Author Topic: Newbie with a big BUT...  (Read 2309 times)

zorwarrior

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Newbie with a big BUT...
« on: April 17, 2017, 08:28:29 PM »
Hi Fellow Mustachians,
I have recently been reading some of the MMM blogs and have seen articles in mainstream media previously. I have been plotting & planning my retirement for many years. Initially it was at 30 but then my wants/needs increased, so now it’s much later.

I completely agree with living within ones means and not being driven by consumerism, although temptation got the better of me early in my career. I have been working now for almost 20 years and have firmly reaffirmed my view of not working for another 20 years.  A couple of BUTs have been playing on my mind recently, so would appreciate the views of more seasoned MMM’s.

1.   Unforeseen events/expenses – I know basically what we spend as a family on a yearly basis and could work out how to cover those base expenses without working a 9-5 job. However, what does one do when unplanned larger expenses (house/car maintenance, health etc.) pop up out of the blue? You could dip into your capital but that would just reduce the ongoing return to live off….
2.   Dips in markets & investments – when markets (shares,bonds, realestate) take a dip, what are your strategies to maintain your financial independence, without living on baked beans every day. This is especially the case if your capital is eroded in a dip
3.   Getting back into the workforce – if things do take a dip and for some reason you are compelled to go back to work, how would one enter the workforce with potentially years of being away from it. I would imagine employers would look more to people who have remained in the industry, rather than ‘retirees’

Love to hear your thoughts to help me get over my big Butts!

MDM

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Re: Newbie with a big BUT...
« Reply #1 on: April 17, 2017, 10:50:58 PM »
1.   Unforeseen events/expenses – I know basically what we spend as a family on a yearly basis and could work out how to cover those base expenses without working a 9-5 job. However, what does one do when unplanned larger expenses (house/car maintenance, health etc.) pop up out of the blue? You could dip into your capital but that would just reduce the ongoing return to live off….
2.   Dips in markets & investments – when markets (shares,bonds, realestate) take a dip, what are your strategies to maintain your financial independence, without living on baked beans every day. This is especially the case if your capital is eroded in a dip
3.   Getting back into the workforce – if things do take a dip and for some reason you are compelled to go back to work, how would one enter the workforce with potentially years of being away from it. I would imagine employers would look more to people who have remained in the industry, rather than ‘retirees’
1. As with any good project cost estimate at work, your retirement cost estimate should include contingencies.  See Budgeting infrequent expenses (refrigerator, new tires, paint house, etc) - Bogleheads.org and links therein for some thoughts on percentages, timing, etc.
2. If your planned Withdrawal Ratio (WR) - after including expected taxes, irregular expenses, etc. - is 4% or less, consider "don't freak" as one response.  See Withdrawal methods - Bogleheads for some options.
3. Some might be able to step back into roles (and compensation) similar to pre-retirement, but for most this is likely unrealistic for reasons including the one you noted.

former player

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Re: Newbie with a big BUT...
« Reply #2 on: April 18, 2017, 05:10:38 AM »
I agree with MDM, some of the things you list as unplanned expenses are not "out of the blue", but normal capital expenditure and maintenance items which need to be budgeted for.  (This is a beef I have with some of the encouragement here for "bare bones" retirement - it is actually less than bare bones if these longer-term expenses such as major house maintenance or vehicle replacement are not budgeted for.)

I agree a dip in the markets when you first starting drawing from investments would be a concern, but my understanding is that the 4% is expected to allow for this.  You could allow for extra, but then you need to watch out for "one more year" territory.  Don't forget to balance finite resources against finite life years.

Getting back into the workforce shouldn't be difficult as long as you are not fixated on getting back into the same role at the same pay rate.  If you are sufficiently set up to retire early, and then keep a regular eye on income and expenditure, you will only start hitting a "back to work" phase at the point where just a part-time and much more lowly paid job will be entirely sufficient to stop pulling on investments until they have built back up.  So instead of thinking of it as "back to the grind" you can think of it as "new experience, new colleagues, new skills" in retirement.

Best of luck with thinking this through.

