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Fudge Factor
Old 01-09-2010, 03:34 PM   #1
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Fudge Factor

On the Age-Based Allocations thread, haha wrote:
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I had a very good margin, then I got divorced and I now have an " I hope it's ok margin."
I wouldn't voluntarily pull the plug with just barely enough money to make it, but a recent suggestion that I need enough savings to create a six-figure income over and above the DB pension and Social Security for which I will be eligible seems like extreme overkill.

How much of a fudge factor, or margin for error, have you included in your estimates of how much money you need to retire? If you are already retired, has your margin been adequate, or would you use a bigger fudge factor if you had it to do over?

What's "a very good margin" and what's just "I hope it's OK"?
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Old 01-09-2010, 03:50 PM   #2
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Both of us are retired as of the first of last year. We decided $10k a year fudge factor would be sufficient. Only time will tell if it's enough. $10k is one fourth of our yearly budget.
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Old 01-09-2010, 03:50 PM   #3
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I've measured how much we actually spend this last few years and also done the budget spreadsheets to estimate how much we need to live the lifestyle we'd like in ER.

We have about a 50% safety margin over that. ie we need $X to live a great lifestyle and pensions + 4% SWR of investments would give us 1.5 x $X.

The size of the margin is probably more than we would have accepted but it came about because I needed to attain age 55 to qualify for health bennies, and no company health insurance would have created too much uncertainty for us to pull the plug earlier. I still nearly quit 30 months ago when the going got very stressful but managed to get a transfer to a new position and I'm now very pleased it is working out this way.
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Old 01-09-2010, 04:19 PM   #4
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Did the FIRECalc thing to get a number that would work 95% of the time. Then multiplied by 1.25, so 25% more.
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Old 01-09-2010, 06:06 PM   #5
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I used a $10K budget fudge, like bbamI. I built a generous but not extravagant budget, added $10K to it, and when FIRECalc gave me a success rate over 90% I figured I was good to go.

But I delayed retirement for a couple of years for non-financial reason, and continue to work about 10 hours a week still, so my margin ended up being larger.

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Old 01-09-2010, 06:08 PM   #6
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I take what I spent the last six months, multiply by 2 to get a yearly figure, then target 25x of that amount to determine "nominal FI". My plan is to work until then (about another 4 years), and then probably keep going longer depend on circumstances then.

Some days I think retiring to a 0% fudge factor frugal budget (which is what nominal FI would mean) would be better than working. Some days not.

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Old 01-09-2010, 06:10 PM   #7
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I had a 30% fudge factor when I retired. Then the market made a hard left turn, taking about 25% of that away. Most of it has been restored.

So I'd say 25-30% above your final "number" might be right.

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Old 01-09-2010, 06:45 PM   #8
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My fudge factor is 100%. In other words, I'm planning a SWR of 2%. I'm not by any means averse to risk, but the risk of running out of money without the means to make any more is one I don't want to take.
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Old 01-09-2010, 06:52 PM   #9
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I have about a 50% fudge factor built into my budget. I think this is a bit excessive, but in my case probably a good idea because I have a fairly bare-bones budget. I've tracked my expenses for at least 6 years so I know what my spending is, but keep thinking someday I'll need or want to spend on something outside my normally simple lifestyle.
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Old 01-09-2010, 07:41 PM   #10
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My fudge factor is a 3% SWR.
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Old 01-09-2010, 07:46 PM   #11
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In my bare bones retirement plan (in place before my surprise inheritance), I had a 33% fudge factor. That is my yearly income would have been 133% of what I spent each year from 2002-2006 which I felt was a bare bones budget for me. I think a good solid fudge factor is important in order to deal with the unexpected. When we retire, that is IT! At least for me, no more salary, no earning potential, nada.
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Old 01-09-2010, 07:53 PM   #12
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My fudge factor is my part-time work!

