How to REALLY know you can afford to be FIRE

[bearkeley]

Sorry if the subject is misleading - I don't have the answer, but I'm hoping you guys can help...

We are 2 years away from retiring early...but how can we be sure? My real question is...why not retire in a year? Then again, maybe we're missing something BIG in our projections, and are really 20 years away!

We have a good guesstimate on how much we spend now and how much we'll need. Since we estimate 80k/yr, we figure that if we're a bit off, we can definitely live below our means if needed. (We're both too lazy to use quicken to be 100% certain of our expenses)

We don't have kids, and we seriously would consider living internationally (somewhere cheap) when the dogs are gone. We don't need expensive things like a huge house or an expensive car. We don't need to travel and stay in hotels -of course we anticipate staying in nice B&Bs once in awhile, but neither of us are into resorts, etc. In fact, we are even excited about the possibilities of getting an RV, trailer a small boat and touring the country for the next year or two with our dogs.

One reason we targeted 2 years is because of our real estate exit strategy (we're conservative so not a lot of concern about what the market does) - tax benefits of home sale exclusions, etc. The other is that we are both getting the highest salaries of our careers...another 2 years would help solidify our SWR/ 80k/yr plan.

But...since we don't have kids to will our assets to, we technically can eat into our assets if needed and stop working a year sooner and enjoy our youth with our dogs, right? Why not in 6 months?

How do you really know?

 

[unclemick]

Well of course the real answer is that you don't.

But hopefully you have a plan and some numbers to the best of your knowledge to guide you.

So - to dust off the hoary old rules of thumb - north of 25 times expenses to be paid by the portfolio. Some knowledge of how to adjust expenses if required and so on.

There is a mental adjustment - at least for many of us.

Don't fall into the trap of 'just one more year turning into ten' and look back with regret at fear of flying.

Do the best plan you can and decide for yourself/spouse whether -'it's time'. Time and Tide - like the man said.

heh heh heh

 

[Rich_by_the_Bay]

The real risk is that of making a major calculation error, like:

- Failing to remember you have to pay taxes after retirement, and simply counting on withdrawing your expenses without accounting for uncle sam.
- Failing to correct for inflation
- Counting on unrealistic investment returns, like 10% (may get some flack here, but I feel this is a bad assumption even if it happens occasionally)

I doubt many on this board would make these types of mistakes.

Second observation is that it will ALWAYS feel safer to wait just a little bit longer. You will never avoid that feeling unless you're very rich.

Finally, if your savings and pension-equivalents are something like 20-25x your required gross income needs, you can probably feel you are at least in the ballpark. If not, and if you have no extenuating circumstances, be worried enough to see what's up with your model.

A good sanity check is FIRECalc if you put in reasonable data.

 

[SecondCor521]

A couple of points:

1. If you don't use Quicken, how do you know how much you spend? I think using Quicken for 6 months (or some other method of determining expenses) could be an eye-opener. I do know that for me personally, the approach of adding up the regular monthly bills (rent, utilities, groceries, etc.) underestimates my expenses by about 25-35%, because of the little things (coffee, parking, etc.) and periodic expenses (property taxes, irrigation fees). Some things, like magazine subscriptions, fit both categories. I suspect the 25-35% figure is a good rule of thumb.

2. You referenced the term SWR in your post. If you're referring to the research on the REHP, please note that the 4% rule already assumes that you consume your principal during your lifetime, so if you're counting on your principal being a "safety net", it's already included in that 4% rate.

3. It sounds like you're discussing some pretty serious changes in your lifestyle. This could cause your expenses to go way up or way down. I would spend some of the next six months researching the projected costs of your new lifestyle.

4. If you do the RV thing, consider a lightly used RV. I think I've read that a lot of people romanticize the lifestyle, go whole hog into it, find out they don't like it after a year for whatever reason, and then sell the RV at a hefty discount just to get it out of their hair.

Good luck,

2Cor521

 

[chris2008]

My two cents:
- I would not dare to think about ER if I had no solid history of tracking expenses and setting up monthly and annually our personal "balance sheet" and "P+L".

