Author Topic: Need help with understanding FIRE calculations, am I way off?  (Read 2920 times)

missmoneymachine

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So today I sat down and filled out the CashFlow calculator excel sheet I found on a thread some time ago.  My goal is to be FI by the time I'm 35, which is in 10 years. 

According to the calculator, in 10 years I will have:
$250,306 in taxable
$360,113 in 401k
$97,894 in Roth IRA 
$708,313 total

Stash needed @4.0% SWR with 25k/yr exp: $625,000 (see disclaimer at the bottom)
So I am $83,000 over my needed stash.

This of course, assumes nothing in my life changes.  As a single, almost 25 yr old, I will bet my life will change dramatically in the next 10 yrs.  However, at this stage in my life, I am very independent and do not have any desire to meet anyone and be married any time soon.  I also do not want children.  My plan is to travel almost full time once FI.  I want to spend months at a time in destinations, but still have a home base. 

In the spreadsheet I did not include any income from rentals.  Rental properties is something I am considering but have not decided on.  I wanted to see what my stash would look like without the help of rentals.  I have money in cash right now that could be enough for a downpayment on a rental so this does not affect the investment money above.  I am thinking rental income would be ideal to put towards my mortgage during FIRE, which would lower my expenses in retirement.

So, will I be able to make it with just $250,306 in a taxable account for 25 yrs before 59.5?  I put my numbers in FIREcalc and the answer is no, only a 5% chance it will survive.  I know I can withdrawal the money I put in a Roth and I can do a Roth conversion ladder to cover expenses, however, I feel like the still seems risky given such a low amount in the taxable account.  FIREcalc expects the 250k to have a 95% chance of being completely depleted in 6 yrs.  Adding withdrawals from my Roth contributions doesn't add much to the 250k and I don't have much time to wait 5 years for the Roth conversions to "season". 

Everything I have read on this forum says to include retirement accounts in your stash and figure out the amount needed with the 4% SWR and you're good to go.  Well, according to this I am over my needed stash, but will fail with withdrawing from only the taxable account and from some of the Roth.

I guess what my question is, am I thinking this through correctly?  Do I need to have much more in my taxable account before I can FIRE?  In this situation do I NEED rental (or some other) income during FIRE to help cover my expenses since the taxable account isn't enough?

Disclaimer: the amount needed in retirement is a very rough estimate.  I don't know what I will need for my travels, I thought 10k seemed reasonable but I could be way off.  However, my living expenses should be roughly the same (15k).  I did this exercise to see if FIRE in 10 years was even remotely possible.

ooeei

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Re: Need help with understanding FIRE calculations, am I way off?
« Reply #1 on: March 24, 2016, 01:42:51 PM »
So today I sat down and filled out the CashFlow calculator excel sheet I found on a thread some time ago.  My goal is to be FI by the time I'm 35, which is in 10 years. 

According to the calculator, in 10 years I will have:
$250,306 in taxable
$360,113 in 401k
$97,894 in Roth IRA 
$708,313 total

Stash needed @4.0% SWR with 25k/yr exp: $625,000 (see disclaimer at the bottom)
So I am $83,000 over my needed stash.

This of course, assumes nothing in my life changes.  As a single, almost 25 yr old, I will bet my life will change dramatically in the next 10 yrs.  However, at this stage in my life, I am very independent and do not have any desire to meet anyone and be married any time soon.  I also do not want children.  My plan is to travel almost full time once FI.  I want to spend months at a time in destinations, but still have a home base. 

In the spreadsheet I did not include any income from rentals.  Rental properties is something I am considering but have not decided on.  I wanted to see what my stash would look like without the help of rentals.  I have money in cash right now that could be enough for a downpayment on a rental so this does not affect the investment money above.  I am thinking rental income would be ideal to put towards my mortgage during FIRE, which would lower my expenses in retirement.

So, will I be able to make it with just $250,306 in a taxable account for 25 yrs before 59.5?  I put my numbers in FIREcalc and the answer is no, only a 5% chance it will survive.  I know I can withdrawal the money I put in a Roth and I can do a Roth conversion ladder to cover expenses, however, I feel like the still seems risky given such a low amount in the taxable account.  FIREcalc expects the 250k to have a 95% chance of being completely depleted in 6 yrs.  Adding withdrawals from my Roth contributions doesn't add much to the 250k and I don't have much time to wait 5 years for the Roth conversions to "season". 

Everything I have read on this forum says to include retirement accounts in your stash and figure out the amount needed with the 4% SWR and you're good to go.  Well, according to this I am over my needed stash, but will fail with withdrawing from only the taxable account and from some of the Roth.

