Author Topic: Close to FIRE?  (Read 2483 times)

lV2018

  • 5 O'Clock Shadow
  • *
  • Posts: 4
Close to FIRE?
« on: July 05, 2019, 06:47:28 PM »
I'm looking to reach FIRE by age 31. I'm 29 now and I've got $900k saved and another $200k in home equity. I've got $300k of that invested in Betterment and the rest sitting in a high-interest savings account. In Betterment, I've got the allocation set to 60 stock/40 bonds. My expenses (after tax) are $60k per year, some of that is business related so if I ever decide to stop working my total in expenses would be at about $50k/year. I'm saving on average about $20k/month (after paying taxes), but not sure how much longer I can sustain this amount of income.

My questions are..

1. How much would I need to retire while spending 50k/year?
2. Should I put more of my money into Betterment now, or do I do that only once I've reached my target?
3. Am I being too conservative with my allocation? My thought is that I'm worried the market will crash before I hit my target, so I want to play it safe since I'm close to hitting it. Then once I've hit that, I'll bump it up to 90/10. Is that sensible? 

the_gastropod

  • Stubble
  • **
  • Posts: 235
  • Age: 34
  • Location: Brooklyn, NY
Re: Close to FIRE?
« Reply #1 on: July 05, 2019, 07:23:30 PM »
1. If you follow the 4% rule, you need 25x your annual expenses invested. 50k x 25 is $1.25 Million
2. Yes! Put that money to work now.
3. No. That is not sensible. If you're stressing about a crash, you're probably not using an appropriate asset allocation for your risk tolerance. Find a suitable allocation, and stick with it. Dancing in and out of the market is a sure fire way to underperform.

Congrats on all your success. > $1 Million before 30 is an incredible accomplishment.

RollingGreen

  • 5 O'Clock Shadow
  • *
  • Posts: 41
Re: Close to FIRE?
« Reply #2 on: July 06, 2019, 05:46:16 AM »
Amazing! Can I ask what you do to reach that level so early?

Sent from my SM-N950U using Tapatalk


lV2018

  • 5 O'Clock Shadow
  • *
  • Posts: 4
Re: Close to FIRE?
« Reply #3 on: July 06, 2019, 07:08:14 AM »
Amazing! Can I ask what you do to reach that level so early?

Sent from my SM-N950U using Tapatalk

Music production :)

lV2018

  • 5 O'Clock Shadow
  • *
  • Posts: 4
Re: Close to FIRE?
« Reply #4 on: July 06, 2019, 07:18:02 AM »
1. If you follow the 4% rule, you need 25x your annual expenses invested. 50k x 25 is $1.25 Million
2. Yes! Put that money to work now.
3. No. That is not sensible. If you're stressing about a crash, you're probably not using an appropriate asset allocation for your risk tolerance. Find a suitable allocation, and stick with it. Dancing in and out of the market is a sure fire way to underperform.

Congrats on all your success. > $1 Million before 30 is an incredible accomplishment.

Thanks!

Hypothetical question.. If I knew the market was going to drop 30% within the next 2 years, would it not be better to have more in bonds? I definitely don't want to dance in and out of the market, but we're on track to have the longest period of economic expansion in history, which scares me.. But I know I've gotta take the plunge sooner rather than later.

Buffaloski Boris

  • Handlebar Stache
  • *****
  • Posts: 2062
  • Religion isn't the opiate, politics is.
Re: Close to FIRE?
« Reply #5 on: July 06, 2019, 10:06:48 AM »
Truly amazing.
1. The standard that most people go by is 25X annual spending. I’m a little more conservative, and I personally think that 30X is more appropriate for someone who is very young.
2. Investing is needed. Most importantly, investing in expanding knowledge. Retiring early means you’ll be living on your financial investments for a long, long, long time. A large cash balance in the short term isn’t going to hurt you while you get more information.
3. You’re putting the cart before the horse. You have some time to learn the how, but more importantly you need to understand the “why”. Otherwise at some time you will make really bad, emotion driven decisions that will cost you dearly. I Strongly suggest doing some reading, and then some more reading and listening until you come up with a plan that suits YOU.

