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I think the idea of 4% is that you're achieving 7% and letting 3% remain to cover inflation? So that your, let's say, $40,000 annual withdrawal from your $1,000,000 savings has the purchasing power of $40,000 each year although it increases by ~3%.
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Jul 19, 2013 21:27
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http://www.marketwatch.com/retirement/tools/retirement-planning-calculator Here's a really good retirement calculator. It's very flexible. You can go the very simple route: put in your age, salary, savings rate, current assets, and find your retirement age. Or you can get really specific and add each of your investment accounts, tax rates, adjust your cost of living, adjust expected rates of return, etc.
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Jul 19, 2013 21:49
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GoGoGadgetChris posted:I think the idea of 4% is that you're achieving 7% and letting 3% remain to cover inflation? So that your, let's say, $40,000 annual withdrawal from your $1,000,000 savings has the purchasing power of $40,000 each year although it increases by ~3%. This is correct. We definitely hope the stock market does not return a mere 4% per year on average or we'll all be hosed, financial independence or no financial independence.
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Jul 19, 2013 21:55
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paperchaseguy posted:http://www.marketwatch.com/retirement/tools/retirement-planning-calculator enraged_camel posted:This is correct. We definitely hope the stock market does not return a mere 4% per year on average or we'll all be hosed, financial independence or no financial independence.
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Jul 19, 2013 21:59
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No Wave posted:Eh, I don't really like these types of calculators because I really only want to live on interest (not zeroing out the principal by death - that's kind of stressful) and it's not like the calculations are particularly difficult. They're kind of for newbies - I mean, if you're going down the route of FI you're probably thinking about $$$ and not % saved. You could always hire a hitman to arrange yourself to be assassinated the moment your principal hits a certain amount. That should be sufficient motivation to never zero it out.
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Jul 19, 2013 22:02
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Or you could just zero it out and then go back to work for awhile, do whatever. Perfect is the enemy of good.
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Jul 20, 2013 15:59
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tuyop, I love that sentiment. gently caress perfect, you can't possibly account for every eventuality. Just wanted to share a simple example of frugality and long-term thinking from my weekend. Normally we get home after a hard Saturday's work and we're both so exhausted that we just get takeout, for about $25. This time, however, I did a quick calculation and realised we were spending $1300 a year on this stubborn little ritual. With this realisation, we got off our frugal little butts and made a delicious chicken salad with ingredients available in our fridge. If I can work out how to save $25 a week, and then figure out how to earn $25 more per week, I've got an extra $2600 a year to play around with. Neither of those are particularly hard things to do, and it strikes me as an incredibly entertaining challenge to carry out every so often. I've already saved $25, so to earn a $25 on top of that, I'm going to make a new product display for my stall that I've been meaning to do for a while. Investment Question I think I'm ready to hand over some cash to a Vanguard Index Fund. Anyone with experience here, how does this fit into your portfolio? What percentage of your total investments do you place here? do they give regular 'dividends' or is it more like a bank account that accrues interest? This is a long-term investment, right? I shouldn't expect 7% returns my first month, but over the long-run (5-10 yrs) it should be that or higher? Is it better to put weekly deposits or irregular lump sums? Total newb, just want to make sure I understand it all correctly.
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Jul 21, 2013 10:06
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Chadzok posted:Investment Question
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Jul 21, 2013 22:34
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The 4% number came from an older study. The presumption was that some years you do well, some poorly. But on average, drawing 4% of the current balance should not deplete your assets unless you're living 30+ years in retirement. A more modern study, using similar presumptions, and done after 2008, claims that 2.5% is the new "safe" draw down rate. If you get too many years like 2008, where you lose 50% of your portfolio in a single year then there is no amount you can possibly save that last you until your death (unless you have 8 digits saved up). No Wave posted:One hack I'm still looking into - if you have money in an IRA or 401(k), it seems like you can transfer a little of your money every year into its respective Roth counterpart. This is loving phenomenal for years of low income, ie, most of your years post-financial independence. Just transfer about 25k a year from standard to Roth when your income is zero, pay very little tax, and it'll all be tax-free when you start withdrawing it after age 59.5. This is because money taken from a 401(k) isn't technically "investment" income, and is taxed like normal income, and it's much better to spread out your standard income over a long period (done by the gradual conversion). I work in the industry and this 401k thing you're describing may or may not be allowed by your plan. It is a lot of paperwork for the plan sponsor and they're not likely to do it at all. You probably should be rolling your 401k into your IRA when you leave a company (this depends on the vesting of the company match). Recharacterizing your traditional IRA into a Roth IRA means that you treat it as income in the year you recharacterize it. This is why you do it during your low income years.
