Author Topic: Practicalities of living off the 4% SWR  (Read 14602 times)

kjulez_83

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Practicalities of living off the 4% SWR
« on: November 27, 2016, 05:01:59 AM »
Hello all,

I am wondering about once you have actually FIREed and you are living off your investments.

I'm hoping to 'retire' in 1-3 years time (me 1 year, husband 3) at which time we will have about $850K plus probably about $200K in super (we are in Australia, aged 33 & 36) which doesn't help us for a few years yet.

Considering we need to live on the income that money generates, I am having a few issues with how to invest the money.

I don't want to be a 'dividend chaser' since that overall probably results in poor returns in the long run, but considering we will need to live off the dividends that is kind of important. How do you guys that have already retired deal with this? Also, is the 4% not just in dividends but also in capital growth meaning that if our $850K grew to $875,000 that the money we are going to live off would be from dividends but also by selling off up to $25K of stock if need be (say if dividends were very low that year).

Sorry I feel like these are dumb questions but I have googled this 4% rate and I can't find the answers I'm looking for - they are all hypothetical but I'm looking for real life answers - what mix of income do you live off (dividends/capital growth/something else)? And is the aim to live only off dividends, but dip into your actual investments when things are not good?

I feel like I need a financial advisor to help me with the beginning of all this but I don't trust any, especially with early retirement/ mustachianism which will be a totally foreign concept to most financial advisors who tell people they need to retire at age 65 with at least $2M!!

Thank you hugely in advance for any help :)


jim555

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Re: Practicalities of living off the 4% SWR
« Reply #1 on: November 27, 2016, 05:38:49 AM »
A total return investor does not care about dividends.  So say an index pays 2% in dividends, the other 2% would come from sales of stock.  Capital appreciation should grow back the sale amount over time.

deborah

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Re: Practicalities of living off the 4% SWR
« Reply #2 on: November 27, 2016, 06:02:54 AM »
Like jim555 said...

However, you need to think about where you are currently invested and the returns you are currently getting. For instance, if you have all your money in the bank, your returns will be about 3% rather than 4% (and, of course, you would be paying tax on the interest). And if you have investment properties, your rents may well be less. I am retired, and I made sure I was already getting the income I needed from my investments before I retired.

BTDretire

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Re: Practicalities of living off the 4% SWR
« Reply #3 on: November 27, 2016, 08:00:23 AM »
The first thing you need to figure out is how are you going to invest your stache.
60% stock 40% bond, any of the portfoilios in portfoliocharts* Some real estate.
Whatever it is, it is kind of important that you stick to it, don't jump to something new when your portfolio has a negative return because as soon as you change to a winner, that one will have a down year and your original will come back.
 Second, think about the idea that you may need to adjust your spending depending on the return of your portfolio each year. 20 years from now, you will need more money in your portfolio to keep up with inflation.
 Glad your getting close!!

boarder42

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Re: Practicalities of living off the 4% SWR
« Reply #4 on: November 27, 2016, 08:49:16 AM »
60/40 bonds split is way to conservative for a 4% SWR you need 80.20 minimum

Spork

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Re: Practicalities of living off the 4% SWR
« Reply #5 on: November 27, 2016, 09:11:47 AM »
We are only FIRE'd for 1.5 years, so this is probably not a long enough span to draw any conclusions from...

Our expenditures in the first 1.5 years are less than our earnings.  So regardless of whether we're "dividend chasing" or not... we're not yet delving into our principle.  I will also say: we did save "too much" by pretty much any Mustacian standard.  I tend to be overly conservative estimating expenses and underestimating returns (on purpose).

Our savings rate over the last 365 days is about 14%.... and this past year has felt like it was well above average expenses.

Ozlady

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Re: Practicalities of living off the 4% SWR
« Reply #6 on: November 27, 2016, 03:43:57 PM »
2 questions for you to ponder:

a) how much can you save until both you and your hubby retire ?

b) how much do you need to spend every year?

from a) you will add to your 850K stache...conservatively multiply the new total figure by 3.5% (worse case put in fixed deposits)..can you live on that?

Your super leave it untouched to grow; as it is , you can't touch it anyway..it is your old man/woman money...do projections based on amt you will have in 3 years time to grow conservatively till at least 60...

If i were you, i will not retire...take a break yes....too many unknown factors round the corner..BUT well done on that nest egg at that age:))

deborah

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Re: Practicalities of living off the 4% SWR
« Reply #7 on: November 27, 2016, 03:54:29 PM »
But Ozlady, you plan to retire on an ENORMOUS amount. For most of us, that amount is quite reasonable. If that's what they can live on in perpetuity, they can.

Cassie

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Re: Practicalities of living off the 4% SWR
« Reply #8 on: November 27, 2016, 05:06:34 PM »
I think people are underestimating how things change as you age. You end up paying more for health care and health challenges do occur as you age. Also comfort becomes more important. I used to tent camp but at 62 it is too much work, etc.  Some costs will increase as you age. I have known a few people that retired in their 40's and now in their 60's are sorry they don't have enough money to do anything but exist. As the old saying goes---Nothing is  worse then being old except for being old and poor:))   I think saving some extra $ so you can increase your spending if you want to can't hurt. especially if you are talking about retiring in your 30's.  If you work until 40 you could still spend 50 years in retirement.

deborah

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Re: Practicalities of living off the 4% SWR
« Reply #9 on: November 27, 2016, 05:23:11 PM »
That might be true in the US. I agree that people do want to do more while they are still active, and young retirees are more active for longer, and perhaps spending more. However, as you age in Australia, there are three things that mitigate spending. We have an old aged pension (depending on your assets and income, you get an amount that is about the same as an average ER person needs, so if you do run out of money, there isn't the problem that people in the US face), universal health care and pharmaceutical benefits which give elderly people very cheap access to drugs and medicine.

