FIRE Financial cushions against unforeseen events. What did you do?

[peteyperson]

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

 

[shiny]

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.

 

[acg]

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.

 

[retire@40]

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.

 

[SteveR]

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.

 

[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]

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

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!

 

[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

 

[Mr._johngalt]

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

 

[TromboneAl]

One financial cushion is: a reverse mortgage.

 

[Mr._johngalt]

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

 

[Cut-Throat]

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.

 

[sgeeeee]

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.  

 

[Mr._johngalt]

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

 

[Martha]

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.

 

[Robert the Red]

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.

 

[KB]

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.

 

[Cut-Throat]

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.

 

[retire@40]

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.

 

[REWahoo]

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.

 

[retire@40]

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.

I understand that if I retired in year 1929 I would run out of money before the end of my 40-year retirement, but how does it bring my portfolio back up to $17,446 in year 40 when it was negative in years 38 and 39? If you deplete all your money and do not add to the pot, how can your portfolio go up? Or are the numbers after the first negative meaningless?

year 38 -49241
year 39 -18787
year 40 17446

 

[Cut-Throat]

I understand that if I retired in year 1929 I would run out of money before the end of my 40-year retirement, but how does it bring my portfolio back up to $17,446 in year 40 when it was negative in years 38 and 39?  If you deplete all your money and do not add to the pot, how can your portfolio go up?  Or are the numbers after the first negative meaningless?

    year 38  -49241
    year 39  -18787
    year 40   17446

I tried this and could not get it to go positive, once it went negative.

Do you have any other income streams that are kicking in down the road? Or less spending that would cause a surpluss to be invested again?

 

[retire@40]

I tried this and could not get it to go positive, once it went negative.

Do you have any other income streams that are kicking in down the road? Or less spending that would cause a surpluss to be invested again?

That's exactly what it was. I had put in $18K of social security and that made it go back up. Without it, it stayed negative.

Interestingly, even in my worst-case scenario in a 1929 situation, if I could borrow enough to keep me afloat in a few of the bad years, I could end on a positive note assuming I get social security.

 

[Cut-Throat]

That's exactly what it was.  I had put in $18K of social security and that made it go back up.  Without it, it stayed negative.

Interestingly, even in my worst-case scenario in a 1929 situation, if I could borrow enough to keep me afloat in a few of the bad years, I could end on a positive note assuming I get social security.

And in reality, we'd all cut our spending to uncle mick levels in a 1929 situation and die with 8 figure net worths!