Author Topic: Using tiered income to retire early  (Read 2084 times)

Loren Ver

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Using tiered income to retire early
« on: July 25, 2017, 02:02:39 PM »
I am thinking of a new plan and wanted to run it by you all since you are great thinkers.  :).

A little background - the most solid plan has DH and I retiring in about 3-6 years.  We want around a $35,000 per year income, using the 4% rule so the goal was to have around $875,000-$900,000.  We currently have just over $500,000 in stocks so assuming 7% growth.  I was going to pull the trigger when I turned 40 in 2022. Nothing too surprising there.

Here is where things have changed.  My job is probably going away sometime this year (merger) and I am the main bread winner in a very specialized and competitive field.  Over the past few years my job has been sucking the joy out of doing good work (less people, more work - the usual, but now I have an eye twitch that tells me I need to change things).  DH has also harkened back to the day (before we were married, when I was still in college) when I told him he could retire in his 40s if he started to put money in investments then.  He turns 40 in 2019, retiring before he turns 41 in 2020 makes him smile the big smiles (though he doesn't expect it to happen).  His work is understaffed and he is getting less happy (kinda like me).

Looking at the finances, we need a minimum of about $24,000 per year to keep us a float (this includes the mortgage with about 9 years still on it), so an egg of 600,000.  If I don't get cut until December, and I get a severance we will be right about there.

So the crux of the issue.  We could both walk when we hit $600,000 and pull out 24000 per year.  This should allow the 'stach to keep growing, albeit at a significantly reduced speed.  Then when I gets to higher levels, pull out more until we get to 35000.

PROS -
Significantly earlier freedom!
I don't have to try and find a tangential field or learn a new job.
DH gets out of a job that eats all his energy.  Ditto for me (less eye twitching).


CONS-
This does not leave room for errors.  If the market corrects early on, our ability to pull out less does not exist unless to credit.
Possible changes to health care that are still being discussed.
The first few years would be all home based.  Bigger things (international travel) would have to wait.

To me, it sounds like it could work, and the math works, but it might be more stressful than necessary.  Each subsequent year we put the goal off, our situation improves vastly.  Maybe cut the difference and shoot for 2019/2020.  That gives DH his out before he is 41, but lets the stash build a cushion.  I would also end up with a different job, so maybe that could be interesting too - as long as it is less stressful than the current one.

The closer FI comes, the harder it is still stick it out.  A good problem to have, but ugh!

LV

matchewed

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Re: Using tiered income to retire early
« Reply #1 on: July 25, 2017, 02:10:47 PM »
That's not really tiered income it's just raising your SWR rate to almost 6% randomly(-ish) in the middle of your FIRE attempt.

Doable if you feel you might be able to earn some cash on the side here and there or if you can be flexible with spending. Just be know your risks, mitigate them, and understand what signals you to change your plan.

Laura33

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Re: Using tiered income to retire early
« Reply #2 on: July 25, 2017, 02:25:07 PM »
Seems that you have defined your variables in a way that guarantee success:  if you assume 7% growth, and withdraw 4% annually, you can allow the 'stache to grow until that 4% reaches your $35K target and be good to go from there.

The problem is that real life is not math.  The 4% rule is not a guarantee -- it's based on a study that asked about a safe withdrawal rate over a 30-year retirement without running out of money.  There are many here who will tell you that this figure is conservative, because under most simulations a 4% rate allows your 'stache to grow in perpetuity; there are many others here who will just as persuasively argue that it is too aggressive.  But I don't think anyone here will tell you that assuming a 4% withdrawal rate will allow your 'stache to grow so you can definitely withdraw $35K XX years from now -- the "rule" says you just get the original 4% + an inflation adjustment, in perpetuity.

So it all depends on your risk tolerance and flexibility.  Would you be happy if the 'stache didn't grow and you ended up living on the inflation-adjusted version of today's $24K forever?  Would you be able to find some work or side hustle to clear $10-15K/yr -- without eye-twitches and the like -- if the 'stache didn't grow and you wanted to travel?  Can you look at your "pay off the mortgage" date as the beginning of your travels and such, since that will clear a significant amount of cashflow for you?  Is there an option for one or the other of you to continue some work on a part-time basis until the mortgage is paid off/the 'stache hits your target figure (again without eye-twitches and the like), so you can either live on that income or decrease the immediate draw from the 'stache?  Etc. etc. etc.

Tl;dr:  if you guys are done with the jobs and are miserable, quit.  You may not have RE money, but you clearly have FU money, and your health and sanity is not worth it.  Just don't do it assuming that you'll "just" need to tighten your belt for a few years to get your 'stache where you really want it to be -- have some backup plans.

KungfuRabbit

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Re: Using tiered income to retire early
« Reply #3 on: July 25, 2017, 02:57:33 PM »
Based on the rule you should be fine to retire end of year, like you said.

If you want to buffer it it would be pretty easy to make a combined $24,000 / year to avoid withdraws and just let your stache grow a bit more. For example, get a job at Home Depot making $12 / hour and put in 20 hours / week each. Would be as low stress as it comes - no eye twitch!

That's the amazing thing about living off $24,000 / year. Not only can you retire way young from an average salary, but if you do happen to go broke (or want to let your stache grow) it's super easy to make that much money working part time zero stress jobs.  Personally if I FIRE then go broke I'd work in a garden center, or a bike shop.

