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Old 01-26-2008, 12:06 AM   #21
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So, there are many ways to play this game:

1) Play the odds, like Nords.
2) Play it safe, and find a risk-free return higher than your mortgage rate.
3) Play it safe, and pay down your mortgage.
I pick #3. NO more mortgage.
I thought about taking out a home equity loan (HEL) at 4.99% from PenFed but decided not to proceed, even though the market return should be higher over time.
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Old 01-26-2008, 06:31 AM   #22
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I understand the concept that pre-paying the mortgage is risk-free return, but that always brings up a question in my mind:

If 'risk free' investments are providing less after-tax return than a mortgage pre-pay, does that mean that no one should ever have any money invested in anything until they have paid off their mortgage?

One seems to lead to the other, no?

Let's say that all savings went to pay the mortgage, and that paid it off in 10 years rather than 30. That person would be totally out of the market for 10 years, but could step up the savings rate in years 11-30. Would they catch up?
I was out of the market completely (as far as taxable investments) for the forty-eight months that it took to pay off my mortgage. I did contribute the maximum plus over-50 catchup to my TSP(401K), but that was it. This was a conscious decision and I think such a decision is not the right one in every circumstance, though I think it was absolutely right in mine. Here's why:

Everybody has, or should have, a "bare bones survival income" figure in mind that is necessary for basic survival only in ER. This would be the figure covering nothing more than minimal existence, the income threshold needed for bare short term survival and nothing more. For me it would even involve eating the cheapest food, enduring uncomfortable (though survivable) temperatures inside my home, buying zero that is not immediately needed for survival, no medical, and so on. Got that "bare bones survival income" figure in mind?

OK, I believe the "bare bones survival income" plus inflation MUST be available to me with zero risk (or as near zero as possible) for my entire ER. I have only one child and I doubt she will be able to support me in my old age. I really don't want, or feel that I have, a fallback position of depending on her for my survival.

My expenses beyond "bare bones survival income" can be covered by investments of moderate or higher risk. By paying off my mortgage, my "bare bones survival income" level is reduced to less than half what it was before paying it off. The part covering my "bare bones survival income" must be covered by the very lowest risk investments possible, and whatever excess I have to invest can go into all sorts of risk levels.

In order to get a reasonably balanced portfolio (that is not massively overloaded with very low risk investments that may provide income reflecting little more than inflation), I feel I have to keep the "bare bones survival income" figure lower than it would be if it included mortgage P&I.

Someone like Nords, who I believe has probably a considerably larger portfolio than I ever will in addition to a substantial military retirement pension, has no issues with bare bones survival distorting his portfolio. Any money he gets his hands on from not paying off his home can go into higher risk investments that will provide him with higher gain.

Makes sense to me, anyway. Of course now that I have this potential, unexpected inheritance coming (hopefully), my plans are in a state of flux or transition. My portfolio may end up being several times larger than this prior planning reflects. My planning outlook should respond to any increase in resources.
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Old 01-26-2008, 11:08 AM   #23
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Everybody has, or should have, a "bare bones survival income" figure in mind that is necessary for basic survival only in ER. This would be the figure covering nothing more than minimal existence, the income threshold needed for bare short term survival and nothing more.

....

OK, I believe the "bare bones survival income" plus inflation MUST be available to me with zero risk (or as near zero as possible) for my entire ER.
Thanks WTR, I think that was stated very well.

I do need to calculate a bare bones expense - I haven't done it yet ( I hate actual budgeting, but manage to keep spending within a range, just out of habit and LBYM principles), but I do recognize the need. Being LBYM, there is not a lot I would want to cut, but of course I could if I had to.

One other way to look at this: rather than drawing that bare bones expense from near-risk-free investments, I think one could consider a near-risk-free SWR (2.75-3%?) of a standard portfolio? I can see where someone would be more comfortable drawing that from near-risk-free investments. Who knows what the market might do, but who knows if inflation might outpace those near-risk-free investments far beyond what was thought?

No easy answers I guess. ER-ing (or just R-ing) involves a leap of faith. I know it's been discussed to death on this forum, but at some point we just need to decide when enough is enough, and then get on with enjoying our life.

I've been doing some FireCalc runs, and looking at that 'minimum' number that pops up. When I get it organized, I'll start a thread on that with some test cases, but right now, it looks like a number that might scare most people, especially considering the reaction we have to this little 15% dip in the market.