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Jul 23, 2013 05:34
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Chadzok posted:Investment Question 5-8 years is not necessarily long term  Make sure you real the OP in the retirement thread, as this is one of the areas where you want to make sure you're not making mistakes before putting money in.
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Jul 23, 2013 08:29
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So, is the general consensus that the biggest expenses in early retirement are home costs (mortgage/rent plus utilities) and healthcare? It seems like some of you are settling on numbers like 40k a year, and I'm trying to figure out what this estimate takes into account. As far as I can tell, after these two things, it's basically down to food, transportation, education (if kids are involved), and entertainment, all of which could probably be scaled down to basic levels if need be. Personally, I'd like to get up to my mid 40s and then "downgrade" to a less stressful, but lower paying job until my theoretical kids are out of the house, or in the house but paying rent, and then progress into my 50s at which point I'm either working solely because I like my job, or not working at all. I figure by then I can just eat zero calorie pizza and beer, and have virtual sex with playboy bunnies, since it'll be the year 2035 and we'll have those things.
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Jul 23, 2013 14:35
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Rekinom posted:So, is the general consensus that the biggest expenses in early retirement are home costs (mortgage/rent plus utilities) and healthcare? It seems like some of you are settling on numbers like 40k a year, and I'm trying to figure out what this estimate takes into account. As far as I can tell, after these two things, it's basically down to food, transportation, education (if kids are involved), and entertainment, all of which could probably be scaled down to basic levels if need be. Figure out the minimum you can live on comfortably. 40k (after taxes) is a pretty good amount that allows for some decent luxuries in a low cost area or a more moderate lifestyle in a city.
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Jul 23, 2013 18:17
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Rekinom posted:So, is the general consensus that the biggest expenses in early retirement are home costs (mortgage/rent plus utilities) and healthcare?
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Jul 23, 2013 18:32
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Cicero posted:I think most people going for FI plan to own their homes outright? Like, it you have a lot of money saved up, that's one major expense you can knock out. Sure, you'll still have to cover property taxes and maintenance/repairs, but that is obviously still going to be far less than mortgage or rent, especially if you pick up some handiness to work on your home yourself instead of hiring people. I can only speak for myself (obviously), but my husband and I are throwing almost all of our extra money at paying off the house, and putting a little here & there into investments. The plan is to pay the house off by 1/1/2016, then hammer at the investments.
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Jul 23, 2013 18:48
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What kind of asset allocations are people aiming for? I'm in a fairly good position I suppose to aim for some sort of financial independence but the idea is kind of staggering. I'm currently spending about 55% of my take home pay which would leave me with another 45% to invest. I currently have $22k in cash and $22k in my Roth IRA but I also have an $11k car loan. I'm thinking if I consolidate my cash into one account over the next couple of months I can just pay off my car in one big lump sum, leaving me with an $11k emergency fund and a decent buffer in my now single checking account. I would now only be spending 47% of my take home and could use the rest for investments (although a decent % will probably go into cash reserves just because I like to be a little conservative).
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Jul 23, 2013 20:57
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There's an MMM article for that.  I think of owning rental properties as like the ultimate FI vehicle, even though I know diversification is key and there is no silver bullet. I just think you could do really well owning a four-plex in a medium-sized Canadian city like, say, Halifax or Winnipeg, living in one of the units, renting out two, and slowly fixing up the fourth. Then moving into the fourth, fixing up the one you used to live in, and so on. And you could garden on the roof and keep some rabbits and a couple of bee boxes up there. Eventually you could retrofit the whole building for graywater recycling and alternative energy. If you found enough likeminded individuals, you could even equip the whole thing with composting toilets and expand to provide for common spaces and go full co-housing development and never look back. 
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Jul 23, 2013 21:17
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It does seem like rental property has a good balance of stability and financial gains. The downside is that compared to passive forms of investing it can involve a fair amount of work/headache, particularly if you end up with bad tenants. But yeah diversification is the name of the game.
