The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: time is money on October 08, 2020, 10:43:37 AM
-
Hi All,
I have been reading the forum and the actual site for a while now. This is my first post however.
First of all - huge thanks to the forum members for the amazing help and guidance you are providing.
I am 36, married, wife 30, no kids, but we will be planning next year. We live in Europe in a fairly expensive country, but we will be FIRE-ing in relatively cheaper country. Therefore from 0 to FIRE it should be a journey of about 7 years max.
This might not be a proper case study - therefore I am not putting this in to case study topic - however we would like to put some more structure in to this journey and get some more understanding. Therefore I am reaching out for a bit of advice/clarification on a few things.
We have no debts except the mortgage 520k EUR with fixed rate of 1.2%, house worth around 750k EUR. .
Our current savings are about 35k which are all invested. I know it is not much - but we have started to focus on this only very recently
From now on we are investing 3.5k EUR every month. Considering house equity + religious monthly investments - we should get to a number we want in max 7 years. Ideally 5.
Here is the first question - from reading the forum - I see a lot of you are recommending to have emergency fund. At the moment we do not have it at all. It may sound a silly question - but what would be the main purpose of emergency fund? Is it because the social security is different in US? Let's say if you end up losing job - you would not be receiving unemployment benefit? I will be getting company car any moment, so will be selling my car for about 15k EUR. At this stage I like to have all available money invested - I have set some targets every year how much invested cash I would like to achieve. So this year it is 60k to be invested by end of year. Therefore if you do convince me to have some sort of emergency fund - then the cash received from selling car will not get invested, and we probably will not achieve 60k target by end of year. But instead have 15k emergency fund - I am just not very sure for what would you use it? If we lose job - we are covered with social security for about 1 year. And that should be enough time to figure the situation. Or is it for health related expenses? House related expenses?
Or maybe we should not focus on the target numbers so much? Like I said - I would appreciate if you can help us to put some basic structure in this journey. I understand the whole idea of investing as much as we can and we will end up alright over a period of time, but I would like to have this journey more organized/structured.
Currently our investments are in IWDE and VFEM and some individual stocks. Any advice on what other index funds or ETFs you use in Europe?
Finally - please help me understand more the 4% rule logic and 25x annual expenses. If I understand it correct - the pure mathematical logic of 25x annual expenses rule is that this money in theory should last forever if you are withdrawing 4% annually. However - are you somehow factoring in that at some stage down the line you will start receiving also social security payments (age pension)? And that you might not need to have 25x annual expenses saved up? Or in the US it is different again and your age pension element is already factored in your net wealth calculation?
Apologies if this is a bit chaotic and thanks for your help in advance.
-
An e-fund is for everything and anything that can go wrong in a big way.
1) A storm comes through and rips off your roof. You need a new roof for 15,000.
2) You get hit by a bus and your health deductible is 9000.
3) General bills from a job loss. Most unemployment benefits in the states are low.
4) Your car gets wrecked and, until the insurance payment arrives, you need a new car.
5) Your parents or friends or children need some cash immediately for any of the above. Or maybe you/they need an immediate flight home from vacation in China for health reasons.
If you only have to worry about house expenses, then maybe you can have a lower e-fund.
OR, if your investing funds are not in a tax-advantaged account, then that can be your e-fund.
---
Whether to count old age pension is a personal decision. We didn't so when it comes, even if it's lower than expected, it'll be a bonus. It does mean that we likely over saved.
-
A good emergency fund may be less necessary in some European countries with strong social safety nets, but I think everyone can benefit from an emergency fund -- or if you prefer, just call it "short-term savings for unforeseen events." For example, you have a house worth 750K Euros, do you have money set aside if you need a new roof or if lightning strikes and fries all your appliances?
In the U.S., unemployment benefits are often only a fraction of your previous salary, and in many states they can be very small -- not enough to pay rent, let alone live off of. Similarly, a lot of Americans have high deductibles on their health care plans, and when they are laid off they have to pay for their own insurance which can be extremely costly depending on the circumstances. So many Europeans would not need to save enough to cover these expenses in the case of a job loss, since they wouldn't apply.
The 25X expenses rule is a good guideline but it may not apply to every situation equally. If your old-age pension will be a significant amount of your expenses after you hit the traditional retirement age, then you would want to factor it in, maybe reducing it a bit to account for scenarios where benefits could potentially be cut in the future. There are a lot of FIRE calculators where you can model different scenarios including starting a new income stream at age X, to see how that would impact your chances of success at different portfolio sizes. Try cFiresim, Firecalc, or the Engaging Data calculator here [https://engaging-data.com/will-money-last-retire-early/] and start playing around with the details of your specific situation.
-
Hello, and welcome. I live in the USA. I do not have a cash emergency fund. Other people can explain it better than me but you are correct that you are better off in the long run if you you keep your "cash" in investments. What happens is that you will sometimes have to withdraw for an emergency in a down market. But it will balance out because you will sometimes have to pull emergency "cash" in an up market.