I guess what my question is, am I thinking this through correctly?  Do I need to have much more in my taxable account before I can FIRE?  In this situation do I NEED rental (or some other) income during FIRE to help cover my expenses since the taxable account isn't enough?

Disclaimer: the amount needed in retirement is a very rough estimate.  I don't know what I will need for my travels, I thought 10k seemed reasonable but I could be way off.  However, my living expenses should be roughly the same (15k).  I did this exercise to see if FIRE in 10 years was even remotely possible.

At $25,000 expenses, how does firecalc think $250,000 will not last longer than 6 years?  It's telling you there's a 95% probability your portfolio will DROP in value by 40% over a 6 year time frame.  Something seems fishy.  Re-check what you input into it. 

What it may be saying is there's a 95% chance your principal will be affected.  That would be more believeable.  I believe there's an option where you define "success."  Success can either be "had a balance >0 at the end of the time frame" (which is what you should be selecting), or it can be "did not reduce principle/ended with more than you started" (often what people who are retiring using all of their funds would use).

If you're worried about running out of taxable money, you can just convert more using the pipeline.  The reason people minimize their conversions is to minimize taxes, as the conversion is added as taxable income in the year you do it.  The less you convert, the lower tax bracket you're in. 

Edit:  also you will already have $90,000 in your Roth IRA.  Any contributions you've already made are currently "seasoned" and can be pulled out when you need to.  That's another buffer to help out with the 5 year timeline for the conversions.
« Last Edit: March 24, 2016, 01:50:34 PM by ooeei »

neo von retorch

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Re: Need help with understanding FIRE calculations, am I way off?
« Reply #2 on: March 24, 2016, 02:17:54 PM »
Quote
$250,306 in a taxable account for 25 yrs before 59.5?

Did you set it up that you "only" have $250k, and you're trying to make it from 35 years old to 59.5 years old on that? I'm a little confused as to what settings you chose. At you expense level, you should expect to pay very damn close to 0% effective tax while you're converting 401k to Roth. Considering you have almost $350k available at age 35, drawing down only $25k per year, you need to convert about $250k additional to make it the final 10 years from 50 to 60 (all these numbers changing over time with inflation and investment returns, of course). So convert maybe $16k per year while living off your $25k taxable/Roth and by the time you're 50 it's all in Roth and ready to go.

Gone Fishing

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Re: Need help with understanding FIRE calculations, am I way off?
« Reply #3 on: March 24, 2016, 02:55:07 PM »
You are probably exactly right when it comes to life changes.  Virtually ever aspect of my financial life has changed (some several times) over the past 10 years, not to mention the craziness in both the housing and stock markets over the past decade.       

Not to say I didn't do any projections 10 years ago, I did, but they were very general ones that ended up being way low.  At 10 years out, I would just focus on making and saving as much as you can, as tax efficiently as you can.

The other posts have touched on it but are you well versed in the IRA conversion pipeline?  If not take a look at the ROTH vs Traditional link in my signature below for more detail.

missmoneymachine

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Re: Need help with understanding FIRE calculations, am I way off?
« Reply #4 on: March 24, 2016, 04:19:19 PM »
What I meant to say is the earliest cycle for the 250k to fail was 6 years.  So I could possibly run out of money as early as 6 years.  The 250k only had a 95% success rate to make it all of the 25 yrs.  (yes I know I can use my Roth and tap into my 401k money before that I just wanted to see how long this money would last and got very alarmed when I saw that it could fail in as little as 6 years)

I did not account for the 100k in my Roth because at the time I was thinking I wouldn't be able to touch that money for 5 years but I was mixing it up with the new converted money.  But even so, if I count the 100k in the Roth (for 350k total) it could possibly fail in 9.5 years.  What if the money I'm converting from my 401k isn't enough to help keep my funds at a level to be sustainable in a bad cycle like that? 

I guess I'm just being overly cautious with this and thinking of the worst case scenario.

And, yes, "So Close" I am probably trying to be a little too prepared right now without accounting for life changes, but I wanted to see if I had my spending rate cut enough to be able to realistically be FI at 35.

MDM

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Re: Need help with understanding FIRE calculations, am I way off?
« Reply #5 on: March 24, 2016, 05:54:55 PM »
Everything I have read on this forum says to include retirement accounts in your stash and figure out the amount needed with the 4% SWR and you're good to go.
Well, according to this I am over my needed stash, but will fail with withdrawing from only the taxable account and from some of the Roth.
Both of those statements are correct (assuming the 4% continues to be a Safe Withdrawal Rate as it has been historically).  And yes, if you choose not to use the 401k money then you are likely to run out of the other money.