Seriously, I have not figured out what our steady-state expenses will be. Perhaps I do not want to know. Over the last 10 years, the annual expenses varied over a range of almost 3 to 1. And I thought we were frugal. I still have not added up our expenses this year. Been too busy w*rking!
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Old 01-09-2010, 08:00 PM   #13
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With a very long "retirement" we're planning on a 3% WR ceiling, but will probably spend closer to 2%. We also expect to have some part-time freelance income which could be ramped up if we needed it.
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Old 01-09-2010, 08:05 PM   #14
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My fudge factor is a heavily padded budget that could easily be trimmed by $10,000 . A 3% withdrawal rate and an expensive piece of real estate .
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Old 01-09-2010, 08:09 PM   #15
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Quote:
Originally Posted by kyounge1956 View Post
What's "a very good margin" and what's just "I hope it's OK"?
I'll answer, but first tell me how much of your life are you willing to devote to more work, wage earning, saving, etc., to acheive a safety cushion you'll be unlikely to ever need. 2 yrs? 5 yrs? 10 yrs?

Cushions expressed as percentages over a calculated necessary retirement portfolio amount aren't very meaningful when used to compare one person to another. You need to think about your own situation regarding:

1. Budget requirements. Satisfied with a simple lifestyle or would it be crushing to have to cut back from 5 international vacations per yr to 4?

2. Responsible for others?

3. Satisfied with current pre-retirement life or seriously yearning for change?

4. Tolerance for risk. Would you sleep at night if three years into retirement "The Greatest Recession Since the Great Depression" tanked your portfolio and you didn't have a cushion for your reserves and a 147% projected survival rate?

5. Do you have a positive and flexible attitude about life and living it that would allow you to adapt your lifestyle to a variety of financial circumstances, within reason?

I'm confident that most folks on this board, or at least the ones who I know through reading 100's of their posts, would find a way to adapt to less favorable economic situations and continue to enjoy life but with a more frugal lifestyle if necessary. None of them, however, would be able to turn back the hands of the clock if they realized a yr or two after pulling the plug that they should have done it sooner.

If your time is important to you and if you're not satisfied with how you're spending it now, use prudent calculations in your retirement financial planning but don't undervalue the grains of time passing through your life's hour glass.
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Old 01-09-2010, 08:51 PM   #16
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If your time is important to you and if you're not satisfied with how you're spending it now, use prudent calculations in your retirement financial planning but don't undervalue the grains of time passing through your life's hour glass.
A thoughtful post there, youbet. I realize that I am in a not-too-common situation where my part-time work is reasonably elastic for me to take a somewhat cavalier attitude. Other people's occupations do not allow them the same choice once they pull the ripcord.

But then, as long as we remain flexible and willing to reduce our living standards during hard times, we will survive. I have been joking around here a lot, but actually gave a lot of thoughts about balancing work and play ever since seeing my father in his last years. What if I have only a little more than 20 years left? I'd better played now, while I still can. I am working part-time to have some money for some indulgence, while I still have some of my health. Heck, when that kidney stone hurt, money didn't mean much. I have told myself that if I run short of money 10 years from now and have to live in a class-C RV, that would not be the end of the world. Plenty of people have a great time that way.
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Old 01-09-2010, 11:33 PM   #17
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Good questions, youbet.

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Originally Posted by youbet View Post
I'll answer, but first tell me how much of your life are you willing to devote to more work, wage earning, saving, etc., to acheive a safety cushion you'll be unlikely to ever need. 2 yrs? 5 yrs? 10 yrs?
Maybe for the five years it will take me to reach the top pension step, 60% of best two year average earnings. I think the best I can do is amass a cushion that will probably be adequate unless the next fifty years are a period of ongoing financial turmoil, because I'm definitely not willing (and might not be able) to work for the 20 or 25 additional years it would take me to save two million bucks. Anyway, given a bad enough worst-case scenario, even $2MM wouldn't be enough.

Quote:
Cushions expressed as percentages over a calculated necessary retirement portfolio amount aren't very meaningful when used to compare one person to another. You need to think about your own situation regarding:

1. Budget requirements. Satisfied with a simple lifestyle or would it be crushing to have to cut back from 5 international vacations per yr to 4?
Pretty simple. I don't have expensive tastes like designer clothes, luxury cars or extensive travel. If I take five international vacations the rest of my life it'll be more than I'm planning on. I'd like to go back to the two ancestral stomping grounds of England and Barbados, and I've wanted for a long time to visit New Zealand. That's about it for international travel, or at least intercontinental. I don't count Canada (even though I should), because the border is closer to here than the far side of the state.

