Calculating capital needed for FIRE?

[Paws]

Hello everyone,

I was wondering if everyone could help make sure I have calculated what I need to accumulated to get to FIRE. Here is my process.

1 Calculate yearly living expense
2 Multiplied living expense by 15% for taxes.
3 Add total yearly expense plus 15% taxes =1 year cash reserve
4 took that total and divieded by .035 (safe withdrawal rate) This gave me amount of portfolio needed.
5 Add it up all my debt (Mortgage ect.)
6 add total portfolio needed to 1 year cash reserve plus debt to get total capital needed.

Here is a simple example
1-Living expense $50,000
2-Taxes = $50,000* 15% = $7500
3-Total living expense + taxes = $57500. 1 year cash reserve
4-57500/0.035=$1,642,857.14 portfolio needed
5 total debt $150,000
6 total capital needed =57500+1642,857.14+150,000 = $1,850,357.14
Does this seem like a good started estimate?

 

[MasterBlaster]

Hello everyone,

I was wondering if everyone could help make sure I have calculated what I need to accumulated to get to FIRE. Here is my process.

1 Calculate yearly living expense
2 Multiplied living expense by 15% for taxes.
3 Add total yearly expense plus 15% taxes =1 year cash reserve
4 took that total and divieded by .035 (safe withdrawal rate) This gave me amount of portfolio needed.
5 Add it up all my debt (Mortgage ect.)
6 add total portfolio needed to 1 year cash reserve plus debt to get total capital needed.

Here is a simple example
1-Living expense $50,000
2-Taxes = $50,000* 15% = $7500
3-Total living expense + taxes = $57500. 1 year cash reserve
4-57500/0.035=$1,642,857.14 portfolio needed
5 total debt $150,000
6 total capital needed =57500+1642,857.14+150,000 = $1,850,357.14
Does this seem like a good started estimate?

You have a handle on it. Gross Income divided by safe withdrawal rate = required nestegg size.

It gets more nuanced though. You can proaobly expect some Social security income somewhere down the raod. That reduces your nestegg size.

Also is the 3.5% SWR really a safe witdrwal rate in this environment ?

There are flavors of taxes also from (after tax) capital gains? dividend income ? and qualified money wihdrawals (ie. IRA/401K)

 

[pb4uski]

The approach is sensible, but the outcome is probably too much.

You should consider including SS and any pension in your cash flow, assuming that you are eligible, which will reduce your withdrawals in years after you start drawing them. Since my pension is not COLA'd but expenses and SS are, I needed to do a year-by-year projection. I also had some one-time expenses to include (DD wedding, DS college, etc).

Taxes will likely be much less than 15% since your taxable income will be interest/dividends/capital gains on the taxable accounts in your nestegg. I'm expecting my tax rate this year to be near 0% compared to more than 15% when I was w*rking.

Whether or not to include the debt depends on whether or not debt service is included in the cash flows. Assuming that the 50k of living expenses excludes debt service payments then that approach is fine. If not, then you are double counting.

The approach that I took was to do a spreadsheet projecting my living expenses to age 100 and mortgage payments and then include reductions for projected SS and pensions. I included inflation at 3% for most items but at 5% for healthcare. I also project out taxable income each year based on the above and estimated taxable investment income and IRA withdrawals. Then I discounted the resulting cash flows at an estimated after-tax earnings rate from my portfolio to derive the minimum amount that I needed.

I applied your approach to my numbers and got twice as much as I think I would need.

You might find Quicken's Lifetime Planner (part of Quicken Deluxe and higher) helpful in doing your projections.

 

[ERD50]

Yes, good start. A few details (in addition to previous post):

You might be double-counting some of your mortgage. If you are including the mortgage payment as p/o your annual expenses, then that is paying off the debt. Not sure you need to subtract the debt from your portfolio also. After all, your liquid portfolio will produce X returns, having a mortgage doesn't make that liquid portfolio smaller.

Does 'living expenses' really match your 'retirement living expenses'? These may be the same, but can be very different for some people. I wouldn't assume it, think about health insurance, travel, etc.

-ERD50

 

[Midpack]

Conceptually fine. I'd reinforce two points already made:

1. Why you exclude Soc Sec (or any pensions or other income)? If you want to count only part of the published SS benefit, for example many people use 70% for their Soc Sec projection, nothing wrong with that. But you should reduce your projected expenses by whatever income you expect coming in (with consideration for COLA'd or not).
2. 3.5% withdrawal rate may be right but without your planned retirement duration or age, we don't know. Assuming normal life expectancy, 3.5% would be conservative for a 65 year old, but aggressive for a 45 year old based on past history.

