What sort of buffer do you have?

[RetirementColdHardTruth]

I have been running the numbers and based on a 6% average return between now and the next 6 years using my 1/1/2012 starting value as the basis (so excluding the massive gains this year) I could retire at 46 with a WR of 3.4%. I know my personal inflation rate and have been running monthly expenses thorugh a spreadsheet for the last 5 or 6 years. These included replacement of a roof, 2 new cars to replace my 12 year old ones and expenses such as carpet replacement and house painting. These figures would also cover my health care costs as I plan on moving back to Australia where I can get coverage for around 380 a month for the whole family. I assume a 1:1 dollar conversion rate and plan to move into Austalian based investments so that exchange rates wouldn't come into play. If the USD does well over anytime over the next 6 years I would begin that conversion earlier. What I have also noticed is that dividends in Australia across high yielding stocks (ETF) is in the order of 8% or could just move some to CD givng 6% locked in for 10 years with a good portion of the money.

Anyway if I waited until 50 my WR would drop to 2.1% and that means I could live off the interest on fixed income products for life given my assumptions. My question is 4 years extra working worth the massive buffer that comes from it and the security of miving to higher AA in fixed income worth the lost leasure time? I don't really hate my job, but would rather be surfing ofcourse.

 

[rescueme]

What sort of buffer do you have?

Much more (e.g. multiples) of what we need to live, in the manner that we expect, in retirement.

Some planning, some luck, some LBYM that we are taking into our retirement years.

Since you asked...

 

[MasterBlaster]

is 4 years extra working worth the massive buffer that comes from it and the security of miving to higher AA in fixed income worth the lost leasure time?

Grasshopper:

This question is for you alone to answer in your quest for nirvana

 

[W2R]

My question is 4 years extra working worth the massive buffer that comes from it and the security of miving to higher AA in fixed income worth the lost leasure time? I don't really hate my job, but would rather be surfing ofcourse.

It's a tough decision, isn't it? I ended up with a bigger nestegg than I originally planned, partly because I had to work two extra years to qualify for health insurance. Last year I spent about 1.9%. Barring the unexpected, I won't have to cut back.

However, there's a lot to be said for retiring a little earlier than I did, if one can afford it. You will never regain the time that isn't yours while you are working. Personally I found that time is much more important to me than income (if I have enough for decent food and shelter). Others prefer having enough extra money to be able to afford certain experiences they might long for, such as international travel.

I think the answer to your question is within you and I hope you make the right decision, whatever that may be.

 

[teejayevans]

How much fluff is in that 3.4%, if you HAD to cut, could you? If answer is no, I would work a little longer, but then I'm conservative....
TJ

 

[Midpack]

Statistically 2.1% at age 50 is considerably safer than 3.4% at 46, but both are certainly doable. You can't even be sure real returns will cooperate with your plan over the next 4 years, though we all hope so. You could end up just scraping by or swimming in money when you're 95 yo in either case, or more likely somewhere in between. There is no right answer, only one that you can live with...same for all of us.

Age 46 with 3.4% WR (assumed inputs for comparison).

Here is how your portfolio would have fared in each of the 92 cycles. The lowest and highest portfolio balance throughout your retirement was $120,194 to $19,416,217, with an average of $5,163,322. (Note: values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

Age 50 with 2.1% WR.

Here is how your portfolio would have fared in each of the 96 cycles. The lowest and highest portfolio balance throughout your retirement was $1,000,000 to $25,161,998, with an average of $6,750,335. (Note: values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

 

[Finance Dave]

W2R is wise...it's your choice. I'm still not FIREd, so I'm not the best person to ask.

I do understand your comment though about a "buffer" and security. I am purposefully planning to have a higher number than most say I need...and the reason is that I want my equity exposure to be lower than they say I should have. (That sounds like something Donald Rumsfeld would say).

Good luck and I'm sure you'll make the right decision for you.

Edit: Analysis says I should FIRE at age 52 in 1.5 years, and use a 60/20/20 AA.

Dave (that's me lol) says I should FIRE at age 53 in 2.5 years, and use an AA of 30/20/50.

