Author Topic: How to use the FIRECalc  (Read 4458 times)

Kaminoge

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How to use the FIRECalc
« on: May 04, 2014, 12:14:41 PM »
I've started playing around with an FIRECalc (the one linked to from MMM).

I've been putting in all sorts of random numbers and it's quite interesting but I'm not quite sure how to put in my real situation.

I have property (that I don't live in) worth roughly $1,000,000 and I have roughly $650,000 worth of mortgages on them.

In addition I have about $70,000 worth of money split between a super fund and a managed investment fund (which I'm looking into switching to an indexed fund).

What I want to know is does it make sense to put $420,000 in as my portfolio number? Obviously most of that is tied up in mortgaged properties and I can't get anything like that amount out (because of capital gains tax).

It would be pretty sweet if that is how it works because in that case the calculator is predicting I've got a 91% chance of being ok if I retired in 4 years time! (and planned to live to 90).

I know the calculator is based on you having your portfolio based in stocks/bonds. I'm just wondering if there's a sensible way to get a figure based on having all the property.

Spudd

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Re: How to use the FIRECalc
« Reply #1 on: May 04, 2014, 04:07:05 PM »
I don't think it is proper to put that amount as your portfolio, because what Firecalc will do is assume you have it in a stocks/bonds mix and raise/lower the value over time based on stock/bond market history.

Do you rent out the properties? If yes, then I would reduce my annual spending figure by the amount of rent received from the properties.

arebelspy

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Re: How to use the FIRECalc
« Reply #2 on: May 04, 2014, 05:55:55 PM »
No, because that house will not perform like a 60/40 stock/bond mix.

I'd guess it will perform at the rate of inflation, over the long run, plus whatever return you calculate on top of that if you rent it out.

You can change FIRECalc - or, the better version www.cfiresim.com - to use whatever returns you dictate.

I'd break out separate portfolios based on your real estate and paper portfolio, or integrate the returns.  Not enough info is given to advise exactly how I'd do that, but you can probably figure it out.

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Kaminoge

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Re: How to use the FIRECalc
« Reply #3 on: May 05, 2014, 05:48:02 AM »
Thanks! I thought it was too good to be true.

So no retirement for me in the next couple of years given that I've only got roughly $40,000 invested and accessible (since super isn't really available for the taking until I'm old). Oh well, it was fun dreaming. And it does give me some incentive to really consider what I've got and how my finances are arranged.


arebelspy

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Re: How to use the FIRECalc
« Reply #4 on: May 05, 2014, 07:01:52 AM »
Thanks! I thought it was too good to be true.

So no retirement for me in the next couple of years given that I've only got roughly $40,000 invested and accessible (since super isn't really available for the taking until I'm old). Oh well, it was fun dreaming. And it does give me some incentive to really consider what I've got and how my finances are arranged.

Well again, it depends.  Do you rent that property out?  Are you planning on selling it?  Refinancing it?

How would you access that equity, in other words, to live on?
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

Kaminoge

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Re: How to use the FIRECalc
« Reply #5 on: May 05, 2014, 08:45:36 AM »
The property is all rented.

I've honestly been horribly lazy about my finances up until now. Luckily I'm the sort of person where ignorance has lead to me buying assets and saving rather than spending or going into debt.

My vaguely thought out long term plan has always been to buy property. As my equity increases (through capital gains) I borrow more and buy more. I figured one day I'd stop acquiring and start paying down loans, sell off one or two, use the profit to pay off the others and then live off the rental income. So now I have 4 properties.

But that's always been a very vague plan with no actual number crunching or serious understanding of what I'm doing.

And until recently when I came across this website I'd never even considered the idea of ER.

Now I've got the bug! And so I'm finally taking stock of what I've got, what it's doing for me and whether or not it's the best plan.

As to how I'd access the equity to live on, right now I can't really see any good way. There are however lots of different scenarios I'm going to think through.

1. I could sell 2 properties and have 2 completely paid up but the tax ramifications would not be good.

2. I could keep all 4, switch to interest only loans (which would mean the rent would cover the loans + all other associated costs) and turn my focus to building up wealth in some other form(I'm leaning towards indexed funds because of what I've been reading on here but I've got a lot to learn).

3. I could keep going as I am (paying down principle and interest) and just re-jig some of my other finances (right now I pay $200 into super and $100 into a mutual fund each month I'm not at all sure that's the best place for it to go).

4. Or I could keep hanging around here and other similar forums and who knows what bright ideas I'll come up with.

As I've said on other threads I don't really want to ER right now. What I want is FI. Then my next job change I could ignore income entirely and go somewhere like Africa or Western Europe or S. America (all of which have lousy pay) just for the hell of it because I wouldn't care how much I was earning.

It would be fun to be totally free to choose.

arebelspy

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Re: How to use the FIRECalc
« Reply #6 on: May 05, 2014, 09:02:25 AM »
The property is all rented.

Okay, so the easiest way to model this in cFIREsim is to figure the net rental income and subtract that from your expenses.

If your net rental income covers your expenses, you're FI.  If it doesn't, the rest of your portfolio will need to make up that gap at your given SWR, and you can use a tool like cFIREsim to figure out the probability historically that your portfolio could cover that gap.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.