-ERD50
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Old 01-26-2008, 12:53 PM   #24
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Originally Posted by ERD50 View Post
I've been doing some FireCalc runs, and looking at that 'minimum' number that pops up. When I get it organized, I'll start a thread on that with some test cases, but right now, it looks like a number that might scare most people, especially considering the reaction we have to this little 15% dip in the market.-ERD50
By this do you mean the nadir reached on any non-failing trip?

I posted on this about three years ago; there was zero interest. Although, as you say. there might be more now that a few skin cuts have recently been suffered.

Personally, I know that I will not be a happy camper if my total portfolio gets down to half its starting value.

I don't suspect this; I absolutely know it. So I must set my definition of failure considerably higher than "any positive value".

People are easily influenced by others, and sometimes don't stop to think that the others in question may have very different situations from oneself. (For example, in the case of federal workers, you will be paying their generous pensions and health care.)

Firecalc is clearly a useful tool, but my guess is that a minority of users have really thought through just what it is and is not capable of telling us.

Ha
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Old 01-26-2008, 03:40 PM   #25
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By this do you mean the nadir reached on any non-failing trip?

I posted on this about three years ago; there was zero interest. Although, as you say. there might be more now that a few skin cuts have recently been suffered.

Personally, I know that I will not be a happy camper if my total portfolio gets down to half its starting value.

I don't suspect this; I absolutely know it. So I must set my definition of failure considerably higher than "any positive value".

Ha
Yes, the nadir is exactly what I'm talking about. Do you have a link to your thread on the subject? I'd like to take a look.

I will start another soon (or add on to yours), I just want to get some good test cases together to make the point (and make sure I understand it).

If what I saw holds under other more general scenarios, I do think there is a psychological aspect to these runs that I need to consider for myself. Just as you say, I can probably take a 20 or 30% drop in NW in stride, but a 50% drop would test my ability to say with confidence, 'but, historically, I have a very good chance of recovering....'. And it looks like Even a 100% success rate on FireCalc will see some drops below 50% - Yikes!

No, I don't think I'd sleep well.

-ERD50
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Old 01-26-2008, 04:26 PM   #26
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The latest version of FIREcalc has a "leave some money in my portfolio" option on the "investigate" tab. You can set whatever threshold for failure you like.
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Old 01-26-2008, 05:11 PM   #27
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The latest version of FIREcalc has a "leave some money in my portfolio" option on the "investigate" tab. You can set whatever threshold for failure you like.
Yep, that is the scary part. Not so much the concern of what you (your heirs/charities actually) would end up with, but what you would see on your NW statement along the way.

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Old 01-26-2008, 07:59 PM   #28
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Yep, that is the scary part. Not so much the concern of what you (your heirs/charities actually) would end up with, but what you would see on your NW statement along the way.
-ERD50
That is how I see it, ERD50. I've been living from a portfolio for a long time. I know at least some of the mental pitfalls. It's like a sports bettor who works out an historical data-tested method for betting say college football. He tests it on data outside his discovery range; he knows the games are not correlated. Still, if he loses 10 straight bets at $1000 each, unless is very rich he pulls back. He thinks something has changed that throws his method into question. This could be just a statistically expected variance, or it could be that the linesmakers have changed the way they operate.

Investing is even worse. We know that all these things are correlated in various and shifting ways. Or if we don't know that we should. So when we are irrevocably retired we can get spooked by serious drawdowns. Almost all of us are following a total return strategy, rather than a current income strategy, so it is highly sensitive to assumptions about returns and paths.

This is not and will not ever be a popular idea on a retirement board, and it may be one that no one will ever have to confront. But conceptually it is a certainty that eventually even the PPT will f-up and we will experience an out of range event.

Here is one earlier thread- I believe there is at least one other dealing more particurly with FireCalc.

Worst Draw-Down

Ha
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Old 01-26-2008, 09:20 PM   #29
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This is one of the reasons why I favor minimizing the cost side of the equation, even if it involves reducing the portfolio size. By making as large a % of your spending into discretionary line items, and assuring you could squeak by a couple of years (at least) on dividends, it makes the sickening drops a little more palatable.

The two bucket (or more) strategy also helps. Having your more volatile investments in a bucket you wont be sipping from for at least 15 years makes what happens to those investments seem a little more distant.
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Old 01-26-2008, 09:26 PM   #30
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CFB, what is your quote in reference to please. ty.
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Old 01-26-2008, 11:05 PM   #31
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I've been doing some FireCalc runs, and looking at that 'minimum' number that pops up. When I get it organized, I'll start a thread on that with some test cases, ....
-ERD50
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By this do you mean the nadir reached on any non-failing trip?