With only 30% in equities, a 50% downturn would mean I'd lose only 15% of my money. Even if you count the bonds, a 50% downturn would mean I'd lose 25% of my money. I'd not be happy about that...but I wouldn't jump off a bridge either.

And if we DO have a 50% market drop...I'd move to more equities for a couple years.

 

[MichaelB]

Everything depends on perspective. My WR is higher than your worst case. I took the step because I was clear on what I was missing and it was worth more than the additional money, which was a lot. No one can decide how much is enough for you, but if 3.4% is going to leave you worried and you are not compelled to RE, you probably should stay a while longer.

 

[FUEGO]

I don't have an answer for you as it is a personal answer requiring personal consideration. I am about the same distance from FIRE as you (4 years or so in my case). So I am asking the same question and the answer may be work another year or two to add in that margin of safety.

My plans to increase the margin of safety is to have a low risk cash or short term bond bucket that would cover 5-7 years of barebones expenses. Something around $100-150k would do the trick in my case. I can dip into it to cover lumpy expenses (then repay the fund) and to cover shortfalls if the market is down really bad in any particular year. If the market went to zero, at least I would have a few years of barebones living to figure things out and make a plan D.

Another aspect to my margin of safety is to have a variable withdrawal rate that changes each year based on what my portfolio is worth. Market goes up, I can spend more (but won't necessarily do so). Market goes down, I tighten up some (or dip into my cash reserves). The trick here is that you have to have enough fat in the budget so you can cut some if your portfolio value goes down. For me that might mean spending less on travel (road trip/tent camping vs summering in Europe lol).

 

[Finance Dave]

The trick here is that you have to have enough fat in the budget so you can cut some if your portfolio value goes down. For me that might mean spending less on travel (road trip/tent camping vs summering in Europe lol).

Exactly! That's sorta how I think. I have loads of hobbies I'll be spending money on...so a down market may mean a bit less fun, but I'll still be eating good.

 

[donheff]

50 seems young to me, 46 very young. You say you don't mind your work. I would stick it out until 50 for the extra margin. You can still surf at 50, heck I was playing roller hockey into my late 50s.

 

[traineeinvestor]

The trick here is that you have to have enough fat in the budget so you can cut some if your portfolio value goes down.

+1

We added an arbitrary 20% to our anticipated expenses and the anticipated expenses assumed we will spend more in retirement than while working. We also made no allowance for the children becoming financially independent at some point in the future.

I also went through the issue of trading off more time at the coal face for greater financial security after my protfolio took a hit last year. Even though the numbers still made sense, I decided to push my retirement back one more year to give a bigger margin of safety. Depending on market fluctuations between now and then and the exact retirement date, our withdrawl rate will probably be a little over 2%. With a 50 year retirement time frame and no pensions etc to fall back on, we feel that a low number is appropriate.

 

[walkinwood]

The SWR numbers you hear about here are based on US stock & bond returns. Since you're going to invest in Australian markets, you need to do some research about the appropriate SWR there.

I did not understand you initial question regarding "buffer", so let me take a few stabs
1. Buffer as in withdrawing less than SWR: I use 4% of my portfolio value in the beginning of the year. That's different from the traditional SWR as discussed by Bengen et al.

2. Buffer as in discretionary spending over essentials (housing, medical, food, transportation). We have a considerable buffer there & were able to drop our spending by 25% from 2008 to 2009 and still lead a comfortable life. We traveled a lot in '08 & cut it drastically in 09.

3. Buffer as in sources of income not counted at the moment. Many here do not count on Social Security, so anything we get there is a buffer in our calculations.

There are probably other takes on the concept.

All the best.

 

[scrabbler1]

I define my buffer or cushion as the excess monthly and quarterly dividends from my non-retirement mutual funds over my expenses. I do not count any cap gains distributions or cap gains as a result from selling any shares from my non-retrement mutual funds (I made no sales in 2011 anyway).

For 2011, I had an excess or cushion of about $8,000 (25% of those regular dividends) which was reinvested into some of those mutual funds. This was pretty much how I planned things out in my ER budget a few years ago.

 

[Surewhitey]

We're 41 & 47 and the first 6 months have been good. We're growing an average of 3-4% annualized after expenses.

