42 and hopeful...

[Cool_Sparrow]

Hi all

This is a follow-up to my OP 5 years ago that the system no longer accepts replies on, so I started a new thread to update.

It's almost 5 years since my last update. Things are looking up, mostly thanks to nice capital market growth over the last 5 years. Junior (now almost 8 year old!) college fund has been boosted to $140K. Retirement assets now nearly at $1 million. Good thing I did not withdraw from either account over the last 5 years and kept some part time work going to cover our family living costs. Still living with wife (same one as five years ago ). I am now 42, so that's 5 less years to fund my retirement years compared to my first post in this forum Living expenses (real cost tracking over last one year) average INR 110,000 per month for our family, which works to $1833 (including insurance - see next para). Living a decent upper middle class lifestyle here, so no complaints, other than the typical developing country issues that other expat retirees must also be facing. Inflation here is at least 5-7%, so that's always a worry over long retirement horizons like mine. We haven't traveled much yet, so if I consider that in the future, we should be okay with $2000/month in today's value, or pre-tax equivalent of $2500/month or $30K/year.

Regarding health insurance in India, I did not get medical insurance other than catastrophic health coverage for hospitalization, which costed me barely $25/month for coverage upto $10,000/year, which is fine for 90% of in-hospital surgical procedures in India and even covers a semi-private room for the entire stay. Had to use the insurance twice in the last 5 years, and the insurance covered everything (). OP visits are not covered, which is fine as costs are relatively low. I am OK with this kind of insurance coverage.

I hope to start withdrawing from my portfolio and give up my side income gig (that too gets tiring in the crowded and competitive space here!) soon. So, $30K withdrawal in first year on $1 mill portfolio is 3% WR. I hope this is 'safe' enough to fund a 45-50 year retirement. What I am not including is SS payments of ~$1000/month from 67 (that's what my vested SS current data says) but then, don't want to count much on SS that's 25 years away for me.

A quick clarification please? Should I include dividends (currently reinvested) in the WR calculation? Dividends are around $20-22K for my portfolio, so should I start with stopping the reinvestment and spend that first before selling capital to fund the rest? How does this work in practice for ER?

Your thoughts on the 'revised' plan above please? Would like to hear from ER Experts and people in similar situation as mine. Thanks!

 

[pb4uski]

FWIW, when I retired and started withdrawals rather than accumulation I changed and now receive dividends in cash (direct deposit to my checking account where it is eventually spent) rather than reinvesting. I makes it a tad easier at tax time and is a pleasant surprise each quarter. My monthly withdrawals are just correspondingly lower.

 

[Cool_Sparrow]

Thanks, pb4uski, for sharing your experience.

Nearly 350 views and only 1 reply?!! I request all ER experts (REWahoo and several others) to opine on my plan please... Need confidence that I am on the right track here. Any pitfalls you see? Thanks.

 

[REWahoo]

Sparrow, I'll respond but please understand there is no relation to the number of posts on this forum and expertise. I know next to nothing when it comes to retirement overseas and really don't have a clue what pitfalls or windfalls you may experience as a result of retiring outside the US.

That said, it does appear you have a handle on your financial situation. And like Pb4uski, I also take dividends as income in retirement and yes, they are part of my withdrawal calculation.

One other suggestion: take a look at Gumby's excellent summary of questions you should answer prior to retiring. http://www.early-retirement.org/for...-answer-before-asking-can-i-retire-69999.html

 

[MBAustin]

With a plan like that, I would be keeping a close eye on asset allocation (rebalancing, etc.) as well as low expenses. Also, while hopefully unlikely, I would want a significant emergency fund for medical expenses above your somewhat bare-bones insurance. Finally, while your portfolio covers your expenses in a relatively low-cost country, have you considered what you would do if circumstances led you to return to the USA or another higher-cost location?

Not trying to be Negative Nellie but just some things I would think about. In the meantime, you seem to be enjoying your new life so good for you!

 

[papadad111]

Not an expert either ....

Are you a US citizen and thus subject to global taxation ? You likely fall below the income exclusion limit so should be ok, but something to consider if harvesting a large cap gain in any particular year.

I am concerned with inflation in all developing countries. To hedge that, I recommend at least 1 piece of real estate - perhaps you own your home - that's a good place to start - to limit effects of rent increases. Food and medical costs are known to spike so important to consider that too. Finally good plan on the education fund. Aside college, need to consider cost of private preparatory high school as well if public schools are poorly funded. The heavy kid costs have yet to hit so be prepared to flex your budget accordingly.

