Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Do You Include the amount of your Nest Egg in your estimated four % rate of return?
Old 07-04-2013, 06:44 PM   #1
Recycles dryer sheets
 
Join Date: Feb 2010
Posts: 396
Do You Include the amount of your Nest Egg in your estimated four % rate of return?

I have about 10 percent of my net worth in a secure investment earning nominal interest. This is my emergency money, that would become my short-term living expense money when I am able to retire early.

I was just wondering if you use the amount that you have as emergency money/short term living expense money in the total investment amount that you use to estimate your four percent rate of return.

Thank you for your feedback.
__________________

__________________
nico08 is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 07-04-2013, 06:59 PM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2006
Posts: 11,018
My financial plan estimates a 2% real rate of return, net of inflation, for my whole portfolio.
__________________

__________________
Meadbh is offline   Reply With Quote
Old 07-04-2013, 07:41 PM   #3
Administrator
W2R's Avatar
 
Join Date: Jan 2007
Location: New Orleans
Posts: 38,893
Quote:
Originally Posted by nico08 View Post
I have about 10 percent of my net worth in a secure investment earning nominal interest. This is my emergency money, that would become my short-term living expense money when I am able to retire early.

I was just wondering if you use the amount that you have as emergency money/short term living expense money in the total investment amount that you use to estimate your four percent rate of return.

Thank you for your feedback.
Personally, I don't. That money is what I withdraw once a year for my year's living expenses. It is in my local bricks 'n' mortar bank account along with a few thousand that I just leave there as a minimum balance, for end-of-the-year emergencies. In my case, the money in my bank account is much smaller than 10% of my entire portfolio, though. It varies depending on the time of year, from maybe 1%-3%.

I only include what I have in the TSP and Vanguard when I compute my withdrawal rate.

I also only include the TSP and Vanguard money when I am rebalancing to my planned asset allocation (55% fixed, 45% equities).

In my case, since I only withdraw once each year (withdrawing the entire year's spending money in January), my bank account balance is fairly low at that time anyway, at perhaps 1% or so. So, it doesn't really affect my withdrawal rate much either way.
__________________
Already we are boldly launched upon the deep; but soon we shall be lost in its unshored, harbourless immensities.

- - H. Melville, 1851
W2R is online now   Reply With Quote
Old 07-04-2013, 08:16 PM   #4
Thinks s/he gets paid by the post
 
Join Date: Nov 2011
Posts: 2,364
Those dollars are fungible, so, yes.
__________________
GrayHare is online now   Reply With Quote
Old 07-04-2013, 08:29 PM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 9,965
Quote:
Originally Posted by GrayHare View Post
Those dollars are fungible, so, yes.
Yes, agree.

The only money I don't count is the wad of cash in the jar at the back of a workbench drawer in my shop. DW doesn't know about that............
__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline   Reply With Quote
Old 07-04-2013, 08:41 PM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Ed_The_Gypsy's Avatar
 
Join Date: Dec 2004
Location: the City of Subdued Excitement
Posts: 5,293
Good question.

Let's start with some clarification.

The "4%" sounds like the 'magic number' for how much can be withdrawn safely from a pot of 60% S&P 500 index fund and 40% bonds/bond fund and not run out of money after, say, 30 years. (All before taxes--we are talking portfolio survival here. What you do with the money--pay taxes, eat, etc.--is up to you after you take the 4%/year out.) You called it "4% rate or return". Well, if you can get 4% consistently on average from all of your portfolio (whatever it is made up of), then they are the same thing. It makes 4%/year and you take out 4%/year and you do not outlive your money. You have won the game!

Now, if you already have 10% of your pot in a fixed investment yielding "nominal interest", say, 1.5%, then the rest of your portfolio (the other 90%) would have to earn an average of 4.28% to come up with an overall rate of return of 4%.

