Staged approach to FI

[the lorax]

Hi all
I’m looking for some sense-checking of our proposed approach to semi-FIRE. A couple of things first up – firstly I’m aware that I wouldn’t be FI and secondly I have anxiety so that makes me triple-check and doubt everything…..

I’ve been on this forum for about ten years, tracking our expenses for 15-20 years and we are fairly frugal naturally. I would like to quit work and be a SAHM whilst I still can – my kid isn’t going to want to hang out with me for much longer and I’d like to be there for him as he enters and goes through high school. I am also exhausted and approaching burn out from being the higher earner until recently, in a job which is high stress working for a manager who blindsides me quite often. My typical work day involves 6-7 hours of meetings and worst of all, they don’t achieve much as our leadership can’t make decisions so we spend most of out time in a holding pattern whilst awaiting sign off of projects. Plus we’ve had a ton of natural and man-made disasters to cope with and virtually all our extended family is overseas.
I’m using the ‘bucket’ approach to different phases as we expect to get govt superannuation (currently from 65 years old but that may get pushed out to 67 yo or later if it becomes unaffordable for govt. Healthcare much less of an issue here in NZ and we have critical cover insurance that would help in the event any of us need expensive cancer treatment for eg.

      
Current Assets      
FIRE investments    $   415,000    in index funds - 75% shares, 5% REIT and 20% bonds
traditional retirement investments    $   217,000    similar to above but relatively more in NZ shares & the global share component mostly hedged)
my investments    $     50,000    (virtually all shares)
We also have a nearly paid off house  - we prioritised paying the mortgage when we bought our first house because interest rates were really high, we've got about $35k still to pay off which we are doing at the minimum rate as it's locked into a low rate for the net 2 years
      
in 2023 we spent    $     59,626    This included $3.3k on upgrading our car
      
in 2022 we spent    $     61,336    This was higher as we spent a lot in the home and garden category as we’d recently moved house
      
I think $60k is a reasonable estimate of BAU expenses. I expect our lumpy expenses (major home repairs, overseas travel, car replacement) to average out between $8-$12k per year so I’ve assumed $10k per year for now
      
For next 5 years – transition to one income family
I would quit my job within a few months and become a SAHM. My partner’s income covers our projected BAU expenses (inflation adjusted to our current rate of 4.5%) and the $10k p.a. for lumpy expenses and he’s happy to work for another 10 years. We have some fat in the budget we could trim if needed. For the next 5 years we would then just tread water financially- paying off our remaining very small mortgage off at the minimum rate and not investing unless we don't need to use the sinking funds. We have saved an amount in a separate fund (not shown in assets above) in case our son wants to go on to higher education
      
Years 6-10      
Expenses should drop by around $10k per year when our son leaves home - if he stays we'd expect him to pay for his food and transport, then later on share of electricity etc so he’d be fairly cost neutral. This means we should start being able to save around $10k per year again- plan is to put this all into term deposits to fund year 1 of FIRE
      
      
Years 11-20 – FIRE?      
I’m hoping we'd be able to live off our FIRE stash at this point, with possibly one or both of us doing part-time work. Son should be financially independent by this time meaning our BAU would be about $50k (in today's dollars) plus lumpy expenses averaging out to around $10k, meaning we need to cover $60k in expenses each year
      
This is the period the FIRE stash (currently $415k) needs to cover us for. I'm expecting this to grow to around $480k-550k with the lower limit based on post-tax and fees real return of 1.7% p.a. and higher limit based on real return post taxes and fees of 3.3% p.a
      
Years 21 onwards – traditional retirement
NZ superannuation kicks in (actually would kick in at year 18 for me and year 19 for DH but I'm being slightly cautious in case they raise the age)
NZ super provides    $     39,700    for a couple post-tax in today's dollars
meaning we would want to draw around $20k per year from our retirement stash
I'm still assuming around $10k per year lumpy expenses - medical expenses will likely increase with age but travel will drop
      
Our current $217k traditional retirement stash needs to cover the extra income needed at this phase of life. We have 20 years for this to grow (we will contribute around $6.5k per year to this for the next 10 years and will try to contribute enough to get the govt match once FIRED- that would mean $3k a year going in to this amount still).
 I’m expecting the trad retirement stash to get to around $500k in today's dollars with the higher growth scenario and around $400k with the lower growth scenario.  Given we aren't wanting to leave a big legacy, we'd be comfortable with a withdrawal rate on this of 5-6% p.a. So I think we're covered for this traditional retirement period (?).
      