The reason (I think) most people recommend having an emergency fund is because most people can't stomach pulling out money in a downturn. Or they panic and pull too much. Also depends on the timing. As long as the payment can wait a few days I can get funds out. But I did once need cash on the spot for a tow truck.
I ended up having to take out about 2k in March and boy did that suck. But my stocks have recovered. So whatever makes you comfortable.
Also I get the impression that a lot of people in this forum don't factor in social security but also a matter of comfort. You may have noticed that the financial future of the USA isn't looking so stable so SS might be in question.
-
I think a lot of FIRE discussion is US-centric, although this board clearly has an international contingent as well.
The thinking behind an emergency fund is that one may, from time to time, have large unexpected expenses. These can be met either via an emergency fund, credit/debt/borrowing, or selling of assets. You're right in thinking that an emergency fund has the opportunity cost of not being invested. Some rely on credit/debt/borrowing, but that comes with interest expenses. Selling of assets can work, but in the US there may be capital gains taxes due if selling appreciated investments, which are taxed at ordinary income tax rates if the investment is held less than one year. Selling of, and removal of assets from retirement or other preferenced accounts in the US can be subject to both taxes and penalties. So an emergency fund, depending on your perspective on these other options, may be the best of several not great options.
The usual things I hear mentioned in regards to large unexpected expenses is a job loss or a medical event. And you're right, if those are covered by the social safety net of your government and you believe that to be adequate for your needs, then those emergencies are covered. Other possibilities for emergencies might include the opportunity to buy some underpriced item to resell (such as a car), an actual sudden problem with your car that requires immediate replacement (unlikely, and in Europe you might not even rely on a car - the US is much more car-centric as I'm sure you know), or a severe problem with your house (although there can be insurance for that as well).
I had an emergency fund while I was working mainly to ensure that I could continue to pay child support in the case of job loss. I kept three or four months of expenses and invested anything above that. I never actually used it for an emergency, and now that I'm FIREd I don't really have an emergency fund; if I had something happen I would just pull from my FIRE stash.
I also happen to think that some decent percentage of time emergencies can be minimized, avoided, or planned for. I'm 51 and actually never used my emergency fund. Maybe I lead a boring life.
No advice on ETFs in Europe. I think investing, investment companies, and investment rules are very different between here and there and I have no knowledge or experience in European investing. I'd suggest low-cost, broadly diversified, high quality investments, and LTBH. Personally I am and have been highly invested in equities my entire life, but that requires a certain investing mindset and risk tolerance that not everyone has. And it may not be appropriate for your life situation / goals / timeframe /etc.
In the US we have Social Security, which one can start between age 62 and 70 and you get a monthly check for life. The amount of the check is generally based on how much you (or in some cases your spouse or ex-spouse) earned, with lower income people getting a larger replacement percentage than higher earners. The actuarial soundness of the system is questionable, and people therefore have various opinions on how much one should rely on it. You're right in that the 4% rule generally doesn't account for the fact that Social Security will partially supply income needs at some point during a person's retirement. Some people choose not to account for Social Security and treat it as extra. Others choose to count on it to some degree, either by subtracting it from the spending need starting at SS age or by adding an NPV of those future payments to their FIRE stash.
One minor correction - the 4% rule is not really a mathematically based rule - it's based on historical studies of how people would have done in the past if they had $X invested in a portfolio with a particular asset allocation and withdrew 4% of that every year adjusting that amount for inflation over 30 years. Notably, most 4% rule research (as far as I'm aware) is based on the performance of US investments and US inflation. Your country and your investments may have different historical returns and inflation rates, which is something you may want to consider when evaluating your plan.
-
Thanks all for clarifying. In regards to E-fund - I think it is a nice to have not a must have. As it seems from the above posts - most of the cases you would use it are covered by either health, house, car, travel insurance or social security. Also good point in regards to taxable accounts, where I currently live - any gains from securities held > 6 months are not taxable - therefore I am fine to go without e-fund and if there comes a scenario that none of the insurances/social security covers the situation - I will need to withdraw some cash from investments.
My monthly pension from the current country I live in will be around estimated monthly expenses in the country I am planning to move to. So I guess it makes sense that I do factor that in, just not sure how, I will check out those calculators.
P.S. is it just me or finding the 6th word in the first blog post to answer security question seems amazingly difficult task? - this will be my 20th (not kidding) try to post this. Almost at the stage of giving up and just keep reading the forum instead of posting, as posting something seems will be a serious patience test.
-
P.S. is it just me or finding the 6th word in the first blog post to answer security question seems amazingly difficult task? - this will be my 20th (not kidding) try to post this. Almost at the stage of giving up and just keep reading the forum instead of posting, as posting something seems will be a serious patience test.
I'm not sure when, but that requirement goes away when you have enough posts. It shouldn't be too many.