If I woke up in your shoes, other than being very happy, I would look at:
A. The investment series at millennial revolution. The folks at that website retired in their early 30s and are very entertaining and informative. It’s 53 articles (accck!) but they’re short and you can binge read in a weekend.
B. I’d read JL Collins stock series. He provides a great basis for the “why” of index investing. He’s a great storyteller and I really like what he’s written. I do happen to disagree with his portfolio choices, but it’s not a bad choice and you could do a lot worse.
C. Read and listen to podcasts at the Mad Fientist. Another young retiree who has dialed it in.
D. Start poking around at portfoliocharts.com. This is a great website to use to back test portfolio allocations based on decades of data.
E. Choose FI is a great resource with actionable tips but I would wait until looking at the above information.

That gives a good start.

Once you decide to go further, be sure to read and listen to some of the more dissident voices regarding FI/RE. It’s important to hear the “other side” in my view. Even if I disagree with them; critics often have good points that can help.

Buffaloski Boris

  • Handlebar Stache
  • *****
  • Posts: 2062
  • Religion isn't the opiate, politics is.
Re: Close to FIRE?
« Reply #6 on: July 06, 2019, 10:14:55 AM »
1. If you follow the 4% rule, you need 25x your annual expenses invested. 50k x 25 is $1.25 Million
2. Yes! Put that money to work now.
3. No. That is not sensible. If you're stressing about a crash, you're probably not using an appropriate asset allocation for your risk tolerance. Find a suitable allocation, and stick with it. Dancing in and out of the market is a sure fire way to underperform.

Congrats on all your success. > $1 Million before 30 is an incredible accomplishment.

Thanks!

Hypothetical question.. If I knew the market was going to drop 30% within the next 2 years, would it not be better to have more in bonds? I definitely don't want to dance in and out of the market, but we're on track to have the longest period of economic expansion in history, which scares me.. But I know I've gotta take the plunge sooner rather than later.

Not a very hypothetical question. The market has crashed and will crash. The problem is none of us know when or to what extent. If retirement is imminent, then you probably would want to have a significant chunk in “other than equities”.   

JL Collins talks about this a lot. Good stuff.

the_gastropod

  • Stubble
  • **
  • Posts: 235
  • Age: 34
  • Location: Brooklyn, NY
Re: Close to FIRE?
« Reply #7 on: July 06, 2019, 01:14:44 PM »
Hypothetical question.. If I knew the market was going to drop 30% within the next 2 years, would it not be better to have more in bonds? I definitely don't want to dance in and out of the market, but we're on track to have the longest period of economic expansion in history, which scares me.. But I know I've gotta take the plunge sooner rather than later.

It's tempting to think you're more clever than the rest of the market. Maybe it will crash 30% within the next 2 years. Maybe it'll go up 60% before that. Maybe neither will happen. Nobody knows.

Relevant read: https://forum.mrmoneymustache.com/investor-alley/top-is-in/

MustacheAndaHalf

  • Magnum Stache
  • ******
  • Posts: 2942
Re: Close to FIRE?
« Reply #8 on: July 10, 2019, 01:55:08 AM »
Hypothetical question.. If I knew the market was going to drop 30% within the next 2 years, would it not be better to have more in bonds? I definitely don't want to dance in and out of the market, but we're on track to have the longest period of economic expansion in history, which scares me.. But I know I've gotta take the plunge sooner rather than later.

Vanguard Total Stock Market ETF (VTI) is up +9% over the past 12 months.  For much of that time, you've probably been hearing news stories about the coming crash or end of the market cycle.  And over the past 3 years, VTI averaged +14%/year.  It's hard to predict.

If you're confident in your hypothetical, I'd encourage you to question each of the things you hypothesize as true, and ask why you know that, and what source you used for it.  For example:
1) Within 2 years
2) the stock market will crash -30%
Why do you know the time frame?  Why 2 years?  How do you know it's -30%?  What is your source for that information?

