How conservative are your models?

[youbet]

+1

It would be interesting to know how influential ER.org was in supporting/encouraging/enabling those who post here to ER. It played a huge role in my ER journey.

Me too. I joined the FIRE Forum a year or so before the axe fell at work. Since I had a lot of "nuttin' to do" desk time those final months, I learned a lot about FireCalc and some other on line tools, read this forum and thought about the possibility of moving my planned retirement age to 58 from my original plan of 62. When the HR guy finally came to walk me out, I already had an idea I might be able to never work again. After a short job search yielded nothing that caught my interest, hey, I just limited the job search to what was required to collect unemployment benefits and started to get used to a new lifestyle.

Many of the posters that inspired me then seem to have disappeared but some are still here. Thanks to all of you.

 

[Nature Lover]

I'm a dinosaur (with a 3 legged stool), so my initial models ended up pretty conservative... but I didn't consciously wait to retire based on the models. I got to ~1 yr before ideal early pensions date and then realized I had enough and a bit more. I read some retirement lifestyle books and brainstormed a bit about what I'd be retiring to...and developed a reasonable budget...and a beefed up, more generous budget for comparison.

Initial modeling (essentially after I began thinking about ER at age 54) meant looking at 2 primary scenarios: 1) Investments alone and 2) Pensions/Residual Income alone. I included SS in the analysis at first, then reran the models without it. All of this modeling was against the much more generous budget. The primary tools used were: 100% success in Firecalc, and most conservative in FIDO.

After the primary scenario modeling indicated I was good to go if I wanted to, I did do some "all in" modeling to determine an estimated annual max spend for perspective. This was not necessarily conservative in my view, but important to give me a sense of the "range" in which my spending would likely be safe. In addition to Firecalc and FIDO, I checked iORP for the potential impact of Roth Conversions; I ran some scenarios on VPW starting at 3.5%; and I explored valuation adjustments using PE10.

(BTW, I'm single and live in Ca, so taxes are a big component of my budget. In each case above, the modeling reflected taxes on only the scenario income... which I thought appropriate. Of course, IRL I have income from pensions, residual income and investment income, so both income and taxes are larger than in the models.)

And, I found ER after I started looking at this, but before actually retiring. Discovered many good ideas here that helped me be more confident in my decisions.

 

[USGrant1962]

I find myself dreaming about FIRE. I run a few different models and my plan to retire @55 seems to be reasonable. But then I start in with the whatifs:

1. 40% market drop the day after I retire
2. 0% real return forever
3. SS benefits reduced by 25%
4. Long term care expenses
5. New cars
6. Pad the regular expenses
7. Add more for known unknowns (house repairs, pet emergencies, etc...)
8. lions and tigers and bears....

After I do all that, it is clear I need to work until the day I die.

What I really want to do is get laid off next year and try it out for a year. If I get scared, then get back into the work force but maybe a less stressful job.

How did you find the balance and courage to RE?

The conservatism in my model (primarily FIRECalc with occasional checks via Monte Carlo) are mostly neglecting potential upsides. So:

- my budget assumes about 20% net income tax rate, which I know is high
- 75% of SS (I believe there could be a cut, but more like 5% - anything more is too politically unpopular)
- neglect ACA subsidies in my budget (though gross premiums have now exceeded my budget thanks to ~40% increase in the last two years)
- neglect my consulting and DW's hobby job income
- do not include real estate equity in FIRECalc or MC, consider this LTC insurance
- neglect likely inheritances.

Regarding other items on your worry list above:

1. The Great Depression, Great Inflation, and a ton of other bear markets are already considered in FIRECalc - if I can survive those I'm probably good.
2. 0% real forever - not worried about it. Even at 0% real, a 4% SWR lasts 25 years.
5. For cars I include a "depreciation" allowance in my annual budget.
7. I include an allowance for home repairs in my budget. Certainly aware of that after replacing two A/C units and a roof in the last 4 years.

So if you are forcing a 40% market drop and 0% return into retirement calculators you are double-dipping and shouldn't worry so much. But if you don't have retirement cash flow for "routine" large expenses such as a new car every 10 years or an A/C every 20 you may need to save a little more.

 

[Willers]

+1

It would be interesting to know how influential ER.org was in supporting/encouraging/enabling those who post here to ER. It played a huge role in my ER journey.