Back up plans:      

• I should be able to earn something during the next 10 years
  My investment pot of $50K      
  There is still some fat we could trim in our budget
  We have a significant amount of equity in our house and could move to a smaller cheaper house once our son has left home

      

Risks/concerns + mitigations
•   Sequence of returns risk – with only 10 years to go market fluctuations become really important- we could pick up some part-time work though to mitigate
•   If I stop work and have a gap on my CV, I'll likely struggle to get another well-paid role, particularly a WFH gig. Ageism kicks in early for women so I think I’d be taking a big paycut
•   Climate change - possible impacts on our economy and whether the costs of adaptation mean that the govt cuts superannuation. Insurance and local rates will definitely rise higher than the standard rate of inflation – I’ve allowed a bit for this in the budget. No idea how bad it will get though
•   DH being made redundant or too sick to work- if I can keep earning or even just volunteering, I should be able to get some kind of job and we don't need that much to cover our basic expenses. He would get 6m pay if made redundant and he’s very employable

Questions
Does this seem viable- are my assumptions re growth of our investment funds sensible? Anything I’m missing please?

[jeroly]

Eyeballing your numbers, it seems like you're more or less on track.
Running projections though some retirement calculators like cfiresim will be a good thing to do, and being willing to be flexible will be a huge help.

[the lorax]

Thanks for responding @jeroly it's reassuring to have other eyes on it :) I tried a couple of calculators but found it tricky with having the super-annuation kick in but I can try again thanks

[mspym]

Hello! Bullet points of disorganised thoughts:
- I would try playing around with the rich broke or dead calculator (https://engaging-data.com/will-money-last-retire-early/) as you can add income streams such as Super or extra costs, such as 10K pa from 2024-2034 for your son. It was startling for me to see the risk reduction just from earning $3-5K a year.
- I think you are solid for traditional retirement onwards, and if your husband continues to work for the next 10 years, that is also solid. The question mark would be the time between your husband finishing up and accessing Super, which is close but not 100%.
- Why are your assumed returns so low on your index funds? Even at the top PIR of 28%, a net return of 1.7-3.3% seems really low for 75% stocks. Is this based on your historical returns and when did you last comparison shop for funds? [this is just a prompt, you do not need to answer this]
- What level of risk of failure would you be comfortable with? Mine was when I got to a 2% chance of broke vs an 8% chance of being dead. At that point, I was *fine* binning work.
- Sidenote: as a competent person, you are very likely to be offered paying work once you finish up. The op shop I am volunteering at has been putting out feelers to see if I want to take on paid shifts, where even 3 days a week would cover half our [low] annual expenses, or let us travel overseas.
- Honestly there is no point fretting about climate change and the future other than future-proofing your situation as much as possible. We'll all either be stuffed or fine together.

I think you are really close to smashing it - I just think there is a bit of squishiness and uncertainty for years 11-18.

[the lorax]

Thanks for your feedback @mspym! ok so the rates I have been assuming are based on the following assumption:
1. 'high' return rate assumes 8.75% average gain for the portfolio, then take off 0.5% for fees, then the tax and then I'm assuming 3% for inflation which brings it down to 3.3%
2. the 'low' return is the same but with a starting point of 4.75% returns

I get myself in knots about the correcting for inflation thing - if I plan ahead using our current expenditure I use the inflation-adjusted rates of return. If I use nominal rates for market returns I then model forward increasing our projected spend in line with inflation - is that correct?

Maybe those starting rates are just way too conservative? I have tracked our investments for the last ten years we've had any and they have outperformed where I expected them to be. I've got a rough idea of our inputs and amounts so may be I can try to figure out our actual returns. We're in fairly low cost funds (like Simplicity and Superlife)

If I'm being overly conservative in our expected rate of returns I guess that makes that middle period of years 11-20 a bit safer though. I'll try that calculator thanks :)

[mspym]

I suspect you are being overly conservative - a lot of inflation expenses can be side-stepped via Mustachianism. Although I was legit shocked at how expensive groceries were when I moved back!

