What I can and can't control (investment income vs spending range)

[petershk]

I have to admit. As I get close to FIREing I am obsessed with this idea of waiting until the "any minute now" market correction... Saving almost all my salary between now and then... Then investing it all at that time and get this huge relief that I entered at a good time. It's like a wet dream for me.

This is dumb and won't work.

First... I could spend 10 years waiting or it could happen tomorrow. Second... It could go down... Then down more or up for a second and then down even more. I can construct endless outcomes that are either positive or negative. Time will either be good or bad depending on how I feel.

That's what I can't control.

But what about this?

My spending is about 8500$/mo on about 3.4M which after taxes is pretty safe even at 40 years old. But not paranoid crazy man safe... And I'm a bit of a paranoid crazy man when I think about FIRE and money.

4250 of that is a mortgage that eats no matter what. market cuts in half? Still 4250... High inflation? 4250. Deflation? 4250.

But check this out.

I could rent my unused master suite for about 500$/mo. I could convert my huge garage to a legal rental for about 50k and rent that for about 900. Bam... 1400$ drop... A cut of almost 20% off my annual draw. Think a change in asset allocation or market timing can produce that result with greater success? I don't.

There's more.

Stop eating out completely. 300$/mo. Live with (horror) ONLY 1 phone. 100$/mo. Be careful with grocery shopping. 200$/mo.

That's another 600$.

Suddenly my "bare minimum" is 6250 and I'm not really doing anything extreme (some people might find renting extreme but in parts of socal lots of people do this ).

So now I'm closer to 85k.

That market drop seems much less scary now. And these are changes I can make and control and are largely market independent.

I bet if I spent as much time and energy looking for ways to cut costs or possibly generate income in a happy for me way as I did worrying about the market I might drop my "bare minimum" more... Maybe much more.

What do you guys think? Do you find yourself worried about things you can't control and ignoring the things you can?

Sent from my HTC One_M8 using Early Retirement Forum mobile app

 

[REWahoo]

Peter, you need to chill out.

Take a deep breath and consider how great it is to just be alive. All this angst over uncontrollable unknowns isn't conducive to a happy life. Find yourself a hobby to help you think of something other than markets and spending.

 

[Sarah in SC]

Peter, you need to chill out.

Take a deep breath and consider how great it is to just be alive. All this angst over uncontrollable unknowns isn't conducive to a happy life. Find yourself a hobby to help you think of something other than markets and spending.

Word.

 

[Marita40]

I think if I worried that much I would not retire until "normal" retirement age. In fact, I am a worrier by nature (although not as extreme, I hope, as you) so that is exactly what I am doing. The fact that I like my work and it is mostly stress free helps, of course. I will most likely retire at 66 and at that point should have a very ample nest egg and a good allotment of SS--that is, the resources to ensure that I do NOT have to worry about money in an obsessive manner. I guess we all know ourselves and type A worriers like me need to plan to minimize worry or it can seriously cramp one's life.

 

[samclem]

A good post, thanks.

I bet if I spent as much time and energy looking for ways to cut costs or possibly generate income in a happy for me way as I did worrying about the market I might drop my "bare minimum" more... Maybe much more.

What do you guys think? Do you find yourself worried about things you can't control and ignoring the things you can?

The allowable variability in the annual spending is, I think, almost as important as its magnitude. DW and I have a fairly low baseline "essential" budget : cheap house, cheap cars, low utility bills, etc. That helps a lot, and will allow us to use the "X% of year end portfolio value" withdrawal method rather than the "starting withdrawal adjusted for inflation each year" method. The former method does a good job of preserving a portfolio's ability to recover after bear markets. We can't control market volatility, but by having a low "baseline budget" we can accommodate it and help our goose continue to crank out golden eggs for a few decades.
So--I guess operationalizing this would entail reducing fixed expenses, cultivating hobbies that can accommodate variable spending (e.g. not being locked into big ongoing subscriptions/memberships/fees, having a way to buy supplies/equipment in "fat" years to carry you through "lean" years, etc)
And--a single dollar saved in monthly spending reduces the portfolio needed to support it by about $300-600. Cut $100 out of monthly spending = $30K to $60K less portfolio needed.

 

[utrecht]

I would downsize to a much smaller house (even if I had to move to a lower cost area) before I would rent out my master suite.

