Retire with just $620,000?

[boarder42]

When discussing inflation effect on withdrawal rates a mortgage absolutely effects it. And helps immensely

[DreamFIRE]

In the context of this thread though I don't think it's really about having a mortgage and let's be honest you don't need to have a mortgage. This is really just a discussion about withdrawal rates and mortgages aren't really going to make a huge difference when it comes to amending your WR.

So maybe the discussion on mortgages should be left to a thread that is about having mortgages.

Agreed.  Some people really like to talk about mortgages, though.

[boarder42]

In the context of this thread though I don't think it's really about having a mortgage and let's be honest you don't need to have a mortgage. This is really just a discussion about withdrawal rates and mortgages aren't really going to make a huge difference when it comes to amending your WR.

So maybe the discussion on mortgages should be left to a thread that is about having mortgages.

Agreed.  Some people really like to talk about mortgages, though.

For the record you brought up inflation. Mortgages are the best inflation hedge.

[DreamFIRE]

In the context of this thread though I don't think it's really about having a mortgage and let's be honest you don't need to have a mortgage. This is really just a discussion about withdrawal rates and mortgages aren't really going to make a huge difference when it comes to amending your WR.

So maybe the discussion on mortgages should be left to a thread that is about having mortgages.

Agreed.  Some people really like to talk about mortgages, though.

For the record you brought up inflation. Mortgages are the best inflation hedge.

I didn't bring up inflation itself, I brought up some info on historical real negative gains during specific lengthy time periods, which happens to include inflation as part of the calculation, so I simply pointed that out.  This was in relationship to the OP stating 7% yearly gains on investments in stocks, not in relationship to a mortgage.

[boarder42]

Good so we agree you brought up inflation. Thanks for clarifying it for those who don't know what real returns are.

[DreamFIRE]

Good so we agree you brought up inflation. Thanks for clarifying it for those who don't know what real returns are.

Actually, we don't agree at all.  Reread my last post.  Simply bringing up real gains (which happen to account for inflation - basically just defined what real gains were) does not mean you are actually discussing inflation itself.   That's quite the leap to make, and I could make some interesting analogies based on neck bones being connected to other bones and such.  In fact, it's possible for real gain results to be the result of no inflation or negative inflation (deflation).

[boarder42]

Good so we agree you brought up inflation. Thanks for clarifying it for those who don't know what real returns are.

Actually, we don't agree at all.  Reread my last post.  Simply bringing up real gains (which happen to account for inflation - basically just defined what real gains were) does not mean you are actually discussing inflation itself.   That's quite the leap to make, and I could make some interesting analogies based on neck bones being connected to other bones and such.  In fact, it's possible for real gain results to be the result of no inflation or negative inflation (deflation).

The specific time frames you brought up had poor real gains primarily due to inflation which as tomsang pointed out is mitigated by a low fixed rate mortgage. If you cant see those very simple links in that data I can't help you here.

[DreamFIRE]

Good so we agree you brought up inflation. Thanks for clarifying it for those who don't know what real returns are.

Actually, we don't agree at all.  Reread my last post.  Simply bringing up real gains (which happen to account for inflation - basically just defined what real gains were) does not mean you are actually discussing inflation itself.   That's quite the leap to make, and I could make some interesting analogies based on neck bones being connected to other bones and such.  In fact, it's possible for real gain results to be the result of no inflation or negative inflation (deflation).

The specific time frames you brought up had poor real gains primarily due to inflation which as tomsang pointed out is mitigated by a low fixed rate mortgage.

Ummm.... not quite.  Inflation was not high during the 1999 to 2012 period that I personally calculated and linked to.

https://forum.mrmoneymustache.com/investor-alley/why-not-do-100-allocation-draw-4-at-retirement-and-yolo-it/msg2023973/#msg2023973

The annualized gain over 13+ years was still very low at 1.746% when excluding the inflation adjustment.

Inflation was not high during that time span - looks like less than 3% per year on average.   Any more excuses?

[Padonak]

Can we return to the subject please?

In your opinion, what category does ER on let's say 600-650K fall under? Assuming it's for a single person retiring early, no pension other than Social Security (if it still exists by the time the person is eligible). Willing to use geo arbitrage to lower costs in the US and/or internationally. Willing to look for side gigs or temp jobs to avoid portfolio failure but not counting on them as a base case scenario.

-Early Retirement Extreme category. Possible to retire but too risky by MMM standards (and laughable for a Boglehead)

-Lean Fire. A respectable amount by MMM standards but cutting it close. Ideally need more but can RE if you really want to.

-Pretty normal FIRE nest egg for a Mustachian.

What yearly withdrawal amount or range would you be comfortable with if you were going to retire with a $600-650K 'stache?

[ChpBstrd]

In the context of this thread though I don't think it's really about having a mortgage and let's be honest you don't need to have a mortgage. This is really just a discussion about withdrawal rates and mortgages aren't really going to make a huge difference when it comes to amending your WR.

So maybe the discussion on mortgages should be left to a thread that is about having mortgages.

I think the mortgage decision is a big factor for people retiring on a lean budget and relatively small stache - the subject of this otherwise wandering thread.

To illustrate, imagine having a portfolio of $650k, no home equity, and spending of $32,500 ($19.5k core spending + $13k payments on a 30y mortgage at ~5.1% = $32.5k).

Scenario A:
You keep the mortgage. Your $650k net worth consists of $650k in a 70/30 portfolio. Spending is $32.5k (mortgage included) or 5% of portfolio assets ($650k).

Scenario B:
You pay off the mortgage. Your $650k net worth now consists of $450k in a 70/30 portfolio plus $200k home equity. Spending is $19.5k (with no mortgage) or 4.3% of portfolio assets ($450k).