Villanelle

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Re: Newbie with a big BUT...
« Reply #3 on: April 18, 2017, 05:42:18 AM »
Having a truly sound budget means factor in those infrequent expenses.  It can be tough to nail them down, so I prefer to just sort of add a few thousand.  Looking at your life and deciding whether you are likely to have higher or lower amounts can help you.  If you own a super old house, your contingencies are likely to be higher, for example.

As for our plan, our budget is far from bare bones.  So we would likely scale back spending in down years, or when faced with a large expense.  Fewer/cheaper/shorter vacations. That sort of thing.  We could also go back to work.  Even if it was just selling shoes at Nordstrom for 3 days a week, that should be more than enough to pad a budget in most instances.  Bringing in maybe $8000 per year should make a world of difference and yet shouldn't be a all difficult, or really even unpleasant.  Sure, we might be working at a much lower hourly rate than our professional careers offered us, but that's a risk we are willing to take.  If something more professional/higher paying came along, that's great, but for a relatively short term, greeter at Walmart probably isn't miserable. 

boarder42

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Re: Newbie with a big BUT...
« Reply #4 on: April 18, 2017, 06:05:49 AM »
playing with cFIREsim should help you really understand how safe the 4% SWR is.  Some things i plan to do to help smooth out the ride and increase success are

1. keep my mortgage - by keeping a low fixed rate mortgage you slightly increase chances of failure early on (which will easily be recognizable by what the market is doing the first 5 years) but greatly decrease your chances of late in life failure. 
2. use a variable withdrawal rate.  So this has lots of advantages.
     a. if i can decrease my spending from my FIRE accounts by 10% it gets me a 99% chance of success over 43 year windows
     b. this means i only have to be able to make an extra 5k per year in the absolute worst case scenario or just decrease spending by 5k
     c. this will all show its face very early in the FIRE timeline
     d. during the first 5 years we dont plan to increase our spending based on this method but later in our life its likely our accounts will have grown alot and we can increase or charitable giving etc.

With flexibility in FIRE there are many things you can do to overcome some small early blips on the radar.  And you dont have to get your full income back... making 5-10k once you're out of the rat race should be quite easily accomplished if needed.  If you absolutely wnat nothing to do with making money or work of any kind after FIRE then maybe plan for a bit larger buffer.  but it wont take much.

zorwarrior

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Re: Newbie with a big BUT...
« Reply #5 on: April 18, 2017, 07:45:46 PM »
Thanks all for the great replies. I am still trying to get my head around the 4% rule to understand the practicalities and risks. But it makes sense to have good buffers to tide through tougher times.

The scariest part is coping with unplanned capital expenditure for me. I can cover my base expenses with relative ease. The thought of having to fix the house or buy a new car when not working is a bit frightening.

Ideally a small business/ income would be nice to have to keep some money coming in, apart from investment returns. Lots more to work through...mmmm

better late

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Re: Newbie with a big BUT...
« Reply #6 on: April 18, 2017, 07:56:22 PM »
We met with a financial adviser recently. The retirement scenario he showed us accounted for a major withdrawal ($25K) every five years... to pay for cars, roofs, weddings and other expected but infrequent events. While the number is under debate at our house,  I really like the methodology. I think it is a good reflection of how life goes.

MDM

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Re: Newbie with a big BUT...
« Reply #7 on: April 18, 2017, 09:25:33 PM »
The thought of having to fix the house or buy a new car when not working is a bit frightening.
If you don't prepare, then it may in fact be frightening/traumatic.

Forewarned being forearmed, however, creating a Sinking Fund with those irregular-but-you-know-they're-coming-at-some-time expenses in mind can ameliorate things considerably.  The sinking fund contribution becomes one of your annual expenses.

Villanelle

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Re: Newbie with a big BUT...
« Reply #8 on: April 19, 2017, 12:09:51 AM »
We met with a financial adviser recently. The retirement scenario he showed us accounted for a major withdrawal ($25K) every five years... to pay for cars, roofs, weddings and other expected but infrequent events. While the number is under debate at our house,  I really like the methodology. I think it is a good reflection of how life goes.