In an initiative started by one of our banks, they estimate (every quarter) how much retired people need to live on - see

https://www.superannuation.asn.au/resources/retirement-standard

If you look at it, elderly people (85s) in Australia need less than people who are in their sixties to live.

Cassie

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Re: Practicalities of living off the 4% SWR
« Reply #10 on: November 27, 2016, 05:27:41 PM »
Wow I was not aware of all the great benefits that Australia offers. You guys are lucky:))

Ozlady

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Re: Practicalities of living off the 4% SWR
« Reply #11 on: November 27, 2016, 08:22:15 PM »
But Ozlady, you plan to retire on an ENORMOUS amount. For most of us, that amount is quite reasonable. If that's what they can live on in perpetuity, they can.

This is interesting...you mean someone actually did it on that amount over an extended period?  without pensions? paid for house? paid for cars?

I would love to see the breakdown of expenses and the withdrawal method...care to share?

kjulez_83

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Re: Practicalities of living off the 4% SWR
« Reply #12 on: November 27, 2016, 09:26:14 PM »
Thanks to you for your responses, I know I still have a fair bit of the detail to work out!

We actually plan to still work a few months of the year each (at different times) so that we would hope in any one year we would still be earning somewhere between $20-30K per year (minus what little tax you would have to pay on that) so we won't solely be relying on the 4%. I guess that's why I'm not too concerned about the numbers because I know we have quite a bit invested (around that $850K) and I will be happy for the next x amount of years (who knows - 20 years?) to work a few months of the year. I think it should be quite possible, living in a beach town there is pretty much always seasonal work if you are happy to work in a cafe/hotel/bar whatever, which if it's only for the summer I'm happy to have stress free work for a few months to help us live hopefully worry free the rest of the year.

The main reason we want to 'retire' in this timeframe is because our son starts school in 2018 and I want to sell our crazily valued Melbourne house and buy a much cheaper house somewhere around the Great Ocean Road in time for him to start school, that is where a lot of our cash will be coming from. I would just like him to start primary school at the school he is going to stay at...I don't know why really he is a bit of a shy kid I think it would help him to start fresh with everyone else rather than be the "new kid".
 
I'm interested in the comments that it doesn't seem like enough - I know I haven't given much details but MMM recommends it can be done on even less if you are a bit hardcore. Is it the Australian part of it that makes it seem like $850K isn't enough? Because I sure know when I look at his expenses when he has broken them down in the past I'm like man I WISH car rego was about $300 per year! A lot of stuff does seem a lot cheaper in the US although as you have said Deborah we do get other benefits around healthcare & aged pension.

marty998

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Re: Practicalities of living off the 4% SWR
« Reply #13 on: November 27, 2016, 11:40:33 PM »
Wow I was not aware of all the great benefits that Australia offers. You guys are lucky:))

Correction. Old people are lucky. Young people have to pay for it now, plus we'll have to pay the interest as well because the taxpayer is borrowing $40 billion a year to fund all of the welfare.

The cost of the old age pension each year is exactly the size of the current budget deficit.

happy

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Re: Practicalities of living off the 4% SWR
« Reply #14 on: November 28, 2016, 04:51:49 AM »

I'm interested in the comments that it doesn't seem like enough - I know I haven't given much details but MMM recommends it can be done on even less if you are a bit hardcore. Is it the Australian part of it that makes it seem like $850K isn't enough? Because I sure know when I look at his expenses when he has broken them down in the past I'm like man I WISH car rego was about $300 per year! A lot of stuff does seem a lot cheaper in the US although as you have said Deborah we do get other benefits around healthcare & aged pension.

IMO if you are mustachian and plan to work to earn 20-30k a year, its enough.
The nub of the issue is what are your annual expenses, both now and in FIRE? If your family can live on under 50k AUD a year then you're fine.

The math I used is:
 1. old man money aka super. 200k @5% for 21 years ( hubby will work for 3 more years and stop at 39, with 21 more years to go to access super), adding 2k a year (a conservative guesstimate on super from your seasonal work) will give you 644k when hubby turns 60.  At 4% this is 25k a year and at 3% its just under 20k a year. Not enough on its own.
2. 850k @4% is 34k a year and at 3% is 25k.

The super is a bit thin on its own ( you'd need old age pension to supplement, and the OAP will undoubtedly get more miserly into the future so hard to know what you can count on), so you need the 850k to keep growing. If you lived on 40k a year, earnt 30k, you'd only draw down10k and by historical measures you'd be fine. If you live on 50k, earnt 30k and drew down 20k you should still be fine. A  number of Aussie families on here live well on less than 50k, myself included. However if you want to live on more than that, then the math gets a bit tighter. If I had your situation and numbers I'd aim at living off either 30/10 or 30/20, or 20/20 if you only want to earn 20k.  If the market goes well and money starts piling up ridiculously then you can always change that if you really wish to succumb to consumption creep and be excommunicated from the mustachian cult.

As an additional margin of safety, you still have 1-3 years more saving and 1-3 years more super, so the math should be slightly better.