A 3 pct SWR is reasonable for your nest egg but like others I think you are taking on unnecessary risk by not having better health insurance as you and family get older and more active.

How has the rupee depreciation over past 12-18 months helped your budget and could you see the reverse happen? Are you prepared for that ?

 

[Cool_Sparrow]

Thanks to you all for your inputs. Gumby's summary is indeed excellent, so I thought to answer additional questions you have, I should reply to each point in his very useful list of things to think about. After you review the following, please let me know if you feel confident about my proposal to ER.

1. What are your expenses? No, your real expenses that you have tracked carefully over a period of at least two years, not some rough estimate that you just pulled out of thin air. If you don't know where your spending flow goes now, you've got no business turning off the income flow.

Our monthly expenses, which can be reduced by 15% without much trouble, have been tracked over the last 1.5 years and reconciled with over 98% accuracy by my estimate. So, I believe the $1833 monthly figure is inflated by at least 10-15%. This is due to my current job-related expenses, which will all but disappear when I ER. Another cost reduction down the line possible is moving into own house from current rental. Net savings (rent – monthly condo fees) would be about $400 per month, which is also not considered in the figure. The cost of buying the condo is not included in the retirement pool, and is available separately. Objective of buying condo outright is also to hedge future inflation – rent being the biggest component of our monthly expenses (about 30%). My retirement asset base is currently 75% stocks, 25% cash, 0% bonds. (I have been slowly moving to cash since mid-2013 from 95%+ equities). The 25% cash portion is roughly equal to 10 years of living expenses, so emergency funds are available within the cash portion if required.

2. Are you sure those are your expected expenses in retirement? How will you pay for health care? And how much will you pay? Have you gotten any quotes? If you're accustomed to group health insurance through your employer, prepare to be shocked.

Good points on health care. Perhaps my health insurance needs to be bumped up from $25 per month to $50 per month – which will give me a gold-plated plan here. This can still be covered within my monthly budget with no material change to the calculations. All the outpatient costs are covered in my monthly expenses. Yes, I realize these costs will go up in the future, but we hope they will be covered by inflationary adjustments in monthly expenses. Also, the last 3 years did have significant surgical and medical expenses included in my actual monthly expenses that I have included (other than insurance-covered), so I hope this is sufficient.

3. No, really, did you account for giving money to your children or grandchildren for college or a home or something like that? Or supporting your elderly parents? How about repainting the house, replacing the furnace or roof, buying a new car? If you live long enough, you'll likely do all of these things.

Current monthly expenses include a reasonably good private school till my son reaches undergrad college. Son’s college education is provided for as explained earlier. If he needs more, he’s got to either work or get a loan. Our elderly parents are self-sufficient and have adequate funds for their long-term care. In fact, it’s my parents who inculcated the savings habit in me from early age, so they are living examples for me to follow (even today).

4. Do you plan on any major lifestyle changes? For instance, will you buy a vacation condo on Maui or take up Formula 1 racing? How will this affect your spending?

No. Other than providing for a bit more travel costs explained in my OP (~$170/month) bumping up monthly budget to $2000, we don’t expect to do much more.

5. What are your sources of income in retirement? No, the real, honest-to-God actual sources of guaranteed money (or as close as it gets), not some vague idea that you'll pick up a little part time income on the side.

Part-time work can be continued but ideally would like it not to be forced on me. SS for me at $1000/month (which is 75% of my monthly vested figure as per SS) from age 67. Wife’s SS is $750/month (again 75% of vested figure as per SS). Figures are at today’s dollars. I have taken 25% discount as current SS statement says that we can expect about 3/4th of benefits from 2041 if Congress does nothing. Beyond that, the only ‘guaranteed’ benefits are what my portfolio generates, if I stick only to dividends (no sales), it is $20-22K/year.

6. Do you know what your pension really will be or are you just guessing? Have you taken into account any discount for retiring before some specified age? Will you have a survivor provision, and how much will that reduce your pension? Will you get a COLA?

There is a small vested pension from my wife’s former employment (about $400/month as I recall), but we’ve completely ignored that as who knows if we will ever get it.

7. Have you gone to the Social Security Administration website to calculate how much you will get from social security? If you or your spouse ever had a non-social security job, will you be subject to the GPO or WEP?

Yes, please see answer to Question 5 above. All my figures are from SSA website using my and wife’s actual earnings records.

8. Have you included taxes in your retirement income calculation? Be sure you understand how your state of residence and the IRS will 'reach out and touch you' once you give up your paycheck for an IRA withdrawal, SS, pension or other source of retirement income.

