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Old 11-28-2010, 07:03 AM   #41
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Originally Posted by wrochdvm View Post
The FIRECalc says I won't be broke before I die if I spend another 70K/yr. If you were in my situation, how much confidence would you have in that?
What did you tell Firecalc for it to generate 70k/yr? At your age and 3.4M, the answer should be around 130K/yr.

70K is 2.06% withdrawal rate. You should have plenty of confidence in that number. At 2.06% rate, your net worth should at least double its size 30 years from now (in today's dollar).

Did you really accumulate the 3.4M yourself?
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Old 11-28-2010, 07:51 AM   #42
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The lease for the real estate does not reflect true market rates.
That seems obvious, and is a potential problem. I wouldn't count on a 16% cap rate for the rest of my life. It looks like either the $750k market value is too low, or the income is too high. If it's the latter, then you're going to have problems trying to spend that for the next 40 or so years. Before I spent any more money, I'd have to be real comfortable that the CR income is sustainable (i.e. at or below market). Even then, relying on one tenant for 60% of your income while withdrawing the balance from a portfolio at a 4% rate seems like skating pretty close to the edge.
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Old 11-28-2010, 08:07 AM   #43
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Thanks, Nords, for the thoughtful post. I fully understand that forums like this attracts all sorts of people with all sorts of agendas. Sadly, the internet doesn't allow the full dimension of a personality to be revealed in short, topic specific forums such as this. Certainly, no-one here can even come close to knowing anything about my character or integrity. Nor can they know what good I have done in my life so far. Rest assured, I do not worry about people's speculations or assumptions.

I am glad, though, that I found this forum to ask a question that I do not feel comfortable asking friends or acquaintances.

Sam, I didn't include the value of my real estate in the FireCalc. I also discounted the value of equities in my portfolio. So, I think I used a liquid assets value of about 2.1M (another sign of my caution?)

Dex, I read the thread about 'frugal, cheap, etc'. I think I come down on the side that believes frugal has a positive connotation. Here are a few examples of my behavior that make me say that I believe I am frugal. If something breaks and I can repair it myself, I will repair rather than replace it. I enjoy DIY projects so I do my own landscaping remodeling and home maintenance (just finished replacing three windows). I take pride in pointing out that I did it myself and that I saved money doing it.
My income would allow me to own a much larger home in a more affluent neighborhood, instead I chose a smaller home in an upper middle class neighborhood. Although it is by no means a small house. I buy used cars rather than new, but they are luxury cars.

On the other hand, I don't worry about spending money on things that I enjoy such as works of art, new skis, the expensive wrist watch my wife insisted I buy, or the Airstream and truck.

Thanks everyone for all your posts.
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Old 11-28-2010, 08:23 AM   #44
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Nords, sorry I forgot to answer your final question. Yes I earned it myself. I saved regularly while I was working. I sold my business for cash to a large corporation.

Gone4Good, You were posting at the same time I was. The company that bought me out never buys the real estate of the businesses they acquire and they have an excellent track record for keeping them going. (They have annual revenue of about 1.5B and profit of about 17%)

Thanks again
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Old 11-28-2010, 09:08 AM   #45
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A net 16% yearly return on the commercial real estate (after all expenses) seems a little hard to believe.... especially to rely on it as a long-term stream of income (20 or 30 years). Since it sounds like all the income hinges on one property... it is an all or nothing type investment (no diversification). Of course, you might be able to cash it out and use the proceeds for income if the venture fails in the future.

I was a little confused about some of your assets and the money they generate, level of risk, income wants/needs, etc.

But about the 2M in stocks and bonds and the 4% rule.

No... you are not too paranoid.

But if managing the portfolio or using the WR% on a constant mix to generate a stable and reliable income is outside of your comfort zone.... there are other legitimate ways to manage the assets and income generation.

My goal is to maximize income (using a certain amount of assets) with high level of confidence and lower risk coupled with the ability to sleep during hard times. If some adverse situation happens to one of us (DW or me) as we age... we have a rock solid (guaranteed) base income and a low risk way of achieving our planned income (approach that is somewhat forgiving for DW if I die before her).

This forum seems to heavily loaded with SWR% people constant mix people... so there may be some bias in responses.

I look to the trinity study and the follow-on research more to understand boundaries given history of growth and volatility rather than a hard and fast endowment rule.


I am undergoing the analysis for managing our income. After much study and thought, I am going to split the difference (more or less). A certain % of our portfolio will be dedicated to income generation (low risk). The other part will be invested for some growth (more risk) and represent money for spending over and above our planned lifestyle and as a reserve for unplanned events... whatever they may be.

