Building a buffer

[Random]

What are the strongest ways people use to build a buffer in their FIRE strategy.  Some thoughts:
- use 3% SWR
- add $5k to estimated annual expenses
- have $500,000-1,000,000 remaining estate in retirement calculators
- discount projected future revenue streams (pensions, SS)
- all of the above.

How do you increase the likelihood of FI success?

And what do you think provides the most convincing argument to a somewhat reluctant spouse?

[beltim]

I'd use a calculator like FIRECalc that uses actual historical data.  You can then see what the worst historical case would have been, and plan accordingly.

[2527]

I think a good way is to take X% of net worth every year, instead of X% of NW in the base year plus an adjustment for inflation every year after that.

In the long run, it should be about the same withdrawal, but it takes a load off the portfolio in down years.  But it makes the year to year income less stable, which some people may have trouble with.

[nawhite]

I think you answered your own question, the strongest way to build a buffer is to include all of those things you listed. However, if you did that, you would postpone your FI date unnecessarily.

My personal favorite is to have a past time/hobby that you could theoretically scale all the way until it pays as well as your living expenses. Lets say you are living like the MMM family and spending <$30k per year. Coming up with a fun and enjoyable job that pays at least that well isn't terribly hard and if you have a spouse, its ridiculously easy for each of you to earn $15k/year. At that point you never touch your investment returns so your withdrawl rate isn't 3% or 4%, it is 0%.

Ideas on how to earn 15k/year are significantly easier to come up with than the 50k/year the blog was trying to find. My personal favorite is raft guide in summers and ski instruct in winters.

[footenote]

My two buffers are:
- Having up-to-date and in-demand consulting skills (and keeping them updated) - hopefully in a field you truly enjoy working in
- Buying a mustachian home for cash* and not including the equity in the FIREcalc (or other) calculator's assets

First buffer gives you a better chance to putter around and decrease (maybe even eliminate) SWR in the first five (?) years of retirement. Second buffer is a backstop toward end-of-life in case there is another Great Depression, crazy care expenses, etc.

*This is controversial here - YMMV.

[Eric]

If you plan to earn even a little bit of income during your retirement, it's actually a huge buffer for your portfolio.  Especially if you can use it to decrease your withdrawal amounts during down markets.

Have you read MMM's thoughts on the buffer?

http://www.mrmoneymustache.com/2011/10/17/its-all-about-the-safety-margin/

[arebelspy]

All good ideas.

My personal buffer will be building equity via mortgages paying down.  Rents should rise with inflation, home value should rise with inflation, and I'll live off cash flow, but the extra buffer layer is the equity gained via principal paydown (which should put my savings rate in FIRE, counting that, at about 30%).

[Another Reader]

Yep, that equity build-up is a nice addition to the asset stash and to the savings rate in FIRE.  Income and savings, all in one asset portfolio. 

[Kriegsspiel]

I will probably try to find an interesting part time job. Most likely at a university, so that I can take classes for free (maybe get a second degree, maybe a masters).

[Random]

Thanks for all of the great responses.  There seems to be a strong signal for having a revenue stream early in retirement as a strong buffer that allows the stache to grow relatively (or completely) untouched.

I think you answered your own question, the strongest way to build a buffer is to include all of those things you listed. However, if you did that, you would postpone your FI date unnecessarily.

Perhaps true, though likely not postpone indefinitely.  For me, I think I am there today with good buffers (the wife is less sure of it).  I have a thing or two yet to accomplish at a good job that I generally enjoy (though would rather do sporadically than all day, all week) so I see myself working a minimum of another year, more likely two more (possibly 4-5 more if the right opportunities emerge)

ps, thanks for the link the the MMM post on the buffer

[sol]

There seems to be a strong signal for having a revenue stream early in retirement as a strong buffer that allows the stache to grow relatively (or completely) untouched.

I've thought about "retiring" by cutting my working hours to half time or less.  I love almost all of my job, and staying with it part time would be a great retirement hobby.  And I'd feel a lot more willing to shout FU at anyone who asked me to do something I didn't want to do, compared to what I feel right now.

[StetsTerhune]

I'm planning on a fairly agressive withdrawal rate from my portfolio, coupled with working hard to not burn any bridges when I quit my job.

My main buffer is that I will retire early enough that in the worst case scenario I can just go back to work. Looking at the data behind the 4% rule, all the "worst-case scenario" come with a lot of warning. If I retire and the market drops 60%, then I'm gonna either have to tighten my belt hugely or get a job. I'm ok with that.

[Random]

"...the worst case scenarios come with a lot of warning."

So you could say to yourself, "I am at FI under "normal" conditions, but right now there are a lot of warning signs, so I am going to double down on ensuring I have a bigger buffer before pulling the trigger.  What warning signs or market conditions should we be looking at? 

Todd Tresidder at Financial Mentor.com looks at historical analyses of SWR stratified according to where the P/E ratio of the S&P500 was at the start of the period.  Your mileage would clearly vary if you started retirement at a p/e of 20 v. 13, so that is one indicator.  Others?

[StetsTerhune]

My bad, Random.

Rereading my post, it definitely seems like I feel like I have some secret future predicting formula.

I do not, nor do I particularly believe in such things.

What I meant by "a lot of warning" was something to the effect of "if the market drops 50% and my original SWR of 4% is suddenly 8% based on current market valuation, I'm probably going to run out of money somewhere in the next decade or two"

This is what I meant by a lot of warning and I would attempt to get a job to avoid withdrawing 8% of my portfolio in the next year under those circumstances.

