Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
FIRE Financial cushions against unforeseen events. What did you do?
Old 10-20-2005, 10:44 AM   #1
Recycles dryer sheets
 
Join Date: Sep 2004
Posts: 108
FIRE Financial cushions against unforeseen events. What did you do?

A question mostly for those already FIRE'd, but also those in the serious planning stage.

Lets say that you have a budget for FIRE all worked out, and you know what your 4%|25x that budget comes to.

What I'm curious about is to what extent FIRE'd folks (and others) continue working for a while in order to create a buffer / cushion / emergency backup / what if the market tanks 20% just after I retire? Plan, amount spare over and above what they calculate they need(ed)?

I have read one post on the ER Forum boards where someone handed the fallout from Katrina and found a 10% buffer useful in covering the costs assumed, relocation and so forth. Got me to thinking!

I'm also curious whether it is more relevant to think in terms of absolute dollars (i.e. "I have $10,000 set aside for anything I didn't expect in my planning") or in percentage terms over and above the 25x sum calculated ("If the market falls 20%, I wanted to have room to handle that and not feel I have to go right back to work again").

Thanks to anyone who takes the time to reply with their thoughts.

Petey
__________________

__________________
peteyperson is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Re: FIRE Financial cushions against unforeseen events. What did you do?
Old 10-20-2005, 11:12 AM   #2
Full time employment: Posting here.
shiny's Avatar
 
Join Date: Jun 2005
Posts: 673
Re: FIRE Financial cushions against unforeseen events. What did you do?

Hi Petey,

Yes, I'm all about the "cushions"! In addition to some spare I-bonds that I don't factor into the budget (total emergency money) I also cushion things by over-estimating my budget. Say I think we live on 50k per year, well I run the numbers using 60k (knowing that if we HAD too we could do 40k). That may not be good for everyone, but that is making us comfortable enough to count on.
__________________

__________________
I'm made of atoms, you're made of atoms, and we're all in this together. Ben Lee
shiny is offline   Reply With Quote
Re: FIRE Financial cushions against unforeseen events. What did you do?
Old 10-20-2005, 11:26 AM   #3
Recycles dryer sheets
 
Join Date: Oct 2005
Posts: 63
Re: FIRE Financial cushions against unforeseen events. What did you do?

Hey Petey, I am new at this, too.

I just was FIRE'd last week...been contemplating for quite a while. Planning on relocating, haven't sold the house yet (slow market in the midwest) so that is all gravy (and backup) once it sells. If it doesn't, I'll take it off the market for a while and continue with the move to AZ. (starting to get cold outside and I vowed to leave before the first snowflake falls!)

Set aside $40,000 for back up in checking accounts and short term CD...figured it would get me thru a year or more. This is probably overkill, but I like cushions, too.* Also have access to some money funds if an unforeseen emergency should arise.

Can always pick up a part time job for that extra spending money (should the desire ever arise).

Was looking for a job when I found the last one!

Look at it this way...You have always been a very resourceful person all your life...never went hungry so far, odds are you will be just fine.
__________________
acg is offline   Reply With Quote
Re: FIRE Financial cushions against unforeseen events. What did you do?
Old 10-20-2005, 11:35 AM   #4
Thinks s/he gets paid by the post
retire@40's Avatar
 
Join Date: Feb 2004
Posts: 2,670
Re: FIRE Financial cushions against unforeseen events. What did you do?

I have a normal ER budget for when I fully retire and a worst-case budget. *The normal budget is just about 4% SWR and the worst-case budget is closer to 3% SWR. *Things I would cut out or reduce in the worst-case budget include travel, entertainment, income taxes, gifts, donations, and other non-essentials.
__________________
No man is free who is not master of himself. --- Epictetus
Enjoy Yourself (It's Later Than You Think). --- Guy Lombardo
retire@40 is offline   Reply With Quote
Re: FIRE Financial cushions against unforeseen events. What did you do?
Old 10-20-2005, 11:52 AM   #5
Thinks s/he gets paid by the post
SteveR's Avatar
 
Join Date: Jul 2005
Posts: 2,803
Re: FIRE Financial cushions against unforeseen events. What did you do?

My ER budget is a little different I guess. I have higher expenses in the first 10-15 years followed by significant reductions as I get too old to do much. We are keeping the house for a while but the budget reflects downsizing in 8-10 years which will also be the start of SS. Our spending will be much higher in the early years than in the middle or later years. Health insurance is covered so the major expenses are toys, house, cabin, travel and grandkids.

