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I think I'm FI...maybe not, maybe so...um I dunno!
Old 11-17-2012, 10:39 AM   #1
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I think I'm FI...maybe not, maybe so...um I dunno!

So, after playing around with my budgets for the umpteenth millionth time, I noticed something interesting. It appears with some minor lifestyle changes (primarily selling a lightly used non-income generating parcel of land) that a 4% withdrawal rate from only my taxable accounts covers all of my necessary expenses and even a little bit of non necessary (read beer, motorcycle, and boat) expenses!

Also, if I include my tax advantaged accounts, the withdrawal rate is under 3%! My plan has always been to set up the taxable accounts at about a 60/35/5 allocation and draw on this until I can easily tap my tax advantaged accounts. My tax advantaged accounts are a bit more agressive (around 70/30) as I don't plan on touching them for about 18-20 years at the soonest. I know, everybody says to look at the overall allocation, but I think very early retirees (I'm 42 now) need to look at things more like the "before 60 funds" and the "after 60 funds"

Anyway, if we assume I have 1MM, I would have 300k in tax advantaged and 700k in taxable. I would like to draw about 4% from taxable for about 18-20 years, then start tapping tax deferred which would have hopefully at least doubled by this time, and start looking at Social Security.

Now, don't think I'm just planning on quitting right now, I consider myself to have just breached the edge of FI. My question is (and if I knew how to make a poll, I would have) is how you would feel about retiring drawing on your accounts as such, ie, AM I FI??
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Old 11-17-2012, 02:04 PM   #2
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Make sure you are including taxes in your expenses.

You have a nice opportunity for Roth conversions while living off your taxable accounts. That might drain your taxable accounts a little faster.

Nobody knows what the future holds. If you feel comfortable with your situation and any possible adjustments you might have to make in retirement (death of a spouse is one in addition to investment problems) then you can make the jump. If you are uncomfortable and don't mind w*rking a little longer, then stay as is. The economic uncertainty today might encourage me to w*rk another year or two if that was not a big problem.
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Old 11-17-2012, 02:12 PM   #3
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Congratulations, panhead! It's a great feeling to be FI. While you meet "the definition", I would want a significant buffer before pulling the plug. because sh*t happens! Also, the younger you RE, the less confidence you should have in spending right up to 4%. I am focusing on 3% of investable assets (not counting real estate).
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Old 11-17-2012, 02:38 PM   #4
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My question is (and if I knew how to make a poll, I would have) is how you would feel about retiring drawing on your accounts as such, ie, AM I FI??
To add a poll to a thread you should click on Thread Tools and select Add a Poll, although I'm not sure if you can do this so long after creating the thread, but at least you know for the future.
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Old 11-17-2012, 03:36 PM   #5
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....if I include my tax advantaged accounts, the withdrawal rate is under 3%! .....AM I FI??
Yes, IMO you are definitely FI if you are 42 and your aggregate WR is under 3%. From what you described, this probably ignores SS too!

If you haven't already used it, Quicken Lifetime Planner is a good retirement planning tool IMO in that it is easy to use and intuitive. The only thing that I don't like about it is it doesn't do Monte Carlo analysis, so I also look at the results through firecalc and Vanguard's Monte Carlo simulator.
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Old 11-17-2012, 10:30 PM   #6
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Sure, 3%WR is cool. The only problem I can see is that a young and restless early retiree may think of some leisure activities that are not in the original budget. It is easy to find ways to spend money when you are not working and have more free time.

