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Do They Have Enough?
Old 08-19-2014, 01:48 PM   #1
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Do They Have Enough?

Here is a friend's scenario.

They are 50/51 and planning for a 40 year retirement.

Current Portfolio - $2,700,000
Annual Projected Expenses - $100,000 including taxes.
Projected Combined Annual Social Security @ 70 - $36,000
Home Equity - $500,000
No Pension.

Putting all that into FireCalc says it's 99% with equity allocation between 50-70%. Only 1 cycle of 104 fails for a 40 year retirement.

They both want to retire. Do you tell them to go for it?

If I was them I'd go for it because I know I could manage on much less. But given their expenses, 27x seems not enough for a 40 year retirement. I wouldn't count on social security being secure.

Also, if they are a friend of yours, do you give them your asked for opinion or recommend they talk to Vanguard or some other professional? It's one thing giving anonymous advice on a forum. In this case I'd hate to ruin a friendship over a bad sequence of returns.
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Old 08-19-2014, 01:56 PM   #2
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The only thing I would suggest is to try running those figures for a 35 or 30 year retirement, just to see if some of the more recent cycles would have failed. I actually plot mine out to the age of 100, but as I'm only 44 right now, that's a 56 year cycle, so the most recent cycle would be 1958-now.

I've noticed that if I take one of my scenarios that has a ~97-100% chance of success, but then run it on shorter cycles, sometimes the probability does drop down to as low as 90%. I think it's because it now includes cycles that include where that 1966-82 period comes more into play, but also cycles that start around 1971-73 ('74 was a killer year, and while the later 70's had some good years, I don't think it was always enough to offset that first dive). In my case, the most failure scenarios happen around the 40 year retirement. Get below, or above that, and the odds start looking better.
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Old 08-19-2014, 02:07 PM   #3
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Originally Posted by aim-high View Post
They both want to retire. Do you tell them to go for it?

If I was them I'd go for it because I know I could manage on much less. But given their expenses, 27x seems not enough for a 40 year retirement. I wouldn't count on social security being secure.

Also, if they are a friend of yours, do you give them your asked for opinion or recommend they talk to Vanguard or some other professional? It's one thing giving anonymous advice on a forum. In this case I'd hate to ruin a friendship over a bad sequence of returns.
I fully understand the desire to be helpful - but as you noted in closing, I wouldn't tell anyone (especially a friend) to retire (or not) regardless of what any calculator says. I'd bet I could convince your friend to retire, and just as easily convince them not to.

You can show them how they would have fared historically, and talk probabilities & statistics, but you can't guarantee the future for them. And even then, there is no one right answer, that's a decision each of us has to make based on a lot more than the basic $ amounts...
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Old 08-19-2014, 02:33 PM   #4
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If I was them I'd go for it because I know I could manage on much less. But given their expenses, 27x seems not enough for a 40 year retirement. I wouldn't count on social security being secure.
I agree. At their level of spending and age I would not feel safe about it....
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Old 08-19-2014, 02:42 PM   #5
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I wouldn't tell them to retire, either, but if I were in their financial position at their age, I would retire.
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Old 08-19-2014, 02:49 PM   #6
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I wouldn't be comfortable with a WR of close to 4% for a 40 year retirement.

If they insist on retiring now, I suggest they scale back their spending, at least for the first few years.
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Old 08-19-2014, 02:53 PM   #7
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I'd make sure they had thought about some of the stickier points:
Healthcare expenses.
Infrequent large expenses (car, roof, paint house, remodel, appliances, ...)
What happens if the financially savvy spouse with the biggest SS or pension benefit dies early? (Expenses might not halve, loss of one SS benefit or pension, higher single taxes, ...)
What do they do if the market decreases by 50%? (Is there enough slack in the budget to cut some? Can they hold on to equities and not sell?)
And of course no guarantees.

I'm sure there are others, but certainly that should be enough to get them thinking a little deeper about this and less inclined to accuse you later of saying it was "OK".
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Old 08-19-2014, 03:38 PM   #8
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The only thing I would suggest is to try running those figures for a 35 or 30 year retirement, just to see if some of the more recent cycles would have failed. I actually plot mine out to the age of 100, but as I'm only 44 right now, that's a 56 year cycle, so the most recent cycle would be 1958-now.

