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Are we or aren't we?
Old 05-04-2013, 10:48 AM   #1
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Are we or aren't we?

We took another stab, today, at determining whether we're on the road to financial independence or not. We've been simplifying our savings, divorcing ourselves of some unnecessary repeating expenses, and getting some advice from financial experts regarding our situation, but of course, they won't give a definitive answer because the question isn't definitive, since there are so many variables (cost of health care, the direction of the market, etc.) And even these experts, flat fee-based advisers, seems to be selling something so who knows how much of their perspective can be believed? Better to, as we made clear from the start with these experts, use the opportunity of working with them to learn as much as we can from them, so we can make our own determination with more confidence.

We've also used a couple of online tools (Fidelity, FIREcalc) to try to gain some insight. I can play with the numbers in each to get to the point where we don't run out of money before dying, with 90% and 99% confidence, respectively, but of course it's all reliant on whether the numbers I put in are reliable, and reliant on whether their models remain valid. Again the big question mark is the cost of healthcare (and related to that, the cost of long-term care, something which we've decided to self-insure, because there are no insurance options that are reliably worthwhile, available in the marketplace anymore).

There are also other variables that I don't have full confidence in. We factored in that I'll average 10% less income over the next ten years and my spouse will average about 20% less income over the next five years (as compared to current income). Even those may not be conservative-enough estimates, as we're both late in careers that are generally not kind to older workers. My spouse's contract is up in October, and it's not clear what'll happen from then. My spouse had a phone interview yesterday for a job that would already pay 20% less, so if that goes along with more "time between jobs" during the next five years, then the 20% estimate is too generous. My own situation isn't as tenuous in the short-term, but it reflects worry that I won't be able to keep this job for another ten years, and quite frankly if that happens I think even a 10% cut in pay for the rest of my career might be generous.

Furthermore, I, specifically, will spend my first five years in retirement before becoming eligible for Medicare. We're assuming that the cost of my healthcare will correspond to a reduction in payroll taxes and income taxes, due to no longer working, and we're considering refinancing again, to capitalize on a 0.5% reduction in interest rate, even with no closing costs, and knock three years of the term of the mortgage, so it ends just about when I retire.

How do we simplify these considerations?

The good news, I think, is that we have some more room on the spending side of the equation. The number I'm using for spending seems high to me. It is based strictly on what Quicken is telling us we spend now, but it makes no sense that we're spending that much money. The real question I suppose is how does how much we're paying in taxes (39% of our expenses) translates into the future. Of course it will go down, but don't people say that it'll get eaten up by additional health-related costs?
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Old 05-04-2013, 11:53 AM   #2
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How do we simplify these considerations?
Because you have a number of years before retirement, your projections of future wages coupled with the guesses of how your portfolios will perform is a double variable with major potential for changes over 10 years. You have to realize this, and the only real thing you can do is simply acknowledge that your FIRE date may have to change by 1-2 years (either sooner or later), depending on actual results, given that your household income could vary by 10%-20% (which would directly impact your additions to your portfolios), and your portfolio growth could vary as well.

Apart from factoring in even more conservative assumptions (which would likely force a farther FIRE date in the future), there really isn't anything you can do other than enjoy the next 10 years and see where the dust settles. You can do various other models, but in the end, all models are based on whatever assumptions you make, which can be accurate or not-so-accurate.


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The good news, I think, is that we have some more room on the spending side of the equation. The number I'm using for spending seems high to me. It is based strictly on what Quicken is telling us we spend now, but it makes no sense that we're spending that much money. The real question I suppose is how does how much we're paying in taxes (39% of our expenses) translates into the future. Of course it will go down, but don't people say that it'll get eaten up by additional health-related costs?
This part actually worries me - you say that you don't know how you are spending as much as Quicken is telling you...but I presume that you are entering all of your expenses into Quicken? Either someone hit an extra "0", or you don't have a handle on total expenses.

