Author Topic: Am I FI?  (Read 10929 times)

NinetyFour

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Am I FI?
« on: August 22, 2014, 04:14:31 PM »
I think there are slightly different definitions out there of FI, so I thought I would ask for opinions about my situation.

My investments total $320,377.  At 6% annual growth, they generate about $19,224 per year.  My expenses are roughly $18,000 per year (including minimum mortgage payments).

Since my investments generate (on average) more than my expenses, does this mean that I am FI?

Thanks in advance for your thoughts.

Hugh H

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Re: Am I FI?
« Reply #1 on: August 22, 2014, 04:33:23 PM »
Markets are close to crapping out IMO so don't declare victory yet.

Freedom2016

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Re: Am I FI?
« Reply #2 on: August 22, 2014, 04:36:28 PM »
You have not reached a 4% Safe Withdrawal Rate so.... I'm gonna vote no.

NinetyFour

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Re: Am I FI?
« Reply #3 on: August 22, 2014, 05:01:56 PM »
To clarify:

Even if the answer is "Yes, you are FI", it wouldn't change my current plan.  I will still work 3 - 4 more years to reach my magic FIRE number.

Yes, I know I have not reached my magic number for FIRE, but I thought reaching the point where one's passive income > expenses was significant.  Am I wrong?

By the way, I think my magic FIRE number will occur when my Cash + Investments - Mortgage Balance = $420,000.  Right now, that number is only $125,000, so yes, I have got a ways to go!

Thanks.

randymarsh

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Re: Am I FI?
« Reply #4 on: August 22, 2014, 05:13:38 PM »
Markets are close to crapping out IMO so don't declare victory yet.

Source?

nereo

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Re: Am I FI?
« Reply #5 on: August 22, 2014, 05:29:11 PM »
Markets are close to crapping out IMO so don't declare victory yet.

Source?

I'm also wondering what a market "crap out" looks like.  Is that worse than a correction?

Regarding the OP's original question - I tend to think of "FI" as a continuous spectrum.  You've got enough that returns exceeds your expenses on a average year, but probably not enough to survive for 30+ years of market volitility.

steveo

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Re: Am I FI?
« Reply #6 on: August 22, 2014, 05:34:53 PM »
I thought reaching the point where one's passive income > expenses was significant.  Am I wrong?

I think you have it wrong because you are counting capital growth in your passive income. What if capital growth goes down to 2%.

happy

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Re: Am I FI?
« Reply #7 on: August 22, 2014, 05:37:09 PM »
I would say if you want, you could consider yourself FI, but not yet able to RE. Congratulations, passive income> expenses, woo hoo, way to go!. Celebrate!
However your are really FI at a 6% withdrawal rate, and need to get a bit more breathing room before you are really free. If inflation continues in its current fashion,  the value of your stache  and its yield will gradually decline in real buying power. So thats why some might not consider you truly FI. 
I would celebrate twice - now at minimally FI and later when you get inflation proof FI. 2 Happy dances are better than 1.

NinetyFour

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Re: Am I FI?
« Reply #8 on: August 22, 2014, 05:45:25 PM »
I would say if you want, you could consider yourself FI, but not yet able to RE. Congratulations, passive income> expenses, woo hoo, way to go!. Celebrate!
However your are really FI at a 6% withdrawal rate, and need to get a bit more breathing room before you are really free. If inflation continues in its current fashion,  the value of your stache  and its yield will gradually decline in real buying power. So thats why some might not consider you truly FI. 
I would celebrate twice - now at minimally FI and later when you get inflation proof FI. 2 Happy dances are better than 1.

Ooh, I like this.  I get to celebrate a little now and a lot later!

More info:  if (IF) all goes according to my predictions, when I hit the $420,000 number, my investments will be at (around) $538,000, generating over $32,000 per year--way more than my projected expenses.

Roland of Gilead

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Re: Am I FI?
« Reply #9 on: August 22, 2014, 05:57:11 PM »
You need about a 50% return on your current investments to get you to a 4% SWR.

If you get 6% real growth and make zero additional contributions you will get there in 7 years.

So just do something for 7 years that doesn't require you touch your investments and bingo!   :-)

NinetyFour

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Re: Am I FI?
« Reply #10 on: August 22, 2014, 06:06:05 PM »
You need about a 50% return on your current investments to get you to a 4% SWR.

If you get 6% real growth and make zero additional contributions you will get there in 7 years.

So just do something for 7 years that doesn't require you touch your investments and bingo!   :-)

Right now, the plan is to stay at the current job for at least 3 more years.  Currently, an additional $2750 is contributed to investment accounts every month.  If this changes, it will only be in the upwards direction.

