3 months into FIRE...

[bradaz2488]

Hello… I just found this forum the other day and I must say I was amazed by the number of people who were able to retire early. I know we (FIRE’ers) are a very small percentage of the entire population and it was comforting to see other people making this important life changing decision and reading their ER stories which in some cases mirror my own story. So here is my story… I’m 49 and retired on May 1st 2013. I was an engineer for 25 years at major semiconductor company. Like others on this forum I started experiencing extreme burnout and it was affecting my physical & mental health. For most of the 25 years I have been able to manage the high stress and accepted it as part of the job which comes with the big paycheck. However the last 3 years of my career it seem to get much worse and I felt like I was trapped in my job role as a project manager and reached a grade level that limited my options to move to a different job inside the company. It was a very strange self-awareness point in my life. It was like a just woke up after a 25 year nap and realizing I was in a job that I did not like and was getting zero satisfaction from. I was good at what I did, but I was only doing it for the paycheck. Fortunately I had a grandfather that taught me the value of the “dollar” when I was a kid and I developed very good work ethics and saving habits by the time I started my professional working career 25 years ago. I confess that I’m a compulsive over planner. I started tracking every “cent” of my spending & investments 15 years ago using MS Money which I still use today. By doing this I became aware that early retirement was achievable “IF” I was able to be very discipline and live below my means. Everyone talks about hitting the their “number” meaning how much you need to save for retirement. This a very personal numbers with many variables and assumptions. I do not used the 80% of your final income or the 4% withdraw rules. These “rules of thumb” can be dangerous and misleading IMHO. I use MS Money “Life Planner” as my main tool to track my retirement, but I have also tried many other online retirement calculators which most of them tend to be very optimistic and do not allow you to vary critical variables and assumptions. The most conservative & powerful retirement tool I have found is on the Fidelity website. It is called the Retirement Income planner. If you have a Fidelity account it is worth running the numbers before you pull the trigger on retirement. I did run the FIRECalc tool and it says I have a 100% success rate J… Obviously there is no perfect tool to tell you with 100% certainty that you can retire with no worries. The biggest unknowns for me when building a retirement model were the world economy/politics, future tax rates, healthcare and how long I would live, all of which are out of my control. Being a compulsive planner and striving for the “perfect” plan this drove me crazy and I never felt comfortable about being able to retire. I finally learn to let it go and focus on the things I do have control of and this gave me a sense of freedom. I would be lying if I said that it was an easy decision to leave a great paying job and that I’m not scared of my money running out. Since I have only been retired 3 months I think about this every day. I hope as time passes my retirement model will prove to be okay and I can be more confident in my big life changing decision. So far it has been great and I have no regrets…. Below I have provided a high level summary of my retirement model. I know I’m not the smartest person on this forum and would like to get other FIRE’ers feedback. Thanks in advance for your feedback and I hope to become an active member on this forum in the future….

~36X of annual expenses saved in taxable and non-table accounts. (~50/50 split)
Assume 2.5% inflation rate.
Assume an average of 6% return on investment income. My portfolio: 70% stock, 15% bonds and 15% cash
Plan to have 4 years of living expenses in cash (~15% of portfolio). The thinking here is it will allow investments to recover in a big down market.
No debt and no mortgage.
Married w/ no kids. Wife still works but will retire in ~8 years.
Plan to buy a slightly used car every 7 years.
High deductible health insurance. We have no pre-existing conditions. I assume a 7.5% annual increase in premiums.
We do not have any long term heath care insurance (i.e nursing home). On the fence if I should get this type of insurance.
Currently I assume no SS or Medicare. Our allocated medical expenses when we are 65 is ~$10K is today’s dollars. I see this as one of the biggest risk in my model.
My model has us living until 95.

[pb4uski]

Welcome. Great first post. Looks like you are golden to me.

You're about 9 years younger but our assumptions are very similar other than assuming no SS and your AA (I'm 60/34/6) but with your low WR higher equity exposure makes sense.

