Author Topic: Most direct way to early retirement?  (Read 10975 times)

Jacobi

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Most direct way to early retirement?
« on: February 23, 2015, 07:09:17 PM »
Hi there! I'm in my early twenties and am trying to figure out an answer to this question: What is the simplest, most direct way to be generating 25k/year in take-home pay from passive income? Using the 4% rule, I would need 625k in assets, and I'm imagining that these are all in a Vanguard index fund.

I'm really only interested in index-fund investing as opposed to, say, rental properties. Maybe that will change as I get older, but I'm looking for a solution that involves no upkeep or extra thought other than contributing money to an account.

So what's the best way to get there? Do I just set up one Vanguard account and sock away money until it gets to 625k? Some particular questions I have are:

1. What about IRAs/401ks? If I want to reach 25k/year as quickly as possible, should I skip on the benefits of these accounts in order to have access to my investment money earlier in my life?

2. I'm confused about how taxes affect the Vanguard index-fund strategy. Are your earnings every year taxed at capital gains rates, and then whatever is left you re-invest until you hit the desired goal of 625k?

3. How is the passive income taxed once you reach your goal? If I have 625k in assets and I'm withdrawing 4% off of it yearly, does that 25k get taxed?

4. How does the principal itself factor into the strategy of early retirement? If I have 625k in assets, I have my yearly 25k income, but I also have, in theory, 25 years of income in the principal itself!

I would be extremely grateful for some help! :)

Indexer

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Re: Most direct way to early retirement?
« Reply #1 on: February 23, 2015, 07:39:09 PM »
1.  Sure these can work.  Especially Roth IRAs since you can get the contributions back out.  By having IRAs/401ks you can also convert to a Roth over time to get that money out earlier than 59 1/2, but it requires proper planning because you have to convert 5 years 'before' you need the money.

2.  (Stock) Index funds are super tax efficient.  You will pay dividend taxes on the dividends which are normally at capital gains rates so little in taxes.  The index funds themselves are tax efficient and normally don't distribute capital gains until you sell.

3.  Depends on what it is in.  If you manage to keep your ordinary income in the lowest tax brackets your dividends/capital gains tax rate is 0%.  Also you can draw money from the Roth tax free. 

4.  Well you hope to be living off the dividends so you never touch the principal.  If you are dipping into the principal it might last 20-30 years, but you are planning on a much longer retirement so you need to be able to live off the earnings/dividends, not the original principal.  Exception being in bear(down) markets, but you hope to make up for those in bull(up) markets.  In my personal opinion I prefer to aim for 3%.  The 4% rule was written for someone retiring at 65 so even if you are off a little Social Security should act as a pretty good buffer.  When you retire at 40 you don't have a buffer. 
« Last Edit: February 23, 2015, 07:42:51 PM by Indexer »

MikeBear

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Re: Most direct way to early retirement?
« Reply #2 on: February 23, 2015, 08:06:41 PM »
Your fastest way may be to purchase and run a couple rental properties. Not as passive as owning stock, but if you pay attention to details, not too much work once rented to the right people.

sol

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Re: Most direct way to early retirement?
« Reply #3 on: February 23, 2015, 08:12:09 PM »
What is the simplest, most direct way to be generating 25k/year in take-home pay from passive income?

Marry rich?  I think that's probably the fastest and easiest way, in terms of time and energy invested, to generate passive income.  Find someone who already has it and claim half.

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I'm really only interested in index-fund investing as opposed to, say, rental properties.

If you're only interested in index funds, then the answer you seek is "buy index funds".  Yes, I am very wise to share this little jewel with you.  You can thank me when you're rich.

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So what's the best way to get there? Do I just set up one Vanguard account and sock away money until it gets to 625k?

Yes.  Preferably with the help of an employer matching contribution and inside of a variety of tax shelters.

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What about IRAs/401ks? If I want to reach 25k/year as quickly as possible, should I skip on the benefits of these accounts in order to have access to my investment money earlier in my life?

If you're only withdrawing 25k/year in retirement your tax burden in retirement will be miniscule anyway.  Unless your current tax burden is also near zero, you should not miss the opportunity to use these tax shelters.  Your money will grow faster if you don't pay taxes on your income or your earnings.

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I'm confused about how taxes affect the Vanguard index-fund strategy. Are your earnings every year taxed at capital gains rates, and then whatever is left you re-invest until you hit the desired goal of 625k?

If the index fund is in a Roth IRA, it is never taxed again after you contribute it.  If it's in a 401k or similar, you don't pay any income tax on it this year, it won't be taxed at all until you withdraw it, and then it will be taxed as income.  At near 0% if you're only pulling 25k/yr.

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How does the principal itself factor into the strategy of early retirement? If I have 625k in assets, I have my yearly 25k income, but I also have, in theory, 25 years of income in the principal itself!