If you were 100% certain of the time frame and amount of stock drop, then the most extreme investment would be put options at -28% below the current market.  Because the market thinks that's very unlikely (which should tell you something), those options are cheap.  But if you're wrong, and the options expire without that event taking place, they'd be worthless.

Aren't there too many people afraid of a market drop for it to happen?  The stock market prices all available information into stock prices.  Sudden drops are caused by unexpected information.  This being a long business cycle is not new information.

MustacheAndaHalf

  • Magnum Stache
  • ******
  • Posts: 2942
Re: Close to FIRE?
« Reply #9 on: July 10, 2019, 02:04:00 AM »
2. Should I put more of my money into Betterment now, or do I do that only once I've reached my target?
3. Am I being too conservative with my allocation? My thought is that I'm worried the market will crash before I hit my target, so I want to play it safe since I'm close to hitting it. Then once I've hit that, I'll bump it up to 90/10. Is that sensible?
You could invest at lower cost elsewhere.  I favor Vanguard, but Schwab and Fidelity have their advantages, too.  You have $300k at Betterment, which charges 0.25%/year.  So you're paying Betterment $750/year in addition to expense ratios (the amount a fund/ETF charges to keep in operation).

If you had $300k in Vanguard Target 2020 (fee 0.13%) at Betterment, you'd pay $750 in Betterment fees and $390 in expense ratio.  Moving that money to Vanguard saves you $750/year for the same investment.  What are you getting for $750/year there?

You can do even better: U.S. stock ETF (VTI, 0.03%), International ETF (VXUS, 0.09%) and Total Bond Market (BND, 0.035%).  With 2/5ths in VTI, 1/5th in VXUS and 2/5ths in BND you'd have a combined expense of $132/year, or a 0.044% expense ratio.  Compare that to Betterment charging 5x that per year, before fund expenses.

harvestbook

  • Stubble
  • **
  • Posts: 203
Re: Close to FIRE?
« Reply #10 on: July 10, 2019, 05:10:53 AM »
The 4 percent rule won't work if you're mostly in cash. Most FIRE people tend to be more aggressive moving toward the goal and then become more conservative when they reach it, not the opposite. When you are still working, you have the flexibility to just continue on for a couple of years if necessary, to ride out a recession or offset a loss. I don't know if your field is a "young field" where nobody wants to work with older music producers, but it might be harder to go back after a long gap when you lose contacts and fall behind on the technology and practices.

As noted, using Betterment is just adding another costly layer between you and your money and actually pushes out your 25x number (losing a fourth of a percent a year to expenses.) Your "safe" number then becomes more like 3.75 percent. You're in good shape no matter which way you go, but being extremely conservative is also risky.

Car Jack

  • Handlebar Stache
  • *****
  • Posts: 1685
Re: Close to FIRE?
« Reply #11 on: July 10, 2019, 09:23:11 AM »
Also, don't forget that the 25X number is for 30 years of retirement before running out of money.  Retire at 30 and when you hit 60, you're broke.

DadJokes

  • Handlebar Stache
  • *****
  • Posts: 1652
Re: Close to FIRE?
« Reply #12 on: July 10, 2019, 09:52:40 AM »
Also, don't forget that the 25X number is for 30 years of retirement before running out of money.  Retire at 30 and when you hit 60, you're broke.

The study also noted that the most important time that indicated whether or not a retirement was successful was the first few years of retirement. As long as the first few years go well, then the vast majority of cases ended the 30 year period with more money than they started it with. In the 50/50 allocation often cited in the 4% rule, the median balance after 30 years was nearly triple the starting balance.

Financial.Velociraptor

  • Handlebar Stache
  • *****
  • Posts: 1621
  • Age: 48
  • Location: Houston TX
  • Devour your prey raptors!
    • Financial Velociraptor
Re: Close to FIRE?
« Reply #13 on: July 10, 2019, 10:53:37 AM »
Hypothetical question.. If I knew the market was going to drop 30% within the next 2 years, would it not be better to have more in bonds?