It looks like you have more like 5 years in cash [(15/(1/36))=5.4 years].

Now what are you going to do?

[bradaz2488]

Thanks for the feedback... I'll have to go back and look at my cash position to see if I can put some more money to work.... What am I doing.. I get that a lot these days... I still feel like I'm detoxing from the corporate world. I'm finding a lot of satisfaction in doing small projects around the house that I never got to in my working life. Having the control to start a project and finish it on my timeline is very satisfying to me. I also have a sport car I like to tinker around with and can now drive more often. My ER plan does not allow any additional travel then what I did while working, but when the DW retires I did allocated additional funds for that. I really love the morning time and find that the best part of the day. I have to admit that the after lunch time can get boring if I do not have a project to keep me busy. I'm still a rookie at this ER thing so I have a lot of learning to do and I think this forum will help me through my infant stage .... Some of my fiends think I was crazy to quit my job at 49.. It is hard not to let that kind of feedback second guess my decision to ER. I keep telling myself they are just jealous .... We are heading to Virginia on Friday to stay at our friends lake house. Should be a great time...

[NanoSour]

Welcome Brad from another 49 y/old recent FIRE'd member (July 1st). You look to be all set at 36x spending. I left a great career to move to a part of the country we wanted to live at with only 19x spending saved. It was also an extremely difficult decision for us and I certainly relate to the process you went through.

Like you, I'm obsessive about tracking out finances, altho I'm a mac guy so I use Quicken instead of MS Money. Probably shouldn't open that can of worms Knowing what you are spending is critical to sleeping well regardless of what happens in the markets/world. As you said, control the things you can control.

I'm a Vanguard Lazy-Portfolio guy so haven't used the Fidelity planner, but I see lots of recommendation for its use. After running all the available calculators for over 2 years (FIRECalc, Optimal Retirement Planner, Flexible Retirement Planner, etc), it was ESPlanner that finally gave me confidence in my plan. If you're not familiar with ESP, it's a consumption smoothing calculator that is very thorough in considering all aspects of your financial life; including taxes, SS and Medicare.

Again, welcome to the forum. There's lots of invaluable information buried in these threads. In the meantime, enjoy the lake house.

[walkinwood]

Congratulations!

When I first ER'd, I was surprised at how much I was thinking about money. It suddenly took on a new importance. With time, your confidence in your plan will grow. Portfolio survival will never be fully out of mind, but will recede into the background.

All the best

[bradaz2488]

Thank for the commits and feedback so far. Hope to see more feedback from other members. Maybe my ER situation is not interesting or controversial enough to provoke more feedback ... Off to the lake house today...

[truenorth418]

Welcome to the forum!

I saw a lot of myself in your post..

"I’m 49.."

So am I, although I retired 2 years ago.

"Like others on this forum I started experiencing extreme burnout and it was affecting my physical & mental health."

Yup, that's what happened to me.

"..realizing I was in a job that I did not like and was getting zero satisfaction from. I was good at what I did, but I was only doing it for the paycheck."

Exactly. I don't know if I ever loved my profession. There were times that I liked it, early on, but by the last few years it was merely the path of least resistance to FI.

"I started tracking every “cent” of my spending & investments 15 years ago using MS Money which I still use today. By doing this I became aware that early retirement was achievable “IF” I was able to be very discipline and live below my means."

Same here, except I use Quicken.

"The most conservative & powerful retirement tool I have found is on the Fidelity website. It is called the Retirement Income Planner."

Fido RIP is my favorite, too, although I like to use as many retirement calculators as I can just to make sure I am ok. I aim for 100% on all of them.

"~36X of annual expenses saved in taxable and non-table accounts."

I also retired with 36X expenses. Fortunately we have had a good run up since summer 2011 and now I am at a 44X.

