Author Topic: My FIRE plans - need advice  (Read 890 times)

Deo

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My FIRE plans - need advice
« on: April 15, 2018, 04:29:24 PM »
Hello,

I'd appreciate some advice.

I have a plan to reach financial independence by age 42 (10 years from now), at which point I plan to move somewhere beautiful (probably Devon).  I've chosen this particular date primarily because this is when my daughter will turn 12 and will start secondary school, so it is a natural point to move.  Obviously, I've also selected it because it is (or so I thought) viable at a push.

Being a software engineer and mathematician, I've built a highly sophisticated spreadsheet that takes many things into account, including tax, state pension, private pension, inflation etc. I've always been someone who is ridiculously frugal, but I've never been much interested in investing. Until now, I've just been overpaying my mortgage with a vengeance. However, now that I have my spreadsheet and am taking this more seriously, it's become abundantly clear how important getting proper returns on savings will be to my plans. The issue is that I'm having real doubts about the returns people claim are possible.

What data can I look at to give me confidence that investing is going to pay off?

I've looked at 20+ years of data from the dow jones, FTSE 100 and a few other indexes and I'm not at all convinced by what I see.  However, it's entirely possible that I'm not "getting" it. I'm the first to admit that I'm generally ignorant about investing, so may just need to improve my knowledge. Any particularly good sources?

My plans require my savings to grow by, on average, 5% per year. 

To make it more concrete, assuming 5% savings growth over the next 10 years, and 2.8% pension growth, I'll have:

  • 550,000 pension pot
  • 300,000 in savings
  • my current house, fully paid off, currently worth ~420k

I plan to buy a house costing ~100k more than my current house, so I'll actually be left with 200k in savings.  This runs out at age 52, but I had planned to bridge the gap to age 55 by releasing equity in the house or possibly by working a little.

A few other scenarios:

If I don't invest and make nothing on the savings, it runs out at age 48.
If I make 7% on average per year, I get pretty close to age 55.
If I lose 3% per year, the whole thing probably loses it's viability entirely.

...And then I read this that potentially blows a massive hole in my plans:https://www.telegraph.co.uk/finance/personalfinance/special-reports/11537512/Cash-in-your-pension-at-55-You-may-have-to-wait-till-70.html

Basically, it suggests that private pension age in the UK could shift as much as 12 years for people my age. Hitting this age will release between 150,000 and 200,000 in a tax-free lump sum, and my FIRE master plan depends upon bridging a few years (possibly by releasing equity in my house) and then paying this off upon receiving the lump sum.

It's tempting to pay less into my pension, put it into savings and hope for 7+% returns to keep the plan alive; however, it seems crazy to throw away the insane amount of tax relief I get due to my salary sacrifice pension contributions.

Another option is to delay my great escape by a couple of years.. but then I miss the critical age for my daughter. One of the main reasons I'd like to make the move and give up work at this time is to be able to be a much more meaningful part of my daughter's life before she's too old and too cool to have me around.

Maybe I should just make the move, even if it only means 5 years of independence... but then I may feel that "running out of money" is looming over me all the time and I may be kicking myself for not just spending a couple more years in my highly paid job which would have given me a lifetime of financial security.

Thoughts?

I suppose the reality is that I will just have to wait and see what happens, and make the decision closer to the time based upon the facts then.


Cranky

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Re: My FIRE plans - need advice
« Reply #1 on: April 15, 2018, 05:49:05 PM »
12yo is a terrible time to move, IMO, especially for girls.

Lady SA

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Re: My FIRE plans - need advice
« Reply #2 on: April 15, 2018, 06:12:54 PM »
you don't have to FIRE and move all at the same time. Especially at such a critical age for your daughter. Tweens and teens do much better with stability and sticking with their friend group. Plus, buying a much more expensive house upon FIREing wouldn't be in your best interests. You should be looking to downsize at that time (your daughter will be at the age where she takes up a lot less room), not up-size.

Are you married? Have you discussed FIREing with your partner? Are they on board?

Investing is a critical part of a retiree-s income stream. You need assets that grow at or above the rate of inflation + your withdrawal rate + fees in order to successfully rely on it as an income in the future. Inflation = 2.8% per year, withdrawal = 4% per year (if you can supplement your living expenses with other income, this could be less), expense ratios/fees = 0.1% (don't fall for higher investment fees), for a total "even keel" rate needed of 6.9%.

Good thing that on average, stocks have returned ~7% every year. Yes, there are bumpy and volatile times, but that is to be expected. Definitely educate yourself further on investments, but keep it simple for yourself. Keep your investments in broad market index funds, and utilize a buy-and-hold strategy... no dancing in and out of the market. Set an automated transfer and forget about it.

Deo

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Re: My FIRE plans - need advice
« Reply #3 on: April 16, 2018, 01:21:57 AM »
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12yo is a terrible time to move, IMO, especially for girls.

