The Money Mustache Community
Learning, Sharing, and Teaching => Case Studies => Topic started by: bluepearl on September 05, 2017, 11:01:42 PM
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Hello all -
I may have spent too much time at the bogelheads forum recently. I got a bit discouraged reading case study after case study of people 50+ with net worth north of $1M, $2M, and being told they don't have enough...
I am hoping fellow mustachians can give me some level headed guidance, on what my FI amount should be, so I have a proper goal to work towards. Thank you in advance.
Life Situation: single, age 39.
Individual amounts of each Pre-tax deductions 401k, HSA, FSA, IRA, insurance, etc. -
this is the first year I plan to do them all: 18K 401K, 2.4K HSA, 5.5K backdoor IRA.
Other Ordinary Income: ebay resales. $6K to $12K revenue annually.
Current goal for ebay is to have close to zero addition to income (or small negative) after home office use, miles, share of house expense during wage slave years.
I have completely slacked off on this after I paid off my mortgage last year. If I need cash I can probably crank it up and get $1K/month on part time hours to supplement living expenses.
For the first 5 years of ER I plan to keep doing this part time, travel part time, and do roth ladder conversions.
In my future income estimates I do not consider US social security and Canada CPP (worked in Canada for a couple of years too). If they are still around by the time I retire, they will be nice extras.
Taxes: 28% federal tax bracket, no state.
Expenses:
$27K total annual expense, using relevant average figures $24K for last 6 years, and add $3K for health insurance in the future.
$20K necessary expenses:
$8K home related bills (I have already excluded mortgage P+I since they are gone, prop tax and insurance are still in here, plus electricity, condo fees, garbage, internet etc.).
$4K perishables (all things that will disappear such as groceries, toiletries etc.)
$2.5K car, gasoline
$5.5K finance, fees, mom's bills (mom's bills after my sister reimburses 50%, fancy credit card annual charges - about $1K can be reduced if needed. I have budgeted health and dental care at $3K/ year based on an online enrollment form I filled out today. I am open to medical tourism to get basic stuff done such as regular check ups or teeth cleaning)
$7K discretionary expenses:
$5K books, stuff, clothing (I have not been frugal...)
$1K take out and dine out
$1K travel (limited travel, most of what I do is currently subsidized by employer and/or credit cards)
In my ER years I think my books, stuff, clothing category will go down but travel will go up, so holding this category constant. I find that lifestyle inflation is super easy, but each year I hold myself accountable to a $24K budget by selling more personal items or eating out less, or cancelling pre-booked trips.
If I travel during ER for a couple weeks/months I am also planning to rent out my home/ a room to help offset the cost.
Assets:
~$500K investable assets excluding principal residence. Quickly increasing each month to the tune of 5K -10K per month now since I am debt free.
By the time I pull my trigger I will either have 3 fund or permanent portfolio set up properly, with the right amount of emergency funds. Right now I have way too much cash, so immaterial dividends to include in this analysis. But eventually I see myself holding 50% of my invest-able asset in a total equity fund, some combination of VTI + VTSAX, plus fidelity/ schwab equivalents.
~$375K+ principal residence no plan to sell.
Liabilities: None
Specific Question(s):
(1) My main question is how much buffer I should have before I pull the trigger.
If I only take my necessary expense $20K * 25 = 500K I have the amount. If I include discretionary expenses I will reach it soon (may be in a year or two)? But 600K-700K assets include no buffer.
Common rounded numbers I have seen include 1M or 2M but they are commonly couples/ families numbers. How should I set the right goal for 1 person?
Common ways to include buffer including taking down SWR to 2% or 3%. Should I just make my buffer at 2% SWR? This seems to be what the bogelheads would have done for early retirement people. So 27K/2% or 1.35M. Rounding up for more buffer very soon you get to 2M.
(2) What else should I budget for? common answers seem to be (a) health insurance (b) travel (c) helping low income family out.
First two I have already included in my 27K budget but may be not enough. Again, lifestyle inflation can be super easy...