You clearly need to do some more reading.  Search the forum for "trinity study" or "SWR" and prepare to spend a few hours getting caught up.  The 4% safe withdrawal rate assumes you can draw down both your earnings and your principal with inflation adjusted annual withdrawals.  Your proposal assumes uniform withdrawals over time, which means steadily diminishing purchasing power due to inflation.

skyrefuge

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Re: Most direct way to early retirement?
« Reply #4 on: February 23, 2015, 08:12:48 PM »
4.  Well you hope to be living off the dividends so you never touch the principal. 

Answers #1-#3 were fine, but you're pretty off-base on this one.

Dividends play no role in the math that's behind the 4% rule. The 4% rule assumes that you simply spend 4% of your initial portfolio value every year. If some or all of that money comes from dividends, great. If some or all of it comes from "principal", great. Dividends really come from your "principal" anyway, so that's why they aren't relevant. Seeing your portfolio drop over time is an expected (though not guaranteed) part of the 4% rule. In the worst case, you will run out of money at the end of the 30-year period.

So OP, just think of your $625K as an opaque bag that you can pull $25k out of every year. At the end maybe you'll have $0 in the bag, or maybe you'll have $3M, but the point is you'll have a very good chance of always being able to pull that $25k out for the 30-year period (or whatever length you model).

The 4% rule was written for someone retiring at 65 so even if you are off a little Social Security should act as a pretty good buffer.  When you retire at 40 you don't have a buffer.

No. The 4% rule ignores Social Security and pensions, and is not related to the idea of someone retiring at 65, except to the extent that the 30-year term assumed by the basic 4% rule is best applied to someone about 30 years from death.

If you want to explore what your withdrawal rate should be assuming a longer period, or assuming Social Security/pension payments kick in at some point, you should really go to cFIREsim and run the scenario that fits your life. If you desire a buffer beyond what cFIREsim says has been safe in the past, or want to guarantee that you'll die with a big pile of money, then sure, you can lower the Withdrawal Rate further.

kpd905

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Re: Most direct way to early retirement?
« Reply #5 on: February 23, 2015, 08:23:57 PM »
The fastest way would be to max out a 401k and traditional IRA if you can, lowering your taxes.

If you have expenses of only $25,000 in retirement and you're single, you'll pay 7.1% federal tax on that amount.

SaintM

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Re: Most direct way to early retirement?
« Reply #6 on: February 23, 2015, 08:27:03 PM »

Marry rich?  I think that's probably the fastest and easiest way, in terms of time and energy invested, to generate passive income.  Find someone who already has it and claim half.

Quote

Too much work.  Play Powerball instead:  http://www.cnn.com/2015/02/23/us/north-carolina-powerball-jackpot-winner/

MrMoogle

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Re: Most direct way to early retirement?
« Reply #7 on: February 23, 2015, 08:39:18 PM »

Indexer

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Re: Most direct way to early retirement?
« Reply #8 on: February 23, 2015, 09:08:25 PM »
4.  Well you hope to be living off the dividends so you never touch the principal. 

Answers #1-#3 were fine, but you're pretty off-base on this one.

Dividends play no role in the math that's behind the 4% rule. The 4% rule assumes that you simply spend 4% of your initial portfolio value every year. If some or all of that money comes from dividends, great. If some or all of it comes from "principal", great. Dividends really come from your "principal" anyway, so that's why they aren't relevant. Seeing your portfolio drop over time is an expected (though not guaranteed) part of the 4% rule. In the worst case, you will run out of money at the end of the 30-year period.

So OP, just think of your $625K as an opaque bag that you can pull $25k out of every year. At the end maybe you'll have $0 in the bag, or maybe you'll have $3M, but the point is you'll have a very good chance of always being able to pull that $25k out for the 30-year period (or whatever length you model).

The 4% rule was written for someone retiring at 65 so even if you are off a little Social Security should act as a pretty good buffer.  When you retire at 40 you don't have a buffer.

No. The 4% rule ignores Social Security and pensions, and is not related to the idea of someone retiring at 65, except to the extent that the 30-year term assumed by the basic 4% rule is best applied to someone about 30 years from death.

If you want to explore what your withdrawal rate should be assuming a longer period, or assuming Social Security/pension payments kick in at some point, you should really go to cFIREsim and run the scenario that fits your life. If you desire a buffer beyond what cFIREsim says has been safe in the past, or want to guarantee that you'll die with a big pile of money, then sure, you can lower the Withdrawal Rate further.