 

[Midpack]

Peter, you need to chill out.

Take a deep breath and consider how great it is to just be alive. All this angst over uncontrollable unknowns isn't conducive to a happy life. Find yourself a hobby to help you think of something other than markets and spending.

+2. If you're worried about your plan before you pull the trigger, you're probably cutting it too close for your emotional/mental well-being. There will be market corrections and uncertainties -guaranteed, you have to plan on that.

Our plans are based on a 0-2% real return. have been since well before I retired. Our Withdrawal Rate is 2.5%, yielding a historical prob of success of almost 200%. And our current spending/budget identifies "essential" (about 65% FWIW) and "non-essential" for each category - so we've identified where we could easily cut back if necessary. And we're mindful of not adding long term essential expenses - avoid it at all costs frankly.

So we don't worry much. If our plan fails, FI won't be the only thing to worry about, might not even be the worst challenge if the time comes.

If others choose to plan based on optimistic or best case assumptions and a lower prob of success, I could understand why they'd often be nervous...but they're bringing in on themselves?

 

[Which Roger]

Why don't you pay off the mortgage? That would leave you with a portfolio worth somewhere between 2.5M and 3M, and would cut your monthly spending to a little over 4k.

 

[Cobra9777]

Why don't you pay off the mortgage? That would leave you with a portfolio worth somewhere between 2.5M and 3M, and would cut your monthly spending to a little over 4k.

I'd go even further...

I went back and read your intro thread and also the mortgage thread. Honestly, I would sell the $1.2M house, pay off the $686K mortgage, and buy something for cash with the remainder. Or at least something in between with a significantly smaller mortgage. Just something to think about before you start renting out the garage to a guy with tattoos and a drum set. Also cuts your withdrawal rate dramatically.

The rest of your spending ($51.6K/yr) seems quite reasonable to me for a young family with two kids, in a high COL area. Even so, I'm sure there are ways to cut. When my paycheck stopped, I made it a hobby of sorts to find creative ways to reduce spending without sacrificing anything. For example, don't give up a phone, just get off whatever service charges you $100/phone and find an MVNO.

But that's all small potatoes. Right now, I'd be addressing the elephant in the room, which is your house. No way I'd allocate half the ER budget to service a mortgage. Maybe that makes sense while you're working and your income is 2.5X expenses. But for a 39 year-old retiree, with a $3.4M nestegg, and kids still in diapers... no way. But that's just me.

 

[daylatedollarshort]

I bet if I spent as much time and energy looking for ways to cut costs or possibly generate income in a happy for me way as I did worrying about the market I might drop my "bare minimum" more... Maybe much more.

What do you guys think? Do you find yourself worried about things you can't control and ignoring the things you can?

I find it a fun hobby for me to try to figure out ways to live well or better and spend less. I get a lot of books on topics like simple living and urban homesteading. I can control that and that is something we enjoy doing. We also have some hobbies that earn an income. I can't control the stock market or interest rates. We've been doing this whole increase passive income / decrease recurring costs thing for several years now and I am still blown away by how much we can cut costs and yet go out to eat more, eat healthier at home, take more day trips, join more clubs, live in the same house and drive nicer cars than we used to. We just weren't good at optimizing our expenses before and we didn't have time to look for deals and price shop.

We kept our house because that has been an appreciating asset over the years, cut back on the depreciating consumer goods and found a lot of free or cheap stuff to do all week (meet ups, museum and garden memberships, happy hours, parks, beaches, civic groups, bike trails, urban homesteading, lunch specials, planetarium membership via a Groupon and a discount coupon, finding all the best Taco Tuesdays, etc.)

Houses cost what they cost if you want to live in Coastal California and have a nice house to live in. I think the median price in the Bay Area is now $742K, so I don't see your house as necessarily being a show stopper for you for ER. The key thing to look at is your house likely to be a good long term investment. Many here spend $10K to $20K a year on travel a year and travel has no resale value, appreciation potential and it is not something you can use every day for the rest of your life. I am not against travel - just pointing out your house may also be a good investment and not just a pure expense like other uses of your money might be. Your house may also be a good way to diversify your investments beyond stocks and bonds.

 

[mrfeh]

I'd go even further...

