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 Post subject: How long until I reach FI?
PostPosted: Tue Aug 14, 2012 8:00 pm 

Joined: Tue Aug 14, 2012 5:33 pm
Posts: 10
Ok, so I tried answering a few questions on this forum but now for the question that made me sign up. I want to know at what point I can consider myself financially independent.

So here's the story.

I'm about to hit the big 3-0 in a couple of months. I'm married and have a 7 month old boy. We want to have a second baby in a year or so.

The goal is not to retire, but reach a point where we don't ever have to work if we don't want to. The magical land we call Financial Independence. I'm not exactly sure what we'd do if we reach financial independence. For my wife I don't think much will change, for me I'd like to be home more and work less.

So you'll need some facts to help me determine when we have reached financial independence. I'll try to head off most of your questions by giving you the facts up front.

No debt, never had any, never will. Both of our parents paid for our education so we were very lucky there. No house, not going to finance one. My grandparents are looking to move into an assisted living facility, and since they plan to leave us the house anyway in their will they've offered to let us live there. This will most likely happen within the next two years.

INCOME

My wife and I both work. My wife has been back to work about 3 months now and is not full time. She is able to work per-diem (she likes her job).

It's hard to be exact since we don't have a long history at this income level. Last year our net was 135k and this year it's looking like we will net 105k (not counting investment income).

SPENDING

Last year we spent 39k and saved the rest. Our expenses are looking a little higher this year with baby related expenses. If everything stays the same our spending will be about 45k. We don't have a written budget, we're just frugal don't buy things we don't need (well most of the time).

SAVINGS

We have 101k in retirement accounts, 41k in savings, and 253k in equities. 395k total.

OTHER ASSETS
About 15k in junk silver.
2 vehicles both about 5 years old with about 70k miles a piece.
Enough junk to fill a 2 bedroom apartment.

So that should give you a good idea about our current situation. Now, assuming we can keep saving 50 to 60k a year like we are now. At what point do we reach FI?

Personally, my estimate is that as a family of 4 we could easily live on 50k a year. So if we can save 1 million and get a 5% a year return we could live off of that and not touch our principal. So that's would be a little over 10 years of working. But would inflation eat us alive?

On the other hand, if we worked sparingly we could probably make enough to support ourselves and might be able to call ourselves financially independent right now?

What do you think?


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 Post subject: Re: How long until I reach FI?
PostPosted: Tue Aug 14, 2012 9:34 pm 

Joined: Thu Dec 30, 2010 4:59 pm
Posts: 62
Location: San Diego, CA
Obligatory: Welcome to GRS!

LOL, sounds like you were born financially independent!

MrBudgetBuster wrote:
Personally, my estimate is that as a family of 4 we could easily live on 50k a year. So if we can save 1 million and get a 5% a year return we could live off of that and not touch our principal. So that's would be a little over 10 years of working. But would inflation eat us alive?

On the other hand, if we worked sparingly we could probably make enough to support ourselves and might be able to call ourselves financially independent right now?

What do you think?


But to answer your question you're probably closer than you think. Given that you plan to keep your expenses low and you are not planning to quit working completely. Check out Mr Money Mustache. I'd include the link but there is another link I want to include and the forum only allows one URL per post. Just google Mr. Money Mustache, his blog details his own situation and has a good definition of financial independence.

As a rule of thumb you should use the 4% withdraw rate, now for the link I saved room for http://firecalc.com/ basically this site takes your spending, portfolio, and years you want to be retired. Then it runs it's algorithm against the history of the stock market to see how you'd be doing after the time period. You'll see with about a 4% withdraw rate you can theoretically stay retired forever. aka be financially independent.

MrBudgetBuster wrote:
I'm not exactly sure what we'd do if we reach financial independence. For my wife I don't think much will change, for me I'd like to be home more and work less.


That's what I'd spend more time on, what would you really want to do? What do you do now? Sounds like you're not happy with your job? Ever consider starting a business?


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 Post subject: Re: How long until I reach FI?
PostPosted: Tue Aug 14, 2012 10:03 pm 

Joined: Thu Dec 30, 2010 4:59 pm
Posts: 62
Location: San Diego, CA
Oh, one last think MBB. You need a budget! Why? Because everyone needs a budget! :geek:

Personally I use Mint.com because it's free. It has a lot of shortcomings in my opinion such as not being able to plan future months.

I hear great things on this forum about YNAB http://www.youneedabudget.com/ but have never tried it personally.


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 Post subject: Re: How long until I reach FI?
PostPosted: Wed Aug 15, 2012 7:37 am 

Joined: Fri May 04, 2012 2:23 pm
Posts: 818
tdelamater wrote:

You'll see with about a 4% withdraw rate you can theoretically stay retired forever. aka be financially independent.