EscapeVelocity2020

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Re: Am I FI?
« Reply #11 on: August 22, 2014, 06:47:42 PM »
Well, I don't know your age or marital situation, but FI / RE is a whole lotta' factors that you haven't really discussed.  You seem to be relying on nominal stock market gains to 'make it so'.  I'm a little nervous about the steady US Market gains young people are depending on and low inflation (and have been accused of needing a tinfoil hat, so there you go).  Things could just as likely turn into higher inflation and lower market returns, meaning zero 'real' returns (or negative, you know, that used to happen from time to time).  I am calling myself FI under the 1996 - now scenario (big market downdraft in 2000 and 2008), but sure, you are FI if you get 6% real for the rest of your life - so that's where people are coming from when they say maybe you are being a little optimistic.  I'll be on my yacht, watching 'Wolf of Wall Street' to come up with what I'm going to buy next if that happens :)

NinetyFour

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Re: Am I FI?
« Reply #12 on: August 22, 2014, 07:29:01 PM »
I'm single and 53 (late to the party, I know).

And like I said, whether or not I am technically (minimally?) FI right now doesn't really affect my plan to keep working for 3-4 more years.  I was mostly just curious.

According to this, maybe I am at level 5?

http://retireby40.org/stop-saving-money/

Ynari

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Re: Am I FI?
« Reply #13 on: August 22, 2014, 09:00:32 PM »
Are you accounting for taxes in your yearly expenses?  If you spend $18k per year excluding tax, you may need something like $21k per year to cover taxes.  (Also, 6% annual withdrawal is ballsy and is an assumption I would challenge if anyone claimed FI.  After all, you could "assume" a 50% annual growth and be FI on only $36,000, but nobody would say you're FI.  But it's all about the assumptions.)

So I wouldn't call it an FI stash, but it's certainly big time FU money.

Nords

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Re: Am I FI?
« Reply #14 on: August 22, 2014, 09:38:22 PM »
At 6% annual growth...
The flaw in your logic overlooks the sequence-of-returns risk.  You're proposing to withdraw more than 4% per year from your portfolio during bad market years as well as during good market years. 

As long as the stock market goes up at least 6% every year then you should be fine.  If the stock market doesn't go up at least 6% during a year, then stop spending money from your portfolio until the markets catch back up with your 6% annual gains projection. 

Another way to make it would be to withdraw no more than 6% of your portfolio every year, no matter what your living expenses may be, and ideally Social Security will cover your longevity insurance.  Most ERs are not willing to live with that volatility of withdrawals. 

When you get to the point where you're eyeballing a 5% market annual growth assumption, then read about the 4%/95% withdrawal system in a library copy of Bob Clyatt's "Work Less, Live More".

taekvideo

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Re: Am I FI?
« Reply #15 on: August 22, 2014, 10:13:08 PM »
Definitely a nice milestone, grats.
Not quite FI, but almost there :)

chesebert

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Re: Am I FI?
« Reply #16 on: August 23, 2014, 03:22:39 AM »
I think there are slightly different definitions out there of FI, so I thought I would ask for opinions about my situation.

My investments total $320,377.  At 6% annual growth, they generate about $19,224 per year.  My expenses are roughly $18,000 per year (including minimum mortgage payments).

Since my investments generate (on average) more than my expenses, does this mean that I am FI?

Thanks in advance for your thoughts.
Given that average US stock market CAGR over a 30 year period is around 8.5%(adjusted for inflation), yes you are FI based on that measurement. You have just passed Level 1 FI.

For Level 2 FI, you will need to increase your holding so that you can get the same return based on 50/50 or 60/40 portfolio.

Once you reach Level 2, the next level FI is the 4% rule.

But don't stop there, the bonus level FI is when you can survive on the 4% withdrawal with 50% drop in the market. Most people don't ever reach this goal, but it's a good one to aim for.

I am in the same boat as you, just reached Level 1 FI. Good luck!
« Last Edit: August 23, 2014, 03:24:16 AM by chesebert »

NinetyFour

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Re: Am I FI?
« Reply #17 on: August 23, 2014, 04:46:26 AM »
Are you accounting for taxes in your yearly expenses?  If you spend $18k per year excluding tax, you may need something like $21k per year to cover taxes.  (Also, 6% annual withdrawal is ballsy and is an assumption I would challenge if anyone claimed FI.  After all, you could "assume" a 50% annual growth and be FI on only $36,000, but nobody would say you're FI.  But it's all about the assumptions.)

So I wouldn't call it an FI stash, but it's certainly big time FU money.

I believe that I wouldn't be paying much in taxes, as the amount of $$ I would be drawing down would be so small.  I will still have a mortgage when I quit the job, so I will still have the interest deduction.  I will also have the deductions associated with my rental property.

NinetyFour

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Re: Am I FI?
« Reply #18 on: August 23, 2014, 04:49:00 AM »
At 6% annual growth...
The flaw in your logic overlooks the sequence-of-returns risk.  You're proposing to withdraw more than 4% per year from your portfolio during bad market years as well as during good market years. 

As long as the stock market goes up at least 6% every year then you should be fine.  If the stock market doesn't go up at least 6% during a year, then stop spending money from your portfolio until the markets catch back up with your 6% annual gains projection. 

Another way to make it would be to withdraw no more than 6% of your portfolio every year, no matter what your living expenses may be, and ideally Social Security will cover your longevity insurance.  Most ERs are not willing to live with that volatility of withdrawals. 

When you get to the point where you're eyeballing a 5% market annual growth assumption, then read about the 4%/95% withdrawal system in a library copy of Bob Clyatt's "Work Less, Live More".