I posted on this about three years ago; there was zero interest.

Here is one earlier thread- I believe there is at least one other dealing more particularly with FireCalc.

Worst Draw-Down

Ha
OK, to avoid crossing this subject with this current thread, I started a new thread on the 'Dips in FireCalc' observation:

http://www.early-retirement.org/foru...tml#post606756

-ERD50
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Old 01-27-2008, 06:21 AM   #32
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IMHO - Pay down the mortgage. But make sure you have an emergency fund before you pay it down. People get caught in cash crunches by unexpected expenses.
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Old 01-27-2008, 09:07 AM   #33
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IMHO - Pay down the mortgage. But make sure you have an emergency fund before you pay it down. People get caught in cash crunches by unexpected expenses.
Good point. Katrina taught me that a $1,000 emergency fund, even if only that small for a few days, is not enough and I should have kept $5,000. Thank goodness Frank helped me out during those difficult days.
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Old 01-27-2008, 09:31 AM   #34
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Good point. Katrina taught me that a $1,000 emergency fund, even if only that small for a few days, is not enough and I should have kept $5,000. Thank goodness Frank helped me out during those difficult days.
believe it or not, I am a card carrying risk taker ... but now that I am FIREd, I think that a $5K buffer may be a little smallish, unless you are living on $20K a year. IMO one should have at least 3 -4 months (or maybe 6 if you are really risk adverse) of living minimal expenses as an emergency fund.
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Old 01-27-2008, 09:43 AM   #35
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believe it or not, I am a card carrying risk taker ... but now that I am FIREd, I think that a $5K buffer may be a little smallish, unless you are living on $20K a year. IMO one should have at least 3 -4 months (or maybe 6 if you are really risk adverse) of living minimal expenses as an emergency fund.
If you have a few years living expenses in MMkt, CD's, etc. as many of us FIREd profess to have, I think that would more than cover the need for an emergency fund.
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Old 01-27-2008, 09:47 AM   #36
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believe it or not, I am a card carrying risk taker ... but now that I am FIREd, I think that a $5K buffer may be a little smallish, unless you are living on $20K a year. IMO one should have at least 3 -4 months (or maybe 6 if you are really risk adverse) of living minimal expenses as an emergency fund.
Up to 6 months worth should suffice. However, I am sure that someone will argue that this is insufficient to protect against unexpected expenses, e.g., medical bills, or catastrophic events, e.g, hit by a truck.
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Old 01-27-2008, 09:49 AM   #37
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If you have a few years living expenses in MMkt, CD's, etc. as many of us FIREd profess to have, I think that would more than cover the need for an emergency fund.
Agreed, and I do (have a 5 year bucket)
... I was responding to W2R's post on increasing an emergency fund while (I think in her case) still PRE-FIRE (i.e. w*rking).
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Old 01-27-2008, 10:53 AM   #38
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Agreed, and I do (have a 5 year bucket)
... I was responding to W2R's post on increasing an emergency fund while (I think in her case) still PRE-FIRE (i.e. w*rking).
I agree with you - - at the time, a $5000 emergency fund would have easily covered 4-5 months expenses. I was and am still in the accumulation phase. My federal job comes with pretty decent job security and a paycheck equal to several times my expenses. However, Katrina damage and evacuation expenses were not cheap, and I was pretty concerned for a few days until I officially heard that my paychecks would continue uninterrupted, even though I could only work remotely at best.

Now, since I am slowly beginning to receive partial distributions from my mother's estate, I have considerably more in my emergency fund. In ER, I will have several years' expenses in that fund as well. How many years' worth of expenses depends on whether I'm comparing with bare bones, LBYM, or 4% of my portfolio, or what. But with a paid off house, and a balanced portfolio with a somewhat conservative AA, and no need for more than maybe 1% SWR if push comes to shove, I can earmark plenty as an emergency fund. I will probably have 2 years' worth of LBYM expenses in a separate emergency fund account, but could easily supplement it, KWIM?
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Old 01-27-2008, 11:18 AM   #39
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CFB, what is your quote in reference to please. ty.
Watermelon.
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Old 01-27-2008, 11:26 AM   #40
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Watermelon.
LOL a man of simple (but good) tastes.
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