I disagree with 4% being a viable withdrawal rate forever. It certainly is within the realm of possibilities, but it is highly unlikely IMO. For mainly two reasons.

1) The original Bengen Studies were based on back testing to the 1930's (ish) I believe. I can't remember the exact date. I think this period of stock growth is different than what we will see going forward. Just like the "American Dream" for those born in 1950 is different for those born in 2012.

2) The Bengen et al studies have always maintained that the 4% "safe" withdrawal rate is for 30 years. And even then, a low probability of failure, something like 2-5% (again, the exact number escapes me). When you drive beyond 30 years, the "safe" withdrawal rate decreases very quickly.

Wade Pfau has done some interesting work in this area. Here is a table from Wade's Blog (which admittedly has a lot of variables). But, the point is there, the longer your duration of needing the funds, the lower your "safe" withdrawal rate will be (or higher the chance of failure). It is rather intuitive, but someone in their 50's will need less money to be "financially independent" than someone who is 30 (assuming spending is the same).

Image

What is the point of being financially independent? Is it a state of mind? Is it something to brag about at parties? Is forgoing some gratification today worth being "financially independent" by the age of 40? It's all very interesting, and while there are no right or wrong reasons, some people become obsessed with a goal and loose other things in the process. And, if that makes them happy, by all means, have at it.

_________________
Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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 Post subject: Re: How long until I reach FI?
PostPosted: Wed Aug 15, 2012 10:01 am 

Joined: Thu Jun 23, 2011 3:24 pm
Posts: 87
Bichon Frise wrote:
Here is a table from Wade's Blog (which admittedly has a lot of variables).


Ooh, great data. Thanks for the link!

What does everyone think about considering FI as a 2-period process for the OP MrBudgetBuster - period 1, still working but as a choice, and period 2, may not be working (for income, at least) at all. During period 1, the assets might not be drawn against at all, or possibly at a much lower level - could help shift to a shorter time horizon in Wade's chart.


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 Post subject: Re: How long until I reach FI?
PostPosted: Wed Aug 15, 2012 10:37 am 

Joined: Fri May 04, 2012 2:23 pm
Posts: 818
My problem of being financially independent is that it can mean a lot of things. Technically, I could call myself financially independent if I sold my little mansion up on the mountain and settled for a more modest, but still very comfortable, home somewhere in the valley floor which would be paid for in cash. I then have enough to live rather comfortably for the rest of my piddly life.

Then, there is the issue of calculating your "cross over" point. You make assumptions, crunch some numbers and all seems well. Many may proclaim financial independence, but few will shoot their boss the bird, do cartwheels down the hall in a mini skirt and no underwear and straight into the elevator never to return. Most will remain hesitant and very few will take the proverbial plunge. Just one more year turns into 15. Some will dip their toe in the water with "semi-retirement." Some young and overzealous individuals hide behind the veil of "they always want to work." Throughout time, some may, but more will be looking for the escape hatch.

But, the question remains, what is the point self proclaiming financial independence? People need to figure that out for themselves first.

With the diatribe over, Wade's blog has the best information on solving the riddle of a "Safe" withdrawal rate. If I were condense months of (excellent) blog posts down into a few words, they would be: flexibility is key.

_________________
Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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 Post subject: Re: How long until I reach FI?
PostPosted: Wed Aug 15, 2012 11:25 am 

Joined: Fri Sep 12, 2008 12:29 pm
Posts: 1629
Location: Seattle, WA
As Bichon said, the 4% rate is only for 9X% probability of your money lasting 30 years. I don't agree or at least don't know that that it drops drastically past 30. but it does include spending down principal, so it's not going to last forever.

The other big thing you have to figure out with early retirement is health care. You might think you are spending only $50k per year, but if your employer(s) is(are) covering $1k per month in health insurance premiums, that's $12k or 25% more of living expenses. When you're 40 you can get a fairly cheap catastrophic health policy, but when you're 50 and then 60 and then 64 you may not be able to get or afford such a policy. Of course in this paragraph I am assuming you live in the US. If you live in a country that considers health care as something that all citizens should receive, regardless of their financial status, then you don't have to deal with this issue.

If you did keep working after reaching the point of FI, what would you do with your extra money that you'd no need to be saving?


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 Post subject: Re: How long until I reach FI?
PostPosted: Wed Aug 15, 2012 4:52 pm 

Joined: Thu Dec 30, 2010 4:59 pm
Posts: 62
Location: San Diego, CA
Bichon Frise wrote:
tdelamater wrote:

You'll see with about a 4% withdraw rate you can theoretically stay retired forever. aka be financially independent.



I disagree with 4% being a viable withdrawal rate forever. It certainly is within the realm of possibilities, but it is highly unlikely IMO. For mainly two reasons.

1) The original Bengen Studies were based on back testing to the 1930's (ish) I believe. I can't remember the exact date. I think this period of stock growth is different than what we will see going forward. Just like the "American Dream" for those born in 1950 is different for those born in 2012.

