26X Annual Spending Enough?

[GetNclose]

I want to thank all of you for your participation on this forum. As I have been on the final stretch it has been an encourgement. My wife and I have been on a path to FIRE for the past 25 years when I set that age when I set 50 as my target FIRE age. We have been consistently LBYM. Our kids are 18+ in age and we have 4 yr degrees fully funded for each of them not included in our retirement assets.

My question: Would you retire at age 50 with a net worth that is 26X annual retirement expenses?

My assumptions include:

• Increasing spending in line with inflation
• 40/60 stock/bond allocation
• No pension
• 100% of health care & insurance funded out of annual expenses
• Home included in net worth
• Zero debt including zero mortgage
• Wife is 2 yrs older than I am
• One or both of us live until 90 yrs old

 

[haha]

I want to thank all of you for your participation on this forum. As I have been on the final stretch it has been an encourgement. My wife and I have been on a path to FIRE for the past 25 years when I set that age when I set 50 as my target FIRE age. We have been consistently LBYM. Our kids are 18+ in age and we have 4 yr degrees fully funded for each of them not included in our retirement assets.

My question: Would you retire at age 50 with a net worth that is 26X annual retirement expenses?



My assumptions include:

• Increasing spending in line with inflation
• 40/60 stock/bond allocation
• No pension
• 100% of health care & insurance funded out of annual expenses
• Home included in net worth
• Zero debt including zero mortgage
• Wife is 2 yrs older than I am
• One or both of us live until 90 yrs old

Not to be a pita, but if you have been reading this site you know that your question is 1) unanswerable and 2)solely your call.

A very casual look at the threads will show that your number would not be considered an obvious greenlight, or an obvious no by most experienced people here. (Other than Jacob, who would perhaps say you are overprepared.)

Ha

 

[Midpack]

Our situation is the same as you describe except we're older, and I would not retire at age 50 with 26X, but not sure why you'd ask others as we all have our own risk tolerances, outlooks and other assumptions. Odds are you would make it, but the probability isn't high enough for me to be comfortable (you can run through FIRECALC to get the historical probability).

At 57, I am retiring at almost 40X, that's where we are comfortable. Many people will tell you a 3% WR or 33X is the indefinite SWR, IOW you can retire at almost any age. Here's a recent related thread, best of luck.

http://www.early-retirement.org/forums/f36/never-ending-swr-and-firecalc-55813.html

 

[rescueme]

Home included in net worth

For me, that is a problem when you start talking about assets that may be "targeted" to support your retirement.

What are your intentions for this asset? Will it remain a part of your gross net worth or actually used for retirement "income"?

If used (consumed) while you/DW are alive, how will you handle any anticipated housing expense?

IMHO, a home is part of your current and future terminal estate net worth, but is not an asset to be considered for retirement - in most cases.

 

[GregLee]

... net worth that is 26X annual retirement expenses?
40/60 stock/bond allocation
Home included in net worth

I agree with rescueme that including your home in net worth is problematic. Consider that the stocks and bonds will yield income to pay retirement expenses, but your home won't. (Well, it would if you count rent as a current expense and then, since you own the home, pay the rent to yourself, but there wouldn't be any point to that maneuver, of course.)

 

[RunningBum]

Agree with rescueme, your home isn't a retirement asset. If you plan to sell it down the line, you need to subtract the cost of a replacement home, or include a rental in your estimated expenses.

26x is pretty tight. You'd have to be pretty sure of those expenses. Make sure it includes vacations, home maintenance (especially major items like appliance/roof/HVAC/other replacements), car replacement, etc.

Health insurance and some of your other items may rise faster than inflation.

 

[Katsmeow]

In addition to some of the other comments:

Are you and your wife both eligible for SS? I'm not saying you should rely on it necessarily but it is a factor.

Is all your money in retirement accounts? If so how will you handle withdrawals before 59 1/2? I know you can do 72t but does that give you enough income? Also have you considered taxes in your retirement expenses?

Have you priced health insurance? Have you checked to see about eligibility for insurance?

How much "fat" is in the 26x annual retirement expenses? And you have to considered what the actual amount is.

That is, let's say you estimate annual retirement expenses at $100,000 a year and have $2.6 million, of which say $200,000 is your house. So that leaves $2.4 actual cash. Let's say you estimated health insurance at $5000 a year but it turns out to be $15000. With annual expenses of $100,000 you can probably cut something to make up the difference without problem.

On the other hand, let's say that you say your annual expenses are $25,000 and you have $650,000 and your house is worth $200,000 leaving $450,000 actual money for expenses. In that case if health insurance was really $15,000 instead of $5000 then your annual expenses become $35,000 and there is very little "fat" to cut in the other $20,000 of non-health insurance expenses. That might not be viable at all.