[JohnGalt]

My personal favorite is raft guide in summers and ski instruct in winters.

Is this easy to get into?  Particularly the raft guiding.  Something I've always wanted to do when I'm done caring about how much I take home.

[Eric]

I'm planning on a fairly agressive withdrawal rate from my portfolio, coupled with working hard to not burn any bridges when I quit my job.

My main buffer is that I will retire early enough that in the worst case scenario I can just go back to work. Looking at the data behind the 4% rule, all the "worst-case scenario" come with a lot of warning. If I retire and the market drops 60%, then I'm gonna either have to tighten my belt hugely or get a job. I'm ok with that.

And this is based off of the FIRE Calc simulations and other studies that show that historically the only time you run out of money is if you retire right at the peak of a bull market, correct?  Based on that, the seemingly only time the 4% Safe Withdrawal Rate fails is when the markets make a huge drop shortly after retirement.  So therefore, if you retire, and the markets drop 60% as you're saying, then you'll know that you'll probably come up short and have to make some changes, but you'd still have lots of years to figure it all out.  Of course past results are not indicative of future returns, but it seems like a pretty good guide.

[StetsTerhune]

  Based on that, the seemingly only time the 4% Safe Withdrawal Rate fails is when the markets make a huge drop shortly after retirement.  So therefore, if you retire, and the markets drop 60% as you're saying, then you'll know that you'll probably come up short and have to make some changes, but you'd still have lots of years to figure it all out.  Of course past results are not indicative of future returns, but it seems like a pretty good guide.

Exactly! Much clearer the way you said it than the way I said it.

[backyardfeast]

Lets say you are living like the MMM family and spending <$30k per year. Coming up with a fun and enjoyable job that pays at least that well isn't terribly hard and if you have a spouse, its ridiculously easy for each of you to earn $15k/year. At that point you never touch your investment returns so your withdrawl rate isn't 3% or 4%, it is 0%.

This is basically our plan.  We are older, and plan to "retire" in 10 yrs at 50 and 60 yrs old.  At that point, with the house paid off, we should be able to live on $30K.  The stash we save between now and then would need only to be a bridge to SS for DH (60--SS kicks in at 67 at the moment in Canada), so if we can earn that $30K part-time for as long as possible, we should be in great shape.  The good news is that I can earn more than that part-time teaching, and have some flexibility: 2 days/wk, 8 mos/yr or 4 days/week, 4 mos/yr, etc.  That's if DH earns no money at all, which seems unilkely.

For us, FI will be the house paid off, rather than the size of the stash--the stash will be for unexpected needs: medical, forced unemployment, unexpected travel or home repairs, etc.  And we'll have the home equity too.  So the buffer is really the interest, for us, in earning that bit of income to cover basic expenses.  The amount of money seems so low that I figure we can earn it doing things we enjoy that just keep us engaged in life and the community; we won't have to worry about what it pays, per se.

[matchewed]

I will probably try to find an interesting part time job. Most likely at a university, so that I can take classes for free (maybe get a second degree, maybe a masters).

I like this idea. I've put part time work into and out of my calcs several times. I don't need it but it is a buffer and I like part time work so I don't view it as a bad thing.

[brewer12345]

I'm planning on a fairly agressive withdrawal rate from my portfolio, coupled with working hard to not burn any bridges when I quit my job.

My main buffer is that I will retire early enough that in the worst case scenario I can just go back to work. Looking at the data behind the 4% rule, all the "worst-case scenario" come with a lot of warning. If I retire and the market drops 60%, then I'm gonna either have to tighten my belt hugely or get a job. I'm ok with that.

And this is based off of the FIRE Calc simulations and other studies that show that historically the only time you run out of money is if you retire right at the peak of a bull market, correct?  Based on that, the seemingly only time the 4% Safe Withdrawal Rate fails is when the markets make a huge drop shortly after retirement.  So therefore, if you retire, and the markets drop 60% as you're saying, then you'll know that you'll probably come up short and have to make some changes, but you'd still have lots of years to figure it all out.  Of course past results are not indicative of future returns, but it seems like a pretty good guide.

Actually, the most unfortunate retirees in US history are the ones that bailed in 1966.  What followed was a prolonged period of low nominal returns from most asset classes and very high inflation.  This was actually worse than the Great Depression for portfolio survival.

[nawhite]

My personal favorite is raft guide in summers and ski instruct in winters.

Is this easy to get into?  Particularly the raft guiding.  Something I've always wanted to do when I'm done caring about how much I take home.

Raft guiding in the US is pretty darn easy to get into. In most states, you just have to have CPR/First Aid certifications and show up for a guide training program. On the East coast, guide training is ~4-6 weekends in March or April or May, on the west coast and rockies its usually 1-2 weeks straight in early April.

Usually it is pretty darn hard to make much money your first year as a guide for a couple reasons.
1. Some companies make you work to pay off the training fees.
2. You need to get a minimum number of trips on a river to be certified in that state. This limits the number of trips you can get paid for in one season.
3. You need to buy some minimum amount of gear. (helmet, life jacket, throw rope, clothes)

 My first year, I lived in a tent, and customer tips paid for food and beer and at the end of the season, I had enough money saved up to buy some gear and a kayak and that was it. PM me if you want to know more.

[PantsOnFire]

Since I'm busy (read "lazy") and I haven't gotten past ballpark estimates, I just ignore my defined benefits pension and SS altogether, and plan on a very frugal retirement.  Then when/if some pension and SS payments show up out of the blue, they can be used to purchase a plethora of tuxedos, top hats, and monacles.