2) The Bengen et al studies have always maintained that the 4% "safe" withdrawal rate is for 30 years. And even then, a low probability of failure, something like 2-5% (again, the exact number escapes me). When you drive beyond 30 years, the "safe" withdrawal rate decreases very quickly.

Wade Pfau has done some interesting work in this area. Here is a table from Wade's Blog (which admittedly has a lot of variables). But, the point is there, the longer your duration of needing the funds, the lower your "safe" withdrawal rate will be (or higher the chance of failure). It is rather intuitive, but someone in their 50's will need less money to be "financially independent" than someone who is 30 (assuming spending is the same).


#1 Good point. I also believe future returns will be lower than they have been historically.

#2 I guess that depends on what you consider a safe failure rate. I plugged in spending of 50k, a portfolio of 1.25MM, and a 60 year time frame and I got a failure rate of 18.5% historically. Nevertheless, it's also a good point and I should refrain from using words such as 'forever'.

Wade Pfau's blog looks very interesting regarding the current struggles of retirees. I will have to investigate this further.


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 Post subject: Re: How long until I reach FI?
PostPosted: Wed Aug 15, 2012 10:11 pm 

Joined: Tue Aug 14, 2012 5:33 pm
Posts: 10
tdelamater wrote:
But to answer your question you're probably closer than you think. Given that you plan to keep your expenses low and you are not planning to quit working completely. Check out Mr Money Mustache. I'd include the link but there is another link I want to include and the forum only allows one URL per post. Just google Mr. Money Mustache, his blog details his own situation and has a good definition of financial independence.


Great blog! I started reading it from the beginning. I didn't get too far but I like his writing.

tdelamater wrote:
As a rule of thumb you should use the 4% withdraw rate, now for the link I saved room for http://firecalc.com/ basically this site takes your spending, portfolio, and years you want to be retired. Then it runs it's algorithm against the history of the stock market to see how you'd be doing after the time period. You'll see with about a 4% withdraw rate you can theoretically stay retired forever. aka be financially independent.


So you're saying investments of $1,250,000 to achieve a 4% withdraw rate of 50k. That's about 17 years of savings 50k minus plus or minus investment returns. Fair?

tdelamater wrote:
That's what I'd spend more time on, what would you really want to do? What do you do now? Sounds like you're not happy with your job? Ever consider starting a business?


I guess I'm apathetic about my job. If money was no object I'd like to have a job where I can work outside about 25% of the time. Business? No, not in the near/mid term at least.


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 Post subject: Re: How long until I reach FI?
PostPosted: Wed Aug 15, 2012 10:13 pm 

Joined: Tue Aug 14, 2012 5:33 pm
Posts: 10
tdelamater wrote:
Oh, one last think MBB. You need a budget! Why? Because everyone needs a budget! :geek:

Personally I use Mint.com because it's free. It has a lot of shortcomings in my opinion such as not being able to plan future months.

I hear great things on this forum about YNAB http://www.youneedabudget.com/ but have never tried it personally.


Yada yada yada. I track my spending.


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 Post subject: Re: How long until I reach FI?
PostPosted: Wed Aug 15, 2012 10:33 pm 

Joined: Tue Aug 14, 2012 5:33 pm
Posts: 10
Bichon Frise wrote:
tdelamater wrote:

You'll see with about a 4% withdraw rate you can theoretically stay retired forever. aka be financially independent.




Bichon Frise wrote:
I disagree with 4% being a viable withdrawal rate forever. It certainly is within the realm of possibilities, but it is highly unlikely IMO. For mainly two reasons.

1) The original Bengen Studies were based on back testing to the 1930's (ish) I believe. I can't remember the exact date. I think this period of stock growth is different than what we will see going forward. Just like the "American Dream" for those born in 1950 is different for those born in 2012.

2) The Bengen et al studies have always maintained that the 4% "safe" withdrawal rate is for 30 years. And even then, a low probability of failure, something like 2-5% (again, the exact number escapes me). When you drive beyond 30 years, the "safe" withdrawal rate decreases very quickly.

Wade Pfau has done some interesting work in this area. Here is a table from Wade's Blog (which admittedly has a lot of variables). But, the point is there, the longer your duration of needing the funds, the lower your "safe" withdrawal rate will be (or higher the chance of failure). It is rather intuitive, but someone in their 50's will need less money to be "financially independent" than someone who is 30 (assuming spending is the same).


Looking at the chart, 40 years with a 1% failure rate would mean withdrawing 2.8%. So that's $1,785,714. That's 28 years saving 50k a year plus or minus investment returns. Fair?


Bichon Frise wrote:
What is the point of being financially independent? Is it a state of mind? Is it something to brag about at parties? Is forgoing some gratification today worth being "financially independent" by the age of 40? It's all very interesting, and while there are no right or wrong reasons, some people become obsessed with a goal and loose other things in the process. And, if that makes them happy, by all means, have at it.