Knowledge is your ally here.  Stocks and bonds are not negatively correlated.  That is, there is no guarantee bonds will go up while equities are crashing.  However, bonds have MUCH lower volatility.  Last I checked, since the Great Depression, it is known equities can fall 50% or more.  The worst the broad bond market has fared in that time is a 6% decline.  So, if you are concerned about getting wiped out by a great recession or depression type event, bonds are the place to be.  I use 60% equity and 40% bonds (6.5 years into FIRE).

I'd also recommend you research the "rising equity glidepath" which Google can find for you easily.  Basically, there is lots of good academic research supporting the idea of retiring with a "large" bond allocation and slowly converting to 90%+ equity over time.  The reasoning and mathematics are sound.  But I still prefer to retain 60/40 for peace of mind.  I don't need to die with millions that will never be spent.

So some math:

You are at 900k
Saving 20k/month
Target date 24 months from now

So your additional savings is 20 * 24k or 480k
Target stash (without growth) 900k + 480k or 1.380M

4% rule on 1.380M is 55,200 in annual spending.

On "paper" you are golden at that point.

Your main risk is "Sequence of Returns Risk" (SORR).  That is, your outcome is sketchy if your stash declines 50% in your first 5 years or so.

You have the right idea to mitigate SORR by having a sturdy bond allocation that you can spend down while waiting for your equities to recover.

-----------------------------------------
Some other thoughts:

50k/year is pretty generous.  I've been retired 6.5 years and I budget 25,000 in spending a year and typically come in thousands under budget. I feel like I live pretty high.  I go to movies when I want, I eat out almost exclusively, I take vacations, etc.  Granted my house is paid for, but you didn't indicate what your mortgage plus taxes/insurance are.  It seems like at least on the surface for you are being pretty damn spendy pants for a single guy and might be in need of a classic MMM *FACEPUNCH*.

FIRE doesn't have to be binary.  Could you work freelance after FIRE, just on the projects that really wind your spring and still bring in 40-50k a year?  Or even 15k a year?  That would really move the needle.  You could also take on paying work or side gigs in something you have passion for to make some extra work.  You could go back to work full time for just 12-18 month period in the event of a second Great Depression.  You could do lots of things.  The 4% rule is very mechanical.  It doesn't account for the fact that people can adapt to their circumstances.

Might you get married and/or have children in the future? 

International travel in your FIRE plans?  This doesn't have to be expensive.  Check out gocurrycracker.com for the lowdown on how to become a more or less permanent traveler on a small budget.

What is your medical situation?  Be sure to price ACA in your state and know your budget.  ACA is very reasonable in TX, even after multiple years of 25%+ annual premium increases.  The HSA helps tremendously.

- Lizard King -

pecunia

  • Handlebar Stache
  • *****
  • Posts: 1663
Re: Close to FIRE?
« Reply #14 on: July 10, 2019, 11:06:39 AM »
Forget the money thing for a bit.

Just ask this single question, "What's the worst that could happen?"

Well - If you have my imagination you can think of big trucks barrelling at you, asteroids falling from the sky or incurable leukemia.  However, you are only 31.  OK - You find yourself running out of money after you attempt retirement.  That's the worst.  What do you do?  You find a job.  They will hire you at 31.  You are who they will want.

The odds against illness are still with you at 31.  Time is still your ally.

In years past when I used to walk to work in my thirties, I talked to homeless people that were happier than I was at the time.

Just ask that one question and make your decision.

redbirdfan

  • Stubble
  • **
  • Posts: 170
  • Location: Seattle
Re: Close to FIRE?
« Reply #15 on: July 12, 2019, 04:39:48 PM »
Congrats on the success! You've already won.  You don't need an aggressive asset allocation when you've already won.  You should look at a more conservative split like 50/50 total bond market and total stock market index fund.  You could also look at income funds like Vanguard's Wellesley fund that kicks out around 5% per year even though it about 65% bonds and 35% equities.  Keep enough money in cash to prevent you from worrying about the stage of the market cycle and enjoy your success!

lV2018

  • 5 O'Clock Shadow
  • *
  • Posts: 4
Re: Close to FIRE?
« Reply #16 on: July 12, 2019, 06:17:43 PM »
A. The investment series at millennial revolution. The folks at that website retired in their early 30s and are very entertaining and informative. It’s 53 articles (accck!) but they’re short and you can binge read in a weekend.
B. I’d read JL Collins stock series. He provides a great basis for the “why” of index investing. He’s a great storyteller and I really like what he’s written. I do happen to disagree with his portfolio choices, but it’s not a bad choice and you could do a lot worse.