"Assume an average of 6% return on investment income. My portfolio: 70% stock, 15% bonds and 15% cash.
Plan to have 4 years of living expenses in cash"

The assumptions and AA are similar to mine but I have less than 3 years in living expenses. There are some interesting threads here and on the Bogleheads forum about the utility of a large cash position. The argument against is that it can be a big drag on overall portfolio growth, especially at current cash yields. Therefore it's actually LESS safe vs going all in. Plus, dividend and interest payouts from the taxable side of your portfolio will provide a lot of the cash you need anyway, so maybe several years worth of cash is overkill. On the other hand, I intend to manage my income to qualify for the Obamacare subsidy, so my cash cushion will help "bridge the gap" to allow me to maintain the same rate of spending, at least for a few years. For that reason I will maintain a modest cash position.

"No debt and no mortgage."

Good for you. And this is a great feeling. Most people in the US cannot say this.

"Married w/ no kids. Wife still works but will retire in ~8 years."

I am single. But I can see where having a working spouse could be a benefit, from a personal finance perspective.

"Plan to buy a slightly used car every 7 years."

I haven't decided on this timing but it sounds about right. I am holding my withdrawal amount a little lower than I could in order to offset depreciation on my car. I think a lot of people forget to address these future big ticket items.

"My model has us living until 95."

Me too.

So... congratulations it looks like you are in good very good shape to ER. At least I hope so because if you're not then I am also in big trouble.

Good luck!

[bradaz2488]

Thanks truenorth418 for taking the time to provide feedback to the details & assumptions of my ER plan. I continue to struggle with my cash position of 15%. Maybe 4 years of living expenses is too conservative and I may need to re-think this strategy if I'm going to hit my 6% "average" return rate. I have actually sold off some equities and now sitting on ~32% cash. Like others I'm waiting for next "big" correction in the markets to put this cash to work. The last 2 years have been wonderful for the equities, but as we all know markets will have deep corrections and they tend to be much faster & steeper then the market gains. I just hope I have the guts to get back in when this happens. Not having a steady paycheck makes in harder to put more money into the markets. I'm waiting for the day CD's will be +6% then it will be a no brainer .

[pb4uski]

Overall our planning assumptions are broadly similar.

I assume 3% for inflation, 5.5% investment return which is the long-term average for a 60/40 portfolio less ~200bps to be conservative. Time horizon is to age 100.

I target ~18-24 months of cash/short-term investments - ~6% of total. I think 15% cash is too much. My interest and dividends are roughly the same as my withdrawal rate, so the capital gains that I need to harvest from my portfolio to make up the difference are minimal in total. However, in reality since the interest is all in my tax-deferred accounts and I'm living off my taxable accounts what I would need to harvest is more, but the 18-24 months of cash is a reasonable buffer.

I actually have a mortgage that I took out just before I retired @ 3.375%. I am comfortable with the risk that my investment portfolio might underperform my mortgage rate and if it does then my mortgage will be the least of my worries. I take comfort that on any given day I could do a transfer and pay off my mortgage if I wanted to.

I assume that SS will be there and that my health care costs (HI and deductibles/co-pays) will not go down once I turn 65 and am eligible for Medicare in the interest of conservatism.

Beyond that, I am relying on the law of multiple errors from my 35 years of experience in accounting and finance - that is, "multiple errors tend to offset".

[scrabbler1]

Hi Brad,

We have a few things in common. I turned 50 a few months ago but have been ERed for nearly 5 years (late 2008). At the time I ERed, even in a falling market, I still had about 40x annual expenses in my portfolio. Since then, despite not working in the last ~5 years, that ratio has risen to nearly 60:1.

I don't have the big cash position you have, as I don't like having any significant holdings in stuff which gives me next to nothing in return. However, and this brings me to my first question for you, do you have different asset allocations in your taxable versus your tax-deferred (retirement) accounts? I have about 2/3 of my holdings in the taxable accounts because they need to support me until I turn ~60. And within the taxable accounts I have about 65% bonds and 35% stocks. Within the IRA I have, it is split about 50% bonds and 50% stocks.