It was for me. I did have a budget and did some rough numbers based on the Trinity study, but discussions on this board gave me more confidence and provided information on some very useful tools (FireCalc, RIP, etc.).

Regarding your list:
1. 40% market drop the day after I retire - I actually did have a 10%+ drop the month after I gave my notice. Good timing... I was able to just shrug and assume it would recover. It did and then some.
2. 0% real return forever - I assume 1.5% real, which is pretty conservative compared to most.
3. SS benefits reduced by 25% - I didn't include this, but I could easily adjust if this happened.
4. Long term care expenses - self funding and hoping that someday they offer a real insurance policy (3yr wait and then coverage until death)
5. New cars - in the plan every 10 years for each car
6. Pad the regular expenses - I didn't do this intentionally, but we're already wildly under-spending our budgets so I guess I did without knowing it.
7. Add more for known unknowns (house repairs, pet emergencies, etc...) - all in our "misc" category.
8. lions and tigers and bears....

Our issue was really that we got so used to a spending amount that we just stayed with it. We could have increased our spending, but haven't felt the need to. If you are including even 1/2 the hedges you listed I'm guessing you will have more than enough. Be careful not to include every worst case. You'll work way to long or spend way too little.

 

[foxfirev5]

Pretty conservative. DW and I are transitioning into living on interest and dividends, a small pension and eventual SS. By only taking int/divies from our IRA's I am hoping the remaining return of our total stock market funds will offset inflation and any possible SS cuts.

It's pretty simple and does not singularly rely on a SWR method. We started retirement 2 1/2 years ago taking a 4% withdrawal in a pretty strong market. At the time our interest and dividends amounted to about 2.5%. Thanks to rising CD rates and increased dividend $ we're right about 3% overall now. Enough income to cover our wants and needs. Good enough. Both DW and I are old school and never could grasp the concept of touching the principal, hoping that past results would repeat in the future.


Having been through numerous downturns starting 1973 I have no desire to ride it out and hope for the recovery. Last week I logged on to my Fido account to check my credit card. I did not even notice the brokerage/IRA balances. Now I know I'm at peace with my decisions.

 

[FI_RElater]

...just a few questions

I have a master financial spreadsheet with data going back to 1988. It tracks the budget, income, savings, taxes, SS, life insurance and a few what if scenarios (lose my job). So I have no shortage of data. There are a LOT of moving parts and unknowns between now and mid next year. So, no decisions will be made until some of these risks are either realized or mitigated.

I am crunching the data to determine if I want to ER in June 2019. I have been going full speed ahead for 30 years and maybe it's time for a change. I will post the numbers and see what the collective ER wisdom might reveal. Since there are a lot of moving parts, I am going to baseline everything to June 2019.

Age = 53 (as of June 2019), no debt

99,000 Annual Retirement Income @ 70
45,000 military pension w/COLA
54,000 SS @ 70
Tricare for Life (=no cost until 65, then is a no cost Medicare supplement,$3,500 / year out of pocket cap)

86,744 Base Expenses (includes taxes, excludes any vacation, cars, known unknowns)

12,256 delta

Once I get to age 70, the COLA pension + SS covers all my base expenses (shown below).

So all I really need to do is build a bridge from 53 to 70. I can build that bridge with savings.

773,000 Bridge amount required (assumes 2% real return)

1,070,000 Savings (60/40 AA)
401k = 50%
Roth = 12% (available to withdraw tax/penalty free)
Taxable = 20%
Cash = 18%

I have enough to build the bridge to SS @ 70. I also have enough available to bridge from 53 to 59.5 when the 401k is available.

297,000 left over (can SWR this @ 3%)

The real question comes down to expenses. That $86,744 is our current base budget that we are using. We have overspent it so far this year by $7,000 (mostly for clothes and dining out). It also does not include vacations, cars, major home repairs and who knows what else. The $12,256 difference between that and my retirement income is available, but is it enough? I also have $300,000 outside the SS bridge that I could SWR @ 3% for $9,000 a year. Now my excess is $21,256. Is that enough?

So, this is where I am struggling. If we knew we could stick to a $99,000 budget, we would have enough cushion to retire in June. Here's the budget:

$17,700 a year on food? For 2 people? That's insane.
$4,800 for clothes?!? That's down from $8,400
$10,200 Misc? What's that? I don't know.
$5,000 for gifts?

