Author Topic: FIRE in 8 years?  (Read 5835 times)

andrea-stache

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FIRE in 8 years?
« on: April 08, 2015, 06:54:26 PM »
Alright Mustachians...tell me what you think.  We would like to retire in 8 years when youngest kidgoes off to college.

Assets:
Vanguard Investments - $120K (our retire early account); contributing $4K per month
Roth 401K (wife - current employer) - $19K, contributing max
401K (husband - current employer) - $52K, contributing max
Vanguard IRA (wife, previous jobs) - $201K
Vanguard IRA (husband, previous jobs) -$77K
annuity (wife) - $105K
annuity (husband) - $100K
house value $600K, plan on selling and buying something smaller in lower COL area.
I also have a pension from a former employer that will pay me $800 a month.  I just ignore that in my calculations.
We have savings for both kids for college...but not counting that in our net worth or investments since it's for the kids.

No debts (not even a mortgage), annual expenses about $40K

Questions:
Do we need to be laddering some of the IRA money into a Roth IRA @ Vanguard?  I assume they will know how to do this?? 

I think I need to wait 5 years on the annuities before I can do anything with them.  Or, should I just leave them there and look at them as guaranteed future income? 

Is 8 years realistic?

KungfuRabbit

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Re: FIRE in 8 years?
« Reply #1 on: April 08, 2015, 07:07:33 PM »
how old are you?

its amazing what you can live on if you have no mortgage.  between your $800 pension and social security you are close to set already.

MDM

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Re: FIRE in 8 years?
« Reply #2 on: April 08, 2015, 09:06:11 PM »
I think I need to wait 5 years on the annuities before I can do anything with them.  Or, should I just leave them there and look at them as guaranteed future income?
Most - but not all - annuities are terrible investments.  Need more details before commenting further.

Quote
Is 8 years realistic?
Here's a quick equation - put your numbers into Excel and see what you get....

Time in years to FI = Ln((S + i*E/WR) / (S + i*A)) / Ln(1 + i)

A = Asset amount currently invested in funds you will draw upon in retirement.
E = Total (including taxes) annual expenses in retirement
i =  Real return on invested retirement funds, e.g., 3% (conservative - we hope...)
S = Annual amount invested in funds you will draw upon in retirement.
WR = Withdrawal Rate planned for retirement, using Trinity Study definitions (e.g., 4%)

wisermiser

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Re: FIRE in 8 years?
« Reply #3 on: April 08, 2015, 10:45:49 PM »

Here's a quick equation - put your numbers into Excel and see what you get....

Time in years to FI = Ln((S + i*E/WR) / (S + i*A)) / Ln(1 + i)

A = Asset amount currently invested in funds you will draw upon in retirement.
E = Total (including taxes) annual expenses in retirement
i =  Real return on invested retirement funds, e.g., 3% (conservative - we hope...)
S = Annual amount invested in funds you will draw upon in retirement.
WR = Withdrawal Rate planned for retirement, using Trinity Study definitions (e.g., 4%)


I entered this in Excel and it seems to work with the defaults (when A = $1MM and E = $40k it calcs zero years to FI).  However, adjusting the WR has the opposite impact expected.  Increasing the WR decreases years to FI and decreasing WR increases years to FI?  I don't think I have a formula error and I couldn't find this equation anywhere else to verify.  Is there a typo?

frugaldrummer

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Re: FIRE in 8 years?
« Reply #4 on: April 08, 2015, 10:46:43 PM »
You're just about there already. $675k in current savings,if you move somewhere to a $300k house, add $300k to your savings, that's $975 k which equals $39k per year at a 4 percent withdrawal rate. Everything extra you save now is cushion/safety buffer. 8 more years gives you a $400 k buffer, letting you use a very conservative 2.5 percent withdrawal rate.

Do you really want to both work full time for the next eight years for that safety margin? Or could you each cut to half time now and spend more quality time with your kids?

terran

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Re: FIRE in 8 years?
« Reply #5 on: April 08, 2015, 11:01:09 PM »
I entered this in Excel and it seems to work with the defaults (when A = $1MM and E = $40k it calcs zero years to FI).  However, adjusting the WR has the opposite impact expected.  Increasing the WR decreases years to FI and decreasing WR increases years to FI?  I don't think I have a formula error and I couldn't find this equation anywhere else to verify.  Is there a typo?