Well obviously we disagree.  We do agree the 4% rule was designed for someone with a 30 year time horizon.  If you have a 50+ year time horizon you should probably change that.  If you are tapping into the principal on a regular basis you are going to lose the very long term battle with inflation and end up running out of money.  Inflation of 3% prices double basically once every 25 years.  So the 625k in year one will be the equivalent of 312.5k in year 25 after inflation.  At this point you have another 25 years to go.... a normal person's retirement and you have already lost half your value just to inflation.  This assumes you weren't even drawing down the principal.  If you were drawing down the principal you might have only 200k or less left in inflation adjusted dollars... to last you another 25 years.  At the end of the next 25 years, so year 50 your original 625k is worth... 156.5k in inflation adjusted dollars.  Again this assumes you "aren't" touching the principal and the withdrawals are exactly equal to the growth.  If you had higher inflation, or you had to dip into principal on a regular basis(could be caused by lower returns) this already fragile equation unravels and you are left broke when you are 70. 

So yes.  I personally aim for a 3% w/d rate so you can see some growth above your withdrawals to help fight 50 years of inflation.

And for giggles I did plug it into that program.  Total 625k, w/d 25k a year.  The only numbers I changed were Time Horizon of 50 years and Inflation of 3.3%(historical average....).   The success rate was around 55%.  That isn't comforting at all.....   I'm not sure what rate the thing normally uses for CPI(it didn't list a number I could see), but I can tell you it was well below norms.  The cFiresim also uses past returns.  Past returns were really freaking good.  I wouldn't assume we are getting them forever.

I also tried it at 840k and the success rate jumped to 95%!  Thats around a  3% w/d rate ;).

skyrefuge

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Re: Most direct way to early retirement?
« Reply #9 on: February 23, 2015, 09:34:50 PM »
I'm not sure what rate the thing normally uses for CPI(it didn't list a number I could see), but I can tell you it was well below norms.  The cFiresim also uses past returns.  Past returns were really freaking good.  I wouldn't assume we are getting them forever.

Urg. Please don't give out any more advice relating to Safe Withdrawal Rates until you read up on and understand Safe Withdrawal Rates, because it's clear that you currently don't understand the research.  MMM's article is a reasonable summary: http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/

cFIREsim is an engine that reproduces the research that led to the 4% SWR. It uses past returns because past returns were what was used to discover the 4% SWR. It uses the past CPI for each year as well (by default), so artificially applying a constant CPI doesn't make much sense, since investment returns and CPI are interrelated. Using that actual CPI, the 50-year SWR (at 95% confidence, the same level that produced the 4%, 30-year SWR) is 3.6%. At 4%, it has a 78% success rate.

If you think 3.6% is still too risky, that's fine, but just be aware of what you're saying: "I think the next 50 years are going to be worse than all of the 50 year periods over the last 140 years". And don't associate that belief with SWR research, because that belief is not supported by SWR research.

MrMoogle

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Re: Most direct way to early retirement?
« Reply #10 on: February 24, 2015, 01:04:02 AM »
There's a lot of assumptions in the Trinity study.  I don't know them all, as I'm not there yet.  But one is 50/50 stocks/bonds.  Adjusting to 75/25 gives better, although I think cfiresim defaults to 75/25.

I wouldn't mess with CPI, either you use history or you don't, if you don't then go find a monte carlo sim and play what ifs.

Most people do have lower withdraw rates, or they have contingencies.  Some I've seen:
Lower you expenses if the market is doing poorly
don't take SS into account
don't take house value into account and be willing to sell if things start going sideways
get a part time job to make up gaps

FIRE doesn't mean never make changes to the plan.  You certainly want to have yearly checkups and adjust as necessary. 

Retire-Canada

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Re: Most direct way to early retirement?
« Reply #11 on: February 24, 2015, 01:38:47 AM »

I also tried it at 840k and the success rate jumped to 95%!  Thats around a  3% w/d rate ;).

If you are not a robot and can adjust spending to match market returns you can vary your SWR from 3%-6% over 50yrs averaging better than 4% with a 100% success ratio. That doesn't include any gov't retirement benefits.

-- Vik

Indexer

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Re: Most direct way to early retirement?
« Reply #12 on: February 24, 2015, 06:00:04 AM »
Urg. Please don't give out any more advice relating to Safe Withdrawal Rates until you read up on and understand Safe Withdrawal Rates, because it's clear that you currently don't understand the research.  MMM's article is a reasonable summary: http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/

cFIREsim is an engine that reproduces the research that led to the 4% SWR. It uses past returns because past returns were what was used to discover the 4% SWR. It uses the past CPI for each year as well (by default), so artificially applying a constant CPI doesn't make much sense, since investment returns and CPI are interrelated. Using that actual CPI, the 50-year SWR (at 95% confidence, the same level that produced the 4%, 30-year SWR) is 3.6%. At 4%, it has a 78% success rate.