Alrighty, I entered your numbers into R/B/D and the broke risk goes up significantly around year 15 - https://engaging-data.com/will-money-last-retire-early/?spend=60000&initsav=465000&age=56&yrs=30&stockpct=75&bondpct=20&cashpct=5&sex=1&infl=1&taxrate=17&fees=0.5&income=95000;39700&incstart=46;65&incend=56;%2095&expense=10000&expstart=46&expend=51&showdeath=1&showlow=1&show2x=1&show5x=1&flexpct=10&spendthreshold=90&mort=ss

- I only put in your taxable and personal investments as it's harder to access KiwiSaver before 65 than it would be for me to access my Australian Super (which I can tap from 60 onwards).
- I've put your husband in as working from now till 56 and his income as 95k - again, guesstimates to get us to an after-tax income that would meet your 70k pa expenses
- I've entered expenses as 60k pa with additional 10 for your son for 5 years.
- I've put in a 10% spending flex but I'd recommend playing with those thresholds.
- If you add 20k of Kiwisaver spending to the Super payments, the 'broke' risk essentially flatlines from the big jump around age 60.

[the lorax]

Thanks @mspym :) I took what you did and put in our actual figures and got a similar deal except the big jump occurred around 62-3. But then I looked at if he would work an extra year and the risk when up from around 17% risk of going broke to around 27%???? and if I put in retiring earlier the risk drops about 10%, so now I"m confused :(
Adding in some income from me that we could then invest doesn't seem to make a difference so I'm guessing the model just assumes you don't invest the extra. A 10-15% chance of failure I think I can live with as I do intent to bring in some income and we should be investing again once our son stops costin gus an arm and a leg lol

[mspym]

I finished up with a 10-15% gap and it’s worked out so far. You seem competent and there is generally opportunities to make money lying around for competent people. Example: I just had an old project manager reach out to me after three years with a new project that he’d love me to come work on.

[the lorax]

I finished up with a 10-15% gap and it’s worked out so far. You seem competent and there is generally opportunities to make money lying around for competent people. Example: I just had an old project manager reach out to me after three years with a new project that he’d love me to come work on.

Chucking our emergency fund into the starting amount I'm now at a jump at age 64 to 13-14% risk of failure and I can live with that :) It's tricky trying to work the bucket method but the RBD site is really helpful thanks

[Retire-Canada]

I took a quick look. You've got ~$700K in investments now. You have 10 years before you want to draw those down and some of those years you'll have $10K extra you can add to investments once son goes to school. After 10 years at 5% after inflation you'd have ~$1.1M.

You've got about 10 years between DH stopping to work and your pension kicking in. You want to spend ~$50K + $10K [lumpy] = $60K/year. That's around a 5.5%WR from your $1.1M portfolio.

After 65 you only want to take out $20K = $10K = $30K/year due to your pension kicking in.

In general terms that all looks good. I would go for it. Just monitor your portfolio annually. You could get a few lucky years and money is never a concern again or you could get a few unlucky years and you'll need to trim a bit/maybe DH works a bit extra or a PT job for you, but I wouldn't worry about that now.

[spartana]

I looked it over too and I agree it looks like you are good to go. I don't know much about NZ pensions or funds but from what I've read they seem very stable and will likely be around long term. My only issue would be counting on the DHs 10 years of work as a guareented reliable bucket. Stuff happens -  unemployment, injury, disability, illness, death, burn out and his desire to quit sooner, even divorce, etc - so having a back up plan in the unlikely event something derails the plan to work 10 more years would be helpful. Otherwise enjoy your RE and kids asap!

ETA: I also use a bucket type of thing for my FIRE. Plan how much money I'll need, and which bucket to withdraw from, to cover a ceratain period of time at various stages in my life. But I divorced after a long marriage on the eve of our planned FIRE so I'm always telling people to have some back up contingenty plans just in case something unexpected goes awry. Ex-DH and I (DINKs) had a very amicable DIY divorce and were both equally FI as singles so it didn't do us any damage but if you guys are jointly dependent on one spouse's working income and future FIRE plans you do need to make some contingency plans.