A quick and dirty check is to simply take your total household wages, subtract out your major job expenses (income taxes, SS deductions, health insurance, 401k contributions), subtract out your known cash contributions to taxable accounts, and see if the amount leftover (roughly your total expenses) matches what Quicken is telling you.
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Old 05-04-2013, 12:08 PM   #3
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If I understand this correctly, you are 50 today and looking to retire at 60. You've already done a lot of work - multiple fee-based financial advisers, your own analysis with F&FC.

Looks to me like you are on the road to financial independence. The first few milestones are getting control of expenses, understanding your situation, and having a plan. You've done all three, at least to the extent you can today.

Looking at this post, I'd guess that you can make the most progress today by understanding the spending side. "It makes no sense that we're spending that much money" is an invitation to look harder at expenses. The thorough planners on this board probably had records of multiple years expenses, by major category, in front of them when they were determining their retirement income goals.
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Old 05-04-2013, 02:16 PM   #4
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This part actually worries me - you say that you don't know how you are spending as much as Quicken is telling you...but I presume that you are entering all of your expenses into Quicken? Either someone hit an extra "0", or you don't have a handle on total expenses.
This is something that we'll be working on with the financial planners specifically in June-July. The things we've gone over with them so far (insurance), and then things we're going over with them now (investments) are things we just needed a sanity check on. The expenses will be something we're going to need a method, because multiple logical methods applied return different results, and really we're just spending too much and need to accept that.

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The thorough planners on this board probably had records of multiple years expenses, by major category, in front of them when they were determining their retirement income goals.
We've got at least 15 years of data. We just need to understand what to count and what not to count. Between you and me, I think the financial planners are just going to have to help us (really: my spouse) face the fact that we're spending roughly $2k more per month than we "should" be.

(The number we plugged into the calculators are actually $4k less than our actual last year, but last year was unusual: We bought two brand new cars for cash. That's not going to happen every year.)
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Old 05-04-2013, 02:45 PM   #5
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...

(The number we plugged into the calculators are actually $4k less than our actual last year, but last year was unusual: We bought two brand new cars for cash. That's not going to happen every year.)...
I agree and don't understand why you would add that much to your annual expenses while planning.

You can get an idea of health insurance costs (at least for today), by looking for a quote on ehealthinsurance.com. If you have no significant illnesses now, that quote will come pretty close. Obviously, it is hard to estimate costs 10 years from now when our healthcare system could look totally different from what it is now.
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Old 05-04-2013, 03:46 PM   #6
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This is something that we'll be working on with the financial planners specifically in June-July. The things we've gone over with them so far (insurance), and then things we're going over with them now (investments) are things we just needed a sanity check on. The expenses will be something we're going to need a method, because multiple logical methods applied return different results, and really we're just spending too much and need to accept that.
One more voice to echo that you really need to know your current level of spending. Otherwise you have no way to validate your projected budget or identify the specific actions you need to take now to achieve your plan.

Regarding health care expenses, to be safe I would assume unsubsidized premiums with no underwriting.
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Old 05-04-2013, 05:03 PM   #7
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I agree with this. Understanding your level of expenses is key. FIRE planning cannot be completed without this key piece of data.
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One more voice to echo that you really need to know your current level of spending. .
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Old 05-04-2013, 10:42 PM   #8
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Make the rest of May a ''no spending month", Just pay the regular bills handle needs only and forego all wants. You may be surprised that doing this for just one month breaks habits of impulse and "comfort" spending. Why shoot for 60 when you could shoot for 58?
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Old 05-04-2013, 11:52 PM   #9
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+1 on knowing your annual spending. For cars and home repairs we have annual reserve accounts.

Every $100 a month you can cut from recurring costs means needing $36K less in your retirement nest egg, so it really helps to get a handle on your expenses now rather than later. As heeyy_joe noted, you may even be able to retire earlier than you think.