I think we have a lot of room for reductions.

You may fire when ready, Gridley!

Since you’re retired military, TriCare for medical.(...is $8 k enough to cover everything including any max copays of $3500 for supplement that you noted?)

you’ve obviously seen the nearly $18 k for food
That’s certainly got a huge target on it, that’s certainly an area to drill down. I don’t know anyone that spends 20% on food in that zip code of income.

The gifts amount also is giving off signals.... it’s orange, not red.... but might need some scrutiny

I agree with others that somewhere in that $21k surplus you need to allocate some for vehicle replacement and I would also say some is needed for irregular medical costs not covered fully (major dental?, hearing aids?, which are often needed for those who worked on the flight line, in home care)

when does the house get paid off? are you including enough in your plan for normal replacement of household items (HVAC, roof, water heater, etc) as part of the budget (placed in reserve)?

When I did my plan I planned on my bridge to SS for the total nut, which in your case is 17 years X $54 k (rate at SS @70)= $918 k so I assume you backed the $918 k down to your level by assuming 2% returns? Remember that you take out at the beginning of the year (N - $54 k) so may need to determine how sensitive that real return is.

{ disclosure: in my model that I noted above I would have needed about 2.5 large, which we surpassed, while I see you have just over 1 large... and are counting on a higher spend ($99k) than ours ($89 k) in the intervening years before SS. (admittedly, we can easily go to $120 k/ yr now in retirement... but we planned for worst case). You need to really check for sensitivity}

 

[Lewis Clark]

Tricare for Life (=no cost until 65, then is a no cost Medicare supplement,$3,500 / year out of pocket cap)

You may want to check again about your military retiree medical coverage.

TRICARE For Life is Medicare-wraparound coverage for TRICARE-eligible beneficiaries who have Medicare Part A and B.

If you plan to use military retiree TRICARE for your health insurance before Medicare eligibility, you will need to pay for it.

 

[HI Bill]

I think we have a lot of room for reductions.

The low-hanging fruit:

1) Eliminate life insurance (assuming pensions are transferrable)
2) Reduce cell phone bill
3) Eliminate cable (Roku/Amazon Prime/Netflix)
4) Reduce gifts
5) Food/dining - consider less caviar (joking)...my wife and I spend less than $900 monhtly, and that includes household products
6) Clothing - do you really need to spend $400/month in retirement? I barely spend $400 a year, working.
7) What is the House under discretionary? $300/mo for what?
8) You spend $200/mo on entertainment in addition to eating out, cable, internet, etc.?

Just thoughts....

 

[corn18]

Since you’re retired military, TriCare for medical.(...is $8 k enough to cover everything including any max copays of $3500 for supplement that you noted?)

you’ve obviously seen the nearly $18 k for food
That’s certainly got a huge target on it, that’s certainly an area to drill down. I don’t know anyone that spends 20% on food in that zip code of income.

The gifts amount also is giving off signals.... it’s orange, not red.... but might need some scrutiny

I agree with others that somewhere in that $21k surplus you need to allocate some for vehicle replacement and I would also say some is needed for irregular medical costs not covered fully (major dental?, hearing aids?, which are often needed for those who worked on the flight line, in home care)

when does the house get paid off? are you including enough in your plan for normal replacement of household items (HVAC, roof, water heater, etc) as part of the budget (placed in reserve)?

When I did my plan I planned on my bridge to SS for the total nut, which in your case is 17 years X $54 k (rate at SS @70)= $918 k so I assume you backed the $918 k down to your level by assuming 2% returns? Remember that you take out at the beginning of the year (N - $54 k) so may need to determine how sensitive that real return is.

{ disclosure: in my model that I noted above I would have needed about 2.5 large, which we surpassed, while I see you have just over 1 large... and are counting on a higher spend ($99k) than ours ($89 k) in the intervening years before SS. (admittedly, we can easily go to $120 k/ yr now in retirement... but we planned for worst case). You need to really check for sensitivity}

I think I am going to keep things simple. I will assume my expenses each year will be $99,000 (pension + SS). That gives me an $11k/year cushion for cars, air conditioners, unexpected health care expenses, unknown unknowns.

Then there is the blow that dough money. If I FIRE @ 53, then that is about $10,000 / year. That is purely for vacations, season tickets to WWE or whatever we want outside the base budget.

