The FIRE (Financial Independence, Retire Early) movement is achievable for many young people who prioritize saving and investing early on in their careers. In this piece, we’ll explore the case of a very young prospective retiree looking to achieve a leaner version of FIRE at age 40. Undoubtedly, lean FIRE, which entails modest spending, is the most realistic and achievable of early retirements for those looking to leave the workforce by middle age. And while the simple lifestyle it entails will not be for everyone, it is a great fit for those who value their time above all else.

In this piece, we’ll look at the case of a Reddit user from the r/dividends subreddit with $250,000 invested in just four securities. With their yield-oriented approach, they’ve achieved a monthly income of $2,645 or $31,750 annually. Unless our Reddit user desires a very barebones retirement lifestyle, they’ll probably need to spend a few more years at work if they’re looking to live off dividends rather than relying on annual drawdowns.

Additionally, upon first glance, it seems like the Reddit user may be taking on far more risk than they can handle to achieve a yield of around 12%. Let’s look closely at what’s underneath the hood so investors in a similar situation can proceed most efficiently.

What’s in this Reddit user’s $250,000 portfolio?

This Reddit user has a straightforward portfolio of ETFs, with $100,000 allocated to the NEOS S&P(R) High Income ETF (SPYI), which currently commands a towering 13% yield, and $75,000 in the NEOS Nasdaq 100(R) High Income ETF (QQQI), with a mouth-watering 15.3% yield. Undoubtedly, these high-yielding ETFs have allowed someone to stretch their yield to the limit.

And while covered call ETFs are a great way to give one a nice raise, passive income investors aiming to retire on a limited sum (a quarter million likely isn’t close to being enough, according to many financial advisors) shouldn’t lean too heavily on the high double-digit yields, given there’s no guarantee they’ll be available in any given year. Though I view covered call ETFs as a sound part of any yield-focused portfolio, one must understand that the yields aren’t fixed.

Dealing with yield volatility from covered call ETFs

In fact, they can move quite wildly depending on the magnitude of volatility in a given index. In short, it’s hard to tell where the yield on the SPYI, QQQI, or any similar covered call ETF will be in five years, let alone a year from now. In theory, if volatility stayed through the roof, yields on covered call ETFs could stay heightened for longer. But history suggests a reversion to the mean is the likeliest scenario.

For our Reddit user, I’d encourage them to ask themselves what they’d do if the yield fell towards the lower end of the historical range. Would a high single-digit yield be enough to satisfy one’s annual passive income needs? If not, an early retiree will probably need more than they think, perhaps a lot more.

In the case of our Reddit user, I’d suggest preparing for not only share price volatility, but yield volatility. Indeed, a high single-digit yield is still respectable, but given yields are in the 13-15% range and the projected income is quite minimal, our Reddit user isn’t as close to the FIRE finish line as it seems.

The bottom line

While I’m a fan of the SPYI and QQQI as a supporting cast for an income-oriented portfolio, I do think the main cast should be comprised of dividend stocks and ETFs that don’t have such dynamic yields. Indeed, covered call premiums vary depending on the market environment.

And after the market choppiness we’ve been through, one could argue that yields are skewed towards the high end and bound to return closer to the 8-10% range. In any case, greater diversification would be a good move for this young prospective retiree.

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