Author Topic: Case Study - Am I Ready for FIRE soon?  (Read 6347 times)

fire_ready

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Case Study - Am I Ready for FIRE soon?
« on: February 08, 2015, 04:30:23 AM »
Hi All,
I've being thinking about ER for a couple of years now once I began to think it was possible.  Now I'm almost obsessed with it after discovering MMM, ERE and earlyretirement.org for about 6 months.  Wanted to get some help/advice from more knowledge people than me on our goal to ER within 2 years.  Wife would like to go part time (2 days/wk) instead of full as she likes her job but would like the option not to.

About us:
Professional couple both early 40s.  3 kids (13, 10, 2) living in Toronto, Canada

Income:
Current - $200K gross combined with additional about $30K in stock dividends
In ER - side gig that will net ~$10K/yr.
DB Pension at 65(really long from now) - ~$30/yr inflation indexed

Current expenses:
Food    $700
housing-insurance, maintenance    $200
Prop Tax    $325
Clothing    $100
Kids Fitness/Programs    $150
Car Gas,Maint,Depr,public transit    $250
Gas    $100
Electric    $100
Water-Garbage    $100
Phone-Cells    $75
Internet    $60
Health Dental    $200
Home Basics    $100
Gifts-Charity    $200
Misc-Entertainment-Travel (Avg) $500
Current Total - $3,160/mth

Expected ER expenses:
Desired in ER $4,160/mth (Would like to increase that by $1,000/mth in ER for buffer, more extensive travel, helping kids, aging parents)
Although we can be flexible with spending in case of a down market.  (e.g. no  international travel, less entertainment, etc.)


Assets: Amount & description -
Home - ~$700K
1 car (6 yrs old)
$1M in various (DIY) investment accounts 100% stocks (3% REITS); 50% US, 35% CDN, 15% International
$20K cash
Total: ~$1.7M

Liabilities: None

Goal is to ER in about 2 years as stated above.  Would love to hear any feedback on how we are doing, readiness for ER, anything to watch out for, optimization opportunities, etc. 
Some canadian REIT are paying close to 8% distributions.  Any thoughts to going 40% - 50% to cover most expenses and rest in stocks?

Thanks in advance.
« Last Edit: February 15, 2015, 07:48:21 PM by fire_ready »

Monkey Uncle

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Re: Case Study - Am I Ready for FIRE soon?
« Reply #1 on: February 08, 2015, 05:16:09 AM »
According to the standard 4% SWR theory, you need a little more than 1.2 million (not including your house).  Right now you're not quite there.  Are you on track to build your invested assets beyond 1.2 million in 2 years?  Personally, I would prefer to add a safety factor to that because you are going to be retired for a very long time, and you have 3 college educations to pay for.  So maybe a 3% SWR, which would require about 1.7 million.

As to your question about REITs, no way would I put 40-50% in a single narrow asset class like that.  Look at a few REIT price charts from the 2007-08 real estate crash.  If you had half your stash in REITs then, you would have been wiped out.  Same goes for any other asset class.  While a 60/40 or 70/30 stock/bond split might be ok, you wouldn't want to put the entire stock allocation in one industry.

fire_ready

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Re: Case Study - Am I Ready for FIRE soon?
« Reply #2 on: February 08, 2015, 05:21:32 PM »
According to the standard 4% SWR theory, you need a little more than 1.2 million (not including your house).  Right now you're not quite there.  Are you on track to build your invested assets beyond 1.2 million in 2 years?  Personally, I would prefer to add a safety factor to that because you are going to be retired for a very long time, and you have 3 college educations to pay for.  So maybe a 3% SWR, which would require about 1.7 million.

As to your question about REITs, no way would I put 40-50% in a single narrow asset class like that.  Look at a few REIT price charts from the 2007-08 real estate crash.  If you had half your stash in REITs then, you would have been wiped out.  Same goes for any other asset class.  While a 60/40 or 70/30 stock/bond split might be ok, you wouldn't want to put the entire stock allocation in one industry.

Thanks for the reply.  3% SWR would mean about 4-5 years instead of 2 but I understand where you are coming from.  Do you think 4% may be okay since we can be pretty flexible with withdrawals in a down market period.   Also forgot to mention that we expect to have a side gig that net about $10K/yr (will update original post).

We believe kids should pay for at least half their college/university tuition so they will appreciate it more.  Average here is < $10K/yr, so it is not too bad.  They will have to pay their own way if they wish to go to higher educate after undergrad.  Although they are welcome to live with us to save money.

Thanks for your thoughts on the 40%-50% REIT allocation.  I figured as much, but noticed the distributions from most of the REIT held pretty steady even during 2008-09 crisis.