Fire2025

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Re: Using tiered income to retire early
« Reply #4 on: July 25, 2017, 03:07:38 PM »
Seems that you have defined your variables in a way that guarantee success:  if you assume 7% growth, and withdraw 4% annually, you can allow the 'stache to grow until that 4% reaches your $35K target and be good to go from there.

The problem is that real life is not math.  The 4% rule is not a guarantee -- it's based on a study that asked about a safe withdrawal rate over a 30-year retirement without running out of money.  There are many here who will tell you that this figure is conservative, because under most simulations a 4% rate allows your 'stache to grow in perpetuity; there are many others here who will just as persuasively argue that it is too aggressive.  But I don't think anyone here will tell you that assuming a 4% withdrawal rate will allow your 'stache to grow so you can definitely withdraw $35K XX years from now -- the "rule" says you just get the original 4% + an inflation adjustment, in perpetuity.

So it all depends on your risk tolerance and flexibility.  Would you be happy if the 'stache didn't grow and you ended up living on the inflation-adjusted version of today's $24K forever?  Would you be able to find some work or side hustle to clear $10-15K/yr -- without eye-twitches and the like -- if the 'stache didn't grow and you wanted to travel?  Can you look at your "pay off the mortgage" date as the beginning of your travels and such, since that will clear a significant amount of cashflow for you?  Is there an option for one or the other of you to continue some work on a part-time basis until the mortgage is paid off/the 'stache hits your target figure (again without eye-twitches and the like), so you can either live on that income or decrease the immediate draw from the 'stache?  Etc. etc. etc.

Tl;dr:  if you guys are done with the jobs and are miserable, quit.  You may not have RE money, but you clearly have FU money, and your health and sanity is not worth it.  Just don't do it assuming that you'll "just" need to tighten your belt for a few years to get your 'stache where you really want it to be -- have some backup plans.

This is a wonderful response. 

The only thing I would add is if you really want to walk, and have the stache grow, the thing to do might be to earn $35,000 between you.  That's two simple part time jobs.  Is there anything you guys could enjoy doing while you wait for the stache to catch up with your desires?

Vertical Mode

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Re: Using tiered income to retire early
« Reply #5 on: July 25, 2017, 03:21:36 PM »
Seems that you have defined your variables in a way that guarantee success:  if you assume 7% growth, and withdraw 4% annually, you can allow the 'stache to grow until that 4% reaches your $35K target and be good to go from there.

The problem is that real life is not math.  The 4% rule is not a guarantee -- it's based on a study that asked about a safe withdrawal rate over a 30-year retirement without running out of money.  There are many here who will tell you that this figure is conservative, because under most simulations a 4% rate allows your 'stache to grow in perpetuity; there are many others here who will just as persuasively argue that it is too aggressive.  But I don't think anyone here will tell you that assuming a 4% withdrawal rate will allow your 'stache to grow so you can definitely withdraw $35K XX years from now -- the "rule" says you just get the original 4% + an inflation adjustment, in perpetuity.

So it all depends on your risk tolerance and flexibility.  Would you be happy if the 'stache didn't grow and you ended up living on the inflation-adjusted version of today's $24K forever?  Would you be able to find some work or side hustle to clear $10-15K/yr -- without eye-twitches and the like -- if the 'stache didn't grow and you wanted to travel?  Can you look at your "pay off the mortgage" date as the beginning of your travels and such, since that will clear a significant amount of cashflow for you?  Is there an option for one or the other of you to continue some work on a part-time basis until the mortgage is paid off/the 'stache hits your target figure (again without eye-twitches and the like), so you can either live on that income or decrease the immediate draw from the 'stache?  Etc. etc. etc.

Tl;dr:  if you guys are done with the jobs and are miserable, quit.  You may not have RE money, but you clearly have FU money, and your health and sanity is not worth it.  Just don't do it assuming that you'll "just" need to tighten your belt for a few years to get your 'stache where you really want it to be -- have some backup plans.

Very well put, Laura 33. Especially the advice RE: backup plans.

OP, your $500k 'stash gives you a fair amount of "runway" to work with, even if funding your lifestyle puts you at an unsustainable WR temporarily. By my math, your $35k desired annual drawdown represents a 5.8% WR if the scenario plays out as you have envisioned with the severance. Not that I am advocating this, but there are a few here who have retired on a greater than 4% WR, and a key variable that makes such an approach viable is their flexibility. Any additional income you can earn via part-time work or a side hustle could be the bridge that allows an earlier quit-date to be successful (in that it would both earn you money in the present, and therefore reduce your burn rate on the 'stash). In the meantime, you have ample FU money in the event that your jobs become just too unbearable.

Come to think of it, dropping to part-time or just a side-hustle of some kind as a "bridge" might be a good test to see how you transition from the "saver" mentality to the "spender" mentality. Many have said that it is a mental adjustment to get used to no longer drawing a regular salary and instead drawing on your own stash/resources. Just a thought.

Loren Ver

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Re: Using tiered income to retire early
« Reply #6 on: July 25, 2017, 04:21:18 PM »
:):):)

Thank you all for your thoughtful responses.  It helps so much to hear voices that aren't just the ones in my head.  *Quiet down guys, I'm typing*

I am a lot more at peace with the future now that there are more options on the table and to know that my idea isn't the craziness that comes from being in a pressure cooker at work.  For some reason I have always wanted to stock shelves as a job. That and drive a big rig truck (I really like driving - not very classic mustacian).  Maybe I'll move some of my oh crud find a comparable job searching to more part time side hustle searching.  Something in biking distance :).  See where that takes me.

LV