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Old 12-20-2015, 07:46 PM   #1
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Fire ?

When I read through the assumptions on FIRE it said it did not take taxes into consideration. I guess the spending rate should also include your estimated taxes to be accurate? Everything else about the default option w 75% equity 25% fixed income and .18 expense ratio fits my portfolio almost to a tee.

I have used the "ultimate retirement calculator" which you can google online which is a straight line calculation. What I like about it is that you can choose inflation rate, tax rate, return rate and what estate you would like to leave. It basically says I can spend $220k at a 13.5% tax rate with a 7% return and 2.5% inflation with $5.5mm at age 45 to leave roughly $15mm at age 87, which is the future values of $5.5mm at 2.5% inflation at age 87.

What I like about FIRE is that it is more a monte carlo simulation in real world market environments. When I plug in these spending numbers I come out with a 90% success rate, but maybe I should add taxes to my $220k spending?

I think I will feel more confident if I know my fire assumptions are accurate, and if I can come up with a 90% success rate. I will also feel confident about buying a second home since my investment portfolio is slightly larger than $5.5mm.

Right now I am only spending dividends and interest, but it seems like the numbers can work spending some principal. I'm only 44 so it's scary for me to think of touching principal. The good thing is we have a lot of expenses we could cut if we had to, 22k for vacations, 18k for country club etc. Any thoughts on FIRE, tax rates and what is a good success rate would be appreciated. Thanks.
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Old 12-20-2015, 09:58 PM   #2
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Yes, in firecalc taxes should be included in your spending.

What some of us do is a pretend tax return as if we were retired to get a sense as to the cost of taxes using Turbo Tax or Taxcaster.

https://retirementplans.vanguard.com...estEggCalc.jsf

This Monte Carlo calculator suggests that $5.5m invested in a 75/25 portfolio with a $220k withdrawal has a 86% success rate over a 43 year time horizon. At $180k, the success rate increases to 93%.
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Old 12-21-2015, 06:30 AM   #3
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Do you include social security in your calcs? For us that made a pretty big difference in amount one could withdraw because it was substantial for both my wife and I and


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Old 12-21-2015, 06:42 AM   #4
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With a straight calculation, the result is only as good as your estimates. What if return is lower than 7%? What if inflation is higher than 2.5%? Taxes must be in your spending. You have to pay it, just like food, right? You could try some worse conditions, like 4% return and 4% inflation, as a test. That's not impossible, and might not be worst case. See what you get.
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Old 12-21-2015, 07:06 AM   #5
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Any thoughts on FIRE, tax rates and what is a good success rate would be appreciated. Thanks.
I would make sure you have a solid risk mitigation plan. Worse case, if things go bad, what would you do? Cutting out vacations and country club dues may be easier for some than others.

If you life revolves around the social events of the country club, and you will lose your circle of friends because you can no longer afford to be a member, will they still accept you? Will you want to hang around them? Once you get to a certain level, it's hard to go back.

What about kids college? If you send them to a community college, rather than a name brand, will that impact other perceptions?

Straight line calculations are great, so are Monte Carlo and Historical. You just have to know how they fit in. It will be different this time, it just depends on how different... A 1% success rate is all you need, if you can hit that 1%...

With a $5.5M at age 45, and a 4% withdrawal rate, that is $220K per year. Plan on at least your 13.5% in taxes, likely much higher.

You may pay a higher tax rate than 13.5%, specially if tax rates change. CT (and the Feds) have a high tax bill, and will likely get higher with someone making $220K, after all, you will be withdrawing over $255K, which will be your income. There was talk about limiting tax free withdrawals of a Roth if you make much more than that.

The 4% withdrawal rate is for a 30 year time frame, not 40 years. It could still work.

Have a plan, factor in some contingency money for unknowns, and have a solid risk mitigation plan if things go awry.
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Old 12-21-2015, 09:01 AM   #6
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I have used the "ultimate retirement calculator" which you can google online which is a straight line calculation. What I like about it is that you can choose inflation rate, tax rate, return rate and what estate you would like to leave. It basically says I can spend $220k at a 13.5% tax rate with a 7% return and 2.5% inflation with $5.5mm at age 45 to leave roughly $15mm at age 87, which is the future values of $5.5mm at 2.5% inflation at age 87.
While a 4.5% real return seems like a substantial haircut from the past, keep in mind that some experts are forecasting even lower expected returns. See

Bogle's 10-Year Forecast (3.5% nominal returns for portfolio)

How Much Is Enough for Game Over Won!! (article linked by FIREd in post 116 - 2.4% real return for mixed 60-40 portfolio)

Also make sure you understand the sequence of returns problem.

