Author Topic: Help with FIRE Outcomes given future spending changes  (Read 2710 times)

tooqk4u22

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Help with FIRE Outcomes given future spending changes
« on: September 29, 2015, 08:38:28 AM »
This is a question for me but likely applies to others.

What if one would like to FIRE but really doesn't have enough to do so today based on current spending and a 4% SWR (I am more conservative than most on this board so I plan for 3% but the scenario below is based on 4% SWR to avoid that discussion)....but the trick is some of the spending is temporary but kind of long term due to children. I see my three choices as (1) keep stashing to get to fully cover based on SWR, (2) cover the short fall with part time work, or (c) take the leap and if it doesn't work well then go back to work or adjust and what not.

Here are the assumptions:

Investments:               $1,000,000
Paid Off House:                 176,000

Total Spending:                 $47,200
Base Spending:                   40,000  - includes all expenses - house, food, travel, etc - not directly related to kids
                                                     - expectation is that costs for food and travel now being spent on kids will be
                                                        spent on us in future so this number stays the same.
Kid Spending:                       7,200  - activities, clothing, school stuff, etc. - ie directly related and will go away
Time remaining for
Kid spending:                   12 years

Also assume that the house will be sold in 13 years and replaced with a smaller/cheaper one at $117,000 (could be less), this will directly lower taxes by $2,000 a year (or more if move to a lower COL/tax area which is likely to be the case - property taxes now account for about 15% of total spending) so base spending will decline to $38,000 in today's dollars coupled with the $58,000 add to investments will yield another $2,300 per year based on 4% SWR so a $4300 annual gain.  For this discussion, assume this is a given (ie a conservative assumption).

I am having trouble with the math and how it plays out but I think that if break it into its components such that $86,000 ($7200 x 12 years) goes into a separate account to fund the expected kid expenses and the balance ($914,000) is used to cover base spending at a higher than desired 4.4% SWR for 12 years and then down to 3.9% SWR of $972,000 ($38k spend on $972k ($914k initial plus $58k from house)). 

Seems like it is close enough to do it especially because of option to reduce kid expenses if needed and other spendy expenses like travel and food if needed, and the kid expenses can easily be covered by part time lower wage work if needed.

What would you do?  Should I be looking at it differently?

Se





4alpacas

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Re: Help with FIRE Outcomes given future spending changes
« Reply #1 on: September 29, 2015, 08:56:06 AM »
I would play around with cfiresim until I found a solution that worked with my plan.

honeybbq

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Re: Help with FIRE Outcomes given future spending changes
« Reply #2 on: September 29, 2015, 09:26:23 AM »
I would break it into 2 accounts. One account (probably a savings account since it's a fixed expense I can't down size/change) that needs 84k in it. Then the other one is everything else and has a long range plan and is mainly in investments.

robartsd

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Re: Help with FIRE Outcomes given future spending changes
« Reply #3 on: September 29, 2015, 09:47:21 AM »
A present value calculation on $7200 a year for 12 years at 6% per year comes out to $60,363.68 ($67,572.63 if you make the rate 4% per year). As your scenario has about this much value in downsizing the house after kids, I'd say you can FIRE at will.

Playing with Fire UK

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Re: Help with FIRE Outcomes given future spending changes
« Reply #4 on: September 29, 2015, 09:57:01 AM »
I agree with Honeybbq. Separate out the two. I do a similar thing with work expenses, I don't count them in my post-FIRE budget, and have a different savings rate calculation to balance this out.

If you are decided on moving to a LCOL area, and all are on board with the decision (kids, SO?), I'd add the extra taxes into the kid pot rather than having two values for your WR.