We are also looking at long term taxes too. Too much in the IRAs will require huge distributions taxed at the going income tax rate. I am working my stuff a bit backwards to lower the IRA values before age 70.5 through 72(t) before 59 and then using the taxable portion after that until 70.5. Once we pay off the mortgages and downsize there will be no debt so our expenses will fall a lot and our pension and other investments should cover that so we can afford a smaller IRA distribution later in life.

And besides.....life is short and I would rather spend now and enjoy it rather than wait until I am either dead or too old to enjoy it. If my kids inherit nothing then they will start out exactly where I did. If I screw up and die with some cash then so be it.
__________________
Work? I don't have time to work....I'm retired.
SteveR is offline   Reply With Quote
Re: FIRE Financial cushions against unforeseen events. What did you do?
Old 10-21-2005, 03:42 PM   #6
Thinks s/he gets paid by the post
 
Join Date: Mar 2004
Posts: 1,318
Re: FIRE Financial cushions against unforeseen events. What did you do?

Petey,
I think its essential for ERs to have both a Plan B, and a bunch of little "3-in-1 oil" techniques to help squeak through a tough patch.

I think most people's "3-in-1 Oil" ideas would revolve around either selling the house and/or using a future event/windfall to offset worse-than-anticipated financial conditions. Examples might include spending less when kids grow up and move out, an receiving an inheritance, or selling the boat or vacation home. You budget as though none of these events was going to happen, knowing that if/when it does or if you need to, you'll have that extra amount of financial manouvering room.

But I think a Plan B is also useful in case things get really bad for you. That probably means moving somewhere really inexpensive and scaling back to a much more modest lifestyle. It could also involve some paid work. So if you can kinda sorta get used to the idea of that life as a possibility in your future, then if you really had to do it, it might not seem like such a dramatic fall.

During really bad spells in the market, putting icing on my Plan B by re-arranging the furniture in my imaginary Mexican bungalow by the ocean helps take the sting out of a crumbling portfolio. Hey, it beats Prozac, panic selling or going back to work!
__________________
ER for 10 years; living off 4.3% of savings (and a few book royalties ;-)
ESRBob is offline   Reply With Quote
Re: FIRE Financial cushions against unforeseen events. What did you do?
Old 10-22-2005, 03:28 AM   #7
Recycles dryer sheets
 
Join Date: Sep 2004
Posts: 108
Re: FIRE Financial cushions against unforeseen events. What did you do?

Hey there,

I kind of do that with the idea of UK SS. It may or may not pay in 31 years time when I get to 65. If I were to FIRE between 55 and 60, and wanted or needed to quit work at that time, I could plan to use any SS for travel expenses and medical later. That way you don't rely on it, especially if they make it much more means tested nearer the time which could derail anyone who has built-up a FIRE stash. They already make it nominal instead of inflation-adjusted if you live outside the EU - which makes my living in Thailand, for instance, a non-inflation adjusted state pension - so I would not put anything past "them."

Petey

Quote:
Originally Posted by ESRBob
Petey,
I think its essential for ERs to have both a Plan B, and a bunch of little "3-in-1 oil" techniques to help squeak through a tough patch.

I think most people's "3-in-1 Oil" ideas would revolve around either selling the house and/or using a future event/windfall to offset worse-than-anticipated financial conditions.* Examples might include spending less when kids grow up and move out, an receiving an inheritance,* or selling the boat or vacation home.* You budget as though none of these events was going to happen, knowing that if/when it does or if you need to, you'll have that extra amount of financial manouvering room.

But I think a Plan B is also useful in case things get really bad for you.* That probably means moving somewhere really inexpensive and scaling back to a much* more modest lifestyle.* It could also involve some paid work.* So if you can kinda sorta get used to the idea of that life as a possibility in your future, then if you really had to do it, it might not seem like such a dramatic fall.

During really bad spells in the market, putting icing on my Plan B by re-arranging the furniture in my imaginary Mexican bungalow* by the ocean* helps take the sting out of a crumbling portfolio.* Hey, it beats Prozac, panic selling or going back to work!
__________________
peteyperson is offline   Reply With Quote
Re: FIRE Financial cushions against unforeseen events. What did you do?
Old 10-23-2005, 04:05 PM   #8
Recycles dryer sheets
 
Join Date: Nov 2004
Posts: 283
Re: FIRE Financial cushions against unforeseen events. What did you do?

