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Do You Need to Include Investment Expenses in FIRE Budget?
Old 11-11-2013, 08:32 AM   #1
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Do You Need to Include Investment Expenses in FIRE Budget?

Hi. Assume 4 percent is a safe withdrawal rate in retirement based on this question. Assume I have an investment portfolio worth $1,000,000. Assume the investment expenses (mutual fund fees, brokerage account fees, etc.) on the investment portfolio amount to .5 percent of the value of the portfolio. That would mean an annual cost of approximately $5,000 for investment expenses in this hypothetical.

For me, $5,000 is a lot of money, especially on an annual basis. My question is, do I need to include a $5,000 expense in my annual retirement budget, and treat the investment expense like the cost of gas, groceries, clothing, etc., or is the $5,000 expense "built into" the 4 percent safe withdrawal rate?

Thank you for your insight.
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Old 11-11-2013, 08:44 AM   #2
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Some calculators have an explicit assumption for expenses. Firecalc does.

In others you would reduce the investment earnings assumption by expenses (.5% in the case you illustrated).
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Old 11-11-2013, 08:47 AM   #3
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Personally I look at SWR as whatever is drained from the nest egg each year, inc investment expenses. Agree 100% that the $5k in your hypothetical is a lot of $$ for advice that may be little better than disciplined DIY.
Some food for thought-
http://www.bogleheads.org/wiki/Lazy_portfolios

FWIW- That 4% SWR is prob a bit high under present circumstances (historically very low bond yields).
http://news.morningstar.com/pdfs/bla...ld_1301291.pdf
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Old 11-11-2013, 09:52 AM   #4
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SWR studies in the past (Bengen etc) do not take investment expenses or taxes into account. Like the other poster mentioned, you can model investment expenses in Firecalc.
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Old 11-11-2013, 11:09 AM   #5
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Originally Posted by ERhoosier View Post
Personally I look at SWR as whatever is drained from the nest egg each year, inc investment expenses. Agree 100% that the $5k in your hypothetical is a lot of $$ for advice that may be little better than disciplined DIY.
Some food for thought-
Lazy portfolios - Bogleheads

FWIW- That 4% SWR is prob a bit high under present circumstances (historically very low bond yields).
http://news.morningstar.com/pdfs/bla...ld_1301291.pdf
I do my own investing, but even with low cost index funds and 401k offered funds, .5 percent is about as low as I can go and still get the diversity of investments that I need.
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Old 11-11-2013, 11:19 AM   #6
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Originally Posted by pb4uski View Post
Some calculators have an explicit assumption for expenses. Firecalc does.

In others you would reduce the investment earnings assumption by expenses (.5% in the case you illustrated).
I have used FIRECalc, but the reason I am asking is because I am setting up an Excel spreadsheet that lists all of the exepenses I will have in return, based on priority of importance. Then, I take the annual expense cost and multiply it by 100 and divide it by 4. Based on the amount I have in my investment portfolio, this helps me to "see" how much of my retirement budget, and which expenses, I currently have covered.

For example, say my property tax is $5600 a year. I would need to have approximately $140,000 in my investment portfolio ($5,600 * 100/4) in order to cover that expense.

So I am trying to figure out how/if investment expenses factor into this type of expense spreedsheet.
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Old 11-11-2013, 11:52 AM   #7
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On a pure technical level, you should consider that the 4% is gross and the expense has to be covered by this. Otherwise, two people with the same holdings, one with an ER of 10bp and the other with an ER of say, 75bp would be theoretically the same -- which doesn't make sense.
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Old 11-11-2013, 12:05 PM   #8
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Quote:
Originally Posted by nico08 View Post
I do my own investing, but even with low cost index funds and 401k offered funds, .5 percent is about as low as I can go and still get the diversity of investments that I need.
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Originally Posted by nico08 View Post
I have used FIRECalc, but the reason I am asking is because I am setting up an Excel spreadsheet that lists all of the exepenses I will have in return, based on priority of importance. Then, I take the annual expense cost and multiply it by 100 and divide it by 4. Based on the amount I have in my investment portfolio, this helps me to "see" how much of my retirement budget, and which expenses, I currently have covered.

For example, say my property tax is $5600 a year. I would need to have approximately $140,000 in my investment portfolio ($5,600 * 100/4) in order to cover that expense.