I am at 3.5%WR, but I am a bit older and won't think of new ways to spend money, I hope. On the other hand, being closer to SS age means that I have that extra cushion.
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Old 11-18-2012, 07:10 AM   #7
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Thanks for the responses so far! NWB, yes, I can certainly find more ways to spend money, and this budget really only covers the basics with some extras. I plan on working a few more years still so I can give a further cushion. It works out if I were to move to a cheaper house, I could get down to a 3% draw just out of my taxables and about a 2.5% or so overall. That may be a bit extreme. Man, I'll tell ya tho, feels nice. I finally feel confident that I could get by without a job if I wanted to.
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Old 11-18-2012, 07:20 AM   #8
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On the basis of the information provided, I agree with others here - you are FI. Well done.
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Old 11-18-2012, 07:52 AM   #9
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Man, I'll tell ya tho, feels nice. I finally feel confident that I could get by without a job if I wanted to.
Being as young as you are and working a few more years to address the intangibles is probably wise, but knowing you could get by without the job should make the final few years easier. Congrats!
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Old 11-18-2012, 07:57 AM   #10
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Maybe the math majors can help with the complexities but I took a different approach to taxable vs tax advantaged. I keep all equities in taxable (where I withdraw annually to meet expenses) to keep the taxes from interest low. If I am pulling funds in a down year I will purchase equities in tax advantaged funds at the same time so that I am not selling equities low (from a total portfolio perspective). The hard part is figuring whether the rapid reduction in taxable in a down market (thus leading to an earlier switch to tax advantaged with its regular income taxes) more than overcomes the potential savings from moving interest income to the tax advantaged accounts. ARGH - makes my brain freeze. In my case I am at a higher marginal rate than most others due to pension income so avoiding the interest income intuitively seems to make sense. But is there a general rule for figuring this out?
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Old 11-18-2012, 09:16 AM   #11
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T.....Man, I'll tell ya tho, feels nice. I finally feel confident that I could get by without a job if I wanted to.
I found that I enjoyed my job more once I was FI in that I could be more candid and call it the way I saw it knowing that if they didn't like it and decided to cut me loose that I would be fine. The interesting thing was that my employer found my candidness refreshing and valued me more.

So if you continue to work, have fun!
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Old 11-18-2012, 09:25 AM   #12
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Maybe the math majors can help with the complexities but I took a different approach to taxable vs tax advantaged. I keep all equities in taxable (where I withdraw annually to meet expenses) to keep the taxes from interest low. If I am pulling funds in a down year I will purchase equities in tax advantaged funds at the same time so that I am not selling equities low (from a total portfolio perspective). The hard part is figuring whether the rapid reduction in taxable in a down market (thus leading to an earlier switch to tax advantaged with its regular income taxes) more than overcomes the potential savings from moving interest income to the tax advantaged accounts. ARGH - makes my brain freeze. In my case I am at a higher marginal rate than most others due to pension income so avoiding the interest income intuitively seems to make sense. But is there a general rule for figuring this out?
Tax deferral makes the most sense where the marginal tax rate when you defer exceeds the marginal tax rate when you convert the deferred income to taxable income. If you have a good pension then there is less opportunity because your marginal tax rate is less different.

Nonetheless, if you expect your marginal tax rate to be lower in the future than it is today it makes sense to extend deferral as long as possible, but the benefit that you will get from deferral will be less than others without a pension whose marginal tax rate in retirement will be much lower than it was when they were working.
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Old 11-18-2012, 11:12 AM   #13
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Man, I'll tell ya tho, feels nice. I finally feel confident that I could get by without a job if I wanted to.
For people who share the LBYM philosophy, the sense of security that they gain from having a big stash far exceeds whatever transient ebullience they get from buying that new car, pieces of furniture, or a bigger home. The delayed gratification pays dividend later in life, but some people cannot wait. We have all seen that trait in other people. They make their choice and we make ours.