The reason is that I do not want to jeopardize our lifestyle. What most people overlook is that the risks are not just managing assets in the securities markets and volatility (even with diversification and non correlated assets)... there are so many other situations (coupled with those risks) that together can be compounded into other circumstances that could severely impair one's lifestyle.
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Old 11-28-2010, 09:32 AM   #46
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The company that bought me out never buys the real estate of the businesses they acquire and they have an excellent track record for keeping them going. (They have annual revenue of about 1.5B and profit of about 17%)
How good are your forecasting skills at predicting this company's ability, willingness, and need to pay 10 years forward? 20 years? How about 40? What happens to the cash flow if the property burns to the ground? Sure, property insurance may replace the structure after significant delay, but can you generate the same level of rental income going forward? And in the interim, what's the damage to your $2MM in liquid assets while you draw 10% annually from that portfolio?

I'd categorize the CR cash flow as fairly high risk, even more so if the rental payments are significantly above market, as they appear to be. (Ask yourself, even if the company can pay, why will they continue to pay more than the property is worth? Not only are you banking on the company's continued financial success, but also their financial stupidity. Those seem like mutually exclusive assumptions). To offset the higher risk CR investment, I'd recommend a more conservative withdrawal from the balance of the portfolio. Or, I'd make sure that I could easily cut my increased expenditures if/when, my rental income declines. Spending on a larger primary residence and a second home don't really fit that categorization.
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Old 11-28-2010, 09:56 AM   #47
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Really, the OP is self-contradicting. A triple net commercial property with long term lease and escalations currently earning $120K is worth a lot more than $750k, punto.

Unless of course it is condemned, or next to a flood prone river.

Given weird information, expect weird conclusions.
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Old 11-28-2010, 11:28 AM   #48
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Thanks, Nords, for the thoughtful post. I fully understand that forums like this attracts all sorts of people with all sorts of agendas...
Many of the long-time posters here have no agendas other than to hang around, and to poke fun at each other. Sometimes the humor here may be a bit esoteric for a newcomer to get. For example, my own earlier post on this thread might be misunderstood. What do you expect from a bunch of weirdos? The frugal type who wants to ER is of course different than the average Joe or Jane.
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Old 11-28-2010, 11:33 AM   #49
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Really, the OP is self-contradicting. A triple net commercial property with long term lease and escalations currently earning $120K is worth a lot more than $750k, punto.
Yup.
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Old 11-28-2010, 01:20 PM   #50
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O.K.
I may be mistaken. But, I thought that this forum could provide objective financial advice. While my initial question had ambiguity about my financial decisions, those questions should not involve matters of personal values.

I simply want to know whether or not, given the current economic environment, if there is an agreement about how much of my principle I can draw down and still be solvent in my old age.

My wife and I live very comfortably in the house that we own. We travel and, until recently, have had a modest yacht. We are now embarking on an extended cross country excursion. We bought a used Airstream trailer and a new F250 truck. For a few thousand more I could have bought a fully tricked out Lariat or Ranch King.

So, am I being too frugal? The luxury of the higher end vehicles would be enjoyable. But, my frugal side says, don't do it.
Nords has given good advise.

I'd suggest when posting to a forum you keep your assumptions and questions as simple as possible.

Frugality is a subjective. Look how many times you use it to describe yourself. When a person uses a word several times it is important to that person. So addressing it is appropriate.

From your original post you mention inflation; hence my original post. Future economic outcomes are debatable. The current economic environment is not inflationary. There might be 80s style inflation later in the decade. Should we address that?


"how much of my principle I can draw down and still be solvent in my old age." Most would say use Firecalc and other strategies.


My view of your question is not Frugality or inflation, but fear (not paranoid). To address that you need to analysis your risk tolerance and invest appropriately.

If your fears are preventing you from enjoying life, then you are being too fearful.

Finally, you might not always get what you want but you get what you need.

I have several times less money than you. I've been retired for 4 years at 51 and am currently in 100% cash. I need to preserve my principle until 62 when I start SS.

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I have been very frugal and fairly successful. I have a net worth of about 3.4M. About 2.0M is in stocks, bonds and cd's ( 40%, 40% and 20% respectively). The rest is in commercial real estate (750K value generating 120K/yr) the rest is in my home and personal property.

I have been retired for the last 3 years and have limited my spending to the income available from my real estate and a small amount from consulting (less than 8K/year).

I have run the FIRECalc and at age 58 (wife is 59) it seems I should be able to spend about 70-80K more per year.

But, I seem to have a great fear of doing that. I'm worried that inflation such as we saw in the early 80's is almost guaranteed (at least in my mind). So that, even though I have a good amount in equities, it may not be enough to guard against inflation.

Am I being too paranoid?

W
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Old 11-28-2010, 01:45 PM   #51
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It appears to me that you have $2.75m in assets for retirement. The other assets, like your home, your truck, your skis, any toys, do not produce income and are depreciating assets. Your home may appreciate in value but how likely are you to sell it for income for living expenses?

Thus, plug the $2.75m into firecalc. Or, if you want to simplify things and use the 4% rule, you could use $110,000 per year, and "probably" not outlive your money. I would take the 2.75m figure back to firecalc and see what it says after including all of your other assumptions. I would also suggest running it with the $2m as a just in case scenario (tenant moves, fire destroys building, whatever).