Monkey Uncle

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Re: Case Study - Am I Ready for FIRE soon?
« Reply #3 on: February 10, 2015, 04:25:03 AM »
According to the standard 4% SWR theory, you need a little more than 1.2 million (not including your house).  Right now you're not quite there.  Are you on track to build your invested assets beyond 1.2 million in 2 years?  Personally, I would prefer to add a safety factor to that because you are going to be retired for a very long time, and you have 3 college educations to pay for.  So maybe a 3% SWR, which would require about 1.7 million.

As to your question about REITs, no way would I put 40-50% in a single narrow asset class like that.  Look at a few REIT price charts from the 2007-08 real estate crash.  If you had half your stash in REITs then, you would have been wiped out.  Same goes for any other asset class.  While a 60/40 or 70/30 stock/bond split might be ok, you wouldn't want to put the entire stock allocation in one industry.

Thanks for the reply.  3% SWR would mean about 4-5 years instead of 2 but I understand where you are coming from.  Do you think 4% may be okay since we can be pretty flexible with withdrawals in a down market period.   Also forgot to mention that we expect to have a side gig that net about $10K/yr (will update original post).

We believe kids should pay for at least half their college/university tuition so they will appreciate it more.  Average here is < $10K/yr, so it is not too bad.  They will have to pay their own way if they wish to go to higher educate after undergrad.  Although they are welcome to live with us to save money.

Thanks for your thoughts on the 40%-50% REIT allocation.  I figured as much, but noticed the distributions from most of the REIT held pretty steady even during 2008-09 crisis.

Have you tried running your numbers through http://www.cfiresim.com/input.php and/or http://www.firecalc.com/?  Those calculators can accommodate income from side gigs and one-time expenses like college costs.  However, I don't think they can account for unconventional investment strategies like a heavy allocation to REITs.  We may be mixing apples and oranges here by talking about safe withdrawal rates in the same breath with discussing using REITs to produce income.  A SWR assumes you are drawing down earnings and principal over time, whereas your REIT strategy seems to focus on withdrawing only the earnings.  I don't know enough about REITS to know whether you'd be safe assuming they would continue paying high yields indefinitely.

kpd905

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Re: Case Study - Am I Ready for FIRE soon?
« Reply #4 on: February 10, 2015, 06:09:12 AM »
It depends if you plan on selling the house and downsizing.  If not, you are close but not quite there.  Although it would also depend if you wife does the part-time work, and how reliable your side gig income is.

2Birds1Stone

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Re: Case Study - Am I Ready for FIRE soon?
« Reply #5 on: February 10, 2015, 06:17:24 AM »
With that side gig and a downsized home I would pull the trigger now!

boarder42

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Re: Case Study - Am I Ready for FIRE soon?
« Reply #6 on: February 10, 2015, 06:23:50 AM »
Use Cfire sim as mentioned above.  makes it very easy to see and understand.

morning owl

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Re: Case Study - Am I Ready for FIRE soon?
« Reply #7 on: February 10, 2015, 06:29:35 AM »
Wow, you are doing great! +1 for cfiresim. It's a great tool for figuring out all the possibilities from all angles.

For your REIT allocation, I agree that it's risky to go too high. My own comfort level for REITs is 8% of my portfolio. It's tempting to higher when so many cdn REITs pay so well atm. But with interest rates going lower, they are also quite highly priced right now.

I'd say a two year FIRE horizon looks totally doable in your situation. You have some time to play with the numbers, in any case.

fire_ready

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Re: Case Study - Am I Ready for FIRE soon?
« Reply #8 on: February 15, 2015, 01:23:44 PM »
Thanks for all the advice everyone!  This community is amazing!

Will use the cfiresim and firecalc as suggested and report back.  Had a quick look.   Many options so may need a bit of time to figure it and and tinker with the numbers.


fire_ready

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Re: Case Study - Am I Ready for FIRE soon?
« Reply #9 on: February 15, 2015, 01:32:54 PM »
It depends if you plan on selling the house and downsizing.  If not, you are close but not quite there.  Although it would also depend if you wife does the part-time work, and how reliable your side gig income is.

thanks for the reply.

The kids are still young so can't downsize just yet since we need the space.  It's only a 3 bedroom.  Yes, house prices are CRAZY here.  So tempted to sell into the hot market and rent!   

We will probably downsize in the next 15 to 20 years once all the kids are on their own.  Most likely a small condo or something.  Hopefully the market will be good at that time too.

The side gig is reliable enough and it shouldn't be too time consuming.  Wife likes her job and it's a good social outlet as well.  She just rather do a couple of days instead of 5 days a week.  However, we would want that to be for additional "fun" money instead of a necessity in case she changes her mind.

« Last Edit: February 16, 2015, 04:32:39 AM by fire_ready »

fire_ready

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Re: Case Study - Am I Ready for FIRE soon?
« Reply #10 on: February 15, 2015, 01:38:29 PM »
Wow, you are doing great! +1 for cfiresim. It's a great tool for figuring out all the possibilities from all angles.

For your REIT allocation, I agree that it's risky to go too high. My own comfort level for REITs is 8% of my portfolio. It's tempting to higher when so many cdn REITs pay so well atm. But with interest rates going lower, they are also quite highly priced right now.