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Jul 23, 2013 22:14
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In addition to the (possibly) unexpected amount of work, you sort of get tied down to a particular location with you own rental properties. Sure you can own remotely but that'll cut into your margins if you have to pay someone to manage it for you. I personally am investing in companies that pay dividends. I have a mix of lower yielding, higher growth companies and higher yielding, lower growth. Right now I'm getting right around 5% annual yield on cost with a mix of stocks, REITs, mREITS, and P2P lending. I try to weight them so that the high risk portions of my portfolio are a relatively small percentage of the total. I also added some munis on the recent bond "panic". Lately I've been adding stocks which have a history of consistently raising their dividends in the hope that they will continue the trend at a rate higher than inflation. I hope to eventually have enough monthly dividend income that I can work less hours or take a job which I actually enjoy. With a portfolio well diversified between the major industry sectors as well as various different income streams, I am hoping that this income will be relatively stable. This is basically known as dividend growth investing. As far as health insurance goes, I'm still young and don't plan on leaving my corporate job any time soon but I am hoping that Obamacare will be successful and have all of the kinks worked out by the time I am ready to "retire".
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Jul 24, 2013 03:44
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It seems like a big part of financial independence for most people is living is a place with a reasonable cost-of-living. In particular, that makes it much easier to own your house outright, which eliminates what is most people's largest expense: rent/mortgage. Of course, you still have to pay property tax and for maintenance & repairs, but at least the latter can be alleviated by becoming handy (it seems that a DIY attitude is common among FI'ers). So, the wife and I are currently looking at Corvallis, OR as a place to eventually achieve FI or semi-FI*. Things in its favor: - Good for biking. Corvallis has the highest rate of bike commuting in the country (9.3%, for reference Portland is around 6% I think). - Good bus service (I think?). At least, the city voted to make it fareless via a fee on water bills, so I'm assuming strong public support indicates that the public transportation is decent. - Large, relatively strong/prestigious state school nearby, Oregon State University. This is nice because the wife and I are both interested in tutoring (french horn and piano for her, programming for me) as a side gig, and a large student populace gives us a potential client base. Of course there are other advantages to having a large college around too. - Good public grade schools. Test scores at least seem to be pretty high. I know test scores aren't everything but they seem to be a decent indicator. We have a toddler right now and will probably have one or two more, so this is important to us. - Reasonable cost of living. In particular, housing costs are about 120% of the national median, according to various cost of living calculators, which isn't bad at all. Most places that are even lower tend to be less than desirable to live in. - Pretty nice climate. Average Highs/lows for the middle of summer are around 82/52, for the middle of winter 47/34. Fairly rainy (and thus green) at around 44 inches of precipitation a year, but not absurdly so. We're in the Seattle area right now and my wife loves the climate and hates when we travel to drier places. - About an hour and a half from a major metropolitan center (and thus, airport), Portland. Of course, being even closer would be nice, but an hour and a half isn't that bad. Basically, Corvallis does good to great on a variety of metrics that we're interested in, and the linchpin is that it does it without being really expensive to live in, and in particular, to buy a house in. Of course, we tend to change our minds about life plans two or three times a year, so who knows if this is where we'll actually end up. I'm hoping to eventually get an online-only software development job so that even prior to FI we can move somewhere and live there a bit before cutting out permanent full-time work. Does anyone else have any particular cities they're thinking would be good for financial independence? * For me, semi-FI would basically entail owning a house outright, living frugally in general, and doing things like becoming handy and having a garden to reduce expenses further, such that expenses were low enough to live off of consistent part-time work, or occasional full-time work, while still continually increasing our savings.
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Jul 30, 2013 23:16
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How much money do you think it would take to make you FI living in Corvallis with your hobbies? Including the house .
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Jul 31, 2013 02:07
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I'm more than a few years off from this being actually possible, so I haven't drilled down to detailed numbers, but I'd guess something like this: I'm thinking around 200-250k for a modest house (3br/2ba). For income, would probably target around 30k/year, so at the standard 4% withdrawal rate, that'd be 750,000 in funds passively invested. If I used a more active method of getting income from investments, like rental houses, could probably reduce that to between 400 and 600 grand. Obviously that's a lot of money, which is why I'd be ok with being semi-financially independent, which to me means just means greatly reducing expenses to where you can pretty easily get by with side gigs/part-time work instead of a full-time occupation. Would be aiming to achieve that by owning my own home + baller frugality/DIY muscles. I'd also probably keep up on doing some kind of development-as-a-hobby so that I'd be able to get back into a career if need be (in addition to the potential for contract work). This question inspired me to come up with a hypothetical budget. Disclaimer: I made up all of these numbers. In practice, I'd move somewhere and live for a while with a regular job before quitting to make sure I'd be able to hew to a given budget before jumping in to FI. pre:Item Cost per month Property Tax 200 House Maintenance 100 Utilities 200 Internet 60 Phones 90 Car Insurance 80 Gas 60 Car Maintenance 100 Groceries 300 Kid 1 100 Kid 2 100 Misc. Household 150 Husband allowance 100 Wife allowance 100 Travel 300 Healthcare 400 Sum 2440 Yearly Sum 29280 Cicero fucked around with this message at 07:52 on Jul 31, 2013 |
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Jul 31, 2013 07:37
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So $1m post-tax cash is what it takes to make it in a lowish cost of living part of America these days. No wonder a bunch of people live paycheck to paycheck - it can seem pretty depressing when you're up against that.