I've read up on SWR.  If you read any 'current' research many asset management firms are now doubting whether a 4% rule works... and Vanguard, Charles Schwab, and Morningstar are included in that list(as is just about everyone else, but I find people here tend to respect those 3 more than the others). 

So correct me if my prior assumption was wrong.  We are in 100% agreement that the 4% SWR was designed for a 30 year time frame, and to keep 95% confidence you have to have a more conservative rate over 50 years.  You did say that so I'm not sure where 'urg read this...' is coming from.  You say the success rate for 4% SWR over 50 years is is 78%, and testing it now I got that same result(which isn't good).  Its not like I'm saying everyone needs to double their retirement goals, just that I personally shoot for 3% which raises the retirement $ goal by around 200k... not world changing stuff here.  :)

Scandium

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Re: Most direct way to early retirement?
« Reply #13 on: February 24, 2015, 06:07:00 AM »

I also tried it at 840k and the success rate jumped to 95%!  Thats around a  3% w/d rate ;).

If you are not a robot and can adjust spending to match market returns you can vary your SWR from 3%-6% over 50yrs averaging better than 4% with a 100% success ratio. That doesn't include any gov't retirement benefits.

-- Vik

Well that's easy to say. But might be hard to sell the wife on it when I say we have to sit at home and eat ramen for a few years because the S&P is down. When instead we could have made 6 figures in our jobs and traveled as much as we wanted (within our generous vacation time). If I can convince her conservative nature that we can retire and then this happens, I think it would prove that I was wrong.

brooklynguy

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Re: Most direct way to early retirement?
« Reply #14 on: February 24, 2015, 08:20:46 AM »
I've read up on SWR.  If you read any 'current' research many asset management firms are now doubting whether a 4% rule works... and Vanguard, Charles Schwab, and Morningstar are included in that list(as is just about everyone else, but I find people here tend to respect those 3 more than the others). 

So correct me if my prior assumption was wrong.  We are in 100% agreement that the 4% SWR was designed for a 30 year time frame, and to keep 95% confidence you have to have a more conservative rate over 50 years.  You did say that so I'm not sure where 'urg read this...' is coming from.  You say the success rate for 4% SWR over 50 years is is 78%, and testing it now I got that same result(which isn't good).  Its not like I'm saying everyone needs to double their retirement goals, just that I personally shoot for 3% which raises the retirement $ goal by around 200k... not world changing stuff here.  :)

In the above-quoted post, you are essentially saying that you (like Vanguard, Charles Schwab, Morningstar and others) have doubts about whether the future will be as good as the past.  That's fine; your crystal ball works as well as anyone else's.

But your previous posts reflected a fundamental misunderstanding of the SWR research.  Skyrefuge's "opaque bag" analogy could not have been clearer (no pun intended), but you are continuing to draw a false distinction between "receiving interest" and "tapping principal," which are functionally equivalent.  The "W" in "SWR" includes "tapping principal."

Retire-Canada

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Re: Most direct way to early retirement?
« Reply #15 on: February 24, 2015, 09:18:18 AM »

I also tried it at 840k and the success rate jumped to 95%!  Thats around a  3% w/d rate ;).

If you are not a robot and can adjust spending to match market returns you can vary your SWR from 3%-6% over 50yrs averaging better than 4% with a 100% success ratio. That doesn't include any gov't retirement benefits.

-- Vik

Well that's easy to say. But might be hard to sell the wife on it when I say we have to sit at home and eat ramen for a few years because the S&P is down. When instead we could have made 6 figures in our jobs and traveled as much as we wanted (within our generous vacation time). If I can convince her conservative nature that we can retire and then this happens, I think it would prove that I was wrong.

If 4% constant WR works for you and 3%-6% variable SWR averages out to more than 4% it's not overly hard to manage your withdrawals so that in years with good returns you:

1. pay for big ticket items you have planned [new roof, new car, etc...]

2. spend only 4% and put the extra 1%-2% into a non-equity investment that you can use to top up your 3% WR years

The reason why this is important to at least consider is that if you aim for 4% WR vs. 3% or 2% you can go FI potentially years sooner. Ultimately you have to ask yourself what is each extra year of freedom worth.

Personally if I am planning for 4% WR and I have to take 3% for 3 years I won't be eating ramen. I just won't be renovating the kitchen or replacing the car.

-- Vik

Scandium

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Re: Most direct way to early retirement?
« Reply #16 on: February 24, 2015, 09:42:29 AM »

I also tried it at 840k and the success rate jumped to 95%!  Thats around a  3% w/d rate ;).

If you are not a robot and can adjust spending to match market returns you can vary your SWR from 3%-6% over 50yrs averaging better than 4% with a 100% success ratio. That doesn't include any gov't retirement benefits.