Dad will be 89 soon - he had the "die broke at 83" plan just about right.* *Mom is an active 84 and doing well.* I have been planning on living that long (now 62) and my fear is running out of cash when I and DW need it in our 80's.*

Two things impressed me to build a plan that had a cushion for the far future;*
* (1) the ORP* Retirement Calculator http://www.i-orp.com that spreads out expenses into the future showing that one's expected living expenses will magnify significantly in 30 years just from modest inflation.* This indicates to me that we need to have a cushion and continue a good level of equity exposure to survive the unexpected.
* (2) the Henry Hebeler "JK Lasser's Your Winning Retirement Plan" also discusses the need to continue saving into retirement to avoid the problem of running out of $ in later years.

So, our plan has been to make that cushion bigger than the optimum, minimum amount calculated to the penny that seems to be discussed often, hoping that will cover any conventional unforseen events.* We do it by LBYM and saving while retired and keeping a relatively high percentage in equity allocation in our portfolio.

JohnP
__________________
Dad's Dream; to have enough money someday to live the kind of life my wife and kids do...
Life is what happens while you are making other plans... John Lennon...
the more you look, the more you see...
JohnP is offline   Reply With Quote
Re: FIRE Financial cushions against unforeseen events. What did you do?
Old 10-23-2005, 05:15 PM   #9
Thinks s/he gets paid by the post
 
Join Date: Dec 2002
Posts: 3,875
Re: FIRE Financial cushions against unforeseen events. What did you do?

Quote:
Originally Posted by JohnP
Dad will be 89 soon - he had the "die broke at 83" plan just about right.* *Mom is an active 84 and doing well.* I have been planning on living that long (now 62) and my fear is running out of cash when I and DW need it in our 80's.*

Two things impressed me to build a plan that had a cushion for the far future;*
* (1) the ORP* Retirement Calculator http://www.i-orp.com that spreads out expenses into the future showing that one's expected living expenses will magnify significantly in 30 years just from modest inflation.* This indicates to me that we need to have a cushion and continue a good level of equity exposure to survive the unexpected.
* (2) the Henry Hebeler "JK Lasser's Your Winning Retirement Plan" also discusses the need to continue saving into retirement to avoid the problem of running out of $ in later years.

So, our plan has been to make that cushion bigger than the optimum, minimum amount calculated to the penny that seems to be discussed often, hoping that will cover any conventional unforseen events.* We do it by LBYM and saving while retired and keeping a relatively high percentage in equity allocation in our portfolio.

JohnP
Hello John. You are about where I am (same age, same age parents still
living, etc). OTOH, I don't expect to live another 25 years (although I might).
And, no equity exposure at all for us. Our "cushion" is our ability to cut way back if necessary, but no more saving in ER for us. We spend all income and plan to
continue. I believe Cutthroat would endorse this, even tho he does not
agree with the "no equities" thing.

JG
__________________
MRGALT2U is offline   Reply With Quote
Re: FIRE Financial cushions against unforeseen events. What did you do?
Old 10-23-2005, 05:24 PM   #10
 
Posts: n/a
Re: FIRE Financial cushions against unforeseen events. What did you do?

One financial cushion is: a reverse mortgage.
__________________
  Reply With Quote
Re: FIRE Financial cushions against unforeseen events. What did you do?
Old 10-23-2005, 05:33 PM   #11
Thinks s/he gets paid by the post
 
Join Date: Dec 2002
Posts: 3,875
Re: FIRE Financial cushions against unforeseen events. What did you do?

Quote:
Originally Posted by TromboneAl
One financial cushion is: a reverse mortgage.
True! Unless I have unforeseen good fortune, I intend to have one in
place more or less to coincide with my SS start up. It's expensive,
but otherwise a painless way to tap into your home equity.

JG
__________________
MRGALT2U is offline   Reply With Quote
Re: FIRE Financial cushions against unforeseen events. What did you do?
Old 10-23-2005, 05:59 PM   #12
 
Posts: n/a
Re: FIRE Financial cushions against unforeseen events. What did you do?

Quote:
We spend all income and plan to
continue. I believe Cutthroat would endorse this, even tho he does not
agree with the "no equities" thing.
Not sure what you mean by 'Income'. But if my portfolio returned 8% in one year, I'd still continue to spend my 4%, rather than the 8%. I'd endorse a 4% SWR, re-evaluated every few years.
__________________
  Reply With Quote
Re: FIRE Financial cushions against unforeseen events. What did you do?
Old 10-23-2005, 06:00 PM   #13
Thinks s/he gets paid by the post
 
Join Date: Feb 2003
Location: Mesa
Posts: 3,588
Re: FIRE Financial cushions against unforeseen events. What did you do?