Quote:
2. Responsible for others?
Not financially. I have aging parents and am their only child living nearby, but even if my parents did need financial help (which I don't expect) I have three siblings to share the responsibility with me.

Quote:
3. Satisfied with current pre-retirement life or seriously yearning for change?
I am getting pretty antsy, and probably also more than a little burned out. Or maybe it is just sleep deprivation. I am a night owl in a morning lark world. But being antsy is a dumb reason to rush into retirement with inadequate resources.

Quote:
4. Tolerance for risk. Would you sleep at night if three years into retirement "The Greatest Recession Since the Great Depression" tanked your portfolio and you didn't have a cushion for your reserves and a 147% projected survival rate?
If I had no cushion at all, that would probably keep me awake. With 100% cushion, I don't think I'd worry—but it would take me more than five years to develop a 100% cushion. Being mentally not very agile, I have a difficult time conceiving of the next few decades as being drastically different from the last few.

Quote:
5. Do you have a positive and flexible attitude about life and living it that would allow you to adapt your lifestyle to a variety of financial circumstances, within reason?
Not very, as I just mentioned, and I think I am becoming even less so as I get older. Nor is my outlook on life notably positive. I tend to worry if events do not fall out as desired/expected. And I hate making big decisions—like how much money I need to retire. That's probably why my questions on the forum tend to run along somewhat predictable lines.

Quote:
I'm confident that most folks on this board, or at least the ones who I know through reading 100's of their posts, would find a way to adapt to less favorable economic situations and continue to enjoy life but with a more frugal lifestyle if necessary. None of them, however, would be able to turn back the hands of the clock if they realized a yr or two after pulling the plug that they should have done it sooner.
Well, I would find a way to adapt, too. I wouldn't have any choice in the matter, would I? But that doesn't mean I'd like it. I've been broke, and I've been not-broke, and I like not-broke a bunch better. While what you've said about turning back the clock is true, it works both ways. For me, it probably would also be impossible to turn back the clock and "un-retire" if I found I should have saved for another year or two. I'd be most unlikely to find anything with a starting wage that could match what I earn on my City job with 25 years of service.

Quote:
If your time is important to you and if you're not satisfied with how you're spending it now, use prudent calculations in your retirement financial planning but don't undervalue the grains of time passing through your life's hour glass.
I guess the prudent calculation part is what I am trying to do with my questions here at E-R, or perhaps I am just trying to wrap my inflexible brain around the idea that I really can do it and it will (probably) work out OK. It is sounding like most folks figure on between 25 and 50 percent cushion. I can probably do that in two to four years. You never did say what yours is.
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Old 01-09-2010, 11:52 PM   #18
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DH and I are probably going to make an offer to buy our retirement home (posted about extensively in another thread -- if we buy it, will pay cash) and one way we are adding some cushion is buying this house that is about $100,000 less than what we were willing to pay for a house. That is, our range was $250k to $300k and this house is about $200k. The way it gives us a cushion is that it is in a great location and is adequate as is. However, there are some things we would like to do to remodel it but they would be optional. So, when our teenage kids are out of the house if things have gone well and we are confident with the budget and how much we have then, we could spend some money on remodeling. OTOH, if things had not gone as well then we wouldn't have to spend it and would do without the remodeling.

We do have padding in the budget mostly for discretionary spending that we could lessen.

We have also made a decision to intentionally reduce our standard of living. I don't mean that in any unpleasant way but we have decided we want the time more than the high consumption lifestyle. The house we are looking at is much smaller and much much less expensive than our current house. I do enjoy many of the nice things in my current house. But, they aren't really fundamentally important.
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Old 01-10-2010, 06:01 AM   #19
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I don't know how to search for it, but there have been many discussions about "padding" or "cushion" or how much to pad a retirement portfolio, or projected bare bones expenses versus "normal" expenses and what multiplier makes sense. Etc.

Maybe that can give you an idea of some searches to try.

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Old 01-10-2010, 08:22 AM   #20
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100% (really ).

My DW/me are extremely risk adverse, and we have the responsibility to ensure our disabled son is cared for after we're gone (even though he probably won't need to tap into our remainder estate).
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