I'm not retired so I can't claim to have done this: but as Deborah says, you should make sure you can live off the "income" from your investments, which is usually regarded as the dividends paid. Fully franked dividends will also yield a tax reduction or return. By not selling any of the shares the 850k invested will grow with the capital gain of the shares. If you can organise it so that you are only drawing 10-20k net from the dividends (by earning 30k/yr), there should be some left to reinvest, yet another margin to ensure growth of your capital.

The most important factor is: what are your expenses?

deborah

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Re: Practicalities of living off the 4% SWR
« Reply #15 on: November 28, 2016, 05:08:14 AM »
Wow I was not aware of all the great benefits that Australia offers. You guys are lucky:))

Correction. Old people are lucky. Young people have to pay for it now, plus we'll have to pay the interest as well because the taxpayer is borrowing $40 billion a year to fund all of the welfare.

The cost of the old age pension each year is exactly the size of the current budget deficit.

My family is very anti receiving government welfare, so even though I had a great aunt who lived to 105, and many other family members who have lived well into their 90s, none of them have ever applied for the OAP. I expect that I will never receive it, and I think that is the attitude people should take - it is there as a backstop if you really need it. Unfortunately, there is a myth currently circulating that it is a right. That's never been the case, and I don't know who dreamt that one up - but it is one with all the other "rights" that people on middle class welfare seem to have. It is also unfortunate that successive governments have given more than they should to people who really don't need it.

arebelspy

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Re: Practicalities of living off the 4% SWR
« Reply #16 on: November 28, 2016, 06:43:45 AM »
But Ozlady, you plan to retire on an ENORMOUS amount. For most of us, that amount is quite reasonable. If that's what they can live on in perpetuity, they can.

This is interesting...you mean someone actually did it on that amount over an extended period?  without pensions? paid for house? paid for cars?

OP has over 1MM (AUS).  Many people here in the states retire with less (even counting the currency conversion).  Here is a whole thread asking about people retiring on the equivalent US amount (750k).  There are others you can dig up with a search.

I would assume anyone retiring on that would likely have any vehicles paid off, and no consumer debt.  Some may have a paid off house, but others may have a mortgage, and others renting.

No pensions, typically, or they may not even need that much saved, if any is needed at all (my MIL, for example, will retire at 60 with a 6k/mo pension, and only 50k in her retirement accounts, a leased car, no house or other assets--not a traditional "FIRE" scenario, but goes to show, if you have cash flow, you may not need assets--most the people here have assets rather than cash flow, like a pension).
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boarder42

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Re: Practicalities of living off the 4% SWR
« Reply #17 on: November 28, 2016, 07:13:31 AM »
my current fear of FIREing esp on a lower total account balance is the current shiller PE ratio is projecting around a 3.6% SWR for money to last for life.  So if one were to FIRE in the current market conditions i would FIRE but be very flexible.  we have a High FIRE goal with lots of fat to cut if needed in a downturn.  FIREing barebones right now would be an adventure and may lead to needing to produce some income in FIRE if you were planning on a 4% SWR today.

Metric Mouse

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Re: Practicalities of living off the 4% SWR
« Reply #18 on: November 28, 2016, 09:05:44 AM »
my current fear of FIREing esp on a lower total account balance is the current shiller PE ratio is projecting around a 3.6% SWR for money to last for life.  So if one were to FIRE in the current market conditions i would FIRE but be very flexible.  we have a High FIRE goal with lots of fat to cut if needed in a downturn.  FIREing barebones right now would be an adventure and may lead to needing to produce some income in FIRE if you were planning on a 4% SWR today.

Do not fear the FIRE.  How many threads are on here asking about how much money firees make after leaving work?  There are very few stories of people who wished to make some money not being able to. For the most part one can go back to a job if FIRE doesn't work out - one can't get back the days they spent at work.

At a 1MM portfolio, .4 percent is $4k a year. Not that much to cut from a budget or have to earn each year if it came down to it.  Remember that the SWR is the worst case scenario minimum - most of the scenarios run show that higher, sometimes much higher, withdrawal rates are possible while still retaining portfolio balance.

arebelspy

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Re: Practicalities of living off the 4% SWR
« Reply #19 on: November 28, 2016, 09:33:09 AM »
my current fear of FIREing esp on a lower total account balance is the current shiller PE ratio is projecting around a 3.6% SWR for money to last for life.
At a 1MM portfolio, .4 percent is $4k a year. Not that much to cut from a budget or have to earn each year if it came down to it. 

This is a good point.  Even if 3.6% going forward is reasonable, cutting 10% from a 4% WR, or earning that 10% of your spending seems totally doable.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

boarder42

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Re: Practicalities of living off the 4% SWR
« Reply #20 on: November 28, 2016, 09:46:55 AM »
my current fear of FIREing esp on a lower total account balance is the current shiller PE ratio is projecting around a 3.6% SWR for money to last for life.
At a 1MM portfolio, .4 percent is $4k a year. Not that much to cut from a budget or have to earn each year if it came down to it. 

This is a good point.  Even if 3.6% going forward is reasonable, cutting 10% from a 4% WR, or earning that 10% of your spending seems totally doable.

that is a good perspective but the theory behind the shiller is that one would have to consistently make this 10% as when you FIRE the SWR set at that point is it for the rest of your life so you'd have to consistently make that extra 10% back. i'm in a unique situation where just working one more year at the point of when i can FIRE would more than make up for that 10% gap forever so each situation may be unique but my golden handcuff due to privately held company stock that must be sold when we leave makes it much simpler to just say i'll work one more year.  or in my case.  i'll take a mid year 4-5 month sababatical to test the FIRE waters as well as gain those extra earnings on the stock with out departing.