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Jul 31, 2013 09:06
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Cicero posted:
No offense but your breakdown looks pretty ludicrous considering that you're budgeting $200 a month for raising 2 kids, and $400 for healthcare.
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Jul 31, 2013 11:45
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Evil Robot posted:So $1m post-tax cash is what it takes to make it in a lowish cost of living part of America these days. No wonder a bunch of people live paycheck to paycheck - it can seem pretty depressing when you're up against that. $1m post-tax cash is the estimate to "make it" if you define make it as a family of 4 with no one working at all.
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Jul 31, 2013 13:17
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shrike82 posted:No offense but your breakdown looks pretty ludicrous considering that you're budgeting $200 a month for raising 2 kids, and $400 for healthcare. 2. The idea with health insurance would be to get a high deductible plan with low premiums. Of course, this would involve tapping into savings if a major healthcare event came up, but hopefully we'd be saving money in months where we didn't need any healthcare (or only got preventative checkups, which are now free). For this purpose, $400/month doesn't seem off, especially since my wife gets her healthcare through the VA at essentially the same cost as if she had decent insurance, so any plan we got wouldn't have to cover her. For reference, MMM got a $237/month plan for his family of 3: http://www.mrmoneymustache.com/2012/11/01/our-new-237-per-month-health-insurance-plan/ Vomik posted:$1m post-tax cash is the estimate to "make it" if you define make it as a family of 4 with no one working at all.
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Jul 31, 2013 16:28
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Cicero posted:1. That's for raising 2 kids aside from whatever kid-related costs are covered in other areas. Over the last 6 months for our one kid we're actually slightly under that at $588, although that number is volatile month-to-month and doesn't include babysitting (right now we have a regular babysitter to give my wife a chance to practice her music, which we wouldn't need during FI since I'd be home much more). My mom loves buying stuff for her grandkids, so we rely on that some. How old are your kids right now? You should set aside money for their education (college most of all).
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Jul 31, 2013 16:33
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shrike82 posted:How old are your kids right now? Worst-case scenario, our kids would have to rely on grants, scholarships, part-time/summer work, and student loans to go to a state school, OR we'd have to dip farther into savings to support them (along with potentially picking up jobs again). Best-case scenario, I pass on my coding skills to my kids and by the time they graduate high school they barely even need college  . Average-case, we've saved up enough extra money to mostly support them in school, with them partly relying on grants, scholarships, and part-time work (this is the situation I was in in college, although the money that didn't come from my parents was mostly 'fun money').Interestingly, we may not even need to save up for their schooling if we're in Oregon, and paying more of your kids' education is correlated with worse academic performance. The last one doesn't really surprise me, I seemed to be more on top of things when I was working part-time.
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Jul 31, 2013 18:15
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I've been looking at this topic for a few years, and since this thread started I've made a plan and gotten into this. I talked it over with my wife and we've started down this path. Right now, we're at a 55% savings rate but we can easily increase that to 60% and 65% shouldn't be very hard to reach. Beyond that we'd have to really start cutting back but 75% wouldn't be out of the question. We were saving for a down payment on a house but we decided that we want to stay in Chicago for the next 5 years or so, then move to a low cost of living place like Wisconsin, possibly as a cash buyer at that point. The goal isn't to stop working but to not have to worry about working a job either of us hates and to be able to raise kids without extensive day care services. Once the kids are born, we'll certainly put aside a 529 plan for each of them. I'm pretty sure we can raise them right and they won't want to go off to a crazily expensive private school, but if they do and can't get a scholarship, they can learn what it's like to dig themselves out of debt.