So you would have a 'kid pot' of (7200+2000)*12 = 110k, a remaining stash of 890k+58k (I'm assuming that the difference in your house purchases tracks your investment growth), at 4% this will give you a hair shy of 38k, which would be made up by the growth/interest of your kid pot. By this back of envelope scratching I would say you are good to go if 4% feels right, and not far off if 3% feels right. Spending more in the early years would increase the sequencing risk if the market tanked in the first few years, but if you'd be willing to readjust or go back to PT work (take cheaper holidays) then you're fine.  [DYOR etc]

Try building a spreadsheet that has the spending and assumed growth for each year going down the page, and play with growth and withdrawing rates to see if it feels right to you. PM me if you are having issues with building it or the calcs because I love spreadsheets.

The risk tolerance between 4% and 3% is a judgement call, and I'm not going to say that it's wrong, because preference towards risk is a real thing and I'm grown up enough to know that it's okay when adults disagree. If you have kids depending on you I can only imagine how this is magnified.

If I were you, I'd be giving my notice today.

kendallf

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Re: Help with FIRE Outcomes given future spending changes
« Reply #5 on: September 29, 2015, 11:48:13 AM »
I would play around with cfiresim until I found a solution that worked with my plan.

This.  If you're really agonizing over the math, just run it in Cfiresim and enter your deltas at the appropriate year points.  I don't think you can reduce your spending at a certain year, but you can add in a "pension" that takes effect that year, or similar.

tooqk4u22

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Re: Help with FIRE Outcomes given future spending changes
« Reply #6 on: October 06, 2015, 01:26:51 PM »
I agree with Honeybbq. Separate out the two. I do a similar thing with work expenses, I don't count them in my post-FIRE budget, and have a different savings rate calculation to balance this out.

If you are decided on moving to a LCOL area, and all are on board with the decision (kids, SO?), I'd add the extra taxes into the kid pot rather than having two values for your WR.

So you would have a 'kid pot' of (7200+2000)*12 = 110k, a remaining stash of 890k+58k (I'm assuming that the difference in your house purchases tracks your investment growth), at 4% this will give you a hair shy of 38k, which would be made up by the growth/interest of your kid pot. By this back of envelope scratching I would say you are good to go if 4% feels right, and not far off if 3% feels right. Spending more in the early years would increase the sequencing risk if the market tanked in the first few years, but if you'd be willing to readjust or go back to PT work (take cheaper holidays) then you're fine.  [DYOR etc]

Try building a spreadsheet that has the spending and assumed growth for each year going down the page, and play with growth and withdrawing rates to see if it feels right to you. PM me if you are having issues with building it or the calcs because I love spreadsheets.

The risk tolerance between 4% and 3% is a judgement call, and I'm not going to say that it's wrong, because preference towards risk is a real thing and I'm grown up enough to know that it's okay when adults disagree. If you have kids depending on you I can only imagine how this is magnified.

If I were you, I'd be giving my notice today.

I like your views....my thoughts and analysis were along this line before this post but the fears of sequencing risk add a bit to the concern.   

tonysemail

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Re: Help with FIRE Outcomes given future spending changes
« Reply #7 on: October 06, 2015, 02:46:32 PM »
I would play around with cfiresim until I found a solution that worked with my plan.

This.  If you're really agonizing over the math, just run it in Cfiresim and enter your deltas at the appropriate year points.  I don't think you can reduce your spending at a certain year, but you can add in a "pension" that takes effect that year, or similar.

Yup, cfiresim has you covered.
similar to OP, I divided my spending into core expenses and kid expenses.
I also liked selecting variable spending plan and setting the floor to 90% of core expenses.


Playing with Fire UK

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Re: Help with FIRE Outcomes given future spending changes
« Reply #8 on: October 08, 2015, 08:49:58 AM »
I Spending more in the early years would increase the sequencing risk if the market tanked in the first few years, but if you'd be willing to readjust or go back to PT work (take cheaper holidays) then you're fine.  [DYOR etc]


If I were you, I'd be giving my notice today.

I like your views....my thoughts and analysis were along this line before this post but the fears of sequencing risk add a bit to the concern.

Thanks :). It sounds like either path will work for you, so your preference for security or going earlier should be the deciding factor as whatever you choose will, by definition, be the right choice.