A slightly different strategy

[GreenSheep]

I was considering doing this, thought I must have made a math/logic error somewhere because I had never heard of anyone else doing it, and then I read today on thepowerofthrift.com that this is what she's doing, so maybe it's not so crazy.

Let's say you're 3 years from FI at your current income/spending rates. If you stop contributing to your 'stache today, it will take it 6 years to grow to your desired FI level assuming an average 7% interest rate and no withdrawals. You can earn enough income at your current job in one year to support your current lifestyle for the next 6 years. So you could quit 2 years early, live on your savings, and let your invested 'stache continue to grow for another 5 years (subtracting one because you're actively working and living on your earnings for that first year of the 6 years).

There has to be a down side. Obviously the market could take a downward turn, but aside from that, what am I missing?

[yachi]

For these things to all be true at the same time, you need to be spending much more today than you expect to spend in retirement.  If every year you work you can save 5 year's worth of ER expenses, then you should be closer than 3 years away from FI.  For example, If you start with close to 500k, expenses are 30k, income is 180k, you'll hit 750k in 6 years without contributing to your stache.  But you would have been way ahead of 750k at year 3 if you instead added your 150k saved every year.  Indeed you would have hit 880k in year 2.

                          Save & Invest       Retire & Wait
Today:                      499,756.67    499,756.6679
Added:                      150,000.00                       0
Value in 3 years    1,094,458.41     612,223.41
Value in 6 years    1,244,311.61     750,000.00

[dandarc]

Reads like you're actually 1 year away from your FI number at current income / spending rates, since you can retire in 1 year.

[CmFtns]

Let's assume you live of of $10,000, you make $60,000, and calculate for 7% inflation adjusted returns so that we have EZ-Math

You proposed that you are 6 years of market returns away from your fire number (let's say $250,000 again) so that means right now you have around $167,000

Your proposed idea:
Start (Beginning of year 1) Bank: 00k Fire Account: 167k
year 1  Bank: 50k Fire Account: 178k (You work this year & put 50k in bank)
year 2  Bank: 40k Fire Account: 191k (Retired & withdraw 10k from bank @ start of year)
year 3  Bank: 30k Fire Account: 204k
year 4  Bank: 20k Fire Account: 219k
year 5  Bank: 10k Fire Account: 234k
year 6  Bank: 00k Fire Account: 250k

Just stick it in retirement account:
Start (Beginning of year 1) Bank: 00k Fire Account: 167k
year 1  Bank: 00k Fire Account: 228k (You work this year & put 50k in Fire Account)
year 2  Bank: 00k Fire Account: 233k (Retired & withdraw 10k from fire account @ start of year)
year 3  Bank: 00k Fire Account: 239k
year 4  Bank: 00k Fire Account: 245k
year 5  Bank: 00k Fire Account: 252k
year 6  Bank: 00k Fire Account: 259k

So as you can see you would be better in the assumed average scenario if you invested the 50k into your fire account and withdrew from there rather then putting it in the bank and withdrawing.

I guess the leson is that you are not ready to fire just because you are 6 years of average returns away from your fire number with 6 years of expenses in the bank.

The 4% rule will give you more security than the scenario you proposed.

[yachi]

Let's assume you live of of $10,000, you make $60,000, and calculate for 7% inflation adjusted returns so that we have EZ-Math

You proposed that you are 6 years of market returns away from your fire number (let's say $250,000 again) so that means right now you have around $167,000

Your proposed idea:
Start (Beginning of year 1) Bank: 00k Fire Account: 167k
year 1  Bank: 50k Fire Account: 178k (You work this year & put 50k in bank)
year 2  Bank: 40k Fire Account: 191k (Retired & withdraw 10k from bank @ start of year)
year 3  Bank: 30k Fire Account: 204k
year 4  Bank: 20k Fire Account: 219k
year 5  Bank: 10k Fire Account: 234k
year 6  Bank: 00k Fire Account: 250k

Just stick it in retirement account:
Start (Beginning of year 1) Bank: 00k Fire Account: 167k
year 1  Bank: 00k Fire Account: 228k (You work this year & put 50k in Fire Account)
year 2  Bank: 00k Fire Account: 233k (Retired & withdraw 10k from fire account @ start of year)
year 3  Bank: 00k Fire Account: 239k
year 4  Bank: 00k Fire Account: 245k
year 5  Bank: 00k Fire Account: 252k
year 6  Bank: 00k Fire Account: 259k

So as you can see you would be better in the assumed average scenario if you invested the 50k into your fire account and withdrew from there rather then putting it in the bank and withdrawing.

I guess the leson is that you are not ready to fire just because you are 6 years of average returns away from your fire number with 6 years of expenses in the bank.

The 4% rule will give you more security than the scenario you proposed.

Except the scenario should also place you 3 years away from FI.
I get:
Start (Beginning of year 1) Bank: 00k Fire Account: 167k
year 1  Bank: 0k Fire Account: 229k (7% gain, 50k added end of year)
year 2  Bank: 0k Fire Account: 295k (7% gain, 50k added end of year)
and Bam! you're FI before year 3

[Gondolin]

The 7% average return rule is ONLY valid for periods of +20 years. Applying it to short term plans (<10 years) and ignoring volatility is an easy way to fool yourself into thinking your are closer to FI than you really are.

[GreenSheep]

Thanks for the insights. That was especially helpful, CmFtns. Best to stick it out!

One clarification I should have made is that I plan to spend more after FIRE due to travel. That's why I'm not as close to FI as it appears I should be. I do travel a fair amount now, but I'll do more after FIRE... though with the ability to do more slow travel, I might not end up spending that much more... in which case it will just be a nice buffer.

[arebelspy]

The idea is over simplified, so the math doesn't actually work when you run it.

It's probably more like this:
You're 11 months from FIRE number $X counting contributions and market growth... then, by not contributing to your retirement investments for a year, but a cash buffer, you need to work for a year, rather than 11 months.  Then you can live on that cash buffer for the first year, stache grows (over that year of working plus year of ER) to your FIRE number, and then you're good.

Aka the cash will add a drag to your portfolio, on average, that will add a slight amount to your FIRE time, and increase it from 11 months to 12 months, or whatever.