I've noticed that if I take one of my scenarios that has a ~97-100% chance of success, but then run it on shorter cycles, sometimes the probability does drop down to as low as 90%. I think it's because it now includes cycles that include where that 1966-82 period comes more into play, but also cycles that start around 1971-73 ('74 was a killer year, and while the later 70's had some good years, I don't think it was always enough to offset that first dive). In my case, the most failure scenarios happen around the 40 year retirement. Get below, or above that, and the odds start looking better.
I am sure that this is the correct explanation. Nevertheless, is it not crazy? And thus a good reason to put less faith in the Firecalc machine?

Ha
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Old 08-19-2014, 03:49 PM   #9
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Some good points about healthcare and unexpected costs. Also agree how much can they cut expenses if they had to? What is the AA they have now or plan for the future? That has a lot to do with risk and what a safe withdrawal rate might be, especially as regarding an income stream off those investments. Since no pension, all income has to come from the investments, until SS kicks in, which in your example has 20 years wait. Using numbers provided: $100K/yr x 20 years x (inflation factor) = cutting it pretty close if there is a lot of bad investment return years.

I would probably make the decision to retire if in their shoes, but with knowledge that my expenses may have to be reduced slightly. I see the house equity as a fall-back for last resort.
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Old 08-19-2014, 04:09 PM   #10
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Quote:
Originally Posted by aim-high View Post
Here is a friend's scenario.

They are 50/51 and planning for a 40 year retirement.

Current Portfolio - $2,700,000
Annual Projected Expenses - $100,000 including taxes.
Projected Combined Annual Social Security @ 70 - $36,000
Home Equity - $500,000
No Pension.

Putting all that into FireCalc says it's 99% with equity allocation between 50-70%. Only 1 cycle of 104 fails for a 40 year retirement.
Try running Firecalc assuming they take the reduced amount of SS at age 62. Betcha it will give 100% success.
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Old 08-19-2014, 04:27 PM   #11
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Also, if they are a friend of yours, do you give them your asked for opinion or recommend they talk to Vanguard or some other professional? It's one thing giving anonymous advice on a forum. In this case I'd hate to ruin a friendship over a bad sequence of returns.
I would show them the data and explain what it means, and I would also give them some printouts of threads here that have lists of books to read as well as questions to ask yourself to see if you are ready to retire.

I'd probably also recommend they talk with VG - they have enough assets to be Flagship from the get go if they aren't already there.

And I would be honest with them that you are hesitant to give specific advice because the markets are impossible to predict in the short term and you'd hate to lose their friendship if the market goes way down in the next couple of years (even if they would still be OK to have retired despite the downturn).
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Old 08-19-2014, 04:35 PM   #12
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Quote:
Originally Posted by aim-high View Post
Here is a friend's scenario.

They are 50/51 and planning for a 40 year retirement.

Current Portfolio - $2,700,000
Annual Projected Expenses - $100,000 including taxes.
Projected Combined Annual Social Security @ 70 - $36,000
Home Equity - $500,000
No Pension.
FWIIW, I plan to retire in 1 year (would be age 53) with less portfolio (< 2M), less home equity (< 320k), more projected SS, and similar expense. Firecalc says I can although I am using Bern spending model (I have solid reasons as to why). So, my gut feel is your friends can retire now.

SS @70 and only gets $36k? Must have not paid too much SS tax during their work years. 36k looks pretty small.
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Old 08-19-2014, 04:38 PM   #13
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I doubt that there are many people who would make such a big leap with just one person's opinion, so I'd feel free to give it. I'd focus on their spending, since that is the one thing that is within their control. Are they really going to be able to survive on $100K/year, or are they spending more than that? Are there expenses they will have post-retirement that they don't have today (healthcare comes to mind, as others have suggested)?

I also have my budget broken out by "Fixed" and "Variable." I probably spend about $700/month on entertainment - going out to movies, going out to eat, etc. In a prolonged down market, I could substantially reduce or even eliminate that (I wouldn't want to, but I could). My electric bill, on the other hand, is pretty much fixed at $200/month on average. The bigger the variable component, the safer their budgetary estimates are.

My view on SS, is for people their age and above, I really can't imagine it being too vastly different than the projections. The issue is that people who get SS vote, and our elected officials know that. I know that's probably not very conservative, but I just don't see it changing that much. There are people who live completely on SS (for the life of me, I cannot figure out how people do that), and we'd have all kinds of problems if that went away.
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Old 08-19-2014, 05:06 PM   #14
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I wouldn't be comfortable with a WR of close to 4% for a 40 year retirement.

If they insist on retiring now, I suggest they scale back their spending, at least for the first few years.
Hmmm. Not sure I agree about the WR rate of 4% - it's 3.7%, and SS will knock it way down when it comes online...