Which portfolio is more likely to survive a deep recession, Japan scenario, high inflation, etc? I would argue Scenario A has the potential for faster growth if investments consistently return better than the mortgage interest rate, but Scenario B is probably more resilient and lower risk due to the lower WR.

If I was to retire at a WR above 4%, I would scrutinize my housing finance decision very carefully. It is a risk/reward calculation: can my investments outperform my mortgage interest rate forever? Retiring mortgaged involves risk arbitrage between my risk-free mortgage interest rate and the yield on risky assets.

Remember, the Trinity study and most spin-off studies are only looking at portfolio value and spending rate. Home equity counts for nothing in this framework unless it eliminates some spending, as in Scenario B. In reality, the paid-off house could create opportunities for portfolio rescue down the road, such as selling and moving to a rental, taking out a mortgage or reverse mortgage, HELOCs, under-insuring, etc... It also creates risks, such as not being able to leave the house with your lender if its value decreases, your equity turns negative, and must move due to external factors (e.g. lava flows, Love Canal scenario, civil instability).

[ChpBstrd]

Can we return to the subject please?

In your opinion, what category does ER on let's say 600-650K fall under? Assuming it's for a single person retiring early, no pension other than Social Security (if it still exists by the time the person is eligible). Willing to use geo arbitrage to lower costs in the US and/or internationally. Willing to look for side gigs or temp jobs to avoid portfolio failure but not counting on them as a base case scenario.

-Early Retirement Extreme category. Possible to retire but too risky by MMM standards (and laughable for a Boglehead)

-Lean Fire. A respectable amount by MMM standards but cutting it close. Ideally need more but can RE if you really want to.

-Pretty normal FIRE nest egg for a Mustachian.

What yearly withdrawal amount or range would you be comfortable with if you were going to retire with a $600-650K 'stache?

MMM retired on about $650k plus an owned-outright home.

I would call it a Lean Fire, particularly at today's CAPE and especially if full home ownership is not included in addition to the 600-650k.

Most Mustachians on this forum seem to be aiming for >$1M portfolios, but many of them are not single.

I would be comfortable at a 4% WR as a single or as a family.

[tomsang]

MMM retired on about $650k plus an owned-outright home.

MMM had a mortgage for a year or two after he retired. His website and other income was so great that he finally paid it off.

[Villanelle]

I guess of those choices, I'd call it a lean FIRE.

Really though, I think it's a perfect scenario for someone whose skills lend themselves to consulting or other part time work, or who has reason to feel confident they can get some sort of part-time gig that won't overly impede their version of the FIRE dream.  (I'm a big proponent of substitute teacher as a post-FIRE supplemental job, for example, because most places don't require a lot more than a college degree and a basic test, it pays a semi-decent amount, and the schedule is 100% flexible, which is the most important part in my mind.  Want to travel?  Tired and feel like lazing?  Working on a large project on your home or garden?  Don't take work that day.)    Making $6-10k in a year should be pretty easy and low stress, but allows for so much more security, and it can be scaled up during down markets, especially early on, to mitigate against SoR risks.  I'd be entirely comfortable doing that if $40k was a pretty accurate spend for me.  But no way would I rely on a 7% SWR.

And really, this is kind of what MMM did.  He retired at that low number but kept working and brought in supplemental money.  It just so happens that in his case, the supplement because more than the stache withdraw. 

[dude]

Can we return to the subject please?

In your opinion, what category does ER on let's say 600-650K fall under? Assuming it's for a single person retiring early, no pension other than Social Security (if it still exists by the time the person is eligible). Willing to use geo arbitrage to lower costs in the US and/or internationally. Willing to look for side gigs or temp jobs to avoid portfolio failure but not counting on them as a base case scenario.

-Early Retirement Extreme category. Possible to retire but too risky by MMM standards (and laughable for a Boglehead)

-Lean Fire. A respectable amount by MMM standards but cutting it close. Ideally need more but can RE if you really want to.

-Pretty normal FIRE nest egg for a Mustachian.

What yearly withdrawal amount or range would you be comfortable with if you were going to retire with a $600-650K 'stache?

The thing is that these categories are going to differ for different people.

How much you feel you need to live on is an entirely personal question. How much you need saved is also personal because for some people, continuing to work to build a buffer is no big deal because they enjoy their jobs, and for others pulling the plug at very low numbers is fine because they feel comfortable with generating more income in the future if necessary.

You mention being willing to work if needed, but that’s such a vague statement.
For some people, they don’t have skills or experience that lend well to picking up work in retirement, others can easily generate their entire year spending with just their hobbies.

The range of realities is vast.
A little snap shot of how much someone has saved isn’t nearly enough to determine how successful their retirement plan is likely to be.

Not to mention, in down years (think 2008), jobs are hard to come by. Labor gets squeezed as unemployment rates rise. So going back to work may not be the simple exercise one envisions. A friend of mine got laid off from his law firm in 2008 (after more than a decade of being there). It took him more than 18 months to find employment -- in a state 1,000 miles away. He was stressed as a motherfucker, and had to spend down savings just to make ends meet. Also, his house went underwater. When people toss out the "I'll just go back to work if things aren't going well (in all likelihood because of a bad economy)" line, well, just call me skeptical.

[Villanelle]

Can we return to the subject please?

In your opinion, what category does ER on let's say 600-650K fall under? Assuming it's for a single person retiring early, no pension other than Social Security (if it still exists by the time the person is eligible). Willing to use geo arbitrage to lower costs in the US and/or internationally. Willing to look for side gigs or temp jobs to avoid portfolio failure but not counting on them as a base case scenario.

-Early Retirement Extreme category. Possible to retire but too risky by MMM standards (and laughable for a Boglehead)

-Lean Fire. A respectable amount by MMM standards but cutting it close. Ideally need more but can RE if you really want to.