While working and raising our children, we never felt deprived, having good working cars but not the latest and fancy models, a 2,700-sq.ft. home, taking vacation trips once or twice a year, etc... When we have reached a comfortable lifestyle, spending more for upgrades brings diminishing returns. We valued "counting money" more than spending it. I do not understand people who spend all of what they make and live paycheck-to-paycheck, unless they make so little that barely covers necessities.
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Old 11-18-2012, 12:20 PM   #14
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I agree with the others that you do meet the definition of FI. Congratulations! However, just because you are FI does not mean it is a good idea to go out and quit your job, especially at your age. From reading your post, you seem to have a very reasonable and mature outlook. The only thing I would recommend is that you keep track of all of your non necessary expenses. Have you calculated your WR rate including these expenses? They will probably increase if and when you RE.
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Old 11-19-2012, 07:11 AM   #15
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Thanks again for all the responses. I felt close to FI in 2009 where a 4% withdrawal from all of my accounts (taxable/deferred/free) would've given me what I needed, but I decided to go back to work at the time b/c it was too close. That's when I redefined my minimum requirements to 4% max of taxable and 3% max of everything. That being said, Scrabbler has me thinking about trying to get to the point where I can just live off dividends and interest....
Some responses:
pb4uski: I play with firecalc alot, I've used financial engines and i-orp as well. I'll look into the Quicken tool, and I've used the Vanguard tools too....and yeah, I agree about the job thing, I certainly don't mind speaking my mind when it's constructive even if it goes against the grain...
NWB: Yeah, LBYM for me was never something that I purposely put into place, it was just kinda natural. Probably depression era parents instilled that into me, tho my sister is just the opposite, and is broke, so not sure. I've never understood those people either, I guess they simply don't value the the most important thing that, IMO, money can buy....freedom.
David1961: Good points and yes, I've done this exercise. I travel alot for work and use my own credit cards for this. It's a discover so they have a nice spending analyzer tool which tracks up to the last 24 months spending. If my house was paid off (which it would be) my overall spending with business travel would be about 42k/year. If I could clear that in retirement, I wouldn't even need to budget. That's a ton of eating out, many domestic and some international trips, rental cars, etc. This is what my ultimate target goal is. I don't really need to hit it, but the closer I get, the easier things will be. Anyway, my plan is to work for another 3 years till I'm 45, and then re-assess at that point.

Thanks again for all the positive comments and suggestions, I was looking for some positive feedback. I used to bounce some of this off a good friend, but he is going thru a very hard time right now that will likely end in bankruptcy, so it didn't seem appropriate . Always nice to have this group to spitball with as everyone gives ya a straight answer whether you want it or not!
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Old 11-19-2012, 09:07 AM   #16
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Congrats on have a nice portfolio at such a young age. That can make work easier knowing some pressure is off. But, probably would be smart to work a few more years to pad the account. There is always the 'work one more year' trap, but I would want a little extra cushion. Sounds like you do too.

Best of luck with your tax planning.
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Old 11-19-2012, 10:53 AM   #17
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little bit of non necessary (read beer, motorcycle, and boat) expenses!
Ahh, those ARE necessary expenses!
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Old 11-19-2012, 12:22 PM   #18
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Congratulations! Sounds like you are doing wonderfully.

Now that you are pretty sure you are FI, try this as ironclad proof (if you have not already):

Sell that unused land, invest the money as you plan to invest it during retirement, and try living on your planned withdrawal rate for a year just as a doublecheck, and to give you a feel for the standard of living you would have in retirement. Don't forget to adjust for taxes and health insurance, and for not paying FICA any more.

If you discover that you'd rather spend more, you are still working so you are no worse off. Meanwhile, anything extra you earn from work can be added to the portfolio.
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Old 11-19-2012, 12:40 PM   #19
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Hey W2R! I actually have already lived on this amount for a little over a year when I was unemployed and for almost another year as self employed at about 1/2 time, and I had to pay my own health care, and taxes. My current portfolio would support almost the exact amount I was getting with unemployment insurance. Funny thing is, that year was really easy, I didn't even spend all my unemployment insurance.....and since then, nothing has really changed in my life, ie, no additional expenses. That being said, I would like to have the ability to spend more, which is one reason I'm going to continue working for the time being. Even if I do decide to retire in 3 years, as I'm currently thinking, I have no doubt that I would still make the occasional buck here and there, or maybe even start my own little part time business. The year I had off I kept falling into things that would make me $500 here, $1000 there, etc, and I wasn't even looking, and they were really cool things to do as well! The main reason I want to pad the portfolio a bit is assurance, working now is one thing, but if I screw this up enough, I'll have to work when I'm significantly older, and that would blow. I have never desired to be a wal-mart greeter.
Oh and a couple more responses:
Animorph: My spreadsheet has a line item for taxes, but I've never really implemented it, just accounted for it in my head. I tried today to put something in that makes sense, but figuring out what I will owe for taxes on portfolio draws is pretty tough. At first look, it looks to be very low. It looks if I draw about 4% from say the 700k port mentioned above, my taxes look like they will be under $2k (about $1700). That's about 6% of my draw. For the time being, I simply put taxes in at this rate, 6% of my draw.
Bimmerbill: you are a man of wisdom, lol! Yes, what's life without these things!
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