>\nWhat Is The Plan Between Now and FIREing?<\/h2>\n
What Do We Invest In?<\/h2>\n
\n
\n
\n
\n
\n
\n
\n
![\"\"](\"https:\/\/i0.wp.com\/modernfimily.com\/wp-content\/uploads\/2021\/01\/Screen-Shot-2021-01-05-at-2.42.38-PM.png?resize=1024%2C272&ssl=1\")
<\/span><\/span><\/p>\n\n
\n
\n
![\"\"](\"https:\/\/i0.wp.com\/modernfimily.com\/wp-content\/uploads\/2021\/01\/Screen-Shot-2021-01-05-at-2.44.10-PM.png?resize=456%2C282&ssl=1\")
<\/span><\/span><\/p>\nWhat About Currency?<\/h2>\n
![\"\"](\"https:\/\/i0.wp.com\/modernfimily.com\/wp-content\/uploads\/2021\/01\/Screen-Shot-2021-01-05-at-2.54.50-PM.png?resize=597%2C53&ssl=1\")
<\/span><\/span><\/h2>\nWhere Do We Stand?<\/h2>\n
Our Net Worth:<\/h2>\n
![\"\ud83d\ude42\"](\"https:\/\/s.w.org\/images\/core\/emoji\/12.0.0-1\/svg\/1f642.svg\")
<\/p>\nSupport This Blog<\/h2>\n
\n