-Pretty normal FIRE nest egg for a Mustachian.

What yearly withdrawal amount or range would you be comfortable with if you were going to retire with a $600-650K 'stache?

The thing is that these categories are going to differ for different people.

How much you feel you need to live on is an entirely personal question. How much you need saved is also personal because for some people, continuing to work to build a buffer is no big deal because they enjoy their jobs, and for others pulling the plug at very low numbers is fine because they feel comfortable with generating more income in the future if necessary.

You mention being willing to work if needed, but that’s such a vague statement.
For some people, they don’t have skills or experience that lend well to picking up work in retirement, others can easily generate their entire year spending with just their hobbies.

The range of realities is vast.
A little snap shot of how much someone has saved isn’t nearly enough to determine how successful their retirement plan is likely to be.

Not to mention, in down years (think 2008), jobs are hard to come by. Labor gets squeezed as unemployment rates rise. So going back to work may not be the simple exercise one envisions. A friend of mine got laid off from his law firm in 2008 (after more than a decade of being there). It took him more than 18 months to find employment -- in a state 1,000 miles away. He was stressed as a motherfucker, and had to spend down savings just to make ends meet. Also, his house went underwater. When people toss out the "I'll just go back to work if things aren't going well (in all likelihood because of a bad economy)" line, well, just call me skeptical.

Sure, if one is looking for work as a lawyer, and *only* as a lawyer.  (Feel free to substitute pretty much any other profession, too.)  And if one requires a huge salary.  But it is it just a case of needing some extra cash to minimize withdraws, first most people are going to have fat in the budget they can trim.  Nix the vacation and add an extra meatless meal each week.  But second, they aren't going to need $100k, or even $30k.  They still have a stache, they are just looking to lower the withdraw rate during a down market.  So even making $5-8k would make a significant difference.  And that can be pretty easy.  It could even mean just cobbling together a bunch of small things.  Walk a neighbors dog or pet sit while they are on vacation.  Baby sit occasionally.  Mow a lawn.  Get seasonal retail work.  Stalk garage sales and do some reselling.  Turn a crafting (or other) hobby into a small side gig.  Drive an old lady to the doctor and pick up her groceries and prescriptions.  Or change her light bulbs and fix her leaking faucet.  Making a lot of money would be hard in a down market.  Making an average of a hundred dollars a week?  Easy.

Your friend was stressed as a mother fucker because he needed to replace a huge salary in a very specific profession.  Someone who is FIREd and just hits a down market only needs to smooth out the edges temporarily, which means any work, no matter how badly paid or random or piecemeal, will be plenty to ride out the storm, especially if paired with budget trimming. 

[boarder42]

Can we return to the subject please?

In your opinion, what category does ER on let's say 600-650K fall under? Assuming it's for a single person retiring early, no pension other than Social Security (if it still exists by the time the person is eligible). Willing to use geo arbitrage to lower costs in the US and/or internationally. Willing to look for side gigs or temp jobs to avoid portfolio failure but not counting on them as a base case scenario.

-Early Retirement Extreme category. Possible to retire but too risky by MMM standards (and laughable for a Boglehead)

-Lean Fire. A respectable amount by MMM standards but cutting it close. Ideally need more but can RE if you really want to.

-Pretty normal FIRE nest egg for a Mustachian.

What yearly withdrawal amount or range would you be comfortable with if you were going to retire with a $600-650K 'stache?

The thing is that these categories are going to differ for different people.

How much you feel you need to live on is an entirely personal question. How much you need saved is also personal because for some people, continuing to work to build a buffer is no big deal because they enjoy their jobs, and for others pulling the plug at very low numbers is fine because they feel comfortable with generating more income in the future if necessary.

You mention being willing to work if needed, but that’s such a vague statement.
For some people, they don’t have skills or experience that lend well to picking up work in retirement, others can easily generate their entire year spending with just their hobbies.

The range of realities is vast.
A little snap shot of how much someone has saved isn’t nearly enough to determine how successful their retirement plan is likely to be.

Not to mention, in down years (think 2008), jobs are hard to come by. Labor gets squeezed as unemployment rates rise. So going back to work may not be the simple exercise one envisions. A friend of mine got laid off from his law firm in 2008 (after more than a decade of being there). It took him more than 18 months to find employment -- in a state 1,000 miles away. He was stressed as a motherfucker, and had to spend down savings just to make ends meet. Also, his house went underwater. When people toss out the "I'll just go back to work if things aren't going well (in all likelihood because of a bad economy)" line, well, just call me skeptical.

18 months isnt a very long time and a Mustachian wont be stressed b/c they have piles of cash. even in the worst cases with a mortgage it takes the perfect storm of events and you still have 10 years before you're out of money completely. 

[ChpBstrd]

There's a lot of faith that a side gig could weather a bad sequence of returns. ERN has some things to say about that.

https://earlyretirementnow.com/2018/02/07/the-ultimate-guide-to-safe-withdrawal-rates-part-23-flexibility/

[boarder42]

There's a lot of faith that a side gig could weather a bad sequence of returns. ERN has some things to say about that.

https://earlyretirementnow.com/2018/02/07/the-ultimate-guide-to-safe-withdrawal-rates-part-23-flexibility/

and my favorite side gig thrives  in economic down turns - buying shit and reselling it on craigslist - the economy is so good right now people really arent shopping for deals they're just spending money. took me  a bit to realize that over the last year an a half so i put it on the back burners.

[Dicey]

There's a lot of faith that a side gig could weather a bad sequence of returns. ERN has some things to say about that.

https://earlyretirementnow.com/2018/02/07/the-ultimate-guide-to-safe-withdrawal-rates-part-23-flexibility/

and my favorite side gig thrives  in economic down turns - buying shit and reselling it on craigslist - the economy is so good right now people really arent shopping for deals they're just spending money. took me  a bit to realize that over the last year an a half so i put it on the back burners.