This all makes sense, except that I am not proposing to withdraw 6% of my investments per year.  As I said, I do plan to keep working until I reach my 4% number.  Perhaps you meant that, in theory, I am considering a 6% withdrawal?

Also I just checked and the book you referenced is in my local library--yay!  Thanks for mentioning it.

Nords

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Re: Am I FI?
« Reply #19 on: August 23, 2014, 10:12:54 AM »
This all makes sense, except that I am not proposing to withdraw 6% of my investments per year.  As I said, I do plan to keep working until I reach my 4% number.  Perhaps you meant that, in theory, I am considering a 6% withdrawal?
Well, you're planning to use the 4% SWR. That implies starting with a 4% withdrawal and boosting it each year for inflation.  (Although I agree up front that nobody actually spends their FI portfolio in this manner.)  If you withdraw 4% during the first year and the market drops 25% during the next year, your withdrawal during the next year will be a lot higher percentage than 4%.  That's fine because the Trinity Study analysis allows for variations like this, but you started out with the assumption that the stock market is growing 6% per year despite the fact that (1) it's a geometric average of a very volatile series of numbers, and (2) it might not even be 6%.  Your assumption is not supported by the Trinity Study upon which the 4% SWR is based.

This sounds like financial nerdiness (because it is), but it's why Dave Ramsey is so screwed up on his assumptions about market returns.  Among other fantasies, he's accused of calculating the stock market's returns as an simple arithmetic average instead of a geometric (compounded) annual return.  Simple but deadly for anyone with fewer assets than Dave Ramsey.

If you're planning a dividend distribution model, where you only spend what your portfolio earns that year, then you'd be financially fine.  But you'd probably be unhappy during a bear market.

Bob Clyatt spent considerable thought (and a big chunk of his own money) coming up with an alternative.  Bob withdraws 4% of his portfolio every year and does not adjust that amount for inflation-- it's just 4%/year.  However if the stock market drops 25% the following year, Bob's added an exception to that year's 4% withdrawal.  Instead of sticking to a 4% withdrawal of a portfolio that's 25% smaller (in other words, a 25% reduction in spending that year), Bob's system says to take 95% of last year's withdrawal.  You keep doing that every year of the bear market until your portfolio recovers and the 4%-of-the-portfolio amount is once again bigger than the 95%-of-last-year amount.  Bob's system was designed in the same way as the Trinity Study, and he paid a financial analyst firm to design the portfolios and back-test the system just as FIRECalc does with market history.

Also I just checked and the book you referenced is in my local library--yay!  Thanks for mentioning it.
I'm happy to-- Bob wrote his book with the help of the posters on Early-Retirement.org, and he's one of my mentors who got me moving on my book.  He's also a living example of what financially-independent early retirees do all day.  Take a look at his website:  http://www.clyattsculpture.com/

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MustacheNY

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Re: Am I FI?
« Reply #20 on: August 23, 2014, 07:29:58 PM »
I would say that you are FI right now, because you seem to not be taking into consideration possible Social Security or other pension income that you may have when you hit 62 or 66 (depending on when you decide to take Social Security).  Let's say hypothetically, you have social security that will pay out that $18,000 a year in expenses starting at age 66, then you only need enough assets to get you to that point, which it sounds like you already do.

NinetyFour

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Re: Am I FI?
« Reply #21 on: August 23, 2014, 07:56:37 PM »
Thanks for your comment, MustacheNY.  Unfortunately, in the job I have had for the past 15 years, I have not been paying into SS.  If I start collecting it at age 67, SS says I will get about $650 per month. ($450 at 62, $800 at 70.)  Still, for me, $650 is a big chunk of my monthly expenses, so that will definitely help.

Also, I rent out my "main" house and live in the Accessory Dwelling Unit, so there is that income as well. Right now it brings in $850/month, but I could/should increase the rent.  I could probably get around $1000.

Those are a couple of nice safety cushions.

Roland of Gilead

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Re: Am I FI?
« Reply #22 on: August 23, 2014, 08:10:02 PM »
SS pays out a nice chunk.  I ran the numbers on my wife and she will get $1650 at age 62 if she retires at age 47 and never makes another contribution.   I of course qualify for half of that, or $825, so combined we would get $2,475 a month at age 62.  If you slap a 4% SWR on that it is equivalent to having a nest egg addition of $742,500.

Man, you should marry someone for a few years who is near max credits :-)

arebelspy

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Re: Am I FI?
« Reply #23 on: September 02, 2014, 08:49:10 PM »
Are you FI?  Well, let's look at history.

If you FIRE'd with 18k in annual expenses (in today's dollars) and a portfolio of 320,377 (again, in today's dollars), 75/25 AA (.18 ER) and did a typical "adjust spending each year up for inflation," out of the last 115 30-year cycles, starting in the late 1800s, you'd have run out of money 48 times and not run out 67 times (for a 58% success rate).

Is that FI?  Depends on your definition.

I personally would say you're "close" and should be there in a few years, since you're planning on a few more years of working and adding to the stache.
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