Since most of my assets are in taxable and Roth IRA accounts (i.e. tax paid already), I think it is mostly tax efficient. Also, Dividends will be primary source of income (at least cover 2/3rds of expense needs), so should be taxed at lower rates. My effective tax rate is very low because of standard deductions and exemptions. Still, as a precaution, I have considered an effective 20% tax rate on $2000/month post-tax budget, so pre-tax budget is at $2500/mo ($30K/year).

9. What is your nest egg? And by nest egg, we mean real measurable dollars in some account that you can value on a daily basis and liquidate bit by bit as you need money, not raw land of speculative value, not the current home equity for a house that you're living in with no plans to move from in the near future, not your collection of Star Wars action figures, and not some inheritance that you may or may not receive in the future.

Retirement nest egg:~$1 million

10. Is there some reason to believe that you will not live to be at least 85?

No, I have assumed living till 90 in all projections. For FIRECalc, I have used 50-year retirement period, which takes me till 92.

11. Once you know the answers to all these questions, did you run your numbers through FIRECalc? What does it say?

Using $30K as pre-tax spending, and portfolio specified as 75% stocks, 25% 5-year Treasury, with 0.5% expense ratio, inflation as per CPI, and not considering any SS or pension, This is what FIRECalc reports:
FIRECalc looked at the 94 possible 50 year periods in the available data, starting with a portfolio of $1,000,000 and spending your specified amounts each year thereafter. Here is how your portfolio would have fared in each of the 94 cycles. The lowest and highest portfolio balance throughout your retirement was $894,763 to $17,382,027, with an average of $5,145,521. (Note: values are in terms of the dollars as of the beginning of the retirement period for each cycle.). For our purposes, failure means the portfolio was depleted before the end of the 50 years. FIRECalc found that 0 cycles failed, for a success rate of 100.0%.


12. If the unexpected should happen and someone dies prematurely, how much income will the survivor have, and will it be enough to continue with the same lifestyle? Don't forget the impact of the resultant change in tax status (i.e. - married filing jointly to single)

One area I worry about is that expenses are in INR and assets are in USD, so there is always a currency risk. That’s the reason I have retained the 20% cushion in my monthly expenses. Besides, owning the primary home here would mitigate the risk significantly in my view (as 30% of monthly expenses are rent). There is another cushion as well: I have about $200K worth of local investment real estate (5 marketable home sites) that I have not included in any of calculations, meant as currency hedge in case of any unexpected expenses on the upside. Of course, this is illiquid and not really to be counted as ‘emergency’ but can be liquidated within 6 months in my opinion. Another uncertainty is long-term return to US, so we intend to purchase Medicare Part B coverage once we become eligible for SS. So, while we certainly will visit US (we have family in States), not sure if we will live there for more than couple of months in a year. I figure we can decide on longer stays in US in my 60’s depending on portfolio size (at that time!) and our health.

Regarding survivor risk, SS provides survivor benefits that both I and my wife qualify for. These benefits are substantial (>$2100/month), so that serves as ‘insurance’ for surviving spouse. Besides, since I am ‘poor’ based on my projected income and living expenses, my tax situation should not change much whether we file as MFJ or MFS.

 

[Cool_Sparrow]

REWahoo, MBAustin, papadad and others.... requesting your views please on my previous detailed post. Thanks.

 

[REWahoo]

Sparrow, it looks like you are comfortable with your answers those questions. Based on that, I'd say you are good to go.

 

[Cool_Sparrow]

Thanks, REWahoo. Btw, I also used i-ORP, it gave similar results as FIRECalc. Don't know of any other calculators, if there is anything else recommended, please let me know. MBAustin, Papad...your views please?

This is a major decision for me, need to be sure I did not miss anything significant. Also, once I give up the part-time gig, getting the same line of work again would be very difficult as I would lose 'currency' in the fast-changing field.

 

[Cool_Sparrow]

Request to forum admin: Given that this thread is more about financial adequacy of my RE plan, should this thread be moved to 'Fire and Money' section to get more viewers and responses?

 

[MichaelB]

Thread moved

Living a decent upper middle class lifestyle here, so no complaints, other than the typical developing country issues that other expat retirees must also be facing. Inflation here is at least 5-7%, so that's always a worry over long retirement horizons like mine. We haven't traveled much yet, so if I consider that in the future, we should be okay with $2000/month in today's value, or pre-tax equivalent of $2500/month or $30K/year.