That's a really astute observation, b42. I suppose that in a good economy people also let go of stuff cheaply or even give it away. Do you see any opportunities for a little judicious stockpiling?

[boarder42]

There's a lot of faith that a side gig could weather a bad sequence of returns. ERN has some things to say about that.

https://earlyretirementnow.com/2018/02/07/the-ultimate-guide-to-safe-withdrawal-rates-part-23-flexibility/

and my favorite side gig thrives  in economic down turns - buying shit and reselling it on craigslist - the economy is so good right now people really arent shopping for deals they're just spending money. took me  a bit to realize that over the last year an a half so i put it on the back burners.

That's a really astute observation, b42. I suppose that in a good economy people also let go of stuff cheaply or even give it away. Do you see any opportunities for a little judicious stockpiling?

could be for some smaller items that were easily stored.

[dude]

Can we return to the subject please?

In your opinion, what category does ER on let's say 600-650K fall under? Assuming it's for a single person retiring early, no pension other than Social Security (if it still exists by the time the person is eligible). Willing to use geo arbitrage to lower costs in the US and/or internationally. Willing to look for side gigs or temp jobs to avoid portfolio failure but not counting on them as a base case scenario.

-Early Retirement Extreme category. Possible to retire but too risky by MMM standards (and laughable for a Boglehead)

-Lean Fire. A respectable amount by MMM standards but cutting it close. Ideally need more but can RE if you really want to.

-Pretty normal FIRE nest egg for a Mustachian.

What yearly withdrawal amount or range would you be comfortable with if you were going to retire with a $600-650K 'stache?

The thing is that these categories are going to differ for different people.

How much you feel you need to live on is an entirely personal question. How much you need saved is also personal because for some people, continuing to work to build a buffer is no big deal because they enjoy their jobs, and for others pulling the plug at very low numbers is fine because they feel comfortable with generating more income in the future if necessary.

You mention being willing to work if needed, but that’s such a vague statement.
For some people, they don’t have skills or experience that lend well to picking up work in retirement, others can easily generate their entire year spending with just their hobbies.

The range of realities is vast.
A little snap shot of how much someone has saved isn’t nearly enough to determine how successful their retirement plan is likely to be.

Not to mention, in down years (think 2008), jobs are hard to come by. Labor gets squeezed as unemployment rates rise. So going back to work may not be the simple exercise one envisions. A friend of mine got laid off from his law firm in 2008 (after more than a decade of being there). It took him more than 18 months to find employment -- in a state 1,000 miles away. He was stressed as a motherfucker, and had to spend down savings just to make ends meet. Also, his house went underwater. When people toss out the "I'll just go back to work if things aren't going well (in all likelihood because of a bad economy)" line, well, just call me skeptical.

18 months isnt a very long time and a Mustachian wont be stressed b/c they have piles of cash. even in the worst cases with a mortgage it takes the perfect storm of events and you still have 10 years before you're out of money completely.

Piles of cash??? There are legions of people in these forums talking of retiring with 25x $25,000/year, ACA coverage, etc. That is not piles of cash IMHO, and many of those people will be one calamity away from going broke.

[dude]

There's a lot of faith that a side gig could weather a bad sequence of returns. ERN has some things to say about that.

https://earlyretirementnow.com/2018/02/07/the-ultimate-guide-to-safe-withdrawal-rates-part-23-flexibility/

Good article.

[boarder42]

Can we return to the subject please?

In your opinion, what category does ER on let's say 600-650K fall under? Assuming it's for a single person retiring early, no pension other than Social Security (if it still exists by the time the person is eligible). Willing to use geo arbitrage to lower costs in the US and/or internationally. Willing to look for side gigs or temp jobs to avoid portfolio failure but not counting on them as a base case scenario.

-Early Retirement Extreme category. Possible to retire but too risky by MMM standards (and laughable for a Boglehead)

-Lean Fire. A respectable amount by MMM standards but cutting it close. Ideally need more but can RE if you really want to.

-Pretty normal FIRE nest egg for a Mustachian.

What yearly withdrawal amount or range would you be comfortable with if you were going to retire with a $600-650K 'stache?

The thing is that these categories are going to differ for different people.

How much you feel you need to live on is an entirely personal question. How much you need saved is also personal because for some people, continuing to work to build a buffer is no big deal because they enjoy their jobs, and for others pulling the plug at very low numbers is fine because they feel comfortable with generating more income in the future if necessary.

You mention being willing to work if needed, but that’s such a vague statement.
For some people, they don’t have skills or experience that lend well to picking up work in retirement, others can easily generate their entire year spending with just their hobbies.

The range of realities is vast.
A little snap shot of how much someone has saved isn’t nearly enough to determine how successful their retirement plan is likely to be.

Not to mention, in down years (think 2008), jobs are hard to come by. Labor gets squeezed as unemployment rates rise. So going back to work may not be the simple exercise one envisions. A friend of mine got laid off from his law firm in 2008 (after more than a decade of being there). It took him more than 18 months to find employment -- in a state 1,000 miles away. He was stressed as a motherfucker, and had to spend down savings just to make ends meet. Also, his house went underwater. When people toss out the "I'll just go back to work if things aren't going well (in all likelihood because of a bad economy)" line, well, just call me skeptical.

18 months isnt a very long time and a Mustachian wont be stressed b/c they have piles of cash. even in the worst cases with a mortgage it takes the perfect storm of events and you still have 10 years before you're out of money completely.