I went back and read your intro thread and also the mortgage thread. Honestly, I would sell the $1.2M house, pay off the $686K mortgage, and buy something for cash with the remainder. Or at least something in between with a significantly smaller mortgage.

+1

Even with a large portfolio balance, I would not want to enter retirement owing $4200/month for my house.

 

[ivinsfan]

This is probably the 3rd thread where the subject of your house has come up.

Why do you have an unused master suite? You mention in your very first intro that you could downsize your home. I guess it really isn't an acceptable option in your mind. I think the trade-off for continuing to live in your current house is more years at work. Those smaller savings you mentioned will be a drop in the bucket compared to changing your housing situation.

 

[haha]

But what about this? <>


But check this out.

I could rent my unused master suite for about 500$/mo. I could convert my huge garage to a legal rental for about 50k and rent that for about 900. Bam... 1400$ drop... A cut of almost 20% off my annual draw.

What will your wife say when some other woman is sleeping in her bed and bathing in her master bath when she is down the hall in the kid's room? You had better hope that the renter will be quiet in her intimate life, and that she is not very good looking.

Ha

 

[Meadbh]

This is probably the 3rd thread where the subject of your house has come up.

Why do you have an unused master suite? You mention in your very first intro that you could downsize your home. I guess it really isn't an acceptable option in your mind. I think the trade-off for continuing to live in your current house is more years at work. Those smaller savings you mentioned will be a drop in the bucket compared to changing your housing situation.

+1
Or start a bed and breakfast. Of course, that's w*rk!

 

[daylatedollarshort]

petershk, if you look at your house expenses, consider how much of your mortgage payment is principal and how much is interest. The principal payments really are not changing your net worth.

Personally I would not want to rent out a room to a stranger. I would downsize before I would do that. But can you cut costs in other ways, like price shop insurance and use conservation methods to reduce your utility bills?

 

[W2R]

This is probably the 3rd thread where the subject of your house has come up.

Why do you have an unused master suite? You mention in your very first intro that you could downsize your home. I guess it really isn't an acceptable option in your mind. I think the trade-off for continuing to live in your current house is more years at work. Those smaller savings you mentioned will be a drop in the bucket compared to changing your housing situation.

+1

My spending is about 8500$/mo on about 3.4M which after taxes is pretty safe even at 40 years old. But not paranoid crazy man safe... And I'm a bit of a paranoid crazy man when I think about FIRE and money.

4250 of that is a mortgage [...] Stop eating out completely. 300$/mo. Live with (horror) ONLY 1 phone. 100$/mo. Be careful with grocery shopping. 200$/mo.

That's another 600$.

So, if you sold your house, moved into a less expensive house and paid it off, and cut back on groceries, eating out, and phone, your expenses would be no more than
$8,500 - $4,250 - $600 = $3,750/month, which is $45,000/year. Maybe less, since house maintenance and utilities are usually less if one moves to a smaller, less expensive home.

During some years perhaps you could spend more if your investment yield would support it. Maybe you could travel during those years if that is appealing to you. When the market is down, then you could stay home and economize.

 

[FIREd]

I recently read "The Old money Book", and the author states that "Financial independence is easier to maintain when you live simply". I agree. I also like to remain "agile, mobile, and hostile".

I live in San Francisco. It is very expensive to live here. But I refuse to buy a home in this area. I rent a small apartment instead. I have trimmed down my worldly possessions to a minimum to remain mobile. I have done away with rental properties and moved to liquid and low-maintenance investments. I have sold my second car. In other words, I have simplified my life so that maintaining financial independence is easier. I don't worry so much about a market crash because if my means become inadequate to stay in San Francisco, I can be out of here by the end of the month. I have not felt this free since I was a graduate student.

 

[Animorph]

Regardless of all the house stuff, I think one big point of the OP is that if you can find that flexibility in your spending you can feel more comfortable with a higher withdrawal rate.


FIRECalc tells us that the average outcome with a 4% withdrawal is a significantly larger portfolio at the end. Far from "spending down" your portfolio, you will most likely have a much larger portfolio. The problem is that there are a few historical retirement years where 4% does drain your portfolio. With flexibility, you can reduce your spending if your portfolio is decreasing, hopefully avoiding an empty portfolio.