Thanks for these recommendations! I'll check them out.

Vanguard Total Stock Market ETF (VTI) is up +9% over the past 12 months.  For much of that time, you've probably been hearing news stories about the coming crash or end of the market cycle.  And over the past 3 years, VTI averaged +14%/year.  It's hard to predict.

You bring up great points. But is it not safe to assume that we're probably closer to a peak than we are to a bottom of the market? I'm just afraid of losing what I've accumulated too early on. Would dollar cost averaging (75k/quarterly) be a good idea? Or would you deposit 90% of what you have as soon as possible? I suppose since I'm being conservative with my allocation, that would help mitigate that risk anyway.

You could invest at lower cost elsewhere.  I favor Vanguard, but Schwab and Fidelity have their advantages, too.  You have $300k at Betterment, which charges 0.25%/year.  So you're paying Betterment $750/year in addition to expense ratios (the amount a fund/ETF charges to keep in operation).

I admit I didn't do a lot of research before deciding which one to go with, but I bought in after reading MMM's post about Betterment ("Why I Put My Last $100k into Betterment"). The Tax Loss Harvesting feature was enticing. Does saving $750/year outweigh TLH? 

Most FIRE people tend to be more aggressive moving toward the goal and then become more conservative when they reach it, not the opposite. When you are still working, you have the flexibility to just continue on for a couple of years if necessary, to ride out a recession or offset a loss. I don't know if your field is a "young field" where nobody wants to work with older music producers, but it might be harder to go back after a long gap when you lose contacts and fall behind on the technology and practices.

Good point, I haven't thought about it that way. I should note that I'm still going to work once I reach FI, but I'll be less stressed, which is the underlying goal.

I'd also recommend you research the "rising equity glidepath" which Google can find for you easily.  Basically, there is lots of good academic research supporting the idea of retiring with a "large" bond allocation and slowly converting to 90%+ equity over time.  The reasoning and mathematics are sound.  But I still prefer to retain 60/40 for peace of mind.  I don't need to die with millions that will never be spent.

Wow, this makes a lot of sense! I'd feel more comfortable going this route. Thanks for that, I'll definitely be reading up on this method. :)

50k/year is pretty generous.  I've been retired 6.5 years and I budget 25,000 in spending a year and typically come in thousands under budget. I feel like I live pretty high.  I go to movies when I want, I eat out almost exclusively, I take vacations, etc.  Granted my house is paid for, but you didn't indicate what your mortgage plus taxes/insurance are.  It seems like at least on the surface for you are being pretty damn spendy pants for a single guy and might be in need of a classic MMM *FACEPUNCH*.

Haha I agree 50k is generous, but the one thing I want to treat myself with is a bigger house in a great neighborhood, and that would make up for about half of my spending. 

Chris Pascale

  • Bristles
  • ***
  • Posts: 330
Re: Close to FIRE?
« Reply #17 on: July 20, 2019, 05:38:25 PM »
When you R.E., will you continue to do something that earns an income? If so, then you might find yourself perfectly content to only draw 1% or 2%.

Thoughts?

TomTX

  • Magnum Stache
  • ******
  • Posts: 4213
  • Location: Texas
Re: Close to FIRE?
« Reply #18 on: July 20, 2019, 06:08:41 PM »
Hypothetical question.. If I knew the market was going to drop 30% within the next 2 years, would it not be better to have more in bonds? I definitely don't want to dance in and out of the market, but we're on track to have the longest period of economic expansion in history, which scares me.. But I know I've gotta take the plunge sooner rather than later.

30% drop? If you're at a reasonable withdrawal rate (~3.5%) or can cut your spending to that amount when your total is less than you started with... It's irrelevant. Your portfolio will be fine.  I'd stay the course with Vanguard index funds, mostly stocks.