If they were my friends I'd advise them as follows:
- If you get hit with a bad sequence of returns you'll need to adapt - which might mean some belt tightening - are you willing to do that?
- If there are extended down markets - would you be willing to take SS earlier to provide some prevention of drawing down your portfolio during bear markets?


I think many of us have learned, or are learning, that adaptability is a factor in our retirement. There are folks here on e-r.org who've described how the markets of 2008-2009 hit them and what they did. Things like taking social security earlier than originally planned so as to preserve principal. Thinks like hunkering down on spending, deferring some of the "extras" that were built into their original spending budget. If your friends go into it knowing they might have to adapt if there are some bad markets, early on, they should be fine.
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Old 08-19-2014, 05:16 PM   #15
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Could they get by on 90K per year? Boom they are at 3.3% WR. Would they consider downsizing house or life if things got tight? What are their prospects to re-engage or partially re-engage if there was a nasty sequence of returns?

If were me I'd be bouncing between OMY and its go time.
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Old 08-19-2014, 05:27 PM   #16
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I agree with those who said "show them the calculators, and show them the sticky on questions to ask before you ask if you can retire". I would never tell anyone what to do - but I would tell them what I'd do in their situation. But I'd also tell them how gut retching retirement might be if the numbers don't hold up.

Having said all that .... my portfolio is 2.8mm 50% equities and 100k in expenses (including taxes). Ages are 51/55. DH will make 12k / year for the next 5 years and then will get approx the same amount from SS in 7 years. My SS (at 65% or 23k) comes in in 18 years. I get 100% in both FIRECalc and cFIRESim. I only have $7k in truly variable expenses in my budget (travel and buying stuff I probably dont need !). My numbers are SO close to theirs, and I'm a chicken, but I'm nearly ready to jump 6 months from now, but given the responses above, and my low variable expense base, I'm starting to reconsider yet again.
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Old 08-19-2014, 05:28 PM   #17
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Based on their age and what their spend is, I don't see how can retire with less than 5million. 40 years is a long time.


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Old 08-19-2014, 05:30 PM   #18
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Quote:
Originally Posted by aim-high View Post
Here is a friend's scenario.

They are 50/51 and planning for a 40 year retirement.

Current Portfolio - $2,700,000
Annual Projected Expenses - $100,000 including taxes.
Projected Combined Annual Social Security @ 70 - $36,000
Home Equity - $500,000
No Pension.

Putting all that into FireCalc says it's 99% with equity allocation between 50-70%. Only 1 cycle of 104 fails for a 40 year retirement.

They both want to retire. Do you tell them to go for it?
They're OK financially IMO. But that's a slightly different question than whether they should "go for it" or not.
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If I was them I'd go for it because I know I could manage on much less. But given their expenses, 27x seems not enough for a 40 year retirement. I wouldn't count on social security being secure.
You also can't count on a long, healthy life. If they are healthy and active now with a strong urge to slip out of the work harness and get onto other things, why should they risk waiting for a modicum of additional fianancial security at the risk of not being healthy and active when they do retire?
Quote:

Also, if they are a friend of yours, do you give them your asked for opinion or recommend they talk to Vanguard or some other professional? It's one thing giving anonymous advice on a forum. In this case I'd hate to ruin a friendship over a bad sequence of returns.
NEVER, no matter what, give friends your opinion as to whether they should retire (FIRE) or not. Help them with a financial calculation, mention tools they can access on the Internet, suggest a book or even an advisor/CPA who might do some figuring for a fee. But don't even hint at whether you think they'll be financially OK and will enjoy a retirement lifestyle or not.

Just sayin' ........
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Old 08-19-2014, 05:42 PM   #19
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Thanks for all the responses. I'll summarize these into a document for review with them.

This board is amazing - should be required for anyone considering retirement . . . early or otherwise.
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Old 08-19-2014, 05:42 PM   #20
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Based on their age and what their spend is, I don't see how can retire with less than 5million. 40 years is a long time.


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Wow... $5,000,000 is really conservative. Less than a 2% WR.

The main reason I'm confident they'd be OK is that their budget, at $100k, is pretty high and their WR is well under 4%. If they do hit armagedon, permanently reducing their budget by 20% still leaves them at $80k, an amount higher than most American families live on. Compare that to someone retiring with a $40k budget and proportionately smaller nest egg. A 20% permanent reduction leaves them at $32 which seems more painful. You're getting down past the lean meat and into the bone.

Higher initial budgets (with supporting nest egg) = more flexibility if financial disaster strikes.
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