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Jul 31, 2013 18:32
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Food for thought (I assume it's talking about the same article) - http://andrewgelman.com/2013/01/22/that-claim-that-students-whose-parents-pay-for-more-of-college-get-wors-grades/
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Aug 1, 2013 00:10
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gvibes posted:Food for thought (I assume it's talking about the same article) - http://andrewgelman.com/2013/01/22/that-claim-that-students-whose-parents-pay-for-more-of-college-get-wors-grades/ That's interesting, and survivorship bias is also the reason why top tier hedge funds have these ludicrous returns over their lifespan (because if they had a bad stroke of luck, they're out of business and out of the study) I work with a guy who pays for his kids' tuition in arrears conditional on performance. The student has to beg/borrow/steal/take loans to secure their own financing. If they maintain a 3.0 each semester, he'll pay off the loan entirely. I like that system. It gives the student incentive to perform well, because if they goof off they know they're on the hook for a full semester of tuition.
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Aug 1, 2013 17:53
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canyoneer posted:That's interesting, and survivorship bias is also the reason why top tier hedge funds have these ludicrous returns over their lifespan (because if they had a bad stroke of luck, they're out of business and out of the study) I also think something like this is a good way to go. Pay off the loans as a sort of graduation present. If the loans are minimal because your kid was awesome, then they get part of a down payment too or a free Master's or something!
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Aug 1, 2013 17:57
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Jesus, reading this thread makes me scared. I was checking out my investments, and I started saving in 2003. As of now, my portfolio has made 2.5% per year on average, far lower then the 4% conservative value that gets thrown around. My timing must have been very bad.
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Aug 2, 2013 14:34
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LorneReams posted:Jesus, reading this thread makes me scared. I was checking out my investments, and I started saving in 2003. As of now, my portfolio has made 2.5% per year on average, far lower then the 4% conservative value that gets thrown around. My timing must have been very bad. US Inflation is like 1.8-2% this year, dude. You need to take some more risks! And 4% is the safe withdrawal rate, which is basically the rate that, given historic market performance and a properly diversified portfolio, will guarantee that you never run out of money.
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Aug 2, 2013 15:26
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tuyop posted:US Inflation is like 1.8-2% this year, dude. You need to take some more risks! One year at -35% really messes with your average. I'm +17% this year, but it was pretty bad between 2007 and 2008.
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Aug 2, 2013 16:32
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Just a FYI but the average return of the market at 7-8% is after inflation is factored in. The reason for the 4% safe withdrawal rate is because that is the average dividend yield. All of this is derived from long term trends (20+ years) and that's why the financial independence crew likes to use it.
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Aug 2, 2013 17:23
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DanManIt posted:Just a FYI but the average return of the market at 7-8% is after inflation is factored in. The reason for the 4% safe withdrawal rate is because that is the average dividend yield. Is it even reasonable to extrapolate past trends into the future, given the troubles virtually every developed nation is going through along with impending issues in nations like China or India?
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Aug 3, 2013 01:22
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Shipon posted:Is it even reasonable to extrapolate past trends into the future, given the troubles virtually every developed nation is going through along with impending issues in nations like China or India?
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Aug 3, 2013 01:24
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DanManIt posted:Just a FYI but the average return of the market at 7-8% is after inflation is factored in. The reason for the 4% safe withdrawal rate is because that is the average dividend yield. 5-6%, after inflation is factored in. There may be specific years, but on average over the long term it has been above.
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Aug 3, 2013 02:37
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tuyop posted:US Inflation is like 1.8-2% this year, dude. You need to take some more risks! http://www.shadowstats.com/alternate_data/inflation-charts One example of a deleted stat is Producer Price Index for Heavy Construction. An elected office I ran for was in charge of a massive transportation construction project. The cost overruns (more than 100% over budget) were due to very high inflation in project essentials such as concrete, steel and copper.
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Aug 3, 2013 03:34
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Huttan posted:The "official" inflation rate is around 2%. The administration keeps deleting consumer price indices and producer price indices that show higher inflation rates. Shadowstats has been measuring inflation and unemployment in much higher amounts than the official stats. If you measure the cost of groceries you purchase, and include the smaller container sizes (cynically called the "grocery shrink ray"), you will measure somewhere between 10 and 15% inflation. The shadowstats inflation calculations are hard to take seriously. See for example http://azizonomics.com/2013/06/01/the-trouble-with-shadowstats/ and http://www.slate.com/blogs/moneybox/2013/07/18/tom_coburn_inflation_truther.html. If you want an alternate inflation measure, I'd put much more faith in http://bpp.mit.edu/usa/.
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Aug 3, 2013 05:01
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