This is more or less in line with what we are planning for, though we call it $5k/yr, knowing some years will be far less and some probably far more.  There is debate between DH and I about whether we would withdraw the $5k and put it in a sinking fund, or leave it in the accounts to grow in the market until needed. 

Laura33

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Re: Newbie with a big BUT...
« Reply #9 on: April 19, 2017, 07:23:12 AM »
Thanks all for the great replies. I am still trying to get my head around the 4% rule to understand the practicalities and risks. But it makes sense to have good buffers to tide through tougher times.

The scariest part is coping with unplanned capital expenditure for me. I can cover my base expenses with relative ease. The thought of having to fix the house or buy a new car when not working is a bit frightening.

Ideally a small business/ income would be nice to have to keep some money coming in, apart from investment returns. Lots more to work through...mmmm

Right.  Sooooo, if you fear you can't cover this yet, then you're not actually FI and you're not ready to RE.  Things like a new roof or a replacement car are normal parts of life, and so you need to plan them into your budget so you have the cash when you need it.  E.g., you look at your history and realize that you have historically bought a new (used) car every $10K, for about $20K.  So you know you need to put away $2K/year (or maybe $2500 with inflation) to account for that.

Or, home repairs.  You may only need a new roof once -- but there will be other stuff that you may need only once, too, like new windows, or more insulation, or whatever.  I'd suggest estimating future expenses by looking at what you've spent over the past decade or so, and looking at what is nearing the end of its useful life.  Then do the same math to put together an estimate.

Now, personally, I plan to get everything shipshape before I pull the plug, to make that capital outlay while I still have plenty of excess income and to avoid that big early expense.  But even if I go into retirement with a new car, that doesn't mean that I can ignore the $2500/yr -- it just means that I *only* have to save $2500/yr, because I have the full 10 years to build that $25K back up before I will likely need a car again.  If I were going into RE knowing I needed a new roof in 2-3 years, I'd need to have a big chunk of extra $ already in the 'stache to cover that. 

[Note that I'm not actually going to have a separate car fund -- rather, I'm going to make sure that my 'stache can throw off the extra $2500/yr I will likely need for a car so that I can afford to pull that $ when I need it.  This is just for illustration purposes -- you plan based on expected costs divided by frequency of recurrence]

Shane

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Re: Newbie with a big BUT...
« Reply #10 on: April 19, 2017, 07:39:20 AM »
GCC's post on how to deal with challenges in ER might help in your planning OP:

The Worst Retirement Ever

tyort1

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Re: Newbie with a big BUT...
« Reply #11 on: April 19, 2017, 11:59:13 AM »
I'll talk a bit about the emotional side of things instead of the practical side.  The first thing you'll want to do is dial down your spending and stay on a tight budget for a couple of years, at least, before you even think about FIRE.

Here's why - when you make a good salary and are in the habit of spending all (or most) of it, you are in the mindset of "where does all my $$ go"?  That makes life (especially finances) seem out of control and very risky.  So even if you save up 25x (or even 30x) times expenses, you still won't feel safe or comfortable with your retirement.

But, once you dial down spending and realize, "hey, I really CAN make it just fine on $40k per year", then suddenly saving up $1.2million and living off that is a lot more reasonable. 

The other thing that's important is if you haven't dialed down your lifestyle in the past, you aren't really sure if you 'can' dial it down.  If you are like me, I tended to just increase my spending every time I got a pay bump.  Always up, never down.  So cutting back was weird and foreign and seemed 'unrealistic'!!

TLDR:  You'll never feel safe cutting the cord until you live on a tight budget for a few years. 

trollwithamustache

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Re: Newbie with a big BUT...
« Reply #12 on: April 19, 2017, 12:27:27 PM »
The concerns you outline above are a big part of why I am a huge fan of becoming an independent contractor.

The continued income lowers withdrawal rate and its much easier to pick back up to full time if needed rather than re-entering the work force with a hole in the resume.

It also gives you some transition years to test out your budget. Nothing is 100% but the more time your budget works the more confidence you can have in it. We tend to budget by month or year but as others noted not all costs neatly fit into that timeframe.

Finally, you don't mention hobbies/passions ect but 15%, 25% or 50% time off may is often enough time to pursue all of that. (ie, its as good as being retired!).