Quote:
I think I will feel more confident if I know my fire assumptions are accurate, and if I can come up with a 90% success rate. I will also feel confident about buying a second home since my investment portfolio is slightly larger than $5.5mm.
Keep in mind that FIRECalc returns the historical success probability for a given withdrawal rate. This is NOT your probability of success in the future which may be substantially different. Due to the lower expected returns issue, many people believe that success rates will be WORSE in the future. E.g. a withdrawal rate that has a success rate of 90% in the past might only be 80% successful going forward.

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Right now I am only spending dividends and interest, but it seems like the numbers can work spending some principal. I'm only 44 so it's scary for me to think of touching principal. The good thing is we have a lot of expenses we could cut if we had to, 22k for vacations, 18k for country club etc. Any thoughts on FIRE, tax rates and what is a good success rate would be appreciated. Thanks.
As a retiree in my early 40s, I'm trying to keep spending at or below the expected return of my portfolio due to the long retirement timeframe. Right now (with low expected portfolio returns) this basically means spending in the range of dividends (e.g., 2% to 3%). If we get better than expected returns (which should happen 50% of the time), I plan to increase spending. So far, my portfolio has been flat (been retired ~2 years) so I stick with my low withdrawal rate.

While this may sound like doom and gloom, on the positive side you have a huge portfolio which is probably bigger than most on this site. As you mention, you have a lot of slack in expenses to cut.
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Old 12-21-2015, 10:21 AM   #7
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At your age you are looking at 40-50 years of living off your savings. And about 20 years before Social Security can be a factor. This IMHO substantially increases your risk if future returns are lower than historical norms. You also have decades of self-funded health care to manage.


Of course, reducing your spending could solve that problem if you are comfortable with that.
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Old 12-21-2015, 08:12 PM   #8
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These are all great comments. Right now I only spend the income, and our portfolio yield is 3.3%, I am semi retired. Our total portfolio if I paid off my house is $5.75mm with $6.75mm currently in financial assets for the wife and I; I have a $1mm mortgage on a $1.6mm house. So I am kind of stress testing things. I also have $1.1mm in a separate account for our kids education. My effective tax rate now is around 10% since we have very little ordinary income, mostly qualified dividends and tax free bonds. I also believe inflation will run below the long term average of 2.9% for various reasons including the Fed; 2.5% may be agressive. I agree that market returns will be subpar for the next several years, but looking out more than a year or two is difficult. If I use historical returns my expected return is higher than 7%, so if we have a few 5 or 6% years in a low inflation environment, that should not impact things in the long term.

This definitely clarifies the FIRE Calc, I actually got an 89.9% with $5.75mm, not $5.5mm. Since I did not include social security which will be substantial, my success rate is even higher. I am also toying with downsizing and getting out of Connecticut. Bottom line, I think I will keep working part time consulting which allows me only to spend the interest and dividends from the portfolio. That is the safest way to go because no matter what the market does, you aren't touching principal, and your income should grow 4-6% per year with dividend increases.

It seems these calculators tempt you to spend a little more, FIRE comes closer to what I my gut has been telling me.

Keep in mind that FIRECalc returns the historical success probability for a given withdrawal rate. This is NOT your probability of success in the future which may be substantially different. Due to the lower expected returns issue, many people believe that success rates will be WORSE in the future. E.g. a withdrawal rate that has a success rate of 90% in the past might only be 80% successful going forward.



As a retiree in my early 40s, I'm trying to keep spending at or below the expected return of my portfolio due to the long retirement timeframe. Right now (with low expected portfolio returns) this basically means spending in the range of dividends (e.g., 2% to 3%). If we get better than expected returns (which should happen 50% of the time), I plan to increase spending. So far, my portfolio has been flat (been retired ~2 years) so I stick with my low withdrawal rate.

While this may sound like doom and gloom, on the positive side you have a huge portfolio which is probably bigger than most on this site. As you mention, you have a lot of slack in expenses to cut.[/QUOTE] b
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Old 12-21-2015, 08:36 PM   #9
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I'm a little surprised you say SS will be substantial (in the context of your situation). I'm guessing you have about 25 years of contributions, leaving 10 years of zeros to fill the "best 35 years" of earnings to calculate your benefit. And with planned spending of $220K, I wonder how SS could make a big contribution.
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Old 12-22-2015, 07:56 AM   #10
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This seems like a rehash of your "Anyone else retire 45 or younger?" thread.

Dude, you're loaded. Moderate your expenses and call it a day if you're really burnt out.
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Old 12-22-2015, 08:01 AM   #11
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I don't even know how to spend 220K in a year. Nice problem to have.
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Old 12-22-2015, 08:02 AM   #12
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This seems like a rehash of your "Anyone else retire 45 or younger?" thread.

Dude, you're loaded. Moderate your expenses and call it a day if you're really burnt out.
+1

You've already won the game, now you're just running up the score.
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Old 12-22-2015, 08:04 AM   #13
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Share your FIRE Milestones

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I broke the $8mm personal net worth threshold this week, with an additional $1.13mm for the kids education. If I can get up to $8.5 on this rally, I am going to sell some stock, pay the tax and hopefully buy more bonds at slightly better yields. If I can do that, I have no idea what I'll do! Maybe downsize and grow a beard, who knows...
How did you go from $8mm to $5.5mm in a month? Or is the $5.5 the liquid portion and $2.5 in real estate equity?