[the lorax]

thanks @Retire-Canada and @spartana  :) that's very reassuring! Thanks very much for taking a look and good point re divorce and unemployment etc affecting reliance on DH's income. For some of the issues listed we'd be covered by our insurance policies but relationships ending unexpectedly is definitely a tricky one. If it happened earlier I would find it easier to get back into the job market, and, if later, then we'd sell the house and I could move somewhere much cheaper and smaller which would free up a lot of capital. I definitely need to keep a toe in the job market for various reasons and it would hopefully also mean I could save extra so he could go down to 4 days a week towards the end.  I'm going to ask for an unpaid leave of absence of 6 months before I quit outright - in the unlikely event my employer agrees to that it would give us a back up plan and test whether me not working does work better for us as a family. Failing that I'll put some feelers out for contract work. Thanks again folks for double checking, its super-helpful for me to have people to check stuff with - DH tends to lose interest v quickly when I try to talk him about the assumptions I"m making and there's no-one else IRL I can check with!!

[Retire-Canada]

FWIW - I went through various levels of PT work on the approach to FIRE and beyond. There is a point where you can shed a lot of the negative effects of working FT while still making a meaningful amount of money. It could be something to look at with the current employer or to find something else once you do quit that is compatible with the amount of time you want to spend with your son and that he wants to spend with you.

[the lorax]

I got to work for 3 days a week for a few months when I had an anxiety flare-up and it was hugely better than my usual 4 days a week. The problem with being a 0.8FTE, particulalry if you manage people as I do, is that you end up trying to do a full-time job in 4 days a week plus taking calls/messages to help the team on the 5th day. Like most 0.8FTE I dropped Friday working but that means  I miss the day with fewest meetings and then have to try to cram my work in between meetings Mon-Thurs. If you only work 3 days a week people  seem to get the  message more that you aren't full-time.
Where I work we have an insane number of meetings and a lot of them really don't achieve much. I've thought about trying to get a 0.5FTE non-management role with my current employer but we're going through a massive restructure atm so there's been very little going. Sadly I don't think they'll offer a voluntary redundancy scheme and I'm wary of staying through the restructure as the last couple of restructures I went through were horrible (they are what caused the anxiety in the first place). I will definitely try to find a proper part-time role though as that would be an ideal solution, even if it doesn't earn that much.
 

[spartana]

I also went back to work 2 years after leaving my job. My old employer (a government agency) asked me to come back for very p/t and on call work. I had a very hard to fill weird job that required a lot of specific licenses, training and security clearances so they were very flexible as to hours and conditions. I was living in Spain at the time and decided to go back to the US to do that. It started out great but pretty soon turned into a full time job with a lot of over time so I eventually quit. It helped pad the stash after my divorce and allowed me to buy a house but boy was it rough! So if you do go back part time be very firm about your time commitment and stick to it. I found that very hard to do myself but it seems most are able to just say "no".  Good luck. I think you'll really enjoy the FIRE life and if you can get a long sabbatical before hand that's great.

[the lorax]

yes I'd struggle to maintain part-time boundaries given the way I"m wired - perhaps not so much if it was in a role I didn't care about the outcomes. I just returned to work today after nearly two weeks off - and now have a flare up of the anxiety after having been fine for ages. Leadership still not making decisions so our area looks completely unproductive :( and they are basically saying no LWOP anymore - they won't hold jobs open so it'll likely be a straight resignation followed by a run to the door and a few months of decompression for me

[PhilB]

Jumping on this a bit late after seeing your link in another thread.  I know nothing about NZ taxes beyond what a quick Google can tell me, but your numbers do seem to broadly stack up.  There is one word of caution I would give about the bucket approach.  Don't underestimate how hard it is to bring yourself to spend all that capital in years 11 to 20.  Spending it looks sensible when treated as a maths problem, but when it comes down to actually doing it, it can really hurt.  Trust me, I've been there.  More power to you if you manage it :)

If, OTOH, you pick up a bit of part time work, it would be possible to make it through to super age with a good chunk of that capital intact, in which case you'd be laughing.

Playing with some rough numbers, 2.5% real growth gets your non-pension investments to around £600k after 10 years.  That would get you through if you spent it all, then the pension funds would just about get you through with the state pension.