Piles of cash??? There are legions of people in these forums talking of retiring with 25x $25,000/year, ACA coverage, etc. That is not piles of cash IMHO, and many of those people will be one calamity away from going broke.

there are not legions of people talking about 25x 25k

https://forum.mrmoneymustache.com/ask-a-mustachian/poll-what-is-your-fire-income-target/

this pole many are shooting for 10-60k PER PERSON most people on here are not single.

https://forum.mrmoneymustache.com/share-your-badassity/poll-what-is-your-annual-spending/

heres' another more detailed PER PERSON one with the majority around 20-30k per person

i wouldnt call this legions

i think the legions exist around 1MM or 40k in spending based on most polls around this site.

[Villanelle]

There's a lot of faith that a side gig could weather a bad sequence of returns. ERN has some things to say about that.

https://earlyretirementnow.com/2018/02/07/the-ultimate-guide-to-safe-withdrawal-rates-part-23-flexibility/

Forst, he completely dismisses any spending cuts in his "guardrail" scenario.  How about it in addition to a side hustle, the retiree cuts spending from $40k to $35k?  He dismisses the idea of spending cuts because it would just be to hard to make huge cuts.  25% or more would just be too hard.  So do nothing?!?!  Okay, make moderate cuts as one angle of addressing the problem.   

Also, I don't think I'd need to get my stache back up to 80%, regardless of age.  That seems pretty OTT to me. He says that his scenario would require 22 years of side hustle.  If someone retires at 40, that puts them at 62, assuming this happened almost immediately after FIRE.  By the time they are 62, they will have or nearly have SSI.  An they will have a lot fewer years to worry about.  Do they really need to get back up to 80% of their original portfolio?   

With a $40k spend, cut down to $35k, supplemented for a few years with a side hustle, I imagine the numbers look pretty damn good for overall success (i.e. not running out of money before you die.).  My eyes admittedly glazed over halfway through the article, but it doesn't seem like he ran the numbers for overall success for that kind of situation.  It would be 22 years to get back to 80%, but would just 2-3 years of pretty minimal income and cuts create a pretty high success % overall (meaning CFireSim success)?  Defining success as basically having 80% of your stache left or working toward that seems unnecessary. 

[steveo]

Good post Villanelle. I really like ERN but he is fairly pessimistic.

[chasesfish]

Good post Villanelle. I really like ERN but he is fairly pessimistic.

I love ERN and he even did one of his 10 case studies on me.   I would call him more...statistical than pessimistic.  He's really hung up on the CAPE ratio right now, even though I don't think its an accurate predictor, especially with the wonky issues of inflated financial sector losses in 2008-2010 with gains realized in the private markets.

The reality is almost every "early retiree", especially those under the age of 45 will find their way into some level of income, be it $5,000/year, $25,000/year, or $50,000/year.  Its just impossible to have a strong skill set, personal discipline, and 112 hours a week for 52 weeks a year and not end up being paid for something.   Even the $2,200/year we can earn as a couple with our eyes closed doing travel rewards is real income that provides an enormous cushion. 

I also can't agree with his "paid off house" right now.  I think the capital is too precious to tie up in a house.  If I can get an inflation protected security like earning 6% - 7% on a low leveraged REIT or private real estate investment with rent increases each year that match inflation, why wouldn't I get a long-term mortgage at 4.5% fixed and maximize net worth?  The only argument I can see that makes sense there is if it messes with ACA subsidies, which is probably a couple-year issue vs. long term issue. 

[boarder42]

Good post Villanelle. I really like ERN but he is fairly pessimistic.

I love ERN and he even did one of his 10 case studies on me.   I would call him more...statistical than pessimistic.  He's really hung up on the CAPE ratio right now, even though I don't think its an accurate predictor, especially with the wonky issues of inflated financial sector losses in 2008-2010 with gains realized in the private markets.

The reality is almost every "early retiree", especially those under the age of 45 will find their way into some level of income, be it $5,000/year, $25,000/year, or $50,000/year.  Its just impossible to have a strong skill set, personal discipline, and 112 hours a week for 52 weeks a year and not end up being paid for something.   Even the $2,200/year we can earn as a couple with our eyes closed doing travel rewards is real income that provides an enormous cushion. 

I also can't agree with his "paid off house" right now.  I think the capital is too precious to tie up in a house.  If I can get an inflation protected security like earning 6% - 7% on a low leveraged REIT or private real estate investment with rent increases each year that match inflation, why wouldn't I get a long-term mortgage at 4.5% fixed and maximize net worth?  The only argument I can see that makes sense there is if it messes with ACA subsidies, which is probably a couple-year issue vs. long term issue.

this really doesnt effect ACA susidies for any one to speak of.

[boarder42]

Good post Villanelle. I really like ERN but he is fairly pessimistic.

I love ERN and he even did one of his 10 case studies on me.   I would call him more...statistical than pessimistic.  He's really hung up on the CAPE ratio right now, even though I don't think its an accurate predictor, especially with the wonky issues of inflated financial sector losses in 2008-2010 with gains realized in the private markets.

The reality is almost every "early retiree", especially those under the age of 45 will find their way into some level of income, be it $5,000/year, $25,000/year, or $50,000/year.  Its just impossible to have a strong skill set, personal discipline, and 112 hours a week for 52 weeks a year and not end up being paid for something.   Even the $2,200/year we can earn as a couple with our eyes closed doing travel rewards is real income that provides an enormous cushion. 

I also can't agree with his "paid off house" right now.  I think the capital is too precious to tie up in a house.  If I can get an inflation protected security like earning 6% - 7% on a low leveraged REIT or private real estate investment with rent increases each year that match inflation, why wouldn't I get a long-term mortgage at 4.5% fixed and maximize net worth?  The only argument I can see that makes sense there is if it messes with ACA subsidies, which is probably a couple-year issue vs. long term issue.

this really doesnt effect ACA susidies for any one to speak of.

