Net worth, Spending and Savings rate

[rocam]

Some advice please :)

I did the calculations after reading the post about Savings rate. I'm not sure I understand how to work with available assets(shares) compared to unavailable ones (property).

Here I'm converting from Danish Kroner to dollars, but I guess it can still be used. We have 230k in property (our lovely apartment in the city, (64% paid off), 54k in portfolio investments, and 280k in pension (available in about 20 years when I hit 62). Our Spend Rate is 24k without including our mortgage payments (which are 19k USD/year).

The idea is to have net worth at 25* spending rate, and we are very close if I don't include the mortgage payments. Why not include them? Well, I'm imagining what we will spend when the mortgage is closed and comparing that to my assets at that time. Maybe this is wrong, but it's what I've done, so correct me or advise me on this.

My issue is that if we push to pay off the loan (which has 2% interest) then yipeee! we are at our goal and can 'retire', but wait a minute, we don't have any income at all.

So what to do about that?
1. Sell our apartment and rent? but then it messes up my budget, and we love our place.
2. Re-mortgage? I'm not keen on that, because I have to pay the bank interest.
3. Keep working another 7 years (saving rate 75%) until we have a new pot that is liquid? But then we have over-saved...
4. I just let the misses work, hehehe

What advice do you folks have? What have you done yourselves?

FYI. In Denmark we have similar opportunities for mortgage like (I think) in Canada where we can have a e.g. 30 year fixed at 2%, or a flexible loan that follows the market which is cheaper but with more risk, and can be 1, 3 or 5 years. Also we can 'freeze' the loan for 10 years and just pay the interest for that time. It's tempting.

Thanks in advance,
/Rocam

[Fishingmn]

Personally, I would put your numbers into a financial calculator. I like - http://www.cfiresim.com/input.php

That will allow you to model your current savings & expenses as well as expected changes. Therefore, you can put in a line item for your mortgage expense but have it end in 7 years if that's what is left.

Now the only issue is that this calculator basically tests your plan against the actual returns in the US stock market over the past 120 years. Not sure how well that correlates to what you might be invested in over in Denmark.

[ADK_Junkie]

So I think you missing a few key factors.  Dollars or Kroners, the currency doesn't matter for this exercise (except that it remains constant)... but I digress.

Your spending is at 24K.  25 times this is 600K.  This means you need 600K in income-producing assets to generate your 24K in annual spending (using the 4% annual withdrawal rate).

Your home is not an income-producing asset, so you should not include that in your FIRE calculations.  Net worth is a different story.  While it is somewhat useful to see your "net worth"... it's not that great of a factor when considering whether/when FIRE is possible.  Again, you need to really focus on your income-producing assets.

If you were to convert your apartment to a rental, and it is generating income, then I think you could include it in your FIRE calculations and that 600K you need... HOWEVER, you now will need a place to live, and that expense will increase your "spend rate" to significantly more than 24K.

The really nice thing about property ownership (such as owning your current apartment) is that once it's fully paid for, your expenses drop significantly which mean you need a much lower income-producing asset base to generate forever income.   For this reason, I exclude the value of my dwelling/home from my FIRE asset calculations... and I'm trying to time FIRE at the point when my mortgage is fully repaid.

[ulrichw]

One other thing to consider is where the 4% "rule" comes from.

The 4% withdrawal rate was a safe rate based on fistorical performance of the US stock and bond markets, and was for a period of 30 years.

Increasing the duration decreases the percentage, and investing outside the US also changes the equation.

See the reference below for some data on how different markets performed historically.

It suggests that Denmark's stock market returned an average 4.58% vs the US' 6.9% (Denmark's average bond yields were the highest of all countries compared)

The net impact of this is that I would plan conservatively.

http://www.finsia.com/docs/default-source/Retirement-Risk-Zone/how-safe-are-safe-withdrawal-rates-in-retirement-an-australian-perspective.pdf?sfvrsn=2

[sisca]

It suggests that Denmark's stock market returned an average 4.58% vs the US' 6.9% (Denmark's average bond yields were the highest of all countries compared)

The net impact of this is that I would plan conservatively.

As should we all. During the last century, the US went from a mediocre country to world superpower. It might not repeat the story.

Never assume history repeats itself.

[rocam]

Thanks for all the responses. Great to have more info from you. I have some research to do now.

[RetiredAt63]

The same in Canada - dividends are taxed more gently than capital gains, because they have already had some tax applied at the company.  For the investment part of my retirement income I am using dividends - the mutual funds would only be sold in dire circumstances.  My dire circumstances, preferably, not the economy's.

Also keep in mind you will likely have to pay capital gains taxes from anything you sell.
In Germany capital gains taxes are roughly 25% that results in a safe withdrawal rate of effectively only 3% thusly I need a bigger nest egg than if I really could take out the 4%.