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Re: Practicalities of living off the 4% SWR
« Reply #21 on: November 28, 2016, 10:43:41 AM »
my current fear of FIREing esp on a lower total account balance is the current shiller PE ratio is projecting around a 3.6% SWR for money to last for life.
At a 1MM portfolio, .4 percent is $4k a year. Not that much to cut from a budget or have to earn each year if it came down to it. 

This is a good point.  Even if 3.6% going forward is reasonable, cutting 10% from a 4% WR, or earning that 10% of your spending seems totally doable.

that is a good perspective but the theory behind the shiller is that one would have to consistently make this 10% as when you FIRE the SWR set at that point is it for the rest of your life so you'd have to consistently make that extra 10% back. i'm in a unique situation where just working one more year at the point of when i can FIRE would more than make up for that 10% gap forever so each situation may be unique but my golden handcuff due to privately held company stock that must be sold when we leave makes it much simpler to just say i'll work one more year.  or in my case.  i'll take a mid year 4-5 month sababatical to test the FIRE waters as well as gain those extra earnings on the stock with out departing.
Don't forget about sequence of returns risk. While the shiller data may provide a nice blanket rule of thumb for you, the actual historical results of a 4% SWR shows that there is a very low percentage of cases where you would even need to bother making extra money. The sequence of returns in the first 10 years of retirement says it all. So don't get too hung up on "making that 10% buffer in one year" when the odds are high that you'll never need it in the first place. Maybe look into sequence of returns a bit more to understand that data as well as the shiller data.

boarder42

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Re: Practicalities of living off the 4% SWR
« Reply #22 on: November 28, 2016, 12:16:35 PM »
my current fear of FIREing esp on a lower total account balance is the current shiller PE ratio is projecting around a 3.6% SWR for money to last for life.
At a 1MM portfolio, .4 percent is $4k a year. Not that much to cut from a budget or have to earn each year if it came down to it. 

This is a good point.  Even if 3.6% going forward is reasonable, cutting 10% from a 4% WR, or earning that 10% of your spending seems totally doable.

that is a good perspective but the theory behind the shiller is that one would have to consistently make this 10% as when you FIRE the SWR set at that point is it for the rest of your life so you'd have to consistently make that extra 10% back. i'm in a unique situation where just working one more year at the point of when i can FIRE would more than make up for that 10% gap forever so each situation may be unique but my golden handcuff due to privately held company stock that must be sold when we leave makes it much simpler to just say i'll work one more year.  or in my case.  i'll take a mid year 4-5 month sababatical to test the FIRE waters as well as gain those extra earnings on the stock with out departing.
Don't forget about sequence of returns risk. While the shiller data may provide a nice blanket rule of thumb for you, the actual historical results of a 4% SWR shows that there is a very low percentage of cases where you would even need to bother making extra money. The sequence of returns in the first 10 years of retirement says it all. So don't get too hung up on "making that 10% buffer in one year" when the odds are high that you'll never need it in the first place. Maybe look into sequence of returns a bit more to understand that data as well as the shiller data.

sequence of returns is what shiller is protecting against.  its looking at an overvalued market and saying hey you probably should withdraw less b/c there is an increased likelihood of a drop in your early withdrawal.

Mr. Green

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Re: Practicalities of living off the 4% SWR
« Reply #23 on: November 28, 2016, 01:33:27 PM »
that is a good perspective but the theory behind the shiller is that one would have to consistently make this 10% as when you FIRE the SWR set at that point is it for the rest of your life so you'd have to consistently make that extra 10% back. i'm in a unique situation where just working one more year at the point of when i can FIRE would more than make up for that 10% gap forever so each situation may be unique but my golden handcuff due to privately held company stock that must be sold when we leave makes it much simpler to just say i'll work one more year.  or in my case.  i'll take a mid year 4-5 month sababatical to test the FIRE waters as well as gain those extra earnings on the stock with out departing.
Don't forget about sequence of returns risk. While the shiller data may provide a nice blanket rule of thumb for you, the actual historical results of a 4% SWR shows that there is a very low percentage of cases where you would even need to bother making extra money. The sequence of returns in the first 10 years of retirement says it all. So don't get too hung up on "making that 10% buffer in one year" when the odds are high that you'll never need it in the first place. Maybe look into sequence of returns a bit more to understand that data as well as the shiller data.

sequence of returns is what shiller is protecting against.  its looking at an overvalued market and saying hey you probably should withdraw less b/c there is an increased likelihood of a drop in your early withdrawal.
The Shiller number could stay high for the next 10 years. A person retiring this year might think that would cause a SWR rate of 4% to be riskier than it used to, yet if we average a 4% return over that decade sequence of returns risk would tell you no 90/10 portfolio that earned that return in the first decade has ever failed over 30 years. It's the difference between the value of the current market vs. the performance over 10 years. I know the shiller number is "predicting" that return, but if it were to stay high it skews to the negative where the yearly return is what would really make the decision for you about whether to go back to work.
« Last Edit: November 28, 2016, 01:36:53 PM by Mr. Green »

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Re: Practicalities of living off the 4% SWR
« Reply #24 on: November 29, 2016, 09:57:08 AM »
Also regarding the Shiller PE one should think about the last 10 years.   Sure the Shiller PE is at 27 right now and the PE is at 25.  But in 2009 when the collapse happened and earnings plummeted (a lot attributed to non-cash charge offs/write downs) the PE spiked.