If you need in come to cover a mortgage, it will push your MAGI up, which will reduce your subsidy.

i'm aware of how it works but have yet to see the math behind what would push it up enough it made sense to pay it off vs keep it invested.  i used to think something similar but i've done the math many times and cant get there.

[gerardc]

It would be 22 years to get back to 80%, but would just 2-3 years of pretty minimal income and cuts create a pretty high success % overall (meaning CFireSim success)?  Defining success as basically having 80% of your stache left or working toward that seems unnecessary.

Strategy 1: You end up with $0 stash 20 years post FIRE.
Strategy 2: You end up with your original stash, say $1M, after 20 years.

Do you really think the difference between scenario 1 and 2 is 2-3 years of $5k budget cut and minimal income?

3.3% WR vs 4% WR makes a difference only when it's sustained for 30-50+ years.

However I agree with you that attacking the problem from both cut and income is helpful. Also ERN didn't optimize the guardrails to minimize cuts and time to side-hustle. Most likely we can do a better job than 70-80.

[Eric]

Good post Villanelle. I really like ERN but he is fairly pessimistic.

I love ERN and he even did one of his 10 case studies on me.   I would call him more...statistical than pessimistic.  He's really hung up on the CAPE ratio right now, even though I don't think its an accurate predictor, especially with the wonky issues of inflated financial sector losses in 2008-2010 with gains realized in the private markets.

It can be both.  He writes from a perspective that if your current retirement plan didn't work 100% of the time in the past, then it's not robust enough.  All of his vast statistical analysis of the past is pointing towards zero failure periods.  Personally, I think that's ridiculous because there is no such thing as 100%, but it's a risk tolerance thing that's tailored to each individual. 

[ChpBstrd]

In a scenario where you retire on a 4% WR in 2007 and then 2008 happens, and your portfolio is down $400k, I do not think selling stuff on ebay, card hacking, or cutting expenses like paper towels and thermostat settings was going to get your $400k back anytime soon. The real risk was selling too many shares at depressed prices to cover living expenses in 2009-2014 and then not fully realizing the recovery (and the recovery was historically swift that time). The simulations show some portfolio scenarios never recover - and not just the great depression cohort.

When he speaks of WR, ERN's assumption is that "retirement" does not mean working part-time until 70 or living in a shack eating dog food. You may differ, but he considers those to be portfolio failure scenarios. He also assumes you can't just decide to cut your budget 25-50% when the stock market goes down. This makes sense because you would never have become an early retiree in the first place if you could cut that much fat just by cancelling your Cadillac Escalade lease, selling your ski boat, firing your pet psychologist, and skipping your annual two weeks in Fiji. We will all go back to work if we're young enough and if our stache will be unable to deliver the lifestyle we want (i.e. our spending today, adjusted for future inflation).

There's nothing pessimistic about admitting that if we want to retire on market returns, our incomes will depend upon externalities more than our attention to hypermiling, DIY projects, or thrift store bargains. A decision about when we have enough should take into account our historical odds of success (where ERN and various calculators are helpful) AND the opportunity cost of getting into a OMY cycle (where the balance is somewhat missing).

We want to get to the point where we say "OK, so my odds of portfolio failure are estimated at 10%. By working OMY I can reduce that to 5%. I am deciding to/not to trade most of another remaining year of my life to mitigate that risk."

[chasesfish]

So I have a pretty live scenario going on right now.

My target house in my retirement destination is $350,000.  Mortgage would be $280,000.  Probably buying it before the end of the year.

I either pay it off after my other house sells, going mortgage free.

Or

I leave the $280,000 invested, a combination of my existing portfolio and money form the sale of current house.

A passive, low turnover index funds will kick off 2.5%/year in dividends plus turnover gains, or an extra $7,000 per year.

Add that into a deferred comp payout I'll already be receiving in the $25,000/year range plus gains generated by a taxable portfolio in the $450,000 range.  That alone puts MAGI in the $25,000 range.  It gets a lot worse if I drop that $280,000 directly into a couple of REITs, or what I'll call real estate arbitrage.  They kick off 6-7% fully taxable, or an extra $19,600/year, which I would turn around and be using to pay down the 4.5% mortgage.  The subsidy starts dropping at $25,000 in income then really starts dropping between $40,000 and $62,000 before its gone completely.  (Yeah, yeah, yeah, I know hold the REIT holdings into the IRAs and hold my small/mid cap index ETFs in the taxable account because they have the lowest yield)

This hurts more and more because the premiums are skyrocketing annually but staying below $62,000 in income for a couple provides a huge benefit.  The specific state I'm looking at its almost a $10,000 difference in the cost of a silver plan because your insurance premium cost is capped.  I plan on buying the house with a mortgage and seeing how the ACA shakes out through 2019, then if I need to I'll pay it down significantly at the end of 2019 I will.  I plan on using COBRA for 2019 since my income will still be "high" due to the couple months of working and bonus season.   I could also fall into side income that makes it a moot point, so who knows.

I also hate that its referred to as a "subsidy".  Its really a cap in insurance cost.  Paying $5,700/year for health insurance with a $14,000 out of pocket rider isn't exactly a free lunch.   I'll leave the "why's" in this to the ACA debate.  Heath-share isn't an option for us either due to a pre-existing condition.

[DreamFIRE]

this really doesnt effect (sic) ACA susidies for any one to speak of.

If you need in come to cover a mortgage, it will push your MAGI up, which will reduce your subsidy.

Exactly.  Despite controlling my MAGI with tax optimized FIRE withdrawals, just a little more income would take me over the next CSR subsidy cliff.

[Threshkin]

Having a mortgage in FIRE also increases your sequence of returns risk by increasing your fixed expenses.  You might be able to cut your personal spending when your portfolio is down but the mortgage company is not going to take less money.

