Author Topic: my FI number...am I thinking this correctly or overthinking.  (Read 1037 times)

MikeO

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my FI number...am I thinking this correctly or overthinking.
« on: August 20, 2020, 11:54:57 AM »
so the only thing that I can't seem to narrow down is how much is enough.  I know what we spend for basics, and what we want to spend with travel/entertainment and I know I want to have a cushion for those "Covid" years - so to speak. what I was think was this:

Basic just get by = $35,000 per year
all in do what we want = $60,000 per year


so if I had $1,500,000 saved total.  When good years are upon us we can withdraw 4% and take home $60,000 per year.  when the market isn't doing so hot we can only take 2.4% which is about $35,000 per year. 

This would give me the earliest  FIRE date by being flexible with the distributions.  I had the idea that I'd keep 2 years of cash on hand, a given market year's gains would be for 2 years into the furture.   IE.  if 2018 was a bad year, i'd know that in 2019 we'd draw the 2.4%, if 2019 was also bad we'd continue that, if it was a good year, then 2020 could be high withdraw year.  that's a simplification but I hope you get the idea.

this is the starting point, of course I could work 1 more year and probably get to $1.700,000 which would lower those distribution percentages to 2% and 3.6% respectively thus adding another layer of cushion just depends on how I feel when I get to that point.  I am just trying to come up with a "earliest fire" solution and then adjust from that.



bacchi

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Re: my FI number...am I thinking this correctly or overthinking.
« Reply #1 on: August 20, 2020, 12:12:22 PM »
The core makes sense. Eliminating the fluff is essentially the same scenario as when you maintain the same spending and work part-time for part of it. Either way, you reduce drag on your portfolio from poor market performance.

Is the 2 years cash included in the $1.5M? That's also a drag on performance.

You will need some rules on when to lower withdrawals and when to increase them.

I.e., if 2018 is -8%, is that a bad year? If not, what is 2019 is also -8%? You'd be looking at a possible SORR if multiple years had losses.

If 2018 is -10% and 2019 is +6%, is it time to go back to 4%? Or do you wait until the market returns a 12% performance?

LifeHappens

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Re: my FI number...am I thinking this correctly or overthinking.
« Reply #2 on: August 20, 2020, 12:15:53 PM »
so if I had $1,500,000 saved total.  When good years are upon us we can withdraw 4% and take home $60,000 per year.  when the market isn't doing so hot we can only take 2.4% which is about $35,000 per year. 
By doing this, you would working past the point of a 4% withdrawal rate. The Trinity Study, upon which the 4% rule is based, supports a steady withdrawal of 4% of your original stash + inflation every year. Withdrawing less in years when the market is down effectively means you are choosing a Safe Withdrawal Rate (SWR) that will work out to be lower than 4%.

That's not necessarily a bad thing, but just know that most people in the FIRE community think it's on the side of being too conservative. If you want to read about this until your eyes bug out, try this thread:
https://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/

MikeO

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Re: my FI number...am I thinking this correctly or overthinking.
« Reply #3 on: August 20, 2020, 12:22:11 PM »
the "PLAN" is that when I do stop working I'd have two years of spending in cash in addition to the saved retirement accounts.  (about $80k in cash saved)

good point on the market...define what is "good" and "bad"  I'm thinking anything less than my distribution rate is a bad year.   so a 4% or greater gain is a good year, <4% gain is a bad year (that's total gain dividends included).  this way I'm trying to never spend more than I'm gaining. Obviously in years with returns less than 2% we'd have to spend more than we earn or go get a job.  If we saw that we'd have SORR on the horizon, we'd have to draw down even more of our spending and/or get a job to supplement spending.  of course I hope that never happens but we can't predict the future.  1 or even 2 years of modest negative returns is survivable but many years or huge declines would be devastating

terran

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Re: my FI number...am I thinking this correctly or overthinking.
« Reply #4 on: August 20, 2020, 12:29:19 PM »
Seems like you're putting some good though into this. Here's some more food for thought: https://earlyretirementnow.com/safe-withdrawal-rate-series/

vand

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Re: my FI number...am I thinking this correctly or overthinking.
« Reply #5 on: August 21, 2020, 03:44:58 AM »
so the only thing that I can't seem to narrow down is how much is enough.  I know what we spend for basics, and what we want to spend with travel/entertainment and I know I want to have a cushion for those "Covid" years - so to speak. what I was think was this:

Basic just get by = $35,000 per year
all in do what we want = $60,000 per year


so if I had $1,500,000 saved total.  When good years are upon us we can withdraw 4% and take home $60,000 per year.  when the market isn't doing so hot we can only take 2.4% which is about $35,000 per year. 

This would give me the earliest  FIRE date by being flexible with the distributions.  I had the idea that I'd keep 2 years of cash on hand, a given market year's gains would be for 2 years into the furture.   IE.  if 2018 was a bad year, i'd know that in 2019 we'd draw the 2.4%, if 2019 was also bad we'd continue that, if it was a good year, then 2020 could be high withdraw year.  that's a simplification but I hope you get the idea.

this is the starting point, of course I could work 1 more year and probably get to $1.700,000 which would lower those distribution percentages to 2% and 3.6% respectively thus adding another layer of cushion just depends on how I feel when I get to that point.  I am just trying to come up with a "earliest fire" solution and then adjust from that.

I think you really need to go back and reread what the 4% rule actually implies

The key is that once you cross the line, the 4% withdrawal is in relation to the size of your pot from that point in time, and the absolute cashflow taken is adjusted for inflation every year going forward, regardless of what happens with inflation or pot growth in the future

- You DON'T adjust your withdrawals based on what happens to your pot size
- You DO adjust your withdrawals every year to account for general inflation
- You DON'T base your withdrawal rate on the current percentage of your pot your are liquidating
- You DO have to accept that you might be one of the unlucky few and your money might run out

So if you have $1.5m and start withdrawing 4%, you withdrawal 60k/yr and adjust that amount for inflation every year - yes, even in years where you pot takes a hit. The theory is that the good years make up for the bad years without you having to adjust your lifestyle.