Why? At this age she will be transitioning to secondary school, at which point she will have to make a new group of friends anyway because there's no guarantee which school she or her friends will move on to.

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Good thing that on average, stocks have returned ~7% every year.

This is exactly the mantra that I'm challenging.  How do you know this, other than that everyone says it? Where is the data that backs this up? From what I've looked at so far, it is not at all obvious.

marty998

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Re: My FIRE plans - need advice
« Reply #4 on: April 16, 2018, 05:54:45 AM »
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12yo is a terrible time to move, IMO, especially for girls.

Why? At this age she will be transitioning to secondary school, at which point she will have to make a new group of friends anyway because there's no guarantee which school she or her friends will move on to.

Ohhhhhh boy you are in for a world of hurt my friend! 12 year old girls do not operate like 32 year old male engineer brains!

She'll have friends outside of school, through sport, hobbies, activities and neighbours. And she will roll her eyes repeatedly at a comment like that from you :)

Laura33

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Re: My FIRE plans - need advice
« Reply #5 on: April 16, 2018, 08:30:40 AM »
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Good thing that on average, stocks have returned ~7% every year.

This is exactly the mantra that I'm challenging.  How do you know this, other than that everyone says it? Where is the data that backs this up? From what I've looked at so far, it is not at all obvious.

What do you mean, what data?  Why not just Google the historic market returns?  You can start here:  http://ritholtz.com/2014/10/stock-market-since-1900-2/

If you would like a better understanding of why this is, you can find it in any basic economics treatise.  Fundamentally, buying shares in a company is riskier than lending money to a company (bonds) or lending it to a bank to loan out to companies (savings accounts/CDs).  As a result, a rational investor is going to demand a higher return to invest in a share of stock than to buy a bond or CD.

Now, obviously, risk is just that:  risk.  You may choose a good company and make out like a bandit, or you may choose a crappy one and lose everything.  But that is why the invention of the mutual fund/ETF in general, and the index fund/ETF in particular, has been so powerful for the average consumer:  we no longer need to flyspeck every possible company's financials and business plan; we can just buy VTSAX, and Vanguard will buy us a piece of thousands of companies.

Which means, in turn, that what you are really buying when you buy an index fund is a piece of the broader economy.  And the success of that economy, in turn, rests on the continued ingenuity of the human species to create and invent and imagine.  So if we all continue to show the creativity and drive that made us the dominant species on the planet, then economy continues to grow, the companies and individuals who are driving that economy make money, and our investments pay off.  OTOH, if the economy craters, so will the market. 

Personally, I have a lot of faith in the ingenuity of the human species as a whole; I mean, we didn't get to the top of the food chain by accident.  But beyond that, I figure that if the economy craters, I'm not retiring anyway, and I'll have bigger things to worry about (like finding/keeping a job, paying my bills, fending off the zombies, etc.).  So I'm putting my money in the market, which is going to get me where I want to go so long as people keep doing what we've always done. 

jlcnuke

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Re: My FIRE plans - need advice
« Reply #6 on: April 16, 2018, 08:44:50 AM »
The average annual return of the S&P 500 since its inception is ~10%, or about 7% adjusted for inflation. Lots of places to find "historical market average returns".

PizzaSteve

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Re: My FIRE plans - need advice
« Reply #7 on: April 16, 2018, 08:58:21 AM »
There is no free lunch, so your plan will require more saving or better investment returns. 

Better returns require risk taking and there are no guarantees, so I am not sure anything we say will convince you.  You are smart and can read.  That said, the Bogleheads Wiki is a gret succinct primer on investing and expected returns from an efficient equities approach.

Frankly, you sound risk adverse, so I would suggest more years of work and perhaps 50% of assets in 'safe' 50% in an equity index as a starting point.  After 5 years see where you are and whether you want to go to 80%.

Seeking a perfect plan or understanding is the enemy of taking action.  There will be bumps along the way, but as you say, the savings needed under a low returns scenario are much greater, but could be also acceptable.  Another approach is to see how you can earn more via work or side jobs.  A different sort of risk there, but it is an alternative way to make the math work.
« Last Edit: April 16, 2018, 09:03:09 AM by PizzaSteve »

Deo

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Re: My FIRE plans - need advice
« Reply #8 on: April 17, 2018, 12:44:02 AM »
Thanks for the help!

I found a good source of downloadable macro data , so I'll do the number crunching myself:  http://www.macrotrends.net/1319/dow-jones-100-year-historical-chart

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Frankly, you sound risk adverse

I like to understand risks before taking them. Saying that one can expect an average annual return of 7% on a diverse portfolio over 10+ years, but that there is "some" risk is pretty meaningless. How much risk? Given past data, what is the probability that I will get at least 5%? What is the probability that I will get out less than I put in? etc.  I'd like to know the answers to these questions and the math behind the answers.