[maizefolk]

I also hate that its referred to as a "subsidy".  Its really a cap in insurance cost.  Paying $5,700/year for health insurance with a $14,000 out of pocket rider isn't exactly a free lunch.   I'll leave the "why's" in this to the ACA debate.  Heath-share isn't an option for us either due to a pre-existing condition.

But that language would be less accurate.

A cap on insurance sounds like the insurance company isn't allowed to charge more than $X/year. A subsidy makes it clear the insurance company is still making the full cost of insurance, it is just that the rest of society is picking up any costs of insurance beyond the first $X/year.

[chasesfish]

Having a mortgage in FIRE also increases your sequence of returns risk by increasing your fixed expenses.  You might be able to cut your personal spending when your portfolio is down but the mortgage company is not going to take less money.

Likely true...although most recessions involve lowering rates, mortgage refinance/modifications, ect.  Agree with your premise though

[chasesfish]

I also hate that its referred to as a "subsidy".  Its really a cap in insurance cost.  Paying $5,700/year for health insurance with a $14,000 out of pocket rider isn't exactly a free lunch.   I'll leave the "why's" in this to the ACA debate.  Heath-share isn't an option for us either due to a pre-existing condition.

But that language would be less accurate.

A cap on insurance sounds like the insurance company isn't allowed to charge more than $X/year. A subsidy makes it clear the insurance company is still making the full cost of insurance, it is just that the rest of society is picking up any costs of insurance beyond the first $X/year.

And that is a morality decision I'll have to make at the time.  If you ask me today, I'm probably okay with it given my total tax contributions over my lifetime.   It'll probably not be a decision I ever come to, I'll find enough paying hobbies in early retirement and there's always a chance the politicians on both sides can just fix the issues inside the ACA

[boarder42]

this really doesnt effect (sic) ACA susidies for any one to speak of.

If you need in come to cover a mortgage, it will push your MAGI up, which will reduce your subsidy.

Exactly.  Despite controlling my MAGI with tax optimized FIRE withdrawals, just a little more income would take me over the next CSR subsidy cliff.

Shortsighted view the math still favors the mortgage.

[tomsang]

I also hate that its referred to as a "subsidy".  Its really a cap in insurance cost.  Paying $5,700/year for health insurance with a $14,000 out of pocket rider isn't exactly a free lunch.   I'll leave the "why's" in this to the ACA debate.  Heath-share isn't an option for us either due to a pre-existing condition.

As an owner of a firm, my family pays $25k in medical, dental and vision insurance per year plus a $5k deductible.  My employees pay something like zero for them or $4k for their family. Our firm covers the amount, we subsidize the costs.  Once a year, we spell out total compensation to our employees including everything we give them.  Gym memberships, Costco memberships, parking, cell phones, insurance subsidy, bonuses, compensation, etc.  They are always shocked at the costs of everything, but specifically medical insurance.  Too many people in the US and even on this board believe that insurance costs what they are paying through their paycheck vs. what the employers are paying.

So to me the ACA is subsidizing, because the true cost is the unsubsidized cost.

[Eric]

In a scenario where you retire on a 4% WR in 2007 and then 2008 happens, and your portfolio is down $400k, I do not think selling stuff on ebay, card hacking, or cutting expenses like paper towels and thermostat settings was going to get your $400k back anytime soon. The real risk was selling too many shares at depressed prices to cover living expenses in 2009-2014 and then not fully realizing the recovery (and the recovery was historically swift that time). The simulations show some portfolio scenarios never recover - and not just the great depression cohort.

Yes, that's the whole point of earning a bit of money or cutting expenses, or ideally, both.  You give your portfolio some time to recover, which in the case of 2008, was only a few years.  Are there worse examples?  Yes.  Should you plan your entire retirement around the absolute worst case scenario?  If so, let me point you to the SWR of Japan at .25%.  That's a lot of extra years at work!

[maizefolk]

I also hate that its referred to as a "subsidy".  Its really a cap in insurance cost.  Paying $5,700/year for health insurance with a $14,000 out of pocket rider isn't exactly a free lunch.   I'll leave the "why's" in this to the ACA debate.  Heath-share isn't an option for us either due to a pre-existing condition.

But that language would be less accurate.

A cap on insurance sounds like the insurance company isn't allowed to charge more than $X/year. A subsidy makes it clear the insurance company is still making the full cost of insurance, it is just that the rest of society is picking up any costs of insurance beyond the first $X/year.

And that is a morality decision I'll have to make at the time.  If you ask me today, I'm probably okay with it given my total tax contributions over my lifetime.   It'll probably not be a decision I ever come to, I'll find enough paying hobbies in early retirement and there's always a chance the politicians on both sides can just fix the issues inside the ACA

I'm not trying to drag morality into it, only arguing that one word is a better descriptor of the process than the other, so it makes sense people call them subsidies rather than a payment cap.

[chasesfish]

I also hate that its referred to as a "subsidy".  Its really a cap in insurance cost.  Paying $5,700/year for health insurance with a $14,000 out of pocket rider isn't exactly a free lunch.   I'll leave the "why's" in this to the ACA debate.  Heath-share isn't an option for us either due to a pre-existing condition.

As an owner of a firm, my family pays $25k in medical, dental and vision insurance per year plus a $5k deductible.  My employees pay something like zero for them or $4k for their family. Our firm covers the amount, we subsidize the costs.  Once a year, we spell out total compensation to our employees including everything we give them.  Gym memberships, Costco memberships, parking, cell phones, insurance subsidy, bonuses, compensation, etc.  They are always shocked at the costs of everything, but specifically medical insurance.  Too many people in the US and even on this board believe that insurance costs what they are paying through their paycheck vs. what the employers are paying.

So to me the ACA is subsidizing, because the true cost is the unsubsidized cost.