Will the other 90% earn 4.28%? What is it invested in (asset allocation)? Different asset categories have different long-term historical performance (we are always looking in the rear-view mirror here; nobody can read the future). The details matter. An S&P index fund with a high annual fee company will hurt you. (Say, 6% average annual returns minus 2% management fees = 4% average annual return, which is less than the 4.28% you need to not run out of money.)

I hope this helps.
__________________
my bumpersticker:
"I am not in a hurry.
I am retired.
And I don't care how big your truck is."
Ed_The_Gypsy is offline   Reply With Quote
Old 07-05-2013, 06:21 AM   #7
Thinks s/he gets paid by the post
obgyn65's Avatar
 
Join Date: Sep 2010
Location: midwestern city
Posts: 4,061
Yes.
__________________
Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.
obgyn65 is offline   Reply With Quote
Old 07-05-2013, 08:08 AM   #8
Moderator
MichaelB's Avatar
 
Join Date: Jan 2008
Location: Rocky Inlets
Posts: 24,460
Quote:
Originally Posted by nico08 View Post

I was just wondering if you use the amount that you have as emergency money/short term living expense money in the total investment amount that you use to estimate your four percent rate of return.

Thank you for your feedback.
We have funds set aside for emergencies and big expense items and I am certain the funds will be spent (new roof, wedding gifts, etc) but no, we don't count that as part of the portfolio.

It probably doesn't matter how the money is counted, as long as all the expenses are included in the projections.
__________________
MichaelB is offline   Reply With Quote
Old 07-05-2013, 09:54 AM   #9
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Amethyst's Avatar
 
Join Date: Dec 2008
Posts: 5,887
You think.

Quote:
Originally Posted by youbet View Post
Yes, agree.

the wad of cash in the jar at the back of a workbench drawer in my shop. DW doesn't know about that............
__________________
If you understood everything I say, you'd be me ~ Miles Davis
'There is only one success to be able to spend your life in your own way. Christopher Morley.
Amethyst is offline   Reply With Quote
Old 07-05-2013, 01:29 PM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,385
I include all money except that which I don't.

Ha
__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is offline   Reply With Quote
Old 07-05-2013, 04:22 PM   #11
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,434
I include everything except my main day-to-day savings and checking accounts which I pay my bills from. They typically have less than $10,000 in them combined and would not affect my WR if rounded to the nearest 1/10th of a percent.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
pb4uski is online now   Reply With Quote
Old 07-05-2013, 05:39 PM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
mickeyd's Avatar
 
Join Date: Apr 2004
Location: South Texas~29N/98W
Posts: 5,881
I have never included emergency money (cash reserves) in my asset allocation (AA) or any investment results that I may calculate. Since that $ is cash (or equivilvient) it will be part of the next dollar that I spend, whereas the investments in my AA are long-term assets that I will not spend for many years, if ever.
__________________
Part-Owner of Texas

Outside of a dog, a book is man's best friend. Inside of a dog, it's too dark to read. Groucho Marx

In dire need of: faster horses, younger woman, older whiskey, more money.
mickeyd is offline   Reply With Quote
Old 07-05-2013, 07:15 PM   #13
Recycles dryer sheets
truenorth418's Avatar
 
Join Date: Sep 2011
Location: New York
Posts: 484
I set aside a few years living expenses for future years spending and emergencies in CDs and checking accounts. I include this in my Net Worth against which I apply my annual withdrawal rate, but I do not count it as part of the AA of my investment portfolio. I count what limited cash I have in my investment portfolio as "dry powder" with the specific objective of reinvesting it soon.
__________________
truenorth418 is offline   Reply With Quote
Old 07-06-2013, 07:24 AM   #14
Thinks s/he gets paid by the post
obgyn65's Avatar
 