So as a proxy if you take the average of the last 120 months PE it would currently be 26, but if you simply removed the 10 months with the highest and lowest PE ratios the average PE would drop to 20 - still high but its something to think about when there are very large swings up or down. 

So I don't think that the Shiller PE may not be as high as it really indicates

kjulez_83

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Re: Practicalities of living off the 4% SWR
« Reply #25 on: November 30, 2016, 01:45:15 AM »

I'm interested in the comments that it doesn't seem like enough - I know I haven't given much details but MMM recommends it can be done on even less if you are a bit hardcore. Is it the Australian part of it that makes it seem like $850K isn't enough? Because I sure know when I look at his expenses when he has broken them down in the past I'm like man I WISH car rego was about $300 per year! A lot of stuff does seem a lot cheaper in the US although as you have said Deborah we do get other benefits around healthcare & aged pension.

IMO if you are mustachian and plan to work to earn 20-30k a year, its enough.
The nub of the issue is what are your annual expenses, both now and in FIRE? If your family can live on under 50k AUD a year then you're fine.

The math I used is:
 1. old man money aka super. 200k @5% for 21 years ( hubby will work for 3 more years and stop at 39, with 21 more years to go to access super), adding 2k a year (a conservative guesstimate on super from your seasonal work) will give you 644k when hubby turns 60.  At 4% this is 25k a year and at 3% its just under 20k a year. Not enough on its own.
2. 850k @4% is 34k a year and at 3% is 25k.

The super is a bit thin on its own ( you'd need old age pension to supplement, and the OAP will undoubtedly get more miserly into the future so hard to know what you can count on), so you need the 850k to keep growing. If you lived on 40k a year, earnt 30k, you'd only draw down10k and by historical measures you'd be fine. If you live on 50k, earnt 30k and drew down 20k you should still be fine. A  number of Aussie families on here live well on less than 50k, myself included. However if you want to live on more than that, then the math gets a bit tighter. If I had your situation and numbers I'd aim at living off either 30/10 or 30/20, or 20/20 if you only want to earn 20k.  If the market goes well and money starts piling up ridiculously then you can always change that if you really wish to succumb to consumption creep and be excommunicated from the mustachian cult.

As an additional margin of safety, you still have 1-3 years more saving and 1-3 years more super, so the math should be slightly better.

I'm not retired so I can't claim to have done this: but as Deborah says, you should make sure you can live off the "income" from your investments, which is usually regarded as the dividends paid. Fully franked dividends will also yield a tax reduction or return. By not selling any of the shares the 850k invested will grow with the capital gain of the shares. If you can organise it so that you are only drawing 10-20k net from the dividends (by earning 30k/yr), there should be some left to reinvest, yet another margin to ensure growth of your capital.

The most important factor is: what are your expenses?


Thanks for the number crunching! :) Current expenses are at about $55K per year including $12K on childcare. But I have sold my car this year and use a bike, so our transport/car costs will be reduced by a fair bit too. Plus living in the beachside town away from the city and knowing we only plan to work for a bit of the year I am planning to cut a lot of other expenses such as less spending on eating out and drinks (since I won't be dong so many 'catch ups' with friends out) and really just cut a lot of the fat that I want to anyway but have been too lazy to do like spending $200 pw on groceries etc. So I am hoping to be able to cut it down to $35K, $40 tops.

steveo

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Re: Practicalities of living off the 4% SWR
« Reply #26 on: November 30, 2016, 03:34:04 AM »
I have 2 questions:-

1. Do you own your house ?
2. Is the $850k excluding your house ?

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Re: Practicalities of living off the 4% SWR
« Reply #27 on: November 30, 2016, 03:55:09 AM »
I have 2 questions:-

1. Do you own your house ?
2. Is the $850k excluding your house ?

1. Yes
2. Yes

Can I ask why they matter though since they can't generate any income? Or I guess I understand why question 1 matters as we have no rent/mortgage costs.

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Re: Practicalities of living off the 4% SWR
« Reply #28 on: November 30, 2016, 04:19:15 AM »
Or I guess I understand why question 1 matters as we have no rent/mortgage costs.

This exactly.  It helps reduce your budget... living off of 4% of 850k (34k annually) is a lot easier with no housing payment.
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Re: Practicalities of living off the 4% SWR
« Reply #29 on: November 30, 2016, 04:50:03 AM »
Yes that is definitely true, and added to the $34K a bit of extra cash from seasonal work it seems so doable!

All I have to do now is convince my husband to sell our house and move to the beach. It's not even that far it's only a 1.3 hour drive from where we currently live (but this is integral to FIREing because our current house has so much capital tied up in it and there is no value anywhere in the general Melbourne area)

I may need to find a good thread relating to convincing your SO to FIRE with you (and make a sea change just to add an extra hurdle to the mix) then I'm just about set (ok well there are a few details to work out but it's hard not to get excited) :D

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Re: Practicalities of living off the 4% SWR
« Reply #30 on: November 30, 2016, 04:55:15 AM »
Yes that is definitely true, and added to the $34K a bit of extra cash from seasonal work it seems so doable!

Definitely!  And I forgot to count your super value in that, which would make the 4% more like 40k, and/or will grow on its own while you draw down on taxable.

I may need to find a good thread relating to convincing your SO to FIRE with you (and make a sea change just to add an extra hurdle to the mix) then I'm just about set (ok well there are a few details to work out but it's hard not to get excited) :D

Worst case, you FIRE first, pad the stache a bit, and have so much fun he decides he has to join you!  ;)
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Re: Practicalities of living off the 4% SWR
« Reply #31 on: November 30, 2016, 05:41:16 AM »
based on my experience it seems one spouse always tends to work longer.. either out of fear of money running out, enjoyment of the job or some other reason.