That's all we need for now. Not wanting for anything so far.

 

[CyclingInvestor]

Anyway if I waited until 50 my WR would drop to 2.1% and that means I could live off the interest on fixed income products for life given my assumptions. My question is 4 years extra working worth the massive buffer that comes from it and the security of miving to higher AA in fixed income worth the lost leasure time? I don't really hate my job, but would rather be surfing ofcourse.

I let job quality make my decision for me. I hit FI in 2004 at 46, but work (programming) was very smooth and easy at that time, so I continued to work to build up a buffer. 2 years later, the work environment suddenly went way downhill, so I was able to retire with significantly more than I thought was needed.

I could not really have planned this in advance - 2 extra years in my final environment would have been toxic.

 

[Animorph]

I'd hold off retirement a few years to gain additional spending power in the future. I wouldn't hold off just to be able to weight the AA towards more bonds. Just the way I feel. I try to be closer to 100% equity in retirement, so I don't think we're of a mind in this!

 

[FUEGO]

We added an arbitrary 20% to our anticipated expenses and the anticipated expenses assumed we will spend more in retirement than while working. We also made no allowance for the children becoming financially independent at some point in the future.

Funny, this is almost exactly what have done for my ER budget. I have budgeted for a 10% extra margin of safety on our core expenses. Then assumed all child related expenses continue indefinitely.

Our plan may call for us to have a 3.x% withdrawal rate but in practice it might be closer to 2.x%. We aren't going to try extra hard to spend up to the 3.x% ceiling, especially in the first years of FIRE.

 

[ziggy29]

I don't know that we have some "magic number" in mind, but when we start seeing rapidly diminishing returns on the probability of "success" is the time I kiss corporate America goodbye. Right now "one more year" still makes a significant difference, but at some point we'll have a larger portfolio with fewer years to make it last and more money -- then "one more year" will make relatively little difference, and that's where I get the hell out of Dodge.

 

[nun]

I I assume a 1:1 dollar conversion rate and plan to move into Austalian based investments so that exchange rates wouldn't come into play.

Just curious, what is your citizenship?

 

[Finance Dave]

I let job quality make my decision for me. I hit FI in 2004 at 46, but work (programming) was very smooth and easy at that time, so I continued to work to build up a buffer. 2 years later, the work environment suddenly went way downhill, so I was able to retire with significantly more than I thought was needed.

I could not really have planned this in advance - 2 extra years in my final environment would have been toxic.

This is exactly the "freedom" we've been bantering in a few posts recently...being FI allows you the option to leave whenever you like. Well done!

 

[Finance Dave]

Funny, this is almost exactly what have done for my ER budget. I have budgeted for a 10% extra margin of safety on our core expenses. Then assumed all child related expenses continue indefinitely.

One of the things we did was set a number, then added $100k to it. Why? We think that during the year we FIRE, we'll want to buy a new car, put hardwood floors in the bedroom, re-stain our privacy fence, take an extra-special vacation, and have a huge party.

I told DW that if we save that extra $100k, we can do all those things and still have "our number" left over.

 

[poorgeezer]

I think this is a very personal decision and we will each take a slightly different approach.

I stopped working in 2005 at the age of 50 and I am very glad that I did. I had various contingency funds and cushions set aside and I still had some lingering doubts. I finally realized that for me the true buffer was my entire portfolio. If things work out I will leave behind about the same amount that I went into retirement with. If things don't work out as planned it will be less but, most likely far from zero. So the folks in my will are really going to be the ones that will be impacted. I wish them the best of luck, that's about all I had when I started.

 

[youbet]

If things work out I will leave behind about the same amount that I went into retirement with. If things don't work out as planned it will be less but, most likely far from zero.

Is this "not spending enough" problem something you could work on and improve?

 

[poorgeezer]

Is this "not spending enough" problem something you could work on and improve?

What would I spend it on?

I have a new car and the Doctor says walk you need the exercise.

I stopped smoking and drinking.

The list of things I am not supposed to eat is longer than the list of things I can eat.

Before you know it I will be like Diogenes and toss away my cup.

I guess I already have enough, no need to buy more until I finish this batch.