-- Vik

Well that's easy to say. But might be hard to sell the wife on it when I say we have to sit at home and eat ramen for a few years because the S&P is down. When instead we could have made 6 figures in our jobs and traveled as much as we wanted (within our generous vacation time). If I can convince her conservative nature that we can retire and then this happens, I think it would prove that I was wrong.

If 4% constant WR works for you and 3%-6% variable SWR averages out to more than 4% it's not overly hard to manage your withdrawals so that in years with good returns you:

1. pay for big ticket items you have planned [new roof, new car, etc...]

2. spend only 4% and put the extra 1%-2% into a non-equity investment that you can use to top up your 3% WR years

The reason why this is important to at least consider is that if you aim for 4% WR vs. 3% or 2% you can go FI potentially years sooner. Ultimately you have to ask yourself what is each extra year of freedom worth.

Personally if I am planning for 4% WR and I have to take 3% for 3 years I won't be eating ramen. I just won't be renovating the kitchen or replacing the car.

-- Vik

Yes this is true. In most years we'd have a return above what's required. Except your 2. will break the SWR, as that assume that years with higher return yield gains that make up for the worse performing ones. If you make 10% in a year you'd have to keep that invested, only taking out the inflation adjusted spending.

Reducing spending in down years would of course be good, but not required in 95%+ of cases, or whatever the trinity study success rate is. There's some spending rate inputs in cFIREsim that I haven't looked at, maybe they can show how this would affect the outcome, give me the "number of years on ramen" result

seattlecyclone

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Re: Most direct way to early retirement?
« Reply #17 on: February 24, 2015, 11:29:30 AM »
If you are tapping into the principal on a regular basis you are going to lose the very long term battle with inflation and end up running out of money.  Inflation of 3% prices double basically once every 25 years.  So the 625k in year one will be the equivalent of 312.5k in year 25 after inflation.  At this point you have another 25 years to go.... a normal person's retirement and you have already lost half your value just to inflation.  This assumes you weren't even drawing down the principal.  If you were drawing down the principal you might have only 200k or less left in inflation adjusted dollars... to last you another 25 years.  At the end of the next 25 years, so year 50 your original 625k is worth... 156.5k in inflation adjusted dollars.  Again this assumes you "aren't" touching the principal and the withdrawals are exactly equal to the growth.  If you had higher inflation, or you had to dip into principal on a regular basis(could be caused by lower returns) this already fragile equation unravels and you are left broke when you are 70. 

So yes.  I personally aim for a 3% w/d rate so you can see some growth above your withdrawals to help fight 50 years of inflation.

You are fundamentally mistaken about this. Tapping into your principal to pay part of your living expenses does not imply that the value of your principal will remain the same in nominal dollars. Your investments will increase in value faster than inflation over the long term. So if you get a typical 2% dividend yield and make up the rest of your withdrawal by selling shares, your investment growth will still outpace inflation the vast majority of the time. You're right that the success rate of a 4% withdrawal goes down as the time horizon increases, but the simulators show that a 3.6% rate is still successful in 95% of past 50-year periods. That's pretty darn good! If you really want to stick to a 3% rate to be extra-super-duper safe, you're certainly welcome to. Everyone has their own comfort levels to think about. Please don't go sowing doubt that anything higher than 3% is a recipe for disaster. This claim is not supported by the historical record.

waltworks

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Re: Most direct way to early retirement?
« Reply #18 on: February 24, 2015, 12:09:30 PM »
I'm not all that interested in this 4% SWR debate, so hey, OP, back on topic:

-The absolute number 1 way to retire earlier is to cut your expenses (and be willing to keep them low in retirement as well). Cutting expenses benefits you in 2 ways - it increases your savings in the present, and it reduces your required withdrawals in the future. Could you live on <$25k/year? If so, you can whack considerable time/money off your retirement requirements.

-Second is probably to find an angle to make more money. RE can offer better returns than equity if you are motivated and willing to seek out and find amazing deals. But it's not hands off like stocks, and it sounds like you want totally hands-off here. You could work more hours, or get a second job, or create a cool side gig that doesn't even feel like "work" if you are clever about it.

-Third on my list would be to partner up (assuming you are single now). Being married/a couple has a ton of financial benefits (you don't need 2x the stuff for 2 people, in general, as you can share a ton of things) as essentially you are teaming up to accomplish your goals (let's assume your spouse is equally frugal/interested in ER).

Best? Do all three. I think a motivated, educated individual in the US should be able to hit RE in ~10 years starting from zero with reasonable luck. Obviously every situation is different, though.

-W

Retire-Canada

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Re: Most direct way to early retirement?
« Reply #19 on: February 24, 2015, 03:04:46 PM »

-Third on my list would be to partner up (assuming you are single now). Being married/a couple has a ton of financial benefits (you don't need 2x the stuff for 2 people, in general, as you can share a ton of things) as essentially you are teaming up to accomplish your goals (let's assume your spouse is equally frugal/interested in ER).