I think you should also look into the true value of the building. What are the discounted cash flows of the building, and what value would you find if you used dcf to come to a value (taking into account contractual terms with the tenant, and assuming for devils advocate sake that disaster strikes the moment the lease is up, etc)? You may find that the real estate is worth more than you are including here, and that a truer to life value could be used in firecalc.

Finally, if your real estate value is in fact what you have stated, and thus you do in fact have $2.75m invested for retirement, and if firecalc did in fact come back with an annual spending figure of $110,000, then any excess cash generated by your investments beyond that amount would theoretically need to be reinvested in order to be able to make it last a lifetime.

Hope this makes sense. Good luck, and welcome!

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Old 11-28-2010, 02:44 PM   #52
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At current rate you're much more likely to have regrets that you did not take advantage of your hard work than that you spent too much.

Let's say you spend more, and you end up with too little money. You can probably adjust things at that point (sell property, for example).

So spend more. Sometimes you will think things like "Boy, I sure wasted money on that fancy horn for the truck," but you should just accept that.
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Old 11-28-2010, 03:04 PM   #53
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At current rate you're much more likely to have regrets that you did not take advantage of your hard work than that you spent too much.
Let's say you spend more, and you end up with too little money. You can probably adjust things at that point (sell property, for example).
So spend more. Sometimes you will think things like "Boy, I sure wasted money on that fancy horn for the truck," but you should just accept that.
Al, I never would have expected you to offer this advice.

It's like UncleMick suddenly rooting for the Raiders.
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Old 11-28-2010, 03:07 PM   #54
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wrochdvm, although my situation is different from yours, in some respects it is a little similar. I am retired and like you, I haven't been spending as much some might think I should.

In my case, I finally realized that I shouldn't HAVE to spend any more than I feel comfortable spending. I retired so that I could do what I want. Now, I have given myself permission to spend less if I want to.

You said,
Quote:
Originally Posted by wrochdvm
The luxury of the higher end vehicles would be enjoyable. But, myfrugal side says, don't do it.
Maybe you don't feel comfortable shifting into a more luxurious lifestyle quite yet. I would urge you not to push yourself, but instead to encourage yourself to buy something if you really want it, or not buy it if the idea distresses you. You may just need some time to ease into a lifestyle change.

Or, maybe you are set in your ways and just are not likely to upgrade your lifestyle much more even after time has passed. There is nothing wrong with that, if it is the case.
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Old 11-28-2010, 03:27 PM   #55
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Thanks for all your thoughtful advice. You've all given me somethings to think about and in many cases confirmed my own thoughts.

Thanks again.
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Old 11-28-2010, 04:53 PM   #56
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Really, the OP is self-contradicting. A triple net commercial property with long term lease and escalations currently earning $120K is worth a lot more than $750k, punto.

Unless of course it is condemned, or next to a flood prone river.

Given weird information, expect weird conclusions.
I disagree. At$750K investment, his rent should be about 2% which means his rent is too low.
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Old 11-28-2010, 07:49 PM   #57
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wrochdvm, perhaps you can confirm something I'm assuming. It seems to me that you assumed nearly all of your expenses are covered with the rental income and no portfolio income. The +$70k comes from FIRECalc using just the portfolio (excluding real estate sale value and income) and coming up with $70k as a supportable income from that source only. So you're thinking of adding that $70k to the rental income stream. I rarely get these right...
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Old 11-29-2010, 10:25 AM   #58
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Animorph, yes, I am living on the rental income only right now despite 30% increase in health insurance expense. Until recently I had a boat that has been costing me between 5-10K per year to maintain (this last year we put well over 10K into her for an extended cruise we did. I've sold the boat so I should easily be able to continue living on the rental income.

I'm reasonably certain that the company that bought my business will continue the lease for at least 15 more years. So, I believe I should be able to start drawing on my portfolio. My wife will start collecting SS in 2 more years, me in three. Unless major changes are made to SS, we should see an additional 2K per month. Therefore, I should be reasonably safe if I choose to dip into my portfolio. I don't plan on drastically changing my life style. But, I can see myself purchasing a second home as both a place to escape the worst of New England winters and as a possible investment.

Hope this clarifies what I'm thinking about.
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Old 11-29-2010, 01:01 PM   #59
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The 4% safe withdrawal rate insures that should you happen to retire into one of those very worst economic times then you almost certainly won't die broke.

However there are lots of times when the economy hums along. In those times if you only spend 4% per year you'll go with an enormouse unspent fortune.

here's some fun reading showing the benefit to retiring into a growing market to perk you up...

Beware the 4% rule

If, for example you were lucky enough to have retired in 1950 then for a 30 year retirement you could have withdrawn just over 15% per year and never have gone broke.
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Old 11-29-2010, 01:53 PM   #60
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the benefit to retiring into a growing market
This concept is faulty. I did a long post explaining the subtle error in the logic behind this idea a few years ago, with 27 8x10 color glossy graphs with circles and arrows, but I can't find it. Can anyone locate that?
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