I'd say a two year FIRE horizon looks totally doable in your situation. You have some time to play with the numbers, in any case.

Agreed.  I'm tempted by the REIT's high yields too.  Some of them of gone down in price the last couple of years already due to the possibly of higher interest rates.  Never invested in them before until very recently.  Dip my toes in and now have a small (3%) allocation with avg. yield of 7.5%.  Afraid to go too much in since I don't have any experience with them in a raising interest rate environment.

Mortgage Free Mike

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Re: Case Study - Am I Ready for FIRE soon?
« Reply #11 on: February 15, 2015, 02:04:38 PM »
Will you health expenses remain so low in retirement? One thing I'd consider.

johnny847

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Re: Case Study - Am I Ready for FIRE soon?
« Reply #12 on: February 15, 2015, 02:15:49 PM »
Assets: Amount & description -
Home - ~$700K
1 car (6 yrs old)
$1M in various (DIY) investment accounts 100% stocks (3% REITS); 50% US, 35% CDN, 15% International
$20K cash
Total: ~$1.7M
In the context of can I retire?, you should not include the value of your home in net worth unless you plan on selling the house by the time you retire (and even in that case, you should only include the anticipated difference in the sale of your home and the purchase price of your new home), or you plan on getting a reverse mortgage (which I don't think is a good idea if you have kids and want to leave them an inheritance). Equity stuck in your home doesn't help you generate income.
And neither should you include the value of your car, unless you plan on getting rid of it (and again, if you plan on buying a different car, you should only include the difference of the sale price and purchase price).

Based on this, you're not ready to FIRE just yet, especially because you want to RAISE your expenses in retirement.
I really think you can lower your desired FIRE expenses. You say that you want to increase it partly for a buffer. But you've already built in a buffer by saying no international travel, less entertainment, etc.

MooseOutFront

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Re: Case Study - Am I Ready for FIRE soon?
« Reply #13 on: February 15, 2015, 02:47:01 PM »
I think your 2-year timeframe is right on track.  Great work managing those expenses living in an expensive city with three kids!  Very impressive.  I would personally be tempted to find a way during the next couple years to get my side income up closer to my annual spend, but that may end up looking a lot like work so I understand just waiting until you're fully ready to pull the trigger.  Agree with others about basically ignoring your home equity in this decision.

tomsang

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Re: Case Study - Am I Ready for FIRE soon?
« Reply #14 on: February 15, 2015, 04:33:19 PM »
$5,160 x 300 = $1,548,000 stache needed. For the $10k side gig, how many years will that continue? If it is forever then you can decrease the stache by $250,000. Have you figured out the true cost of medical and other retirement costs?  How easy would it be to pick up your income if needed in the future?

I think you are 3-4 years out for complete comfort with safety margins of side gig and social security.

You are at the finish line.

Congrats!

fire_ready

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Re: Case Study - Am I Ready for FIRE soon?
« Reply #15 on: February 15, 2015, 07:46:38 PM »
$5,160 x 300 = $1,548,000 stache needed. For the $10k side gig, how many years will that continue? If it is forever then you can decrease the stache by $250,000. Have you figured out the true cost of medical and other retirement costs?  How easy would it be to pick up your income if needed in the future?

I think you are 3-4 years out for complete comfort with safety margins of side gig and social security.

You are at the finish line.

Congrats!

Thanks for the feedback.  Actually, my desired ER income of $4,160 already includes the $1K buffer ($3,160 current spend + $1K buffer).  Sorry, should have been more clear.

So using your calculation, it would be $4,160 x 300 = $1,248,000.

By the way, I forgot one more thing.  I'm in the public sector here in Canada.  So we are one of the few that still have a DB pension that I can  get starting at age 65.  My rough estimate is that it will be about $30k/year and then indexed to inflation thereafter. (will update opening post with this.)

fire_ready

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Re: Case Study - Am I Ready for FIRE soon?
« Reply #16 on: February 16, 2015, 08:37:01 AM »
Will you health expenses remain so low in retirement? One thing I'd consider.

Thanks Mike.  Here in Canada, most health care cost is already covered by the government.  So $200 is regular dental and drugs as necessary.  Family is reasonably healthy so hope that holds up.

Would like to getting feedback from other Canadians on budget for health care cost as well?  I'm open to adjust the $200 figure.

seattlecyclone

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Re: Case Study - Am I Ready for FIRE soon?
« Reply #17 on: February 16, 2015, 09:50:22 AM »
I think a 4% withdrawal rate is perfectly reasonable for you, given that you plan to increase your expenses by ~30% during retirement to do more traveling and are willing to skip that during a market downturn. You're right on track to get there in two years (or maybe sooner, if the market cooperates). I do think putting more than 10-20% of your portfolio in REITs is risky. You do not need to keep your expenses below your dividend income during retirement. Capital gains income is just as good.