 

[Paws]

I did not include mortgage in my living expenses because my DW and I will feel better without it.

The following was just a simple example. I am not sure how to calculate my SS yet. I was also planning to work part time in semi retirement to hedge my bets a little. This income would be subtracted from my need living expense.

Also would I subtract dividend and interest income from Living expenses or is that just part of the total return?

My pension income is hard to calculate right now because I have a cash balance plan so I don't know what my pay out is yet. So I just include that in my portfolio value.

Thank you for any suggestions.

 

[Paws]

I hope to retire early but am not sure if I will make it base on how this rough economy has treated my family. We have weather it better then most but still bean tougher then before.

My concern about SS is how to account for what it will be if I stop working before I start collecting.

Thanks again for the suggestion and points to consider.

 

[Midpack]

Paws: I did not include mortgage in my living expenses because my DW and I will feel better without it. Many of us build in safety factors, there are many ways to do so and your approach isn't uncommon.

The following was just a simple example. I am not sure how to calculate my SS yet. I was also planning to work part time in semi retirement to hedge my bets a little. This income would be subtracted from my need living expense. You can get a SS estimate online anytime, I can't imagine not building something into your plan for SS, but you may have your own good reasons.

Also would I subtract dividend and interest income from Living expenses or is that just part of the total return? Just an unnecessary exercise to try to subtract dividends and interest, it's part of total return.

My pension income is hard to calculate right now because I have a cash balance plan so I don't know what my pay out is yet. So I just include that in my portfolio value. Most companies will provide a monthly benefit (and lump sum where available) estimate if you ask, but maybe yours doesn't.

Again re: WR, how many years will you plan to be retired? How many years until up retire? If you're comfortable answering...

 

[pb4uski]

I did not include mortgage in my living expenses because my DW and I will feel better without it.

The following was just a simple example. I am not sure how to calculate my SS yet. I was also planning to work part time in semi retirement to hedge my bets a little. This income would be subtracted from my need living expense.

Also would I subtract dividend and interest income from Living expenses or is that just part of the total return?

My pension income is hard to calculate right now because I have a cash balance plan so I don't know what my pay out is yet. So I just include that in my portfolio value.

Thank you for any suggestions.

Since you don't include your mortgage payments in your living expense then it makes sense add back the debt as you have.

You would subtract SS and/or part-time income from your needs.

Dividend and interest income is implicitly included in the 3.5% withdrawal rate, but you should calibrate your withdrawal rate based on your age as Midpack suggests.

I would agree with including the cash balance plan as part of your nestegg like any other retirement savings.

 

[pb4uski]

I hope to retire early but am not sure if I will make it base on how this rough economy has treated my family. We have weather it better then most but still bean tougher then before.

My concern about SS is how to account for what it will be if I stop working before I start collecting.

Thanks again for the suggestion and points to consider.

At Retirement Estimator there is a tool that can tell you what your SS will be if you stop working before you start collecting.

 

[eytonxav]

One correction. To get to $50,000 in living expenses after 15% tax, you need to divide $50,000 by .85 = $58,823

 

[rescueme]

One correction. To get to $50,000 in living expenses after 15% tax, you need to divide $50,000 by .85 = $58,823

Yup ...

 

[FIRE'd@51]

You may be overestimating your income taxes.

If 50K is gross income and is all ordinary income, it is not all taxed at 15%. For a couple who file jointly, the standard deduction plus two exemptions is 19.5K, so you would have 30.5K of taxable income. Under current tax law, your Federal tax liability would be about $3.75K, or 7.5% of your gross income. Of course, you may still face state and local income taxes, but it is unlikely that the effective tax rate is 15% for the example you provided.

 

[Paws]

Thank you for all the help I will add in SS to income. I will also lower my taxable income.

 

[Paws]

Another question. How do I add in my SS because if it will be further in the future then when I start using my nest egg? Although SS will probable be around the same as any part time work. So I suppose I could plan to work part time until SS kick in.

Also how will part time work change SS? Will it lower monthly pay out because I am not earning as much for quite a few years?

Thanks again for all the help
Paws

 

[David1961]

This may be a nit, but it seems like you are adding the $57,500 in twice. Won't the $1,642,857 generate the desired $57,500 the first year? Just curious as I'm fairly new to this, too.

 

[Paws]

I add the 57500 back in because I would like to have cash reserve of 1 years expenses so I can have more flexibilty in when I withdrawal money.