 

[Webzter]

You also don't mention what percentage of NW that house makes up. 80% of NW is very different than 10%.

Exclusive of the house, can you fund your expenses and cover inflation? If so, awesome For how long? If not, how do you plan to make up the difference? Reverse mortgage on the house? Downsize?

 

[SecondCor521]

Agree with the previous comments about the house / net worth issue.

Another thing is that funding a 40 year retirement with a 40/60 allocation, especially if you're on the hairy edge, seems like a bad choice. I'd rather be 60/40 or even 70/30 in your shoes.

Disclaimer -- I'm looking at my FI date being when I hit 25x expenses and if I pulled the ripcord then, I would move to 80/20 at that point. Currently at essentially 100/0. FI date is between 45-46 yo at this point.

2Cor521

 

[GetNclose]

Katsmeow/Webzter,

We are eligible for SS. $0 of SS are included in the 26X calculation.

Reasonably confident of annual expense amount having tracked spending closely for 25 yrs. Wild card is health care...annual budget includes $12K per year of spending on insurance and care....both of us are healthy, active, non-smokers.

Annual expense plan has $10K per year of non-essential spending in the plan.

Our home represents 10% of total net worth.

 

[GetNclose]

Based on SSA estimates today....SS for my wife and I combined would represent 30% of our annual expenses starting at age 67. My guess is that we would receive some of this but that either through some combination of escalated inflation or benefit reduction combined SS benefit will actually represent 15%-20% of annual expenses at age 67 and beyond.

 

[plex]

I think SS should be able to make you fairly safe for retirement, but I think you should consider the scenario where one of you prematurely dies, and you lose half your SS (but your expenses will be reduced somewhat, but i doubt by half).

Including the money you have tied up in your house is fairly tricky, because you actually cannot include all of it, ever, because the cost to rent, or the cost of a mortgage, will never be 0%, there are also large selling costs which other investments usually do not have. So, in order to predict the worse case scenario but include your home equity, you can do the following:

If you do plan on including the money tied up in your house as rent, then include the cost to rent something you would seriously permanently rent into your expenses as well (a place nearly as large and nice as your current one). Subtract 10% of the selling costs from your home value before including it as an asset. Subtract property taxes and home maintenance costs from your expenses, since you are "renting", but do not forget you cannot subtract the portion of property taxes which get deducted from taxes.

Or estimate something like an 8% of the value of the house as a yearly mortgage expense (unless you actually reverse mortgage in this unusually low interest rate environment).

 

[Sam]

My question: Would you retire at age 50 with a net worth that is 26X annual retirement expenses?

If net worth does NOT include the value of your principal residence and IS LIQUID, my answer would be a definite yes.

Heck, with my tolerance for risk, I would even do it at age 40.

 

[W2R]

Our home represents 10% of total net worth.

So, I would then assume that your investment portfolio represents 90% of your total net worth? If so, and if you do not plan to sell, then really you have accumulated only 26 x .9 = 23.4 times your present income. But you also have Social Security coming. Your situation would be a definite "no" from me, were it not for Social Security.

Also it is not clear to me whether or not you will be able to maintain your present health care arrangement as a retiree.

As a start, I would run it through FIRECalc, including your Social Security.

 

[GetNclose]

Sam,

Thanks for your reply. About 30% of networth is in 401/IRAs, 10% principal residence net of selling expenses, and 60% in non-tax deferred investments.

 

[Nords]

My question: Would you retire at age 50 with a net worth that is 26X annual retirement expenses?

Based on SSA estimates today....SS for my wife and I combined would represent 30% of our annual expenses starting at age 67.

OK, I'll step up: "Sure. ER tomorrow!"

You certainly don't need our consensus... nor would anyone be able to get it from this "diversity" of opinions.

 

[GetNclose]

Nord,

Clearly this is a decision for my wife and I to make. It's the diversity on the way folks think about this that I am after. Gives me food for thought and identifies "rocks" that I may not have turned over in my own thinking yet. Thanks.

 

[Sam]

Sam,

Thanks for your reply. About 30% of networth is in 401/IRAs, 10% principal residence net of selling expenses, and 60% in non-tax deferred investments.

As suggested by many above, run your numbers through firecalc including SS. I have the feeling that your success rate would approach the super duper conservative 100% threshold.

 

[REWahoo]

You hit the nail on the head when you chose your forum name.

 

[Mulligan]

Nord,

Clearly this is a decision for my wife and I to make. It's the diversity on the way folks think about this that I am after. Gives me food for thought and identifies "rocks" that I may not have turned over in my own thinking yet. Thanks.