Of course in practice no-one actually adhere to this guideline by the letter; we do have the means to make additional contributions to our pot even when we retire and we tend to adjust our withdrawals up or down according to how well our investments have been doing more recently


Playing with Fire UK

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Re: my FI number...am I thinking this correctly or overthinking.
« Reply #6 on: August 21, 2020, 04:55:04 AM »
$1.5M sounds reasonable. You have your 4% based on what you want to spend and a plan if the markets are against you. This is enough.

Personally, I'd add another rule that if the pot dips significantly below the original value, every year is "bad" until the pot rebounds. The 4% rule doesn't require this, but it'll add to your safety margin without cramping your lifestyle too much (assuming that you are happy with your "basics"). However if your "basics" level is solely survival and not a fun existence, I'd add a "moderate" year category and spend 3.2% of the original pot ($48k, inflation adjusted) in moderate years.

Malcat

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Re: my FI number...am I thinking this correctly or overthinking.
« Reply #7 on: August 21, 2020, 06:17:20 AM »
The 4% rule is a rough guideline.

No one practically lives by it because it makes no sense to do so. Some years cost more, some years cost less. One year you might need to replace a roof and another year your might not take a trip because a pandemic shuts down travel.

Most people will automatically choose to spend less when the markets are way down, because that's a normal human reaction. Many people will also shy away from spending their full 4% allowance, and even more will rarely add the amount for inflation and will just adapt to keep under a certain amount for several years at a time.

So if your core spend is 35K, and 4% gives you 60K, and you are likely to spend less on luxuries during low market years, then you are already far more conservative than 4%.

The 4% rule isn't the thing to worry about, as I said already, because of normal human behaviour, it's already more than conservative enough.

What is worth considering are larger possible expenses outside of your expected spend, and if you are willing to work longer in order to hedge against them. For example: complex healthcare/support costs for yourself or anyone in your family.

If you have kids and expect grandkids, is there a future where you see yourself regretting not having the resources to help them in some way? If so, you could put aside an extra 50K just to be left alone to grow as a safety fund.

Remember, the 4% rule accounts for money you intend to spend. It's totally different accounting for a portion of your 'stache that you don't intend to spend, because whatever doesn't get spent, just keeps compounding and growing.

This is why people with sub-4% withdrawal rates are likely to end up with astronomical amounts of money when they die, it leaves so much extra money to just keep growing. So your 2.4-3.6 WR wouldn't produce a bit of buffer, it's more likely to produce a massive surplus. 

A little bit of flexibility in your spending, and a small extra savings fund is more than enough to achieve a very high level of future security.

Much Fishing to Do

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Re: my FI number...am I thinking this correctly or overthinking.
« Reply #8 on: August 21, 2020, 06:24:44 AM »
I think you're thinking through possibilities/options way to 'short term average', way too black and white, way too year to year.  4% constant spending pretty much works over time.  I think it is a great idea to drop spending some when the market is down, but going from 60k to 35k is extreme and unnecessary.  If you're that open to the extreme fluctuations suggested (what most people are trying to avoid when choosing the 4% rule) then maybe the quickest way to FIRE is just plan to get $1.2M and then spend like 5% of your stash, adjusted with your stache up and down, year to year, with guide-rails to keep you from going over inflation adjusted $60k or getting below $35k.  Foundations that think its as important to spend what they can as keeping spending power from dropping have been doing this forever. Firecalc can help figure out what numbers work with this method.

Another example of how short term thinking doesn't generally work is in your statement "of course I could work 1 more year and probably get to $1.700,000".  Unless you're all cash and your extra $200k comes from salary savings, you're probably just as likely to have $1.4M at the end of another year of working as having $1.7M.  That of course doesn't mean you hurt yourself by working another year, just like it doesn't mean any huge gains would have been lost by not working, just that each additional year of working only has incremental effects.

MissPeach

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Re: my FI number...am I thinking this correctly or overthinking.
« Reply #9 on: August 24, 2020, 02:27:51 PM »
I'm doing something similar where I'm aiming for my higher number but could still cut back a bit if it's a bad year.

I would recommend saving more in a brokerage/cash. I recommend most of it in a brokerage for interest and then what you feel good about having around in case for emergencies or a down market. I personally like to do 4-8 months in cash. I'm assuming part of your pot is in retirement accounts so you'll need at least 5-6 years outside of retirement accounts to start building a ladder to convert money to a roth to avoid the early withdrawal penalties.

Financial.Velociraptor

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Re: my FI number...am I thinking this correctly or overthinking.
« Reply #10 on: August 24, 2020, 03:47:13 PM »
The 80k cash extra cushion gives you an enormous amount of protection against SORR.  In a market crash of 50% or more, you cans pend down cash at 40k per year for two years without selling anything "low".  The modern recession cycles (for the market at least) tend to be short lived.  So, if you spend down 65k before the market recovers and you continue to spend about 40k, you can replenish almost all your cash buffer in one year. 

In reality, you have a worst case scenario of 1,580,000 stash which you would draw 35k against or 2.215% withdrawal rate.  That is crazy conservative.  If you can't tolerate the risk yet because you haven't had the decompression time to adapt mentally...go part time.  Make 12k a year as a cashier or barista or something similar with flexible hours and low to moderate stress compared to corporate warrior.  That gets you to bare bones 23k withdrawal.  After six months, I suspect you'll wonder why in the hell you didn't go full FIRE sooner.