- ER is in your future and nobody is able to "really know" about it. However, we can use statistics to check the likelyhood of our expectations.
How did we "really know" that our partner or our new job was the right one? We checked some important features, we felt confident about the decision, we knew that the decision could be reconsidered if need arises.

As you did not mention problems at work - could you test run ER by taking a sabathical or starting part time work when you feel ready for ER?

- I would buy the toys like RV while still working and not pay for them by using the retirement funds. Also, if you want to travel more in ER than today I would set up a seperate travelling fund and not include this fund when projecting future income and expenses.

Take care,
Chris

 

[Rich_by_the_Bay]

2. You referenced the term SWR in your post. If you're referring to the research on the REHP, please note that the 4% rule already assumes that you consume your principal during your lifetime, so if you're counting on your principal being a "safety net", it's already included in that 4% rate.

Someone may correct me, but I think you'll find that the SWR of 4% pretty much allows indefinite withdrawals once you get out long enough (like 25 years). In fact, it usually allows substantial growth after withdrawals.

--I stand partly corrected. See this updated post.

For shorter term there is enough volatility that you need to be watchful. Try FIRECalc with various ending balances remaining to see how it fairs for your situation. There's a lot of slack there for longterm plans.

 

[Ed_The_Gypsy]

I doubt many on this board would make these types of mistakes.

I did once, but not lately.

It is always safer to work a little longer. It doesn't sound like you find it intollerable. If your investments have a timetable of some kind, be aware of the costs of changing that timetable. Don't back yourselves into a tight corner if you don't have to.

Do it when it feels right.

 

[Scrooge]

1.  If you don't use Quicken, how do you know how much you spend?  I think using Quicken for 6 months (or some other method of determining expenses) could be an eye-opener.  I do know that for me personally, the approach of adding up the regular monthly bills (rent, utilities, groceries, etc.) underestimates my expenses by about 25-35%, because of the little things (coffee, parking, etc.) and periodic expenses (property taxes, irrigation fees).

Quicken will also help you break down your expenses by category, which will be helpful if you discover that you need/want to cut back. If you don't need that level of granularity, you can simply review your checkbook and add up the last 12 months worth of expenses that will still be applicable post-retirement. Ditto with your credit card statements.

 

[unclemick]

Yep - way back when circa 90-93, I did it like Scrooge mentioned - went thru several years of checking with the old no. 2 pencil and handheld calculator to swag expenses.

heh heh heh - before my old webtv even.

 

[bearkeley]

Thanks all - VERY good points! Ok, so I can't be lazy and need to start using quicken.... you're right - the Starbucks runs aren't in our 'estimate' now...

The other thing I didn't mention is that a majority of our projected income is most likely going to come from rental properties rather than the stock market (outside our 401k and IRA).

I have tried to use FIRECalc but because our income will be from rent rather than stocks, it did't really work for us....Our estimates include vacancy factors, management and reserves. Cashflow less taxes would give us the 80k/yr in our model.

Another scenario we had was basically estimating a conservative sale price on all real estate and take 4% of it for living expenses....basically, if we had 2M in cash, and invested it safely, 4% would give us the 80k we need.

Major faux pas in our assumptions? Thanks again!

 

[brewer12345]

Thanks all - VERY good points!  Ok, so I can't be lazy and need to start using quicken.... you're right - the Starbucks runs aren't in our 'estimate' now...

The other thing I didn't mention is that a majority of our projected income is most likely going to come from rental properties rather than the stock market (outside our 401k and IRA).   

I have tried to use FIRECalc but because our income will be from rent rather than stocks, it did't really work for us....Our estimates include vacancy factors, management and reserves.   Cashflow less taxes would give us the 80k/yr  in our model.

Another scenario we had was basically estimating a conservative sale price on all real estate and take 4% of it for living expenses....basically, if we had 2M in cash, and invested it safely, 4% would give us the 80k we need.

Major faux pas in our assumptions?  Thanks again!

