Race to $1,000,000

[EscapeVelocity2020]

I understood Foobar's response, but not this so much.  Just simple inflation (which has been pretty negligible recently, which is historically unusual) is very corrosive.  Hopefully medical expenses are covered, to the extent of it being an essential operation, by insurance (or MediCare / MedicAid).  Zombies are pretty tough to hedge against.

[foobar]

Gold is the hedge against zombies (in the real world that is economic collapse. You know when canada invades and burns the capital to the ground or the proletariat rises up and throws off their chains and takes over the means of production). You did up you coins and move to Australia.

Bad sequencing in expenses can be just as bad as bad return sequencing. Imagine the first year after you retire you have a storm that requires 5k in repairs AND jr goes to the ER (theres another 5k). Having that 10k early on is much worse than have an added 1k in expenses over 10 years. 

I always wonder when people talk about not having to worry about stock prices because they are living off the dividends if any of them were invested in 2009 when divs were cut by 20%?

I understood Foobar's response, but not this so much.  Just simple inflation (which has been pretty negligible recently, which is historically unusual) is very corrosive.  Hopefully medical expenses are covered, to the extent of it being an essential operation, by insurance (or MediCare / MedicAid).  Zombies are pretty tough to hedge against.

[Cheddar Stacker]

I agree it would be devastating to take a first year hit with an unexpected $20K medical expense or something like that. If that happens, I will reduce other expenses and find some additional income to replace the unexpected occurrence. If you are rigid and must spend 3% of your portfolio with no flexibility to earn more/spend less it certainly increases the likelihood of failure.

BTW - I don't plan to live off dividends, I'm just thinking through the 3% SWR and with a little flexibility it seems almost foolproof. Hell you could put your entire portfolio in cash and it would last 33 years ignoring inflation, or something like 25 years after adjusting for inflation of 3%. I understand fear of the unknown, I just think 3% SWR is going to cover almost any reasonable scenario.

[dabears847]

My question is how much is enough? What number will get the average Joe at the point of no longer needing to work?

[nicknageli]

BTW - I don't plan to live off dividends, I'm just thinking through the 3% SWR and with a little flexibility it seems almost foolproof. Hell you could put your entire portfolio in cash and it would last 33 years ignoring inflation, or something like 25 years after adjusting for inflation of 3%. I understand fear of the unknown, I just think 3% SWR is going to cover almost any reasonable scenario.

I'd like to think that a 3% withdrawal rate would be pretty bulletproof too, but I wouldn't expect to keep it constant year over year.  In bad years,  I plan to reduce.  In good years maybe 4% would be reasonable.  I'm definitely not one of those people who thinks, "Oh I've saved 25x minimum expenses, so I'm quitting tomorrow."

[Cheddar Stacker]

I believe I will have a few things keeping me at work once I reach 25x expenses (maybe less actually), but I would leave immediately if I could once I reach that point. I have every intention of continuing to earn a few dollars doing things I prefer after I retire, so I'm fine with the 4% SWR. I will be very flexible during the ups and downs, and just try to earn a few more $ elsewhere when I need to.

My question is how much is enough? What number will get the average Joe at the point of no longer needing to work?

The answer is....it depends. But most people here will tell you 25-33x your annual expenses. So first, figure out what you ideal annual expenses would be, then accumulate 25-33x that amount. Then maybe either a little extra, or keep an open mind to be flexible once you reach that threshold and spend less or make some extra money if the market doesn't perform as you need it to.

[dabears847]

Thanks for the comments Foob.  After this nice run since 2009, my wife and I (40 y.o.) have the majority of our investments in 401k's and t-IRAs (~75/25), so I'm not so sure most ER folk will be 50/50, unless you count in home equity (which I don't since we plan to stay in the eventually paid off house).  In my experience, after-tax investments just didn't accumulate and grow as quickly, and the dividends, income, and capital gains have a tax drag while the 401k doesn't. 

Since the 401k is automatic and saves on taxes, I always maxed out and had very little left over for taxable early in my career.  Only recently am I at a point where I put more in after-tax investments than pre-tax, but I'm also planning to ER, so I think ER might actually limit people getting to 50/50.  I do view growing my after-tax balance as having a big effect to help me manage taxes in ER. 

But I also worry a little about how to spread a large 401k balance to limit tax.  If I use a 72t, I can get ~10k/yr but am stuck paying tax on it after the 40k in interest and dividends.  If I roll it into Roth, I pay tax and don't get access to it for 5 years, and I've had that ugly situation before where the balances go down after paying tax and the joys of re-classifying back and forth.  Ugh.

I think most ER (people retiring at 65 are different) are more like 50/50 as they hit the plan max long before they stop saving. It would take working for 20 years and contributing 40k (2 couple each maxing out and getting a match) to get 1 million in a 401(k) and close to 30 to get to 2 million.  Hard to work 30 years and early retire.:)

But as always a lot depends on your assumption. 2 million in a roth, 2 million in cash, 2million with a cost basis of 0, owning a 2 million dollar house and 2 million in a 401(k) are all 2 million dollars but in reality they all have different values. 

As far as lifestyle fragility, it depends.  Yeah it is great when you have guaranteed source of income (SS) that covers your needs.  But that isn't the ER family.  Imagine 2 40 year olds each living in a house with a 200k mortgage (call it 1 k/month) and 3k of property taxes for a total of 15k per year of expenses. The market then drops. Would you rather be the guy trying to live on 5k after housing or they guy trying to live on 25k? It is a lot easier to cut out trips to Europe and eating out than to have to find cheaper living arrangements.

The key with spending is to realize that all isn't created equal. You can cut cable, stop eating out, stop traveling,  and so on very easily.  Moving on the other hand is a lot harder.

The lower SS payments (i.e. if I retire with only 20 years versus 35) is actually one of the big risks of retiring early in my mind.  Make it to 58 and I be able to collect ~50k/yr starting at age 67. That is well over what I need. Retire at 40 on the other hand and I am looking at 25k/yr at 67 which is doable but it might mean not being able to visit the grandkids as much as I might like.  In theory you shouldn't need either amounts. The question is will theory match reality:)

I have a quick question about the 72t rule for 401k, I found a couple different sites showing different withdrawal rates from 1% to 2.36% which all depends on the tax code. Thoughts on which it is?

[EscapeVelocity2020]

@dabears - I almost missed your question embedded in the quoted material.  I would only use a non-IRS calculator for a rough estimate, the IRS materials are pretty clear and you should calculate your own number and method following their rules so that you can back it up.  The percentage depends on your age (or joint life expectancy, if married), a calculated interest rate, and the calculated qualified plan's starting balance. 

I'd start with the IRS FAQ's (http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Substantially-Equal-Periodic-Payments), if you want to get comfortable with going this route.  It's quite a commitment for an ER, as you have to choose one of 3 methods.  The one I personally prefer, that adjusts with portfolio (RMD method), the payment is recalculated each year.  There are also two fixed (amortization/annuitization) methods which allow you access to higher payouts, but this fixes the dollar amount paid and could be problematic if your portfolio takes a substantial hit in the early years.  You do get a one-time change down to RMD, but you've still technically overdrawn on a critical year. 

The good news is, if your portfolio goes to zero, the IRS doesn't charge you the 10% penalty :)