I'm not trying to be super conservative early in retirement. I'm willing to spend a bit extra (all part of the budget, not seat of the pants) as long as things are going well. Including letting the 3.25% mortgage ride. If it looks like we're on a bad retirement scenario, we'll cut back then. Seeing that flexibility in our spending was an important factor in being able to calmly retire.

 

[eta2020]

That's what I can't control.

But what about this?

My spending is about 8500$/mo on about 3.4M which after taxes is pretty safe even at 40 years old.

4250 of that is a mortgage that eats no matter what. market cuts in half? Still 4250... High inflation? 4250. Deflation? 4250.

That 3.4 Million is invested assets or it includes the house?

That make a lot of difference because you may be talking about big 1 Million dollar house which cuts income producing assets to 2.4 million and which will suck lot of money on maintenance and taxes.

Personally I would downsize unless you are talking about small place ( which makes it at least cheap to maintain) in expensive and nice location and that is not included in 3.4 million you mentioned.

And yea I would be worried to retire with 4200 USD mortgage. Add to this property taxes and maintenance costs.......

 

[ivinsfan]

I think the point several of us are making is you have a hard time being "flexible" when your house payment is 4200 bucks a month....

 

[daylatedollarshort]

I went back over some of your other posts. If you pay off the house you still would have $2.9M left, right? At $50K spending a year (no mortgage) you would have 58 years of expenses covered (even assuming a zero real return), not including Social Security or part-time work. At $80K expenses, that drops to 36 years.

If it was me and I really liked the house and my spouse was resistant to moving, I'd consider working part-time and/or cutting down on consumer goods and services and keep the appreciating asset I also got to live in and enjoy 365 days a year. If you have kids and good public schools that is another reason to stay. Private school can be very expense and the tuition doesn't appreciate.

 

[petershk]

That 3.4 Million is invested assets or it includes the house?

That make a lot of difference because you may be talking about big 1 Million dollar house which cuts income producing assets to 2.4 million and which will suck lot of money on maintenance and taxes.

Personally I would downsize unless you are talking about small place ( which makes it at least cheap to maintain) in expensive and nice location and that is not included in 3.4 million you mentioned.

And yea I would be worried to retire with 4200 USD mortgage. Add to this property taxes and maintenance costs.......

Good points.

the 3.4 doesn't include the house and the payoff mortgage is 680k or so. It's about 2300 sqft and about a 7200sqft yard which is pretty average for the area... socal is ridiculous . Also the 4250 includes taxes and insurance which are about 1k of that.

 

[petershk]

I think the point several of us are making is you have a hard time being "flexible" when your house payment is 4200 bucks a month....

I think you hit it on the head.

I think my biggest decision is whether to
1) pay off the house and have lower average returns with less volitility
2) move to a cheaper place and increase spending flexibility
3) Keep things as they are and not be so stressed about what is essentially an amazingly great situation.

I really appreciate the forum's indulgence. I'm new to this stuff and there's VERY few places where I can be open and transparent. Family and Friends can potentially provide support, but I'm sure you all know the challenges of that

 

[NW-Bound]

Good points.

the 3.4 doesn't include the house and the payoff mortgage is 680k or so. It's about 2300 sqft and about a 7200sqft yard which is pretty average for the area... socal is ridiculous . Also the 4250 includes taxes and insurance which are about 1k of that.

So, if you pay off the mortgage, you still have $2720K left, with an expense of $63K/yr. That works out to a WR of 2.3%. That should be OK, though you are still young at 40, and with little kids.

Your expenses are quite reasonable. We are spending significantly more than you are, and we are empty nesters. Our WR is higher than 2.3%, but we are also a lot older and closer to SS. I don't want to leave too much to our kids.

 

[eta2020]

I think you hit it on the head.

I think my biggest decision is whether to
1) pay off the house and have lower average returns with less volitility
2) move to a cheaper place and increase spending flexibility
3) Keep things as they are and not be so stressed about what is essentially an amazingly great situation.

I really appreciate the forum's indulgence. I'm new to this stuff and there's VERY few places where I can be open and transparent. Family and Friends can potentially provide support, but I'm sure you all know the challenges of that

You do not own McMansion and it is located in a nice part of the country.

I would pay off the house and then retire if you are under 55. If you are over 55 I would just retire and enjoy life.