If I work until 55, that goes up to $24,000. Or we could cut the budget down to something reasonable and retire now and still have $24,000 to blow.

Two more years of work so we can spend $50/day on food. Is it really that simple?

 

[corn18]

You may want to check again about your military retiree medical coverage.

TRICARE For Life is Medicare-wraparound coverage for TRICARE-eligible beneficiaries who have Medicare Part A and B.

If you plan to use military retiree TRICARE for your health insurance before Medicare eligibility, you will need to pay for it.

I have been using the retiree medical since I retired 10 years ago and I don't pay anything for it. I pay a portion of my bills and that averages about $2,500 / year (and that is with some serious hospital visits). Cap is $3500 I think.

 

[Lewis Clark]

I have been using the retiree medical since I retired 10 years ago and I don't pay anything for it. I pay a portion of my bills and that averages about $2,500 / year (and that is with some serious hospital visits). Cap is $3500 I think.

Sounds like you have the TRICARE Select plan for current medical coverage, or something similar depending on where you live. This is not the same as TRICARE for Life.

In any case, thank you for your service to our country. : )

 

[corn18]

The low-hanging fruit:

1) Eliminate life insurance (assuming pensions are transferrable)
2) Reduce cell phone bill
3) Eliminate cable (Roku/Amazon Prime/Netflix)
4) Reduce gifts
5) Food/dining - consider less caviar (joking)...my wife and I spend less than $900 monhtly, and that includes household products
6) Clothing - do you really need to spend $400/month in retirement? I barely spend $400 a year, working.
7) What is the House under discretionary? $300/mo for what?
8) You spend $200/mo on entertainment in addition to eating out, cable, internet, etc.?

Just thoughts....

1. Need life ins to cover the loss of benefits. Pension is 55%. SS is about 60% I think.
7. General home care stuff. Light bulbs, lawn care, paint, who knows what.
8. Yup.

 

[corn18]

Sounds like you have the TRICARE Select plan for current medical coverage, or something similar depending on where you live. This is not the same as TRICARE for Life.

In any case, thank you for your service to our country. : )

You are correct. I always call them the wrong thing.

 

[steelyman]

One of the “I coulda had a V-8” realizations I had after working with a budgeting tool was that my income had no piece of the action. It’s only about outgo (in my mind).

 

[FI_RElater]

...and another thing

hmmm, just wondering where you have the federal taxes at? (I’m assuming that you are in a “no state tax” residence)

I agree with HNL Bill that the clothing budget at $400 is much higher than we ever spend (we might do just over $1k for the year in retirement) but don’t expect that reduction to phone, internet, or other similar “niceties” would move the needle. I also expected that there was some reason for the LI, so didn’t concern myself with that.

Still, same question....have you paid off the house?
If not, is the amount budgeted (understanding that the costs are very irregular) adequate?

I definitely understand the calculus of two years of stressful work only contributes to an extra $N k/ year of spending; that’s why we saved so many marshmallows. As per another thread, we probably “oversaved” but we knew that once we stepped off the treadmill we weren’t going to get back. By being sufficiently conservative in our planning, saving those nuts, we KNOW that we will have no problems making it for any reasonable retirement.
We certainly didn’t include part time work “in retirement” as part of the plan in that a short period of extra work puts a significantly higher stash in the bank than part time work at minimum wage (and where we retired to there’s really not the same type of environment for consultants in our former fields .... and I expect you don’t either...so only you know if the OMY is worth it.

 

[corn18]

hmmm, just wondering where you have the federal taxes at? (I’m assuming that you are in a “no state tax” residence)

I agree with HNL Bill that the clothing budget at $400 is much higher than we ever spend (we might do just over $1k for the year in retirement) but don’t expect that reduction to phone, internet, or other similar “niceties” would move the needle. I also expected that there was some reason for the LI, so didn’t concern myself with that.

Still, same question....have you paid off the house?
If not, is the amount budgeted (understanding that the costs are very irregular) adequate?

I definitely understand the calculus of two years of stressful work only contributes to an extra $N k/ year of spending; that’s why we saved so many marshmallows. As per another thread, we probably “oversaved” but we knew that once we stepped off the treadmill we weren’t going to get back. By being sufficiently conservative in our planning, saving those nuts, we KNOW that we will have no problems making it for any reasonable retirement.
We certainly didn’t include part time work “in retirement” as part of the plan in that a short period of extra work puts a significantly higher stash in the bank than part time work at minimum wage (and where we retired to there’s really not the same type of environment for consultants in our former fields .... and I expect you don’t either...so only you know if the OMY is worth it.