Well if debt is slavery then financial independence is freedom. The point is to feel free. I guess it is a state of mind. Maybe there is small percentage of bragging, but it's not something I would talk about to people in real life. That's the beauty of the anonymity of the internet! Personally I don't feel like we are forgoing any gratification. The only thing I can think of is being in a job that is not particularly exciting for the high salary.


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 Post subject: Re: How long until I reach FI?
PostPosted: Wed Aug 15, 2012 10:36 pm 

Joined: Tue Aug 14, 2012 5:33 pm
Posts: 10
babysteps wrote:
Bichon Frise wrote:
Here is a table from Wade's Blog (which admittedly has a lot of variables).


Ooh, great data. Thanks for the link!

What does everyone think about considering FI as a 2-period process for the OP MrBudgetBuster - period 1, still working but as a choice, and period 2, may not be working (for income, at least) at all. During period 1, the assets might not be drawn against at all, or possibly at a much lower level - could help shift to a shorter time horizon in Wade's chart.


That's right! The withdraw rates above assume there is no income. I like the idea of two-phase FI. Maybe because it doesn't take 17 - 28 years to get there.


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 Post subject: Re: How long until I reach FI?
PostPosted: Wed Aug 15, 2012 10:42 pm 

Joined: Tue Aug 14, 2012 5:33 pm
Posts: 10
Bichon Frise wrote:
My problem of being financially independent is that it can mean a lot of things. Technically, I could call myself financially independent if I sold my little mansion up on the mountain and settled for a more modest, but still very comfortable, home somewhere in the valley floor which would be paid for in cash. I then have enough to live rather comfortably for the rest of my piddly life.

Then, there is the issue of calculating your "cross over" point. You make assumptions, crunch some numbers and all seems well. Many may proclaim financial independence, but few will shoot their boss the bird, do cartwheels down the hall in a mini skirt and no underwear and straight into the elevator never to return. Most will remain hesitant and very few will take the proverbial plunge. Just one more year turns into 15. Some will dip their toe in the water with "semi-retirement." Some young and overzealous individuals hide behind the veil of "they always want to work." Throughout time, some may, but more will be looking for the escape hatch.

But, the question remains, what is the point self proclaiming financial independence? People need to figure that out for themselves first.

With the diatribe over, Wade's blog has the best information on solving the riddle of a "Safe" withdrawal rate. If I were condense months of (excellent) blog posts down into a few words, they would be: flexibility is key.


Yeah, i'm not going to be doing cartwheels out the door like you describe. But the image does make me laugh. On the inside of course.

The point of financial independence is not to actually do cartwheels out the door. It's to know that you could. Also to be confident that you can say no to requests from your employer that you don't agree with. Like working extra hours or weekends or extended travel etc.


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 Post subject: Re: How long until I reach FI?
PostPosted: Wed Aug 15, 2012 10:48 pm 

Joined: Tue Aug 14, 2012 5:33 pm
Posts: 10
stannius wrote:
As Bichon said, the 4% rate is only for 9X% probability of your money lasting 30 years. I don't agree or at least don't know that that it drops drastically past 30. but it does include spending down principal, so it's not going to last forever.

The other big thing you have to figure out with early retirement is health care. You might think you are spending only $50k per year, but if your employer(s) is(are) covering $1k per month in health insurance premiums, that's $12k or 25% more of living expenses. When you're 40 you can get a fairly cheap catastrophic health policy, but when you're 50 and then 60 and then 64 you may not be able to get or afford such a policy. Of course in this paragraph I am assuming you live in the US. If you live in a country that considers health care as something that all citizens should receive, regardless of their financial status, then you don't have to deal with this issue.

If you did keep working after reaching the point of FI, what would you do with your extra money that you'd no need to be saving?


Right, healthcare is expensive in the US. I'm sure Obama will take care of it for me (sorry couldn't resist).

Yes my employer pays a large percentage of my families insurance costs. But I think the 50k number still stands because we won't have or $1,250 a month rental payment. Yes we'll have maintenance/insurance/taxes from the house, but we'll probably have an extra $800 a month to put toward health insurance costs. Does that make sense?

If I did keep working after reaching the point of FI, I don't know what I would do with the extra money. Leave it to my kids I guess.


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 Post subject: Re: How long until I reach FI?
PostPosted: Wed Aug 15, 2012 10:55 pm 

Joined: Tue Aug 14, 2012 5:33 pm
Posts: 10
Thanks for all the replies everyone. I tried to respond to everyone. I don't think I have come to a resolution in my mind yet. I did learn quite a bit of how much I would possibly need to completely retire and maintain my lifestyle. I suppose that puts a ceiling on what it would take to reach FI.


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