I've run FIRECalc and various Monte Carlo retirement simulations ad nauseum. *I've simulated various spending models from fixed amount of portfolio to inflation adjusted and everything in between. *I've used the simulators to look at mortgage pay off decisions. . . *Some people on these boards will testify to these facts and sigh just being reminded of the results I've posted over the years.

But I don't believe my life is going to conform to withdrawal simulator spending models. *I did all those simulations to understand what level of control I had over the important variables. *The main finding from all that work is clearly that your own control over spending has the most dramatic impact on your survivability. *If you get close to a 4% withdrawal rate using a cushy budget, you will be able to absorb almost anything the economy throws at you simply by adjusting your spending modestly during down years. *I spend what I want. *I don't spend to a budget. *I made sure I had enough cushion that I would be able to this. *
__________________
sgeeeee is offline   Reply With Quote
Re: FIRE Financial cushions against unforeseen events. What did you do?
Old 10-23-2005, 06:14 PM   #14
Thinks s/he gets paid by the post
 
Join Date: Dec 2002
Posts: 3,875
Re: FIRE Financial cushions against unforeseen events. What did you do?

Quote:
Originally Posted by Cut-Throat
Not sure what you mean by 'Income'. But if my portfolio returned 8% in one year, I'd still continue to spend my 4%, rather than the 8%.* I'd endorse a 4% SWR, re-evaluated every few years.
Good question. By "income", I mean earned and unearned cash flow,
but (hopefully) only enough to keep our net worth from declining.
Right now, I know how much is coming in, how much is likely to come in
over several years, more or less exactly. For example, my bonds/MM/notes money produces "X". My spouse's wages produce "X", In a few months,
my SS will produce "X". I know what's coming in and it should be enough.
The "going out" is the tough part, the wild cards being health care and inflation.
Anyway, my income is unlikely to vary much after next September
until 2011 (when DW draws SS). We won't have any swings from
4% to 8% or vice versa.

I MAY be giving up some upside potential, but I accept that in order to have
predictability. Just my system. Not recommended for anyone else.

JG
__________________
MRGALT2U is offline   Reply With Quote
Re: FIRE Financial cushions against unforeseen events. What did you do?
Old 10-24-2005, 11:47 AM   #15
Moderator Emeritus
Martha's Avatar
 
Join Date: Feb 2004
Location: minnesota
Posts: 13,212
Re: FIRE Financial cushions against unforeseen events. What did you do?

Historically, our day to day spending used to come out of the amount of my draw from work. Bonuses were invested and used for large capital expenses, like buying a car. We never made a budget. We are now for the first time looking at seeing where our money goes. I am a little concerned that we spend more than I initially thought.

We also are not living on my income anymore. Because we didn't pay estimated taxes this year, I am in the odd position of withholding all of my income for taxes (outside of contributing to the 401k and paying health insurance premiums). It has felt like we are spending to much. But feeling is different than knowing.
__________________
.


No more lawyer stuff, no more political stuff, so no more CYA

Martha is offline   Reply With Quote
Re: FIRE Financial cushions against unforeseen events. What did you do?
Old 10-24-2005, 12:17 PM   #16
Recycles dryer sheets
Robert the Red's Avatar
 
Join Date: Aug 2005
Posts: 325
Re: FIRE Financial cushions against unforeseen events. What did you do?

Quote:
Example: Say the market tanks 3 years in a row and it's down 40% from when you retired. (not as bad as the Great Depression, but it's got your attention).* Remember the Market dropped 90% during the Great Depression and your FireCalc Plan kept you spending the same amount.
The GD is a little misleading here: true, the stock market dropped 90%, but very briefly, and then recovered to about a 40-50% loss, and then stayed there for a longish time.* The FIREcalc assumptions don't happen to have the simulated person selling off right at the bottom, which would have been deadly.* So the GD as simulated in FIREcalc is actually fairly in tune with your hypothesized 40% drop.
__________________
Robert the Red is offline   Reply With Quote
Re: FIRE Financial cushions against unforeseen events. What did you do?
Old 10-24-2005, 12:40 PM   #17
Thinks s/he gets paid by the post
 
Join Date: Jun 2004
Location: No. California
Posts: 1,600
Re: FIRE Financial cushions against unforeseen events. What did you do?