I guess you take your risks where you choose. If you are happy with rental properties, great. Just make sure there are no looming financing problems, deferred maintenance, or other gotchas.

The problem with skimming the 4% off a cash portfolio is that inflation will eat you alive over time. This is a major concern for younger retirees.

 

[kcowan]

The other thing I didn't mention is that a majority of our projected income is most likely going to come from rental properties rather than the stock market (outside our 401k and IRA).   

I have tried to use FIRECalc but because our income will be from rent rather than stocks, it did't really work for us....Our estimates include vacancy factors, management and reserves.   Cashflow less taxes would give us the 80k/yr  in our model.
...!

Then I think you are done. So a bit of "what if" analysis especially relating to vacancy rates in your area. What is the likely highest it might get to be. (Remember that 30 years can present many changes never experienced before.) This will simulate the risk factors you are missing. What you need is something like: our $80k/yr will be generated with 90% likelihood.

Are you in an area where jobs can be exported, or in a sunbelt where ER will drive growing demand? Will increased taxes from property value escalation eat up your profits?

 

[Arif]

The other thing I didn't mention is that a majority of our projected income is most likely going to come from rental properties rather than the stock market (outside our 401k and IRA).

I have tried to use FIRECalc but because our income will be from rent rather than stocks, it did't really work for us....Our estimates include vacancy factors, management and reserves. Cashflow less taxes would give us the 80k/yr in our model.

I recently read How to Retire Early and Live Well and I think this was the first book I've read about retirement that advocates real estate as part of the formula. He advocates a balance on the mortgage of 50% which should provide adequate cashflow in a majority of circumstances.

One thing that I've realized is that real estate is technically a bond (like a pension) that could be ranked according the the pool of renters. For instance, if you buy properties in low income areas that investment would be classified as junk status (for the sake of collection of rents). For properties in middle income areas that would be the equivalant of maybe a B+. By classifying your rentals this way you can rate the dependability of the income stream you're getting from the rentals.
Haven't really gone much further than that but it did open my eyes to the fact that not all rental income is created equal and should be discounted accordingly.

 

[poyet]

The big difference is between 4% on residential estate and 10 to 14% revenue before taxes on commericial estate rent to companies and not individuals.
Surprising that most go for residential instead of commercial. I do not rent residential estate as it is too much of a hassle while commercial is easier dealing with companies. Of course, some go bankrupt from time to time and it is a significant problem, just to get rid of the stuff they leave behind when we talk of industrial activities... I've the case right now, but that would not divert me from commercial estate.
Mt two cents.

 

[azanon]

- I would not dare to think about ER if I had no solid history of tracking expenses and setting up monthly and annually our personal "balance sheet" and  "P+L".

Ive used Quicken since 96 for all my finances, but i have to disagree with this.   Its not like subtracting how much you save per month from your net income is such a hard calculation.   The difference is how much you currently live on.

 

[laurence]

Ive used Quicken since 96 for all my finances, but i have to disagree with this.   Its not like subtracting how much you save per month from your net income is such a hard calculation.   The difference is how much you currently live on.

Agreed, DW and I have tracked our expenses in great detail simply with excel '97, even have pretty charts to track trends.

bearkeley, how old are you and your spouse? Have you paid much into social security, will you be seeing a good chunk at 62/67? What is your current mortgage?

At first when I calculated what it would take to ER, I was very upset because of the uncertainty that such a long time horizon presented. But once I factored in SS (yes, I'm an optimist) I realized I was talking about the portfolio needing to last only a dozen years. With no mortgage, DW and I could live on a conservative SS estimate and my small pension. Certainly we'd prefer to live better than that, but it takes a lot of the fear out of it (that and the understanding of SWR).

 

[kumquat]

Simple, I think. Just save 25X your current income. 4% WR gives you your current income. If you aren't spending more than you make then you have arrived. That's our plan.

 

[youbet]

There's only one way to REALLY be sure.........RETIRE. If you don't run out of money before you die, then, sure enough, you could afford to retire. No other test will give you 100% accurate results.