My mom will need some help during her life (winter jacket as gifts, heating bill that kind of thing. She lives in Canada so I don't expect crazy medical bills). But I'm also expecting a small inheritance from my dad eventually so I think the parents bucket will even out, with obviously a timing difference.
One final thing to note, my 2 grandmas died shortly before 100, (96, 97, 98?) in relatively good health, living alone or with part time help. So in all my calculations I have life expectancy set to age 120. I don't plan to live at fancy assisted living facilities or be fed through a tube to maintain my life.
It would take me till I am 48 to reach $2M, saving $100K a year at 6% return. 48 seems too long , working at where I am now... It's not really early retirement... Do I really need 2M? Or can I quit no matter what once I hit a number (say 1.35M? 1.5M?), plus some magical age (43? 45?)
I look forward to your collective advice, thanks again!
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I understand your fear, 700,000 would not make me feel safe, too. But doubling it and rounding it up to 2 million seems to be the other extreme.
Aim for a million and then maybe soft-launch the RE part. You talk about working part time and renting out the house. This could already be enough income to fund your planned lifestyle and in addition it mitigates the risk of an economic downturn at the beginning of the retirement.
Another way would be to make a sabbatical with the option to return to your high paying job. Then you can really test your assumptions (and you are not the guy who failed to retire early and had to come back to beg for a job).
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The first thing I would encourage you to think about is a fund for periodic capital expenses -- new roof for the house, replacement car, new appliances/HVAC, etc. I also agree that your set-aside for health insurance might not be high enough.
The second thing to consider is whether you may get married, have kids, etc. Not that those things make it impossible to RE on $27K/yr, but they do provide many more opportunities for lifestyle inflation.
Otherwise, I'd say don't let fear hold you back. You seem to have a number of built-in safety nets, between renting out rooms, eBay, etc.; with your low expenses, just bringing in a few grand a year will really help bridge any shortfalls. If you want a little more of a safety net, just assume $30K/yr expenses ($750K target), or maybe $35K to be very conservative. But if you are happy with your current lifestyle and expenses, and can keep the lifestyle inflation under control, you really don't need to keep going into the millions to be comfortable.
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48 seems too long , working at where I am now... It's not really early retirement
I think you'll feel differently at 48. It's very early for retirement. People will still look at you funny for even mentioning it.
Source: I'm much closer to 48 than you and people look at me funny when I mention it.
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I'd encourage you to spend some time reading the thread on why you should not worry about the 4% rule. Also, spend some quality time running simulations on cFIREsim to see what your actual spending and asset allocation might bring about. Personally doing both made me feel that they people spending time discussing 3% vs. 3.5% withdrawal rates are just wasting precious minutes of their lives that could be spent having fun. It is critical to make sure you have a good percentage of your investments in stocks to make the long retirement work, but otherwise I agree with others to not let fear get you down. Heck, add in SS into the mix as your backup and see how much more comfortable you would be pulling the trigger.
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H If I need cash I can probably crank [ebay] up and get $1K/month on part time hours to supplement living expenses.
For the first 5 years of ER I plan to keep doing this part time, travel part time, and do roth ladder conversions.
In my future income estimates I do not consider US social security and Canada CPP (worked in Canada for a couple of years too). If they are still around by the time I retire, they will be nice extras.
So you need ~$27-30K/yr to live and have a viable side gig that could generate $12K/yr which means you really only need $18K/yr.
Are you working in an industry that only has a 'one-way' door? Could you take a year off and then go back to work? If so, I would recommend that you quit with the expectation that you'll take 6-24 months off and then reevaluate if you want to go back to work. You might find you'll want to go back or a market correction might push you back; you might find that your ebay business takes off with more focus and generates plenty to cover your entire annual living expense and you'll laugh at the fact that you use to be worried. Either way, you'll get a (most likely) much needed break now and could continue building in the future if needed.
On another note, I agree with Laura33 that your health insurance estimate seems low. Average for the us is like $5-8K/yr, not $3K.