Either way you've got more than enough if you're really sick and tired or want to leave Wilton. Are you StuckinCT or StuckinHighEndLifestyle?
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Old 12-23-2015, 07:15 PM   #14
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I'm a little surprised you say SS will be substantial (in the context of your situation). I'm guessing you have about 25 years of contributions, leaving 10 years of zeros to fill the "best 35 years" of earnings to calculate your benefit. And with planned spending of $220K, I wonder how SS could make a big contribution.
Social Security will be roughly 10% of our income in future dollars I am guessing, every little bit helps.
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Old 12-23-2015, 07:21 PM   #15
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You don't need to worry at all. You've got $5.5 million. Enjoy and relax - that money is going to go a long way, even if you pay 30% on taxes. I don't even know why you come here to ask with the money you got. You got plenty to stretch you retirement money. Many people don't have $5 million.
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Old 12-23-2015, 07:38 PM   #16
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Share your FIRE Milestones



How did you go from $8mm to $5.5mm in a month? Or is the $5.5 the liquid portion and $2.5 in real estate equity?

Either way you've got more than enough if you're really sick and tired or want to leave Wilton. Are you StuckinCT or StuckinHighEndLifestyle?
A little of both, I recognize we could cut expenses but the truth is, our real estate market is frozen, especially for homes like ours; I won't go into detail other than to say that we once had many big banks close by and the commute is a bit long to NYC, and 32k in property tax requires a high paying job. I'd rather wait until the foreclosures and fire sales clear the market to list. We have 6.7 to 6.8 in financial assets for ourselves, 1.1 set aside for the kids, maybe 600k in home equity and 125k in possessions. If we paid off our mortgage, we would have 5.7 to 5.8. I know this puts us in rarified air, but the truth is, I am realizing we can't afford to retire here. We have three kids, we shop at Costco, but this is among the highest cost of living areas in the country, maybe the highest, so yeah we could cut some, but to live on much less than 200k is here is difficult.

I get that it would be different elsewhere.
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Old 12-24-2015, 08:47 AM   #17
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Well at least you don't have the 8.8% tax rate for $225k income we have here in VT.


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Old 05-19-2016, 01:05 PM   #18
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I get that it would be different elsewhere.
Move to Florida. Buy a gorgeous 4-5k sq ft home for 900k-1mm with a pool and palm trees. Forget 9 months of miserable cold weather. Never see below 65 degrees again. No state income tax. Yes high property tax and HOA but equivalent to Fairfield, CT so nothing new for you.

If your living strictly off your dividends of 5.5mm invested @ 4% yield (you can easily bump up your portfolio of current 3.3% yield) without touching the principle ever..qualified equities only.. you will net 15k a month after paying 18.3% total in taxes. Can your family live off 15k a month if your home is paid for in cash and your kids college is covered? Your on the brink if not ready to go. Do it and don't look back. Good luck!
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Old 05-20-2016, 12:54 AM   #19
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Hiya. Like others I also saw your other thread.
we're pretty close in terms of age and assets.

The other way we're similar is that we probably spent tons of time running all kinds of scenarios, simulators, what ifs and so on. You have to do that, so keep doing it, but it's not going to change the result much .

If you have 5.5m and you are anywhere close to 4% SWR and you have any reasonable amount of flexibility, you are pretty much set. By that I mean that 90%+ of the rest of humanity will go down in flames before you will.

There are ways to screw it up. Getting overly paranoid and trying to double your money to feel really, really, REALLY... no REALLY safe. (this is the don't risk what you need for something you don't rule).

The other way to screw it up is to spend so much time worrying about it that you don't really enjoy things anymore... stress out... have a heart attack and so on.

What I'VE been doing is simplifying my portfolio, reducing my fees, NOT looking/thinking about money and focusing on what I do care about.

In day to day life I (and my DW) try to be "reasonable" with what we spend, but we don't really think about it THAT much and every month we try to make sure we're roughly under budget. We use 2.5% SWR on total assets, but would be comfortable up to 3%.

The other thing I think is worth doing is removing things that cause stress. For example you mention the real estate market is frozen. I don't know exactly what that means, but if you wait years for it to become "unfrozen" and during that time you're stressed because you feel like the high cost of living in the area would be nice to escape from... well... that sounds like optimizing the wrong way. Sell the house. Move to a stress free area and call it a day :P

If you won the game and don't enjoy it anymore, why keep playing

I'm sure you'll figure it out... just keep running those calcs until you can't take it anymore :P
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Old 05-20-2016, 08:56 AM   #20
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Although I haven't used it for along time, used to use Morningstar. Now rely on Fidelity and my own spreadsheet.
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