u/belangp

This post is for those who are on the journey and who are feeling like progress towards FIRE is going too slowly for their liking. It's a few words of encouragement & principles to help you feel the power of what you are doing, from a guy who has been retired for five years now but still remembers what it felt like at every stage along the journey. Here goes...

1. At every step along the way remember that if you have savings, even if you just recently got started and only have $10,000 to your name, even if you have worked your way out of a debt hole and are just now "back to broke" it is a testimony to your ability to delay gratification. This should not be taken lightly! The ability to delay gratification is a super power. It is the key that unlocks the door of financial independence.
2. You know that finish line that seems so far away you have to squint to see it? That whole retire early thing? The "RE" in "FIRE"? If you really think hard about it you'll realize that's not really the goal. The goal is freedom. It's options. And that's not a binary "on or off" thing. Every month of living expenses you have set aside represents a month worth of options. You don't have to leave those options untouched until you have enough of them to leave the work force completely and permanently. Once you get to a year or so of expenses saved up in an accessible fund you'll not have to live in fear of a layoff. With a few years saved up you might find that you have enough courage to transition to a whole new career or start your own business. With enough set aside you might even *gulp* take a lower paying (but much less stressful) job. It's all about options. And options don't just appear one day at the end of a 30 year journey.
3. Power is also a continuum. Towards the end of my career I remember my colleagues mentioning on more than one occasion how Zen I was when certain aggravations came along. I smiled to myself and thought "oh, if you only knew" until one day they found out (I pulled the trigger on retirement). You'll find, as I did, that you'll grow bolder as you accumulate wealth. As you build your financial resources your power will grow. You'll feel empowered to say "no" more often without fear of repercussions. You'll be more assertive. You won't feel as reserved when you have ideas that run counter to your management. And this can lead to some surprising benefits (such as unexpected promotions believe it or not). FU money is a beautiful thing. Others won't know you have it, but they'll notice the confidence it will give you.
4. Comparison if the thief of joy. I know, it's cliche. But it is absolutely true! Nothing will make you feel like you're not making progress quite like seeing someone who has something you want (even if it's someone on a FIRE sub who posts about their multi-million dollar stash). It's not the things you want that will make you happy. When you acquire them there will always be another desire to replace the one that was filled. Ironically, it's the ability to not want things that leads to financial freedom. Not wanting things (i.e. savings) is what will build up your financial resources and then not wanting things is the key to making your financial resources last a lifetime. As Henry Thoreau once said, "A man is rich in proportion to the number of things which he can afford to let alone."
5. The RE number is much lower than many people realize. Expenses can be much lower on the other side of retirement. You know those work clothes you always needed to replace? Forget it. You won't need them any more (except a couple of pairs of business casual). All that gas you burned driving to work? Not a thing anymore. Oh, and the Social Security and Medicare tax you were paying? Gone. And some of those past payments will be coming back to you in the form of benefits. And those other taxes? They'll be much lower too. And if they're not it just means you chose to work longer than you truly needed to (because your realized income is higher than when you were earning a wage), and that's OK.

I hope this all helps to lift the spirits of everyone working towards FIRE. I'm rooting for you all. You can do this!

Sure, it's lost 25% of its value in a month, but look at those juicy 10%+ yields! /sarc

I just learned something new that surprised me, but isn't surprising in retrospect. I thought I'd pass it along to share it with those who might be interested and to spur on some conversation. TLDR: while the companies held by an ETF or mutual fund might pay out X% cash as dividends, and while the the SEC might require the fund to pay out all cash dividends to shareholders on record, fund share issuance in a given quarter owing to fund popularity can significantly dilute the cash paid to existing shareholders.

The quandry I explored: VHYAX and VYM (Vanguard's High Dividend Yield Index) had a disappointing year over year dividend increase of 0.8% despite its largest holding (Broadcom with an 8% weighting) increasing its dividend payout by over 10% in December last year. So why such a meager fund year over year increase in its distribution? The answer turns out to be the popularity of the fund! Q1 fund inflows were somewhere between $3.5-4 billion. This resulted in fresh share issuance, a feature of all open ended funds. With total net assets of about $90 billion, this represents a share dilution of about 4%. In other words, the combined VHYAX/VYM share class issued roughly 4% new shares. During this period the fund was continuously receiving dividends from its existing underlying companies; however, new share purchases would only increase the amount of cash available to pay shareholders if the new purchases were made prior to the ex date. The simple math: if the fund's underlying components increased their payments by 4.8% year over year and the fund increased its share count by 4% in Q1 then the year over year increase in the fund payout would only be 0.8%. Mystery solved.

So what does this mean for us (often maligned) dividend investors? It means that we're not 100% entitled to the cash distributed by the companies held by funds we own. If a fund becomes popular and there is a significant capital inflow then the cash accumulated in a given quarter will also be distributed to new shareholders on record. It can be a problem for a couple of reasons: 1) When relying upon the income stream of the fund the mutual fund share issuance can significantly F*** the quarterly distribution (sucks), and 2) When evaluating a dividend oriented fund it's important to bear in mind that the historic track record of dividend growth may have been suppressed. I think open ended funds are still a great way to gain exposure to a diversified slate of dividend paying companies, but this is one land mine I wan't aware of until now.