As a person who is fortunate enough to be able to live off a COLA'D pension, I am not one to give advise on your situation as others can. But I still want to congratulate you are your efforts so far. Building that amount of wealth and being able to fully fund your children's college education is something to be proud of. I sure hope your children appreciate your planning and sacrifice. Good luck in your decision!

 

[clifp]

OK, I'll step up: "Sure. ER tomorrow!"

You certainly don't need our consensus... nor would anyone be able to get it from this "diversity" of opinions.

GetNClose I think you Got There.

As HaHa says you are well within the margin of error for the forum's wisdom. As I often have said the forum is terrific at keeping people from doing truly stupid things, not great at telling them what to do.

The plus for me is you have

• tracked expenses
• house is a small portion of your net worth
• Good balance between taxable and tax deferred AA
• Social security provides a good margin of safety

Negatives

• 40/60 probably too conservative for 40 year retirement
• 50/52 is young
• Good chance future returns on capital will be lower than historically.

To amplify on the last point as I result of the crisis, central bankers have injected a ton of liquidity and as a result there is a lot capital looking for returns and us savers are seeing poor returns.

For most of the last 20 years a retiree could stick 60% of his money in bonds/CD and get 5%+. Meaning of the 4% withdrawal, fixed income would be providing 3+%, this left the 40% in equities to return an additional 1% and keep up with inflation. As long as equities returned 8-10% over a long periods of time, this provided the needed 4% withdrawal and compensated for inflation in the 2-3% range.

Going forward the Total Bond Market is only yielding 3.4% so your 60% fixed income proportion is only providing 2% of your needed income. You are depending on the remaining 40% in equities to provide 2% and protect from inflation. I think this is a bit risky.

 

[FreeAtLast]

I never consider my house which is paid off as an investment asset. It will be some day if I down size or have to move to an ALF and finally sell it, but who knows what it will be worth then.

Hard to put a value on something you may or may not sell in the future and that you may have to put additional capital into the property for major maintenance.

We had to sell my mother's home in 2008 at a very difficult time for real estate when she moved to an ALF. We were fortunate to get a buyer, however, we she would have received much more if she sold it a year or two sooner.

 

[VaCollector]

I vote to GO FOR IT! You're not getting any younger

There are several folks here who seem to be getting by on much less and you can ALWAYS give it a try and make adjustments ~ either through spending or possibly part time w*rk....I believe the old adage of "where there is a will, there is a way!"

If you have been tracking your expenses for 25 years and have (obviously) mastered the art of saving, then IMHO, you are MORE than capable of making the leap!

Good luck with what ever you decide and (in case I missed it elsewhere) welcome to the forum!!

 

[OrcasIslandBound]

Hello GetNclose! Welcome to the Forum!

Your situation is kind of similar to our situation. We agree with the 40/60% stock/bond split and that is where we are at. Yes, bonds are a bit low at this instant in time, but the anticipated overall return of 7.5% we feel is enough to fund our planned retirement starting in 2 1/2 years. We'll be 56 when we retire early.

We also intend to depend on SS for some of our income. If I did a calculation of the ratio of our total net worth to our planned annual expenses that Fidelity simulations say we can support, it would be about 1.9M/72K = 26.38. What a coincidence. However, we intend to live below the 72K number. We also anticipate ~30K SS and the 72K includes that. Fidelity gives this a 95% chance of making it to age 95. These numbers, I suspect, are probably a bit lower than yours. So, if that is the case, it should be even easier for you to manage. Without the house, it comes out to 1.5M/72K = 20.8. Most people would shy away from such a low number, and I certainly would reduce the 72K if possible down to a number that give a ratio of 25. (60K). Or perhaps our investments will be a bit higher than 1.5M in 2014.

You get the picture. You're in the ball park!

 

[Rambler]

It depends on if you are a belt guy, a suspenders guy, or a belt and suspenders guy. I tend towards belt and suspenders, and would not try to ER before I had assets held for retirement of 33-35x expenses NOT including my principle residence. DW and I are nearing 50, have at least a year and a half to go, with an agreement in principle on a semiretirement or reduced workload plan after that. If the semiretirement thing works out well, I may go on for a few years. If not, we'll still be north of 35x. If it looks any lower than that I'll find other work that allows me to slow down a little but still cover most of our expenses.

Another point, I would probably plan for much more than 12k in medical insurance and out of pocket costs. Several times a year I work on fine tuning the budget to the latest information and assumptions. Assuming we don't get sick, we can find plans for less than 12k but that assumes low out of pocket costs due to good health. But the moment something goes wrong, it will be very easy to hit the out of pocket limits, pushing the cost way up over 12k. My projections were 15k until last week, when I upped them to 20k to provide some comfort. Of course, in the good years, the extra can fund extra travel or toys. When the bad years come, the money will fund the medical incl all out of pocket costs. Of course, as with all things, YMMV.

Good luck

R