Join Date: Sep 2010
Location: midwestern city
Posts: 4,061
Just curious about this comment ... So if you have say 10k or 20k in your bank checking account to cover for big expenses items, you are not including these 20k in your portfolio ? I include everything as I plan to keep some cash in my current account, for which I will not have any income - therefore reducing MAGI.
Quote:
Originally Posted by MichaelB View Post
We have funds set aside for emergencies and big expense items and I am certain the funds will be spent (new roof, wedding gifts, etc) but no, we don't count that as part of the portfolio.
.
__________________
Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.
obgyn65 is offline   Reply With Quote
Old 07-06-2013, 07:46 AM   #15
Moderator
MichaelB's Avatar
 
Join Date: Jan 2008
Location: Rocky Inlets
Posts: 24,460
Pretty much. Our portfolio is to fund future expenses, and our bank account is to fund current expenses, emergencies, commitments made (kids) and major one time expenses that are certain to happen in the next few years. It is just one way to project, it makes it easier to quantify the future withdrawal rate, and adds a bit of safety. There is no "right way" to project, just the way that works for each of us.

Quote:
Originally Posted by obgyn65 View Post
Just curious about this comment ... So if you have say 10k or 20k in your bank checking account to cover for big expenses items, you are not including these 20k in your portfolio ?
__________________
MichaelB is offline   Reply With Quote
Old 07-06-2013, 11:10 AM   #16
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,434
Quote:
Originally Posted by obgyn65 View Post
Just curious about this comment ... So if you have say 10k or 20k in your bank checking account to cover for big expenses items, you are not including these 20k in your portfolio ? I include everything as I plan to keep some cash in my current account, for which I will not have any income - therefore reducing MAGI.
If you withdraw $35k on a $1 million your WR is 3.5%, if you then include $20k of operating cash/emergency funds your WR is 3.43%. So unless you side fund is significant, it doesn't make much of a difference.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
pb4uski is online now   Reply With Quote
Old 07-06-2013, 12:31 PM   #17
Thinks s/he gets paid by the post
veremchuka's Avatar
 
Join Date: Oct 2010
Location: irradiated - too close to the nuclear furnace
Posts: 1,294
My cash is 2% of the portfolio so it doesn't matter but I do count it. That cash is at Ally and I use it to cover bills that my pension and SS wouldn't cover. But since I typical bank part of the pension/SS, it isn't an emergency fund as my expenses are met by them.
__________________
veremchuka is offline   Reply With Quote
Old 07-06-2013, 09:20 PM   #18
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 16,471
Quote:
Originally Posted by nico08 View Post
I have about 10 percent of my net worth in a secure investment earning nominal interest. This is my emergency money, that would become my short-term living expense money when I am able to retire early.

I was just wondering if you use the amount that you have as emergency money/short term living expense money in the total investment amount that you use to estimate your four percent rate of return.

Thank you for your feedback.
No (and I think you mean withdrawal rate)
__________________
Well, I thought I was retired. But it seems that now I'm working as a travel agent instead!
audreyh1 is offline   Reply With Quote
Old 07-06-2013, 09:56 PM   #19
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Ed_The_Gypsy's Avatar
 
Join Date: Dec 2004
Location: the City of Subdued Excitement
Posts: 5,293
Hmm. I see that there are two ways to look at it.

On second thought, it is smarter to leave the emergency money out of the calculations. It needs to be a separate concept.
__________________
my bumpersticker:
"I am not in a hurry.
I am retired.
And I don't care how big your truck is."
Ed_The_Gypsy is offline   Reply With Quote
Old 07-07-2013, 06:56 AM   #20
Thinks s/he gets paid by the post
obgyn65's Avatar
 
Join Date: Sep 2010
Location: midwestern city
Posts: 4,061
please can you explain why it needs to be a separate concept ? I am not trying to be contradictory or argumentative, just would like to understand your viewpoint better. Thanks.

Quote:
Originally Posted by Ed_The_Gypsy View Post

On second thought, it is smarter to leave the emergency money out of the calculations. It needs to be a separate concept.
__________________

__________________
Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.
obgyn65 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


 

 
All times are GMT -6. The time now is 12:10 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.