This also has the potential to crash your FI plans if things go wrong.  I would partner up only if you really want to be with that person....not because it's a good FI move. You can see many examples around you to prove the financial risks of entangling your life with someone else.

Getting a room-mate is a safer way to cut costs if that's your main aim and you can still date anyone you want.

-- Vik

waltworks

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Re: Most direct way to early retirement?
« Reply #20 on: February 24, 2015, 03:08:33 PM »
Yeah, that is a good point. I didn't mean just shack up with the first person who comes along!

*IF* you find a great partner, it can accelerate your FI. If you find a bad one... ugh.

-W


-Third on my list would be to partner up (assuming you are single now). Being married/a couple has a ton of financial benefits (you don't need 2x the stuff for 2 people, in general, as you can share a ton of things) as essentially you are teaming up to accomplish your goals (let's assume your spouse is equally frugal/interested in ER).


This also has the potential to crash your FI plans if things go wrong.  I would partner up only if you really want to be with that person....not because it's a good FI move. You can see many examples around you to prove the financial risks of entangling your life with someone else.

Getting a room-mate is a safer way to cut costs if that's your main aim and you can still date anyone you want.

-- Vik

Indexer

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Re: Most direct way to early retirement?
« Reply #21 on: February 24, 2015, 10:20:04 PM »
To clarify when I say you don't want to touch the principal I was trying to convey that if you have a 50+ year time horizon you want your long term growth to exceed your withdrawal rate.  I wasn't looking for a debate about whether a dividend comes from your principal. I regret not being more clear as that could have avoided a lot of confusion.

In the above-quoted post, you are essentially saying that you (like Vanguard, Charles Schwab, Morningstar and others) have doubts about whether the future will be as good as the past.  That's fine; your crystal ball works as well as anyone else's.

The financial planning industry is basing the idea that a 4% SWR might not be as safe anymore on a few pieces of hard evidence. 
1.  People are living longer.  Its been beaten to death, but 4% SWR doesn't really make as much sense over a 50 year horizon as it does at 30. 
2.  Bond rates are at historic lows.  Bond returns are very highly correlated with bond yields.  If the bond portion of a portfolio is earning significantly less than we originally anticipated based on historical returns then any rules based on those historical returns will need to be adjusted.


Assuming 80% stocks, 20% bonds over a 40 year time frame Vanguard says a 3.4% SWR has an 85% chance of success.  I will 'personally' take Vanguard's word over cFiresim.  More conservative portfolios fared even worse.  They didn't have data for 50 year time horizons. 

source: http://www.vanguard.com/pdf/s325.pdf   (This article is from 2012, but bond rates have been even lower since the article was published so the numbers wouldn't look any better if they republished the article today.)

sol

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Re: Most direct way to early retirement?
« Reply #22 on: February 24, 2015, 10:39:04 PM »
Assuming 80% stocks, 20% bonds over a 40 year time frame Vanguard says a 3.4% SWR has an 85% chance of success.  I will 'personally' take Vanguard's word over cFiresim.

Why?  The last time I checked, Vanguard was pushing a monte carlo simulator that ran all possible combinations of all possible years, meaning some of their scenarios were the 30 worst years in market history back to back.  Like pretend you had a 2008 followed by a 1931 followed by a 1957 followd by a 1974.  What kind of BS market simulator is that?  Why would you "take Vanguard's word" about their results without bothering to understand them?
« Last Edit: February 24, 2015, 11:26:01 PM by sol »

AZryan

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Re: Most direct way to early retirement?
« Reply #23 on: February 24, 2015, 11:14:22 PM »
Assuming 80% stocks, 20% bonds over a 40 year time frame Vanguard says a 3.4% SWR has an 85% chance of success.

Actually, Vanguard's Retirement Calc (Monte Carlo Sim), which as Sol just noted includes the very worst things imaginable, gives a 91% chance to 80/20 @ 40yrs. @ 3.4%. I woulda' expected it to give something below the 85% Indexer noted.

It does say that Vanguard will tell you two somewhat diff things though depending on which calc you're using on their site. 

Scandium

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Re: Most direct way to early retirement?
« Reply #24 on: February 25, 2015, 06:51:00 AM »
The financial industry also has an incentive to sow doubt about the 4% SWR being adequate, so people will save up more money into the mutual funds they administer, and draw and ER from. Even if it's not overt, working all day with building massive funds might lead people to think that more is more..

brooklynguy

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Re: Most direct way to early retirement?
« Reply #25 on: February 25, 2015, 07:39:41 AM »
source: http://www.vanguard.com/pdf/s325.pdf   (This article is from 2012, but bond rates have been even lower since the article was published so the numbers wouldn't look any better if they republished the article today.)