I keep 2 years expenses in accounts that I can access anytime. I also have additional money invested in Ibonds and CDs that I can tap if needed.

My back up plan is selling my house. I'm in California, land of the hugely inflated homes, and my house has inflated to the point where I might just sell it to get the cash out of it. I'm not ready to sell yet, but absolutely wiling to do so if needed.
__________________
KB is online now   Reply With Quote
Re: FIRE Financial cushions against unforeseen events. What did you do?
Old 10-24-2005, 12:53 PM   #18
 
Posts: n/a
Re: FIRE Financial cushions against unforeseen events. What did you do?

Quote:
Originally Posted by Robert the Red
The GD is a little misleading here: true, the stock market dropped 90%, but very briefly, and then recovered to about a 40-50% loss, and then stayed there for a longish time.* The FIREcalc assumptions don't happen to have the simulated person selling off right at the bottom, which would have been deadly.* So the GD as simulated in FIREcalc is actually fairly in tune with your hypothesized 40% drop.
That's the whole idea! - You don't sell off! - A good knowledge of history and the ability to admit you can't time the market will keep you from doing stupid things! - Also FireCalc assumes the individual keeps on spending at the same rate they spent before the depression. If anything FireCalc is even more conservative than the GD! And in fact most of the folks that went through the GD, never enjoyed spending money again, and were the tightest folks on the planet!

Also a 40% drop without an accompanied depression would be pretty tame without a GD. People would not be losing their jobs like they did in the GD, selling pencils on the street, standing in soup lines Etc. Etc.

In summary a 40% market drop does not equal the Great Depression - Not by a Long shot!! A 40% drop is very much like we had from 2000-2003, when the Dow went from around 11K to around 7K.
__________________
  Reply With Quote
Re: FIRE Financial cushions against unforeseen events. What did you do?
Old 10-24-2005, 03:29 PM   #19
Thinks s/he gets paid by the post
retire@40's Avatar
 
Join Date: Feb 2004
Posts: 2,670
Re: FIRE Financial cushions against unforeseen events. What did you do?

Quote:
Originally Posted by Robert the Red
The GD is a little misleading here: true, the stock market dropped 90%, but very briefly, and then recovered to about a 40-50% loss, and then stayed there for a longish time.* The FIREcalc assumptions don't happen to have the simulated person selling off right at the bottom, which would have been deadly.* So the GD as simulated in FIREcalc is actually fairly in tune with your hypothesized 40% drop.
When I run FIREcalc with my worst-case numbers, I have a problem in the 1929 row, but the negative happens at the tail end of that row. I'm sure if I saw my net worth dropping significantly half-way though my 40-year ER, I would pull the reins on spending for a while.

One thing I could never understand with FIREcalc is how it puts me back into positive net worth in the years AFTER it tells me my net worth goes negative.
__________________
No man is free who is not master of himself. --- Epictetus
Enjoy Yourself (It's Later Than You Think). --- Guy Lombardo
retire@40 is offline   Reply With Quote
Re: FIRE Financial cushions against unforeseen events. What did you do?
Old 10-24-2005, 03:51 PM   #20
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
REWahoo's Avatar
 
Join Date: Jun 2002
Location: Texas Hill Country
Posts: 42,078
Re: FIRE Financial cushions against unforeseen events. What did you do?

Quote:
Originally Posted by retire@40
One thing I could never understand with FIREcalc is how it puts me back into positive net worth in the years AFTER it tells me my net worth goes negative.
It doesn't "put you back into positive net worth". That one year (1929 in the case you stated) would simply prevent you from having a 100% success rate.

See http://www.fireseeker.com/explain.htm for an explanation of how FIREcalc works.

__________________

__________________
Numbers is hard

When I hit 70, it hit back

Retired in 2005 at age 58, no pension
REWahoo is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Does your spouse share your financial goals? JustCurious FIRE and Money 41 02-17-2007 07:20 PM
About to FIRE - can you help me stir my pot? coolie Hi, I am... 3 09-24-2006 10:15 AM
Need to fire financial planner Jeff55 FIRE and Money 16 09-15-2005 04:50 PM
FIRE? Go to sporting events! Berkshire_Bull Young Dreamers 2 10-28-2004 07:43 AM

 

 
All times are GMT -6. The time now is 11:31 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.