That's how it should work. Withdrawal rate is the percentage of your portfolio you can take each year as income. So if you need $30k/year then a 4% WR means you need $750k ($750k * 4% = $30k), and a 3% WR means you need $1M ($1M * 3% = $30k). If you're saving the same amount, then it will by definition take you more time to reach $1M (for the lower 3% WR) than to reach $750k (for the higher 4% WR). Therefore increasing WR (3% to 4%) decreases total portfolio required ($1M to $750k), which decreases years to FI.

MDM

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Re: FIRE in 8 years?
« Reply #6 on: April 09, 2015, 01:13:51 AM »
...I couldn't find this equation anywhere else to verify.
See the footnote in Nords' blog (shows a derivation without existing assets) and Heart of Tin's post (shows an algebraically identical version of the final equation) for a couple of sources.

Repeating variable definitions here:
A = Asset amount currently invested in funds you will draw upon in retirement.
E = Total (including taxes) annual expenses in retirement
i =  Real return on invested retirement funds, e.g., 3% (conservative - we hope...)
S = Annual amount invested in funds you will draw upon in retirement.
WR = Withdrawal Rate planned for retirement, using Trinity Study definitions (e.g., 4%)


To derive the whole equation, start with E/WR as the future value you need to declare success, according to the Trinity Study folks.

The future value of a series of equal investments (aka an annuity) is S * [ (1 + i)^n 1] / i

The future value of current assets is A * (1 + i)^n

Combine the above to get:
E/WR = S *[ (1 + i)^n 1] / i + A * (1 + i)^n

Do a little algebra to get:
E/WR + S/i = S/i * (1 + i)^n + A * (1 + i)^n

A little more algebra:
E/WR + S/i = (S/i + A) * (1 + i)^n

Getting closer:
(E/WR + S/i) / (S /i + A) = (1 + i)^n

Rearrange a little:
(S + i*E/WR) / (S + i*A) = (1 + i)^n

And finally solve for n:
n = ln((S + i*E/WR) / (S + i*A)) / ln(1 + i)


MDM

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Re: FIRE in 8 years?
« Reply #7 on: April 09, 2015, 02:07:39 AM »
Note that the previous post assumes no increase in either annual expenses or savings, and "real" (not including inflation) investment returns.

One could also assume (among an infinite number of possible assumptions) that both expenses and savings increase with inflation each year, and use "nominal" investment returns.

We'll use the same variable definitions, except
r =  Nominal return on invested retirement funds
i =  Inflation rate

Now we start with E*(1+i)^(n-1)/WR as the future value you need to declare success.  The exponent is (n-1) because we assume we know the first year's expenses and they increase starting in the second year.

The future value of a series of growing investments is S * [ (1 + r)^n (1 + i)^n] / (r - i)

The future value of current assets is A * (1 + r)^n

Combine the above to get:
 E*(1+i)^(n-1)/WR = S * [ (1 + r)^n (1 + i)^n] / (r - i) +  A * (1 + r)^n

After a bunch of algebra similar to that in the previous post we get:
n = ln((S + (r - i)/(1 + i)*E/WR) / (S + (r - i*(1 + i))*A)) / ln((1+r)/(1+i))

If A = 0, the results of the equations for "n" are identical because (1 + nominal rate) / (1 + inflation rate) = (1 + real interest rate).  When A is not zero, there is little practical difference between assuming 0% inflation and real returns vs. non-zero inflation and nominal returns.

So, after all that...just use current values for retirement-type expenses and savings, and use real returns - simpler and accurate. 

bruce88

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Re: FIRE in 8 years?
« Reply #8 on: April 09, 2015, 03:22:44 AM »
My question is how much do you think you will be spending on your target home?  In the Midwest, you can live in a very, very nice home for $250k.

If you only need 40k a year in income, and you add 300k (net taxes on over $500k tax free home sale and after buying new home) into investments, you might be there already.

wisermiser

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Re: FIRE in 8 years?
« Reply #9 on: April 10, 2015, 08:08:33 PM »


That's how it should work. Withdrawal rate is the percentage of your portfolio you can take each year as income. So if you need $30k/year then a 4% WR means you need $750k ($750k * 4% = $30k), and a 3% WR means you need $1M ($1M * 3% = $30k). If you're saving the same amount, then it will by definition take you more time to reach $1M (for the lower 3% WR) than to reach $750k (for the higher 4% WR). Therefore increasing WR (3% to 4%) decreases total portfolio required ($1M to $750k), which decreases years to FI.
[/quote]

Thank you for the explanation.  I'm used to thinking of a withdrawal of a fixed asset amount and my logic was backwards.

frugaldrummer

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Re: FIRE in 8 years?
« Reply #10 on: April 10, 2015, 10:27:03 PM »
If you downsized now, you'd have $440k of assets you could draw on for early retirement. That would cover 11-12 years at $40k per year.