Not to belabor the point about the false distinction between withdrawing principal and receiving dividends/interest, but in the linked article Vanguard actually argues that, in their view, the 4% rule still works when used as intended.  They say:

Quote
But with today’s yields at historic lows and retirees often reluctant to spend from the principal, many are questioning whether 4% is an appropriate and/or feasible goal. Vanguard believes that 4% is still a reasonable starting point for investors who follow a total-return spending approach—that is, an approach in which they remain properly balanced between stocks and bonds, and diversified within asset classes, so that their portfolios can potentially benefit from both dividends and capital appreciation. [emphasis added]

In other words, if (like many investors) you have an irrational objection against "tapping principal," then of course you're going to need a stash size in excess of 25x your expenses, but if you exercise logic and simply withdraw 4% per year (on an inflation-adjusted basis) without distinguishing between "principal" and "interest/dividends", then a stash size of 25x your expenses should be sufficient.

On the subject of longer expected human lifespans:  the SWR research has always focused on 30-year retirement periods, and the FIRE community has always been faced with the prospect of much longer retirement periods.  Longer time horizons do have lower historical success rates, but if you retire at the age of say, 35, then your stash is most likely going to have to support your for well over 30 years, regardless of whether you expect to live to 80 or 120.  That's why the concepts of safety margin and flexibility in your retirement plan are so important.  And it's also worth nothing that the historical data on extremely-long time horizons is less reliable, simply because the data-set includes less of them (e.g., there are fewer 60-year periods in the data-set than 30-year periods).

astvilla

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Re: Most direct way to early retirement?
« Reply #26 on: February 25, 2015, 09:13:16 AM »
no kids

Allen

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Re: Most direct way to early retirement?
« Reply #27 on: February 25, 2015, 03:31:34 PM »

I also tried it at 840k and the success rate jumped to 95%!  Thats around a  3% w/d rate ;).

If you are not a robot and can adjust spending to match market returns you can vary your SWR from 3%-6% over 50yrs averaging better than 4% with a 100% success ratio. That doesn't include any gov't retirement benefits.

-- Vik

Well that's easy to say. But might be hard to sell the wife on it when I say we have to sit at home and eat ramen for a few years because the S&P is down. When instead we could have made 6 figures in our jobs and traveled as much as we wanted (within our generous vacation time). If I can convince her conservative nature that we can retire and then this happens, I think it would prove that I was wrong.

That is a similar argument to saying "but if we retire, we might not be able to buy EVERYTHING WE WANT ALWAYS!" which says to me your wife is still more happy with traditional earn and spend policies rather than freedom or (implied your) happiness.

FFA

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Re: Most direct way to early retirement?
« Reply #28 on: February 25, 2015, 07:00:43 PM »
no kids

I used to think so too, but so far (for us at least) it has not been the case. We have two under 3 years, so it may be too early to say. A lot depends on future decisions (i.e. education), but are lucky to have an almost free public system that we intend to use. Just before having kids we had started to get into some lifestyle creep habits (expensive socializing), which kids have put a stop to, so sometime I actually think we have improved our savings rate with kids.

fewaopi, not sure if your comment is tongue in cheek or serious, but just to point out the conventional wisdom doesn't always apply.

Baron235

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Re: Most direct way to early retirement?
« Reply #29 on: February 25, 2015, 08:26:28 PM »
no kids

I used to think so too, but so far (for us at least) it has not been the case. We have two under 3 years, so it may be too early to say. A lot depends on future decisions (i.e. education), but are lucky to have an almost free public system that we intend to use. Just before having kids we had started to get into some lifestyle creep habits (expensive socializing), which kids have put a stop to, so sometime I actually think we have improved our savings rate with kids.

fewaopi, not sure if your comment is tongue in cheek or serious, but just to point out the conventional wisdom doesn't always apply.
Kids have delayed my retirement significantly (10 plus years).  I don't regret having kids but in no way do they speed up retirement.  Also kids are cheapest before 3.   

swashbucklinstache

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Re: Most direct way to early retirement?
« Reply #30 on: February 26, 2015, 04:47:22 PM »
I'll second earning more, while not increasing your expenses.

Another thing, from someone much nearer the start than the end: Don't worry too much about the magic number you'll need at this point. Your current spending levels may be drastically different than they will be in 10 years, and that's okay. Do the best you can every year saving and try to not willfully increase your spending (unless it genuinely increases your happiness), and then when you get closer to 25x or 33x or whatever take a closer look over the past few years of spending. This helps me stay focused on things I can control and deal with things I can't much easier (health, market returns, laws). When I talk to people in my life who give the typical "oh no" concern about "retiring in 10 years" I like to remind them, and myself, that this is just a goal - I'm not signing a 10 year contract and leaving afterwards no matter what. That'll mitigate any disappointment if things do come up and help you focus on your happiness, the most important thing in this equation.