I often describe unfettered access to my IRA, my frozen company pension, and Social Security as my "reinforcements" which will greatly boost my available income when I turn ~60. This means my ER plan was split into two parts with the first and more important part being able to get to age ~60 intact. With my SWR around 2.5% that doesn't appear to be a big problem. As a Fidelity client, I was able to use their RIP program and have my own Account Executive (for free, just for advice, not management). both of which have given me the green light for my plan going back to when I was still putting it together in 2007-08.

Two things which were requirements when I was putting this whole thing together: One was that my day-to-day lifestyle would not change and the other was that I would build in a surplus or cushion of dividend income over expenses so I would not have to worry about any small, unforeseen expenses which could bust my budget. I do have to watch out for cash flow because some expenses (i.e. car insurance, income taxes) are large but not monthly. But that is what spreadsheets are for, right?

Glad to have you aboard, fellow originally-under-50 retiree!

[pb4uski]

scrabbler, just curious as to why you don't have all your fixed income allocation in your tax deferred accounts (to the extent your tax deferred accounts can absorb them).

In my case, all my fixed income is in tax-deferred accounts for tax efficiency and I just look at my AA across taxable, tax-deferred and tax-free accounts.

[scrabbler1]

Quote:

Originally Posted by pb4uski scrabbler, just curious as to why you don't have all your fixed income allocation in your tax deferred accounts (to the extent your tax deferred accounts can absorb them). In my case, all my fixed income is in tax-deferred accounts for tax efficiency and I just look at my AA across taxable, tax-deferred and tax-free accounts.

Pb4uski, most of the bond funds in my taxable accounts generate the monthly dividends I use to cover my monthly expenses. I do have some bond funds in my IRA and I have stock funds in both the IRA and taxable accounts, all of whose dividends and cap gain distributions gets reinvested. Any excess dividends from bond funds (some are munis) in my taxable accounts get reinvested, too.

As a percent of all of my investment income (not counting IRA income), I pay about 9% in income taxes (federal and state combined).

[explanade]

Is that 36X your current expenses or projected retirement expenses?

Is that a simple calculation, divide total assets by your current annual expenses?

Or are you projecting inflation (like the higher than inflation rate for medical care)?

[bradaz2488]

Thanks Pb4uski for the feedback... Based on the feedback from you and others I should really look at reducing my cash allocation. I guess being a newbie to FIRE I'll need to test the waters first before feeling comfortable with a 18 to 24 months supply vs. 48 months. I went back and forth about paying off the mortgage vs. taking that cash to invest. I guess I just felt better about being debt free, but you are right that you should be able to make more on your money then the 3.4% loan rate... Thanks again...

[bradaz2488]

Quote:

Originally Posted by scrabbler1 Hi Brad, However, and this brings me to my first question for you, do you have different asset allocations in your taxable versus your tax-deferred (retirement) accounts? I have about 2/3 of my holdings in the taxable accounts because they need to support me until I turn ~60. And within the taxable accounts I have about 65% bonds and 35% stocks. Within the IRA I have, it is split about 50% bonds and 50% stocks.

Hello scrabbler1... Thanks for the feedback. I have ~50% split between non-taxable (401K) and taxable (investment accounts). My 401K is 75% stock, 15% bonds and 10% cash. My cash position is the lump sum that I took from the company pension fund when I left in May. In my taxable accounts I am 47% stocks, 0% bonds and 53% cash. I plan to put some the cash back into equities/bonds when we see a pull back in the markets or I may just do the cost dollar averaging strategy. Not sure which is the best at this point and I know that you should not try to time the markets either . Based on what I have seen from others I should be no more then 36 month of living expenses in cash which is ~8% for me.... Thanks again...

[bradaz2488]

Quote:

Originally Posted by explanade Is that 36X your current expenses or projected retirement expenses? Is that a simple calculation, divide total assets by your current annual expenses? Or are you projecting inflation (like the higher than inflation rate for medical care)?

