How to Retire

[rxman2010]

Me and my wife have already been living a 90%-Mustachian life and have always wanted to retire early. We stumbled upon this website and now we really think we can retire soon! Both of us are 31 and are ready to have kids. We've paid our mortgage off and our expenses are not too much. I read through jlcollinsnh "Stocks — Part V: Keeping it simple, considerations and tools." I have a few questions.

We plan to purchase a new home further away from the city. We both plan to work until we have enough for a down payment that will have a mortgage that will be covered by renting out our current home. If she has the baby before then, she will retire!

How should we split our money between VTSAX, VBTLX, VGSLX?. I don't mind using this money aggressively. I'm comfortable with using 5-6% of the money through dividends and withdrawal. We want to use this money until we can tap into our 401k at 60. We each maxed our 401k every year and employer put 5% of our salary in. Also, we will have 2 homes that are fully paid off so I am not to worried about my 'stash running out and then using the 401k.

When we talk about a X% SWR rate does that include the dividend pay out? Do we use the dividend yield minus our SWR?

Any help would be appreciated. Looking forward to retirement!

[secondcor521]

When we talk about a X% SWR rate does that include the dividend pay out? Do we use the dividend yield minus our SWR?

Can't advise you on the allocation question, but for this one:

The X% SWR in the original studies say you can take X% SWR from your initial portfolio balance for Y years with a Z% chance of success, usually with some form of inflation adjustment.  The canonical data set indicates X=4%, Y=30, Z=95%, but the inflation adjustment and your portfolio allocation impact that also.

So supposing you had $1M at the moment you retire.  If you take $40K from that pile of money this year, and then $40K*(1+CPI%) next year, and so on, the chances are 19 out of 20 that you'd would not run out of money for 30 years.

If that portfolio throws of $30K of dividends and you took those and spent them, they would be included in your SWR amount.  So you could remove an additional $10K from the portfolio to get you to the 4%.  It would not be "legit" to spend the $30K plus an additional $40K.  You could do that, but if you did that would be a 7% WR, which most people don't think would be sustainable over the 30 year period.

Also, that $40K needs to include all of your outflows, including taxes.

[matchewed]

Regarding your Asset Allocation portion, the correct answer is whatever will generate enough for you to maintain your 4% SWR and won't make you react poorly to a big financial event. Unfortunately only you can determine what that allocation is.

I'd look into Wade Pfau if you are close to FIRE, he's very conservative but has a huge amount of information on SWR's, Asset Allocations, and success rates. http://wpfau.blogspot.com/

[rxman2010]

Thanks for your help. A few more questions.

Based on those models/formulas/calculations etc.. Do they include all tax, non-tax accounts?

Say I had 1M spread through out the 3 funds I spoke of earlier and I had an additional X amount in a 401k. Do you include both your 1M and 400k in the calculation? I like to keep things simple and not touch it until I can withdraw penalty free. I've seen people talk about funneling through Roth IRA and 72(t).