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Re: Practicalities of living off the 4% SWR
« Reply #32 on: November 30, 2016, 06:07:00 AM »
based on my experience it seems one spouse always tends to work longer.. either out of fear of money running out, enjoyment of the job or some other reason.

The wife and I FIRE'd at the same time, but I think you're right, and we're the exception.  It does seem much more common for one to pull the trigger earlier.  It usually seems the one more "into" FIRE will be done sooner--like you mention, I think often their partner doesn't mind their job as much, or isn't as into the idea of freedom, or is worried about the money and hasn't researched into it as much, so they want to work longer.

Most couples I can think of (RoG, MMM) had the wife work longer.

There are some where they pulled the trigger at the same time (Freedom with Bruno, for example... I think GCC?).

I was going to say we should have a poll, but then thought that maybe we already did, or at least had a thread asking if you FIRE'd at the same time as your SO, as that sounded familiar. Sure enough, a quick search revealed:
http://forum.mrmoneymustache.com/post-fire/retiring-before-spouse/

With 63 votes, 52% said they ER'd before their spouse.  33% said no (not clear what this means--if the spouse went first and/or if same time is both lumped into that?--the poll is not worded super well), 14% said semi-ER.

Either way, over half there did ER before the spouse, so it seems like your intuition was correct from that small sample size.

Some other discussion of people retiring before their spouse, and how it worked out for them:
http://forum.mrmoneymustache.com/ask-a-mustachian/you-retired-early-and-your-so-didn't-how's-that-working-out/
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Re: Practicalities of living off the 4% SWR
« Reply #33 on: November 30, 2016, 08:07:23 AM »
All I have to do now is convince my husband to sell our house and move to the beach. It's not even that far it's only a 1.3 hour drive from where we currently live (but this is integral to FIREing because our current house has so much capital tied up in it and there is no value anywhere in the general Melbourne area)

I may need to find a good thread relating to convincing your SO to FIRE with you (and make a sea change just to add an extra hurdle to the mix) then I'm just about set (ok well there are a few details to work out but it's hard not to get excited) :D

Nicely done. ^^^

My SO is working longer. The job is enjoyable, it's part-time, and there's some fear there as well. A sabbatical was negotiated so at least we can take a long vacation together.

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Re: Practicalities of living off the 4% SWR
« Reply #34 on: November 30, 2016, 04:37:31 PM »
Yes that is definitely true, and added to the $34K a bit of extra cash from seasonal work it seems so doable!

All I have to do now is convince my husband to sell our house and move to the beach. It's not even that far it's only a 1.3 hour drive from where we currently live (but this is integral to FIREing because our current house has so much capital tied up in it and there is no value anywhere in the general Melbourne area)

I may need to find a good thread relating to convincing your SO to FIRE with you (and make a sea change just to add an extra hurdle to the mix) then I'm just about set (ok well there are a few details to work out but it's hard not to get excited) :D

I assume selling your house would then increase you investable assets ? If so I really think that you are done. We have about $400k including Super in assets now but we have a house worth $1.5 million. I reckon we could FIRE if I could convince my wife to move outside of Sydney and downsize but she doesn't want too. To be fair the kids are in school and it would be tougher on them to move. The problem is that by the time the kids are older and we have enough to FIRE in Sydney we probably don't need to move.

I think we can retire with a 5.5% WR simply because we have the ability to downsize the house and potentially get the aged pension.

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Re: Practicalities of living off the 4% SWR
« Reply #35 on: November 30, 2016, 07:20:13 PM »
I assume selling your house would then increase you investable assets ?

Yep, we currently have about $200K ($90K is in cash though - we were saving up for an investment property deposit but the property market is no good so we probably need to put most of that money to work) and $247K in super.

Over the next 3 years with me working 1, husband working 3, we should be able to save another $160K. The changeover amount from selling our house and buying in the beach town will give us $490K (next year). So by the time my husband stops working that is when we will have (what I have deemed) the magic $850K, and hopefully even more since we would have nearly $700K invested by the end of next year so it will already have been growing.

I reckon we could FIRE if I could convince my wife to move outside of Sydney and downsize but she doesn't want too. To be fair the kids are in school and it would be tougher on them to move. The problem is that by the time the kids are older and we have enough to FIRE in Sydney we probably don't need to move.

Yep that's why I want to do it by the end of next year before our son starts school in 2018. All of this is a giant hypothetical unless i can convince my husband to want to do it too.

But it's not just the FIREing, it's the lifestyle. I do love Melbourne but I have lived here all my life and I want something different and simpler where i am hoping it will be easier to live a less consumer driven lifestyle (i.e. without the kids feeling pressure from other kids at school to want all the brands, gadgets etc).I'm not saying that kids in a beach town will not be into brands etc but I would really hope it's less than in the city. This seems like a great solution to me, at only 1.3 hour drive from Melbourne, we will still be able to stay in close contact with our friends and family which has always been what's stopped me from moving away in the past.