So I am trying to figure out how/if investment expenses factor into this type of expense spreedsheet.
While I don't see much point to the analysis you describe. I would not think that your ER should affect the computation. 4% is a WR, not a rate of return. Theoretically, your ER would affect the WR, but not a direct reduction.

Presumably unless you have a really low WR, over the next 30 years your investment expense will decline as your portfolio declines and your living expenses will go up for inflation.

Unless your 401k ERs really stink, you should be able to do much better than .50% overall ER - mine is around .18%.
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Old 11-11-2013, 12:22 PM   #9
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Personally, I would consider the earnings ratio as a (negative) part of overall investment yield.

Then, I take my expected overall yield into account, as well as the possible length of my retirement, when deciding how much to withdraw. 4% is just a starting point in your computations, and not always a good withdrawal rate for every set of circumstances.
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Old 11-11-2013, 03:16 PM   #10
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The index fund return is net of internal expenses. If you include the expense ratio in your calculation, that would be incorrect. If there are sales or brokerage fees or charges, they would be categorized.
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Old 11-11-2013, 03:23 PM   #11
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I would recommend including this in your expenses. A lot of the academic stuff done on portfolio returns is based on data from CRSP or index returns, rather than ETFs.

You can do better than an expense ratio of 0.5% (sometimes people say this is 50 basis points). The Vanguard Small-Cap ETF charges 0.1%. The VTI, Vanguard's international ETF, charges 0.05%. Investments like these should be making up about 40% of your portfolio.

Once you retire, you are free to roll over your 401k to a rollover IRA and invest in whatever you'd like. I'd recommend taking up one of Schwab's or ETrade's rollover offers where they'll give you something like $300 to set up an account with them if you have > $100K in retirement savings.
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Old 11-11-2013, 06:03 PM   #12
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While I don't see much point to the analysis you describe. I would not think that your ER should affect the computation.
I am guessing that OP wants to see what nuts they have already stored for the long ER winter. Could be part chipmunk . I did similar analysis to see what I could ER with if a RIF came along unexpectedly.
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Old 11-11-2013, 06:11 PM   #13
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I am guessing that OP wants to see what nuts they have already stored for the long ER winter. Could be part chipmunk . I did similar analysis to see what I could ER with if a RIF came along unexpectedly.
You are exactly right. I am setting this spreadsheet up so that I can see how many of my essential living costs are covered by my investment portfolio value. And as I save and the portfolio grows, I can see the costs that will be covered based on the portfolio growth.

And if things get unbearable at work, I will know where I stand, if I decide to leave or if there are layoffs. Knowledge is power, you know.
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Old 11-11-2013, 06:54 PM   #14
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You are exactly right. I am setting this spreadsheet up so that I can see how many of my essential living costs are covered by my investment portfolio value. And as I save and the portfolio grows, I can see the costs that will be covered based on the portfolio growth.

And if things get unbearable at work, I will know where I stand, if I decide to leave or if there are layoffs. Knowledge is power, you know.
Great plan. Fortunately, I never had to execute my "what if" plan, but I always knew when my working days were funding cable TV for life.
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Old 11-11-2013, 07:07 PM   #15
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Great plan. Fortunately, I never had to execute my "what if" plan, but I always knew when my working days were funding cable TV for life.
Yes, for me, I have the majority of my costs covered and the ones that I need to continue to invest and save for are: auto repair/maintenance; computer replacement fund; vacation fund; entertainment; eating out; pet; haircut; and miscellaneous. But the biggees- like mortgage, property taxes, home maintenance, health insurance, groceries and income/capital gain taxes are all covered.
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Old 11-14-2013, 06:06 PM   #16
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I built a very similar spreadsheet when I was planning for FIRE. I rank ordered my expenses, and the cell turned green if I had enough savings to cover x years of the expense. Taxes were very high on my expense list, but I subtracted the expense ratio from my withdrawal rate. So instead o a 4% withdrawal rate, I used 3.85%, sine my expense ratio was .15%.

No reason you couldn't treat it as an expense though.
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Old 11-14-2013, 08:28 PM   #17
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I built a very similar spreadsheet when I was planning for FIRE. I rank ordered my expenses, and the cell turned green if I had enough savings to cover x years of the expense. Taxes were very high on my expense list, but I subtracted the expense ratio from my withdrawal rate. So instead o a 4% withdrawal rate, I used 3.85%, sine my expense ratio was .15%.

No reason you couldn't treat it as an expense though.
Don't want to leave the ER expense to grow in the portfolio though, if you modeled a portfolio.
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