If one of you worked part time making $20k per year for the next 8 years, you could last 16 years on that money.

And if you downsized, worked enough to make $40k per year to meet expenses for the next eight years, that $440k plus 8 years interest would cover you for another twelve years, making it 20 years before you have to access the inaccessible retirement vehicles.

bluebelle

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Re: FIRE in 8 years?
« Reply #11 on: April 10, 2018, 04:32:24 PM »

Here's a quick equation - put your numbers into Excel and see what you get....

Time in years to FI = Ln((S + i*E/WR) / (S + i*A)) / Ln(1 + i)

A = Asset amount currently invested in funds you will draw upon in retirement.
E = Total (including taxes) annual expenses in retirement
i =  Real return on invested retirement funds, e.g., 3% (conservative - we hope...)
S = Annual amount invested in funds you will draw upon in retirement.
WR = Withdrawal Rate planned for retirement, using Trinity Study definitions (e.g., 4%)


I entered this in Excel and it seems to work with the defaults (when A = $1MM and E = $40k it calcs zero years to FI).  However, adjusting the WR has the opposite impact expected.  Increasing the WR decreases years to FI and decreasing WR increases years to FI?  I don't think I have a formula error and I couldn't find this equation anywhere else to verify.  Is there a typo?

I don't think I understand what S and E are.  I thought E was what I needed, and S was what I needed to withdraw.  But if I lower S, time to FI gets longer?

a    1,000,000    a    1,000,000
e    50,000       e    50,000
i   4.00%      i   4.00%
s    50,000       s    25,000
wr   3.00%      wr   3.00%
FI    6.62       FI    8.77

bluebelle

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Re: FIRE in 8 years?
« Reply #12 on: April 10, 2018, 04:33:39 PM »

Here's a quick equation - put your numbers into Excel and see what you get....

Time in years to FI = Ln((S + i*E/WR) / (S + i*A)) / Ln(1 + i)

A = Asset amount currently invested in funds you will draw upon in retirement.
E = Total (including taxes) annual expenses in retirement
i =  Real return on invested retirement funds, e.g., 3% (conservative - we hope...)
S = Annual amount invested in funds you will draw upon in retirement.
WR = Withdrawal Rate planned for retirement, using Trinity Study definitions (e.g., 4%)


I entered this in Excel and it seems to work with the defaults (when A = $1MM and E = $40k it calcs zero years to FI).  However, adjusting the WR has the opposite impact expected.  Increasing the WR decreases years to FI and decreasing WR increases years to FI?  I don't think I have a formula error and I couldn't find this equation anywhere else to verify.  Is there a typo?

I don't think I understand what S and E are.  I thought E was what I needed, and S was what I needed to withdraw.  But if I lower S, time to FI gets longer?

a    1,000,000    a    1,000,000
e    50,000       e    50,000
i   4.00%      i   4.00%
s    50,000       s    25,000
wr   3.00%      wr   3.00%
FI    6.62       FI    8.77

duh!  as soon as I posted, I understood....S is how much a year I'm contributing towards saving for retirement....  I'm a poo poo head.

swashbucklinstache

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Re: FIRE in 8 years?
« Reply #13 on: April 10, 2018, 08:42:16 PM »
if you haven't already, try running your numbers in cfiresim.com
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Laura33

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Re: FIRE in 8 years?
« Reply #14 on: April 11, 2018, 07:09:17 AM »
Since others have more than ably done the math, I will answer the question:  you are thinking of the wrong kind of Roth at this point.

Right now, you should definitely be putting some of that $4K/mo. into a traditional or Roth IRA.  I am going to assume you make too much to contribute to a tIRA (since you both already have 401(k) plans, the the cutoff is very low), so go Roth.  If you make too much to contribute to a Roth directly, then consider the backdoor Roth -- BUT only if you can roll your existing IRAs into your current 401(k)s.

Once you retire, you should roll over your 401(k) to IRAs and begin converting portions of that to a Roth.  You do not want to convert your existing IRAs now, because you will pay taxes on the converted amount, and your current tax rate is much higher than it will be when you RE. 

Tl;dr:  While you are working is the time to build the Roth through new contributions; after you RE is the time to convert tIRAs to Roth a bit at a time to take full advantage of lower tax rates at lower income levels.

PS:  your wife should be in a traditional 401(k), not a Roth -- that will knock down your taxable income now, leaving you more to invest (and perhaps even making you eligible for a tIRA or direct Roth).  You would then convert that money to a Roth post-RE, as above, when your tax rate is lower.
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