Quote
I guess what my question is, am I thinking this through correctly?  Do I need to have much more in my taxable account before I can FIRE?  In this situation do I NEED rental (or some other) income during FIRE to help cover my expenses since the taxable account isn't enough?
See http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/.

You need enough money in taxable, plus Roth contributions if also needed, to cover that five year stretch following retirement.  After that, using the Roth conversion money, you should indeed be good to go.

Make sense?  If not, just ask.

missmoneymachine

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Re: Need help with understanding FIRE calculations, am I way off?
« Reply #6 on: March 24, 2016, 06:07:10 PM »
Everything I have read on this forum says to include retirement accounts in your stash and figure out the amount needed with the 4% SWR and you're good to go.
Well, according to this I am over my needed stash, but will fail with withdrawing from only the taxable account and from some of the Roth.
Both of those statements are correct (assuming the 4% continues to be a Safe Withdrawal Rate as it has been historically).  And yes, if you choose not to use the 401k money then you are likely to run out of the other money.

Quote
I guess what my question is, am I thinking this through correctly?  Do I need to have much more in my taxable account before I can FIRE?  In this situation do I NEED rental (or some other) income during FIRE to help cover my expenses since the taxable account isn't enough?
See http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/.

You need enough money in taxable, plus Roth contributions if also needed, to cover that five year stretch following retirement.  After that, using the Roth conversion money, you should indeed be good to go.

Make sense?  If not, just ask.

Yep I got it. I forgot to add my Roth to the 250k initially so I was a little nervous about the possibility of it running out in 6 years. The Roth pushes it back to 9.5 years, which isn't great, but it's the worst case scenario so I shouldn't worry too much.

Thanks for everyone's help. I've been reading MMM for about a month and I'm trying to really crack down on a plan for myself and I got a little hung up on these calculations earlier.

SwordGuy

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Re: Need help with understanding FIRE calculations, am I way off?
« Reply #7 on: March 24, 2016, 06:13:44 PM »
So, one way would be to put less in the 401k and more in the taxable accounts.  You will make less overall money but it will be in the right bucket.

I know there's a way to make "substantially equal withdrawals" on a 401k (and I think an IRA) but I do not know the details.  Hopefully that will help your google-fu to succeed on that topic.

Another way would be to diversify your income stream so you aren't as subject to stock market fluctuations.

Example: 2 rental houses costing $100,000 total, making $9600 profit (before taxes), would go a long way towards reducing your stock market exposure.   Assuming rentals and the stock market break even compared to one another (my bet's on the rentals), you would be reducing your market risk exposure by 40%.    And, of course, the sooner you diversify, the sooner you get to start raising rents...

Eric

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Re: Need help with understanding FIRE calculations, am I way off?
« Reply #8 on: March 24, 2016, 06:23:31 PM »
I know there's a way to make "substantially equal withdrawals" on a 401k (and I think an IRA) but I do not know the details.  Hopefully that will help your google-fu to succeed on that topic.

If you're going to google that, it's called SEPP -- Substantially Equal Periodic Payments.  Essentially withdrawing a small % from your pre-tax accounts from when you start until you reach age 59.5.  No stopping without penalty.  No adjustment without penalty.  It's not bad if you're only a few years away, but for a longer timeframe, it's a little inflexible.

missmoneymachine

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Re: Need help with understanding FIRE calculations, am I way off?
« Reply #9 on: March 24, 2016, 07:00:01 PM »
So, one way would be to put less in the 401k and more in the taxable accounts.  You will make less overall money but it will be in the right bucket.

I know there's a way to make "substantially equal withdrawals" on a 401k (and I think an IRA) but I do not know the details.  Hopefully that will help your google-fu to succeed on that topic.

Another way would be to diversify your income stream so you aren't as subject to stock market fluctuations.

Example: 2 rental houses costing $100,000 total, making $9600 profit (before taxes), would go a long way towards reducing your stock market exposure.   Assuming rentals and the stock market break even compared to one another (my bet's on the rentals), you would be reducing your market risk exposure by 40%.    And, of course, the sooner you diversify, the sooner you get to start raising rents...

I'm leaning towards rentals but haven't made a definite decision. I'm thinking of buying a 50-60k college campus condo that has the potential to be paid off before I FIRE. Once I make a decision I'll consult the real estate investing thread.

I'll look into the SEPP. I have seen them mentioned before but haven't done any extra research
« Last Edit: March 24, 2016, 07:01:38 PM by missmoneymachine »