The ACA cost without a subsidy is actually higher than my employer's total per-employee cost of insurance (employer plus employee contribution).  I work for a Fortune 500 company that self insures, from what I understand we have a healthier employee pool than the ACA's employee pool in the home state of our insurance carrier. 

[DreamFIRE]

this really doesnt effect (sic) ACA susidies for any one to speak of.

If you need in come to cover a mortgage, it will push your MAGI up, which will reduce your subsidy.

Exactly.  Despite controlling my MAGI with tax optimized FIRE withdrawals, just a little more income would take me over the next CSR subsidy cliff.

Shortsighted view the math still favors the mortgage.

That math shows that a few thousand dollars more in income loses my CSR and PCT both, and my insurance and healthcare costs go through the roof.

[Villanelle]

It would be 22 years to get back to 80%, but would just 2-3 years of pretty minimal income and cuts create a pretty high success % overall (meaning CFireSim success)?  Defining success as basically having 80% of your stache left or working toward that seems unnecessary.

Strategy 1: You end up with $0 stash 20 years post FIRE.
Strategy 2: You end up with your original stash, say $1M, after 20 years.

Do you really think the difference between scenario 1 and 2 is 2-3 years of $5k budget cut and minimal income?

3.3% WR vs 4% WR makes a difference only when it's sustained for 30-50+ years.

However I agree with you that attacking the problem from both cut and income is helpful. Also ERN didn't optimize the guardrails to minimize cuts and time to side-hustle. Most likely we can do a better job than 70-80.

Maybe I'm not following your post, but I'm not sure how my strategy would lead to $0 in 20 years.  There is a lot of territory between $0 remaining, and 80% of the original retirement amount.  And yes, I do think that a difference about ~$15k in the amount withdrawn (roughly $5k in cuts and $10k in income, for example) for a few years, if those are the down years, could make an extremely significant difference in one's FIRE success. 

[boarder42]

this really doesnt effect (sic) ACA susidies for any one to speak of.

If you need in come to cover a mortgage, it will push your MAGI up, which will reduce your subsidy.

Exactly.  Despite controlling my MAGI with tax optimized FIRE withdrawals, just a little more income would take me over the next CSR subsidy cliff.

Shortsighted view the math still favors the mortgage.

That math shows that a few thousand dollars more in income loses my CSR and PCT both, and my insurance and healthcare costs go through the roof.

I love math equations that end with "thru the roof" can you please share the formula that outputs this answer. 

[boarder42]

It would be 22 years to get back to 80%, but would just 2-3 years of pretty minimal income and cuts create a pretty high success % overall (meaning CFireSim success)?  Defining success as basically having 80% of your stache left or working toward that seems unnecessary.

Strategy 1: You end up with $0 stash 20 years post FIRE.
Strategy 2: You end up with your original stash, say $1M, after 20 years.

Do you really think the difference between scenario 1 and 2 is 2-3 years of $5k budget cut and minimal income?

3.3% WR vs 4% WR makes a difference only when it's sustained for 30-50+ years.

However I agree with you that attacking the problem from both cut and income is helpful. Also ERN didn't optimize the guardrails to minimize cuts and time to side-hustle. Most likely we can do a better job than 70-80.

Maybe I'm not following your post, but I'm not sure how my strategy would lead to $0 in 20 years.  There is a lot of territory between $0 remaining, and 80% of the original retirement amount.  And yes, I do think that a difference about ~$15k in the amount withdrawn (roughly $5k in cuts and $10k in income, for example) for a few years, if those are the down years, could make an extremely significant difference in one's FIRE success.

You're correct it's why variable withdrawal increases success. You can use cfiresim to calc this. With my own numbers including a mortgage and dropping my withdrawal from my stashe by 10k in fire if I need to the only year that still fails after 40years is 1966

[DreamFIRE]

this really doesnt effect (sic) ACA susidies for any one to speak of.

If you need in come to cover a mortgage, it will push your MAGI up, which will reduce your subsidy.

Exactly.  Despite controlling my MAGI with tax optimized FIRE withdrawals, just a little more income would take me over the next CSR subsidy cliff.

Shortsighted view the math still favors the mortgage.

That math shows that a few thousand dollars more in income loses my CSR and PCT both, and my insurance and healthcare costs go through the roof.

I love math equations that end with "thru the roof" can you please share the formula that outputs this answer.

That's because the amount varies based on the plan and the actual healthcare needs in any particular year in any particular state for any particular income, for any particular family size, but when I have checked in the past, I determined it was very important to keep my retirement MAGI low during the years I would use ACA.   A lower MAGI qualifies for a greater PCT, and qualifies for CSRs to boot.  See:  https://www.healthcare.gov/lower-costs/   That's where you need to get the specific figures on how high your costs could be.  It can be very significant when your MAGI goes up.

Also see this thread, which will help explain it to you:
https://forum.mrmoneymustache.com/ask-a-mustachian/information-on-the-affordable-care-act-with-a-focus-on-early-retirees/

[boarder42]

I've done the math many others here have as well and no one has shown math that actually makes it beneficial to not have a mortgage for ACA subsidies. If you care to share actual numbers.

[DreamFIRE]

I've done the math many others here have as well and no one has shown math that actually makes it beneficial to not have a mortgage for ACA subsidies. If you care to share actual numbers.

It appears you've only done the math regarding a low interest mortgage with an assumed investment earning 7% CAGR, not anything regarding ACA subsidies, which drop off significantly with increased income at certain thresholds.  The links I provided (and the links within) provide info on that.

[boarder42]

I've done the math for ACA. And it really doesn't work out I understand how the subsidies and cost benefits of lower income work but a mortgage doesn't sway it enough to conteract the benefits of leveraging it to invest.

It's a cool topic to bring up and think you're coming out ahead til you actually look at the math and realize it's not a big difference.