In fact there is a book that helped us called Retire on Less Than You Think.
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Old 05-05-2013, 04:53 AM   #10
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We'll definitely need to work on this. I'm getting the, "I might as well give up now," talk from my spouse though, as if the news that our current level of spending might be unsustainable in retirement is a death sentence. Sigh.
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Old 05-05-2013, 05:33 AM   #11
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My advice is investigate health insurance as much as you can now. COBRA will take you to Obamacare but there is a big wild card for future planning.
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Old 05-05-2013, 06:16 AM   #12
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As others know, my spouse knows quite a bit about ACA. And that's actually a bit of the bone of contention: My spouse feels that that 39% we're paying in income and payroll tax right now isn't going to all get eaten up by post-retirement income taxes plus healthcare costs. My spouse indicates that for those five years between the time I am supposed to stop working and when Medicare kicks in, I'll likely be paying no more than $6000 a year in health insurance (i.e., a lot less than that 39%). So suggesting that today's expenses are going to continue unchanged into the first years of retirement just doesn't resonate with my spouse.

Are there any really strong resources on determining how to translate current expenses into retirement expenses?
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Old 05-05-2013, 06:37 AM   #13
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Are there any really strong resources on determining how to translate current expenses into retirement expenses?
Your current income goes to three places: taxes, savings and spending. Break out the spending part. Identify what is strictly work related, like miles driven and tolls. That goes away. Add in new spending to cover "what we want to do when we retire", like travel, if it isn't there today. If you and our spouse don't agree on something like health care, set it aside for discussion later and focus on the things you can agree on.
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Old 05-05-2013, 08:40 AM   #14
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As others know, my spouse knows quite a bit about ACA. And that's actually a bit of the bone of contention: My spouse feels that that 39% we're paying in income and payroll tax right now isn't going to all get eaten up by post-retirement income taxes plus healthcare costs. My spouse indicates that for those five years between the time I am supposed to stop working and when Medicare kicks in, I'll likely be paying no more than $6000 a year in health insurance (i.e., a lot less than that 39%). So suggesting that today's expenses are going to continue unchanged into the first years of retirement just doesn't resonate with my spouse.

Are there any really strong resources on determining how to translate current expenses into retirement expenses?
I see the theme here, and I can relate to it. Your idea of financial management isn't the same as your wife's. In my case, our investments are way more conservative than I think they should be, because my wife is extremely risk averse. And, we've got spending that's her idea,not mine. I've got no advice on that issue other than to say you can at least understand the dollars for your situation.

I've heard lawyers and financial planners say that they earn their fees by getting spouses to sit down and talk to each other about things they really don't want to talk about.

Regarding the technical issue of taxes, if most of your retirement savings are in tax deferred accounts, then you can assume you'll pay regular income tax on all the money you spend. It's pretty straightforward in that case to pick a number an run actual taxes based on current law.

And, regarding lump sum spending (two cars in one year!), since you've got lots of data, it's just a matter of looking through the data for the big expenses and converting them to annual equivalents.
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Old 05-05-2013, 10:35 AM   #15
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Are there any really strong resources on determining how to translate current expenses into retirement expenses?
The way that works best for us is simply making different spreadsheets. We have one with our year by year expenses, taxes, income, liquid assets, net worth, etc. that goes out for several decades. You can make different versions of your spreadsheet to model low inflation, high inflation, SS cuts, etc.

The second main spreadsheet has a more detailed budget with a line item for every expense category we incur in a year. The third spreadsheet tracks our actual spending month to month.

The detailed budget can have one column for your expenses now and then other columns for key years into the future. For example, you might have a column for next year after undertaking a bunch of savings ideas and see what the difference is to your total expenditures for the year. Other key key columns might be for years you turn 65 or a year you downsize your home.

If you are unsure of what your expenses will be a certain categories, you can check out the Consumer Expenditure Surveys for some reference points.
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Old 05-05-2013, 12:06 PM   #16
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....How do we simplify these considerations?....
Quicken Lifetime Planner has a lot of flexibility in addressing considerations. Increasing and decreasing income or expenses at different points in time, etc. It might work well for you. You can also include or exclude certain items in your retirement projection with a couple clicks and do a what-if that graphically compares two different scenarios.
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Old 05-05-2013, 12:10 PM   #17
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...Are there any really strong resources on determining how to translate current expenses into retirement expenses?
I did two. I created a "budget" in Quicken using my historical spending patterns adjusted for how I thought things would change in retirement. I also did a budget in Excel that used a similar process but was a bit easier to change.
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