Also, I think you should do some reading and continue to learn, especially as things change. In highschool I got a 95% on the final exam in Econ the first day of class - the teacher said anyone who got a 100% could have the whole semester off. I thought I was an expert. After reading online in blogs for 3 months I thought I was an expert. Two years of learning, reading, and talking to people later, I realize how little I know now let alone in highschool. Take the lessons in stride and try to learn them without losing money to do so as often as you can - 6 months of reading about real estate and home ownership while renting is a lot cheaper than losing $10,000 in unnecessary transaction costs of buying and selling your first home in a two year time period.

If you do all this don't forget to not sweat the small stuff. You're going to make mistakes and have setbacks like everyone else in this world, financially and otherwise. But I can tell you from experience that it's way better to have the shittiest things happen to you and come home and relax than it is to come home and worry about how you're going to pay rent next month - - - - - - - no matter what. Good luck!
« Last Edit: February 26, 2015, 04:49:21 PM by swashbucklinstache »

Scandium

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Re: Most direct way to early retirement?
« Reply #31 on: February 27, 2015, 09:31:56 AM »

I also tried it at 840k and the success rate jumped to 95%!  Thats around a  3% w/d rate ;).

If you are not a robot and can adjust spending to match market returns you can vary your SWR from 3%-6% over 50yrs averaging better than 4% with a 100% success ratio. That doesn't include any gov't retirement benefits.

-- Vik

Well that's easy to say. But might be hard to sell the wife on it when I say we have to sit at home and eat ramen for a few years because the S&P is down. When instead we could have made 6 figures in our jobs and traveled as much as we wanted (within our generous vacation time). If I can convince her conservative nature that we can retire and then this happens, I think it would prove that I was wrong.

That is a similar argument to saying "but if we retire, we might not be able to buy EVERYTHING WE WANT ALWAYS!" which says to me your wife is still more happy with traditional earn and spend policies rather than freedom or (implied your) happiness.

How is that the same? In no way do we buy everything we want now, and would be fine with the same spending (or a little less) in retirement, but if the market takes such a dive that we have to cut it in half (eat ramen with the heat off and don't leave the state for years to save on gas) then I think I'd be less happy than if I had to go to work. And I'd be inclined to call that a failure too. Yes we'd have (time) freedom to do what ever we want, but no money to do so. Either way I wouldn't be as free as I'd prefer.

FFA

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Re: Most direct way to early retirement?
« Reply #32 on: February 27, 2015, 09:39:38 AM »
no kids

I used to think so too, but so far (for us at least) it has not been the case. We have two under 3 years, so it may be too early to say. A lot depends on future decisions (i.e. education), but are lucky to have an almost free public system that we intend to use. Just before having kids we had started to get into some lifestyle creep habits (expensive socializing), which kids have put a stop to, so sometime I actually think we have improved our savings rate with kids.

fewaopi, not sure if your comment is tongue in cheek or serious, but just to point out the conventional wisdom doesn't always apply.
Kids have delayed my retirement significantly (10 plus years).  I don't regret having kids but in no way do they speed up retirement.  Also kids are cheapest before 3.
Perhaps I'm speaking too soon then. But I do struggle to reconcile the high costs often touted like 1 million per child, if I recall correctly.

 I do agree delaying having kids til early 30's has clearly made a difference for us being able to FIRE earlier

Scandium

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Re: Most direct way to early retirement?
« Reply #33 on: February 27, 2015, 02:04:38 PM »
no kids

I used to think so too, but so far (for us at least) it has not been the case. We have two under 3 years, so it may be too early to say. A lot depends on future decisions (i.e. education), but are lucky to have an almost free public system that we intend to use. Just before having kids we had started to get into some lifestyle creep habits (expensive socializing), which kids have put a stop to, so sometime I actually think we have improved our savings rate with kids.

fewaopi, not sure if your comment is tongue in cheek or serious, but just to point out the conventional wisdom doesn't always apply.
Kids have delayed my retirement significantly (10 plus years).  I don't regret having kids but in no way do they speed up retirement.  Also kids are cheapest before 3.
Perhaps I'm speaking too soon then. But I do struggle to reconcile the high costs often touted like 1 million per child, if I recall correctly.

 I do agree delaying having kids til early 30's has clearly made a difference for us being able to FIRE earlier

I think the number is something like $250,000. Calculated by the USDA (Because you know, kids are livestock..)
But that is based on having a large house to have room for kids, buying a larger car (probably financed, new) to drive more people around etc. While somewhat true, I think it skews it quite a bit.