OTOH, if you were to pick up $25k ish pa of PT work for ten years, I make it that you could split your non-pension funds between a $200k bridging fund to cover a third of your spending, take 5% withdrawals from the other $400k (you don't mind if that's higher than the SWR as you have the state pensionm coming) for another $20k and after tax that together should roughly give you your $60k pa spending.  Note that $25k could be done for the ten years your partner is working to get it out of the way, or it could be 5 years each later, or whatever.

The odds are that you then end up with most, if not all, of that $400k intact when you hit state pension age, at which point you'll be loaded :)

[the lorax]

Hi @PhilB
Thanks for taking a look! I don't quite get the paragraph quoted below sorry - where does me earning $25k per year for the next ten years come in to the bridging scenario below please? So split $200k of our existing stash across the ten years, have a 5% withdrawal rate for a further $20k per year and then use the PT earnings to cover the remaining? I'm probably being dopey, it's been a long day ;)
$25k per year part-time is quite a lot tbh here but I'm hoping to make $10-12 per year somehow!

OTOH, if you were to pick up $25k ish pa of PT work for ten years, I make it that you could split your non-pension funds between a $200k bridging fund to cover a third of your spending, take 5% withdrawals from the other $400k (you don't mind if that's higher than the SWR as you have the state pensionm coming) for another $20k and after tax that together should roughly give you your $60k pa spending.  Note that $25k could be done for the ten years your partner is working to get it out of the way, or it could be 5 years each later, or whatever.

The odds are that you then end up with most, if not all, of that $400k intact when you hit state pension age, at which point you'll be loaded :)

[PhilB]

Sorry, it is all a bit convoluted!

I was basically saying let the non-pension investments grow for ten years, whilst your partner is working.  Split that into separate pots of $400k (equity rich for ongoing growth) and $200k (cashlike).  For the next ten years fund your $60k per annum in three equal parts:

• $20k pa drawdown from the $400k
• $20k pa from the $200k 'bridging fund' to fully deplete it over 10 years
• $20k pa from earnings - either in the same period or saved from the first ten years

The extra $200k earned means that rather than spending the whole $600k, you have most, if not all, of the $400k pot  still intact at the end of year 20.

If $20k x 10 is too much to earn, then how about $15k?  That would let you split the $600k in half so that your spending was $30k from bridging funds, $15k from drawings and $15k from earnings.

Whichever level you do it, you get to re-assign double* the amount of your expected total part time earnings, from the bridging fund (capital you spend) to the drawdown fund (that probably lasts forever).

I am in a very similar situation myself.  I'm halfway through an 11 year period between FIRE and pensions starting to come into payment.  I always had a drawdown fund, but I had planned to burn through a significant fraction of my capital over this period. I ended up working PT, leaving much more of it invested and discovering what a big impact that had.  I'm currently at a point where our own spending is £20k bridging, £20k drawdown and £20k earnings although that is partially driven by tax efficiency considerations.

* The exact doubling comes from the fact I used 5% drawdown over a 10 year period, so if you put X into the drawdown pot, you draw back out a total of 0.5X over the ten year period, leaving just 0.5X to find from other sources.

[the lorax]

Ok thanks! I will try to get some part time work to help reduce our reliance on our stash. It would also be good to have a low key part time job I can maintain in the event they change the rules around accessing our government superannuation, for eg if there's a requirement to have been employed for a certain number of years

[the lorax]

Just a quick update - I managed to hang on in there at work a few more months and then got incredibly lucky and got voluntary redundacy :) I finish up in a couple of weeks and it's a huge weight off my shoulders.

Given the extra months pay, paid out leave, redundancy and scaled-back travel plans we are now sitting at $232k in our trad retirement accounts and $544k in our FIRE stash. According to RBD, that gives us around a 95% success rate if we don't need to draw down our FIRE stash for ten years or 95% if we start using it in 9 years given an expected $62k/yr spend which seems ok to me. I'm still hoping to find a cushy part-time gig to help pad the stash and increase our flexibility and financial resilience but for the next 6 months or so I plan to decompress, get my health back on track and not attend any meetings ;)

Thanks to all those who commented on my case study!

[mspym]

Wow that is such a good outcome, I am so pleased for you. You have *got this*!

[deborah]

Happy for you!

[PhilB]

Congratulations!

[former player]

Congratulations on coming to the FIREside, and best wishes for the decompression.