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Re: Practicalities of living off the 4% SWR
« Reply #36 on: November 30, 2016, 07:39:11 PM »
I think people are underestimating how things change as you age. You end up paying more for health care and health challenges do occur as you age. Also comfort becomes more important. I used to tent camp but at 62 it is too much work, etc.  Some costs will increase as you age. I have known a few people that retired in their 40's and now in their 60's are sorry they don't have enough money to do anything but exist. As the old saying goes---Nothing is  worse then being old except for being old and poor:))   I think saving some extra $ so you can increase your spending if you want to can't hurt. especially if you are talking about retiring in your 30's.  If you work until 40 you could still spend 50 years in retirement.

I think a key thing to realize is a 33 year old retiring with a 4% SWR will be in one of two situations at age 62 if the next 30 years are fairly representative of the past 100:

  • Broke
  • Ridiculously wealthy

The first you realize well before 62 and the latter means the problems you mention won't matter at all.

kjulez_83

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Re: Practicalities of living off the 4% SWR
« Reply #37 on: November 30, 2016, 07:50:02 PM »
I think people are underestimating how things change as you age. You end up paying more for health care and health challenges do occur as you age. Also comfort becomes more important. I used to tent camp but at 62 it is too much work, etc.  Some costs will increase as you age. I have known a few people that retired in their 40's and now in their 60's are sorry they don't have enough money to do anything but exist. As the old saying goes---Nothing is  worse then being old except for being old and poor:))   I think saving some extra $ so you can increase your spending if you want to can't hurt. especially if you are talking about retiring in your 30's.  If you work until 40 you could still spend 50 years in retirement.

I think a key thing to realize is a 33 year old retiring with a 4% SWR will be in one of two situations at age 62 if the next 30 years are fairly representative of the past 100:

  • Broke
  • Ridiculously wealthy

The first you realize well before 62 and the latter means the problems you mention won't matter at all.

Haha look I am slightly worried with the state of the world that it may be the former, but I am flexible. If it doesn't work out and we have to return to work then so be it, we will be in the same situation as a lot of other people in the world but with the benefit of being mustachian and therefore much more likely to find a way to make things work for us ;) I would rather give it a go and maybe it will be the start of an adventure rather than stay in the rat race and always wonder what might have happened if we had given it a go.

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Re: Practicalities of living off the 4% SWR
« Reply #38 on: December 01, 2016, 06:07:34 AM »
Yes that is definitely true, and added to the $34K a bit of extra cash from seasonal work it seems so doable!

All I have to do now is convince my husband to sell our house and move to the beach. It's not even that far it's only a 1.3 hour drive from where we currently live (but this is integral to FIREing because our current house has so much capital tied up in it and there is no value anywhere in the general Melbourne area)

I may need to find a good thread relating to convincing your SO to FIRE with you (and make a sea change just to add an extra hurdle to the mix) then I'm just about set (ok well there are a few details to work out but it's hard not to get excited) :D

I assume selling your house would then increase you investable assets ? If so I really think that you are done. We have about $400k including Super in assets now but we have a house worth $1.5 million. I reckon we could FIRE if I could convince my wife to move outside of Sydney and downsize but she doesn't want too. To be fair the kids are in school and it would be tougher on them to move. The problem is that by the time the kids are older and we have enough to FIRE in Sydney we probably don't need to move.

I think we can retire with a 5.5% WR simply because we have the ability to downsize the house and potentially get the aged pension.
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Re: Practicalities of living off the 4% SWR
« Reply #39 on: December 01, 2016, 06:25:16 AM »
I think people are underestimating how things change as you age. You end up paying more for health care and health challenges do occur as you age. Also comfort becomes more important. I used to tent camp but at 62 it is too much work, etc.  Some costs will increase as you age. I have known a few people that retired in their 40's and now in their 60's are sorry they don't have enough money to do anything but exist. As the old saying goes---Nothing is  worse then being old except for being old and poor:))   I think saving some extra $ so you can increase your spending if you want to can't hurt. especially if you are talking about retiring in your 30's.  If you work until 40 you could still spend 50 years in retirement.

I think a key thing to realize is a 33 year old retiring with a 4% SWR will be in one of two situations at age 62 if the next 30 years are fairly representative of the past 100:

  • Broke
  • Ridiculously wealthy

The first you realize well before 62 and the latter means the problems you mention won't matter at all.

Haha look I am slightly worried with the state of the world that it may be the former, but I am flexible. If it doesn't work out and we have to return to work then so be it, we will be in the same situation as a lot of other people in the world but with the benefit of being mustachian and therefore much more likely to find a way to make things work for us ;) I would rather give it a go and maybe it will be the start of an adventure rather than stay in the rat race and always wonder what might have happened if we had given it a go.
That is the great thing about using sequence of returns risk to analyze your position along the way. This is a US example but, we know that no 90% equities/10% bonds portfolio has left you with less than when you retired, over 30 years, when the average return over the first 10 years has been 4% or more. So you'll know by the end of year 8 in retirement if you're in trouble, because you can estimate the next two years to see how close to 4% you are. If you were retiring right now, at age 33, that means, at the latest, you'll know your portfolio needs a cash infusion by age 41. You can then perform a rolling analysis of the last 10 years as the years progress to have a good idea of when your infusion can stop.