Inflation and currency would keep me awake at night. Keeping your investments primarily in $US while your cost of living is in local currency is a risk. A decade of appreciating currency and high inflation will ruin your plan unless you can find investments to keep pace, and that means you need to bring more of your portfolio into the country and currency as well.

 

[NgineER]

10. Is there some reason to believe that you will not live to be at least 85?

No, I have assumed living till 90 in all projections. For FIRECalc, I have used 50-year retirement period, which takes me till 92.

11. Once you know the answers to all these questions, did you run your numbers through FIRECalc? What does it say?

Using $30K as pre-tax spending, and portfolio specified as 75% stocks, 25% 5-year Treasury, with 0.5% expense ratio, inflation as per CPI, and not considering any SS or pension, This is what FIRECalc reports:
FIRECalc looked at the 94 possible 50 year periods in the available data, starting with a portfolio of $1,000,000 and spending your specified amounts each year thereafter. Here is how your portfolio would have fared in each of the 94 cycles. The lowest and highest portfolio balance throughout your retirement was $894,763 to $17,382,027, with an average of $5,145,521. (Note: values are in terms of the dollars as of the beginning of the retirement period for each cycle.). For our purposes, failure means the portfolio was depleted before the end of the 50 years. FIRECalc found that 0 cycles failed, for a success rate of 100.0%.

Firecalc seems to tell you that you are sitting pretty. However, the last starting date for your firecalc retirement is 1963, so you are missing the 70's and early 80's.

Check this thread out:
What I'm doing wrong - Firecalc

If you want to do a complete fifty year cycle, look at 25-30-35 year cycles, take the lowest output from the final results and use that as a starting point for 25-20-15 to give you a fifty year horizon. This is definitely conservative and hopefully still matches what you have found so far.

 

[walkinwood]

In addition to the excellent point that molof makes....

Are you using inflation numbers that you see in India? US CPI is pretty benign compared to inflation in India. btw, what personal inflation rate are you seeing in India - year to year increase in spending?

What do you plan to do with your time? What will some of your day to day activities be?

Congratulations on your achievement. Very impressive.

 

[Totoro]

Just chiming in on the inflation part & currency risk with my two cents.

Few things to consider:

Don't worry about the assets you hold in international stock and multinationals - they operate worldwide so US currency movements has about the same impact on you as it has on US citizens.

What does have an impact though is inflation on pension and SS since it's derived from the US government and they only adjust on the US inflation rate, but you don't count on those. So that's good.

Another risk are assets you hold in fixed income in foreign currency (bonds denoted in USD for example).

What also has a potential major impact is how fast India is going to grow in real economic terms vs. the rest of the world. The faster they grow relatively, the more likely prices will go up locally, especially in housing and land. People buy the land they can afford, if they get more wealthy, prices go up and you are left behind. Your neighbors also will start outspending you and you'll slide from higher middle class to lower middle class. Same with healthcare, it will get more expensive as wages will rise faster than your income / assets.

In other words: if you believe that the economic future of India is brighter than the rest of the world (and specifically the US), buy real estate and prepare for higher costs of living as time marches on.

Another factor to consider is you might be willing or able to leave India for another low cost country if things go out of whack.

Just a thought ..

 

[rodi]

Firecalc seems to tell you that you are sitting pretty. However, the last starting date for your firecalc retirement is 1963, so you are missing the 70's and early 80's.

Check this thread out:
What I'm doing wrong - Firecalc

If you want to do a complete fifty year cycle, look at 25-30-35 year cycles, take the lowest output from the final results and use that as a starting point for 25-20-15 to give you a fifty year horizon. This is definitely conservative and hopefully still matches what you have found so far.

This is a good suggestion. I'm going to rerun my plans with this...

Cool_Sparrow.
did you use $30k in firecalc. You mention "pre-tax" spending of 30k - but firecalc assumes gross spending.

 

[MBAustin]

Seems like you have thought this through well, sparrow. If you are comfortable dealing with the potential of needing to move at some point and the financial implications of that, then who are we to judge? It's not something I would do but that doesn't mean it's not right for you.

 

[Cool_Sparrow]

First, thank you all for your perspectives. And, molof, a big thank you for that excellent insight. Of course, this stress test has given me a big pause. When I take the 'low' of the 35, 30 and 25 year periods and plug into the next part of the 50-year cycle, the 'low' figure from the second cycle turns negative! So, in this kind of stress test, I run out of money if the entire cycle runs on 'low'. Second, what I liked about this stress test is the number of periods FIRECalc uses increases - from 94 50-year periods to 110-130 periods (depending on cycle length). More data points considered, so more accurate results presumably.