Taxes are in there. No state tax. Only income will be the pension, which is small enough to put me in the 0% cap gains bracket and 12% marginal.

House will be paid off.

OMY for me is a real needle mover as I am saving $200k / year. No doubt 2MY takes me from pretty good too great. Just nice to do the math and see if no more years would work.

 

[daylatedollarshort]

How did you find the balance and courage to RE?

When we retired 30 year TIPS were yielding inflation plus 2%. We looked at the Consumer Expenditure Survey of what most people spent in retirement, compared it to (2% of our portfolio + SS + pensions + some initial hobby income) and said good enough. Plan B was to spend principal, downsize and/or move to a lower cost of living area which are still always options. We use matching strategies, have planned for high inflation and think we will come out ahead if it occurs, and don't have a lot in stocks, so barring the asteroid strike we should be okay. We retired with a mortgage so that interest expense will drop off over the years, freeing up cash for increased discretionary spending as we age.

 

[FI_RElater]

Taxes are in there. No state tax. Only income will be the pension, which is small enough to put me in the 0% cap gains bracket and 12% marginal.

House will be paid off.

OMY for me is a real needle mover as I am saving $200k / year. No doubt 2MY takes me from pretty good too great. Just nice to do the math and see if no more years would work.

{just didn’t see them broken out}

at $200 k/yr extra savings you really have to see what extra that gives you; since you mentioned just over one large I would have pushed on for the extra ~20% to give a decent cushion while two years starts to become more of a question. (I’m not sure that two moves you to “pretty good to great” though; but should get you to upper 90’s in firecalc)

we had similar amounts thrown into savings in our later years... but both of us were topped out (I was over, couldn’t even get full COLA and pension gains were minimal)... but really didn’t see the need when paying 33% fed plus state to push the rock up the hill more than we needed to once I qualified for retiree HI. That health insurance in retirement is ~$6k/yr now (but with higher deductibles) but inflation on that is higher than any receivable (pension or future SS (which I’m eligible for now but postponing to at least FRA) ___ so we planned for the buffer needed to make up that likely gap. You have to ask if your current condition with Tricare deductibles will continue. Remember that former retirees had NO costs at all through the military hospitals ( hence why there was a lot of retirees near certain facilities), so obviously conditions can change.

executive summary: one more year wouldn’t hurt your situation with some reserve padding/ two might not have additional benefit

 

[Scuba]

We have tracked our actual spending by category for 20 years. Pre-ER, I adjusted actual spending to reflect expected spending in retirement (higher travel, healthcare, entertainment; lower car expenses, charitable contributions, clothing). Used the adjusted budget which was around 8-10% higher than historical spending. Then used various retirement calculators (Firecalc, Fidelity, custom spreadsheet) to determine if we had “enough.” All said we were good to go so we ER’d 2 years ago.

So far, so good. Despite withdrawals and a recently bumpy market, we still have more than when we stopped working.

One thing that helped us get comfortable is that 45% of our annual costs are discretionary so could easily be eliminated or reduced if need be. We have a pretty high risk tolerance with our portfolio and intend to remain heavily invested in equities. Between dividend and interest income, deferred comp payouts, a pension, and SS, plus about 25% of our portfolio being invested in assets not directly correlated to financial markets, we can tolerate the volatility of the equity market to get the long-term superior returns offered. YMMV

 

[Caskem]

I find myself dreaming about FIRE. I run a few different models and my plan to retire @55 seems to be reasonable. But then I start in with the whatifs:

I use 3% inflation and 3% withdrawal rate. Seems conservative enough.

 

[Chuckanut]

It varies by the model.

Sophia brags about splitting her ticket.

Andrea and Megan voted Democratic.

Jane and Felicia voted Republican.

Mercury and Kestral voted Libertarian.

Me? I figure 80% of the time the wisdom of crowds will get it right.

 

[freedomatlast]

I'm planning to be able to spend two times as much in retirement as we have spent, on average, in each of the last 5 years. That ought to allow enough for the once in decade large expenditures and the unknowns going forward with respect to health care costs in addition to more travel and the occasional splurge.