So really the notion of ending up 62 and broke is fairly impossible (under typical circumstances) for a very early retiree, unless your spending in retirement is so high that you can't find a job that paid you enough to make a difference to your portfolio 10 years after you retired.
« Last Edit: December 01, 2016, 06:27:21 AM by Mr. Green »

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Re: Practicalities of living off the 4% SWR
« Reply #40 on: December 01, 2016, 09:08:49 AM »
Although a cool acronym, FIRE gives off the wrong impression that the FI and RE have to go together.  Being financially independent is what I perceive Mustache-ism to be.  The "retire" word to many people means that you will or can never work ever again.  Look at what Pete does.  He still does work.  The difference is that he works where and when he wants and gets to quit whenever he wants.  If he decided that he hates writing blog articles, he could stop writing blog articles.  I look at the "retire" part as not coming into my office every day and having to do what my company wants me to do.  I plan to work small, fun jobs until I decide they're not fun or I'd like to try something else or I simply don't feel like working that job anymore.  I've always wanted to work at Best Buy just to see what it's like....work at a hardware store....take your pick.  So it's entirely possible to have done the FIRE thing and still have income.

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Re: Practicalities of living off the 4% SWR
« Reply #41 on: December 01, 2016, 09:19:44 AM »
I plan to work small, fun jobs until I decide they're not fun or I'd like to try something else or I simply don't feel like working that job anymore.  I've always wanted to work at Best Buy just to see what it's like....work at a hardware store....take your pick.  So it's entirely possible to have done the FIRE thing and still have income.
I'm in the same boat. There's some jobs I want to try just because, like I want to try working in a grocery store. I can't exactly explain why but if I want to and have the freedom to do it, why not? The area we're moving to is a big blueberry growing area. This past summer I saw an ad for someone needed to weigh the blueberries and other associated tasks as the pickers came in from the harvest each day. That seems like a cool seasonal job to do once, just to learn more about blueberries and farming.

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Re: Practicalities of living off the 4% SWR
« Reply #42 on: December 01, 2016, 01:12:09 PM »
60/40 bonds split is way to conservative for a 4% SWR you need 80.20 minimum

Except that 60/40 was the benchmark used by both Bengen and the Trinity Studies that established the 4% rule in the first place, and continues to hold up in more recent studies.

steveo

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Re: Practicalities of living off the 4% SWR
« Reply #43 on: December 01, 2016, 01:49:13 PM »
That is the great thing about using sequence of returns risk to analyze your position along the way. This is a US example but, we know that no 90% equities/10% bonds portfolio has left you with less than when you retired, over 30 years, when the average return over the first 10 years has been 4% or more. So you'll know by the end of year 8 in retirement if you're in trouble, because you can estimate the next two years to see how close to 4% you are. If you were retiring right now, at age 33, that means, at the latest, you'll know your portfolio needs a cash infusion by age 41. You can then perform a rolling analysis of the last 10 years as the years progress to have a good idea of when your infusion can stop.

So really the notion of ending up 62 and broke is fairly impossible (under typical circumstances) for a very early retiree, unless your spending in retirement is so high that you can't find a job that paid you enough to make a difference to your portfolio 10 years after you retired.

This is interesting but also relevant to people retiring in Australia. In Australia we have massively over inflated house prices. I think the op intends to retire by cashing in on their house price. I could do the same thing now but as I mentioned my wife doesn't want to.

I think though we have a 3rd option. Retire early with a higher WR and see what happens over the first 10 or so years. If you need a cash infusion you can just downsize the house.

steveo

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Re: Practicalities of living off the 4% SWR
« Reply #44 on: December 01, 2016, 01:50:54 PM »
60/40 bonds split is way to conservative for a 4% SWR you need 80.20 minimum

Except that 60/40 was the benchmark used by both Bengen and the Trinity Studies that established the 4% rule in the first place, and continues to hold up in more recent studies.

I see no problem whatsoever with a 60/40 split. Personally I'd go for a higher equity position but it's a personal decision.

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Re: Practicalities of living off the 4% SWR
« Reply #45 on: December 01, 2016, 04:50:57 PM »
60/40 bonds split is way to conservative for a 4% SWR you need 80.20 minimum

Except that 60/40 was the benchmark used by both Bengen and the Trinity Studies that established the 4% rule in the first place, and continues to hold up in more recent studies.

Trinity study was based on 30 years we're not looking at 30 here we're looking at 60+

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Re: Practicalities of living off the 4% SWR
« Reply #46 on: December 01, 2016, 06:28:38 PM »
60/40 bonds split is way to conservative for a 4% SWR you need 80.20 minimum

Except that 60/40 was the benchmark used by both Bengen and the Trinity Studies that established the 4% rule in the first place, and continues to hold up in more recent studies.

Trinity study was based on 30 years we're not looking at 30 here we're looking at 60+

But if you succeed at 30, very likely your account is silly high and should have no problem succeeding at 60.
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ender

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Re: Practicalities of living off the 4% SWR
« Reply #47 on: December 01, 2016, 07:07:29 PM »
But if you succeed at 30, very likely your account is silly high and should have no problem succeeding at 60.

What if you blindly spend 4% every year without adjusting and run out of money?

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Re: Practicalities of living off the 4% SWR
« Reply #48 on: December 01, 2016, 07:23:00 PM »
But if you succeed at 30, very likely your account is silly high and should have no problem succeeding at 60.

What if you blindly spend 4% every year without adjusting and run out of money?

No, I meant even with blindly spending 4%+inflation every year.  Without the real world fact that you'd adjust if the portfolio dropped.

Even given that, you're very likely historically (95% likely) to succeed, and succeed wildly.  And if you succeeded wildly by 30 years, likely you'll last 60, because your WR would be so low at that point (at which point blindly withdrawing the original 4%+inflation, and not upping it along the way, or at that point, is actually HELPING you).
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ender

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Re: Practicalities of living off the 4% SWR
« Reply #49 on: December 01, 2016, 07:25:19 PM »
I'm bad at jokes.