Hello explanade... The 36X in investment accounts (does not include paid off house) and based on current annual living expenses. Yes, simple calculation of total investment funds divided by current annual expenses.

I'm using a 2.5% inflation rate for all expenses except medical which I use a 7.5% inflation rate.

[papadad111]

Let me guess....a ex-blue badger at a company in Ocotillo and Chandler AZ? If not, am sure it was a similar dilbert-zone megacorp...

So, in your 36X required income needs, you have two accounts. one is taxable and the other is tax deferred. Does your 36x amount of savings take into consideration the taxes that you will have to pay on your tax-deferred account when you pull out money? 36X after taxes have been paid ?

just curious.

44 ... thinking ...

[papadad111]

I think assuming no SS or medicare is very very conservative. I used to think that way, but considering your SS contributions were likely maxed for at least the last 10 or 15 years of work, I would bet you wind up with $1500 (today's dollars) if collecting @ age 62, or more like $2500 (again, today's dollars) if collecting SS @ 70. You may not get 100% of what the estimates say today, but assuming zero is even more unlikely, I think. So...do you consider that an incremental cushion in the 70-95 year range?

[bradaz2488]

Quote:

Originally Posted by papadad111 Let me guess....a ex-blue badger at a company in Ocotillo and Chandler AZ? If not, am sure it was a similar dilbert-zone megacorp... So, in your 36X required income needs, you have two accounts. one is taxable and the other is tax deferred. Does your 36x amount of savings take into consideration the taxes that you will have to pay on your tax-deferred account when you pull out money? 36X after taxes have been paid ? just curious. 44 ... thinking ...

Hello papadad111... Yep, you guess right about the ex-blue badge. I see you are from Oregon (Portland?). Are you a fellow blue badger? The 36X only includes property taxes. The retirement models that I have used takes account of the Fed/State taxes based on the annual withdraw amounts from the taxable & tax differed accounts. The models pull from the taxable accounts first which will be taxed less since the principle has already been taxed. My model has me pulling from the tax deferred accounts at age 68 and this is when my taxes go up significantly since all of the that money has not been taxed and Uncle Sam wants his cut. I plan to look at pulling money earlier (59 1/2) from the tax defer accounts to see if this will help my tax obligations. Not sure if rolling any tax defer funds into a ROTH IRA & paying taxes now will save me anything in the long run. I hope to get these questions answered on this forum ...

You indicated you are 44 and thinking about ER. I highly recommend you using multiple retirements modeling tools (Quicken, FIRECal, Fidelity Retirement income planner, etc.). The 36X of investment funds works for my assumptions, but may not work for yours. I have seen posts on this forum from people that ER with 20X and other that need 50X. I'm still a newbie at ER and new to this forum. There are a lot of people here with real ER experience that I hope to learn from and make adjustments on the way.

Quote:

Originally Posted by papadad111 I think assuming no SS or medicare is very very conservative. I used to think that way, but considering your SS contributions were likely maxed for at least the last 10 or 15 years of work, I would bet you wind up with $1500 (today's dollars) if collecting @ age 62, or more like $2500 (again, today's dollars) if collecting SS @ 70. You may not get 100% of what the estimates say today, but assuming zero is even more unlikely, I think. So...do you consider that an incremental cushion in the 70-95 year range?

I agree.. I'm sure there will be something there for SS and Medicare when I get there, but I did not want to include this into my model since I have no control of it and I wanted to take the conservative approach. I have gone onto the SS web site and use the SS estimating tools to generate different scenarios for SS benefits. It told me I would get $2100/month (today's dollars) at age 67 if I do not work at all from here on out. I believe SS is estimated to be able to pay 100% of benefits up to 2033 (?). After that it can only pay out 75% unless our leaders in Washington can fit it before then. I'm not betting on that horse ... So I'm looking at SS and Medicare as "cream". If I get it then it will give me more funds to travel or want ever else I'm into at 67.... But that is just too far off right now ...

[explanade]

How do the calculators include or exclude medicare?