The worst case for me was 25 year cycle followed by another 25 year cycle. Taking the low of the first cycle ($378K) into the second cycle input results in not only a low of -$1.3 million, but even the average was negative (-$251K). Of course, the idea of withdrawing $30K when you only have $378K is not practical, so presumably, a retiree would have curtailed his expenses or would have worked to generate more income to protect his portfolio - hopefully long before something like this happens.

Regarding inflation, good points. However, if you look at the past data, whenever there is a recession, there has been a 'fight to safety' to US dollar which has depreciated emerging currencies significantly. Same happened in India over the last few years as well (where INR lost more than 25% against USD), so local inflation is partially (if not fully) protected by exchange rate movements. But still, counting on this alone is not prudent in my view, so point taken on having local investments (mainly real estate) to hedge against inflation.

What does all this mean? Should I from ER forum for a few more years till I shore up my portfolio? Now I am not so sure about my ER.

 

[LongPrime]

^ The ol' Black Swan strikes again.

Happen to us in 2001 as son was applying to colleges and again 2008 when we were over 60 and planning for FIRE. Bonds, Bond Indexes, CD's, will not save you, only soften the fall in relation to equity. Tell everyone how you weather the storms?

Sometimes it is better to sell some risk.

 

[NgineER]

Sparrow, no need to bow, I am merely regurgitating what I have read. If I were in your shoes, I'd keep w*rking for a while and see what trajectory you are on, evaluate your costs and hedge for inflation like others have suggested.
I am not risk averse at this point, aggressive portfolio, but as I get closer to ER, I will definitely look at every angle prior to being comfortable pulling the plug.

Keep us updated!

 

[walkinwood]

Why not return to the US & work for a year? Wouldn't that increase your nest egg faster?

 

[Cool_Sparrow]

Thanks all again for your inputs. I cannot help but wonder whether the aggregate of 2 lowest cycles is unrealistic. Taking the lowest of two 25-year cycles in sequence creates a sort of 'double worse' case scenario, does it not? In other words, the worst possible outcome of 25 years is taken among 110+ possible periods that FireCalc looks at. Then, this is paired again with exactly same worse case - As both periods are overlapping, this is not historical data just a math exercise. This kind of double-worse outcome is a probability of (1/110)*(1/110) = 8.25 E-05 or 0.0083%. While probability is calculated by simple math, the likelihood of two consecutive 25-year disasters in global capital markets - both identically worst case in outcome as FireCalc reports - may be even more remote than what the probability estimates. It just never happened in the last 100+ years of capital market history, at least from what I have read (which may be wrong).

So, while on one hand, I appreciate the new insight this kind of conservative FireCalc analysis shows, I am wondering if this should drive ER decision or not? Do you all do this and decide on ER based on the 'double worse' case scenario in all your analysis? For example, do you split even a 30-year retirement into 2 consecutive 15-year periods where the 'low' of first period is input into the second period?

As to my decision, I am mentally preparing myself to move to a full-time job rather than part-time and earn about $120K/year as per an offer I just got. My idea is that a job like this for even 3 years will help increase both the retirement pool and reduce the years to fund my retirement to hopefully make the situation better. But I shudder to run the 'double worse' case scenario again. :-(

 

[Cool_Sparrow]

As a follow-up to my previous post, I found another instructive way to address the risk raised by molof. The biggest risk to retirement income survival that retirees face is early years' market performance. To simulate that, I re-ran FireCalc for 50-year period with the starting portfolio as $750K (25% less than my retirement pool - to simulate a 30-35% decline in equity markets). With this reduced asset base, I tried how much would my starting withdrawal would have to decline for high confidence level. For 96% success, I got $27,000 per year and 100% success is $25,000/year. In other words, to deal with a major 25% reduction in starting portfolio, FireCalc says I only need to reduce my spending by 10% (From $30K to $27K). Given the cushions I have built in my current expenses (presumed tax rate itself is a cushion), I don't see this as such a big deal. Also, in none of the above cases is Social Security even included, so that is also a cushion.

My question to the experts on FireCalc: Is this a more realistic way of 'stress testing' the retirement portfolio or is the 'double worse' case scenario of my previous post better? What are the ways you all stress test your retirement income portfolio?

 

[Cool_Sparrow]

No replies yet to my previous 2 posts?! :-( I request FIRECalc experts and ERed folks to please share your thoughts on the methodologies mentioned.

 

[Cool_Sparrow]

I request other early retirees to share their views about the two approaches to 'stress test' the portfolio described above. Do you do something similar? I would appreciate any ideas in this regard.

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