Investing for Retirement

[Michael]

The NYT posted an article called "How to Retire in Your 30s With $1 Million in the Bank". It's an article about the FIRE (financial independence, retire early) community, which I consider myself a part of. I decided reorient my life to FIRE after reading several posts on the blog Mr Money Mustache. That blog and associated message board led me to the bogleheads website where I learned about the 3 fund portfolio. The basic gist of FIRE is to consume less and save more in order to allow yourself greater freedom. I'm not as hardcore as MMM or the folks in the article, but my hope is to FIRE in about 10 years. For me, FIRE may mean stop working completely, changing careers or staying the course. The important part is living my life on my terms as much as possible.

This post isn't an attempt to brag or anything. I know it's a huge privilege to even consider FIRE, however my hope is someone gets inspired the way I was. Also, now you know why this thread was created in the first place.

[cardsfantx]

obv, just my opinion, but that sounds awful...$1 million is nothing if you retire in your 30's...

In retirement, Mr. Jensen and his wife and two daughters plan to live on roughly $40,000 a year generated from investments. Because his wife currently works, they have yet to draw on those accounts. But already, it’s a life rich on time but short on luxuries: Groceries are bought at Costco, car and home repairs are done by him.

“People always assume there’s an external circumstance: ‘Oh, you must have received an inheritance,’” Mr. Jensen said. “We’ve just chosen to live far below our means. That itself is a radical idea.”

nope, no way...couldn't do it.

[thrill]

obv, just my opinion, but that sounds awful...$1 million is nothing if you retire in your 30's...

In retirement, Mr. Jensen and his wife and two daughters plan to live on roughly $40,000 a year generated from investments. Because his wife currently works, they have yet to draw on those accounts. But already, it’s a life rich on time but short on luxuries: Groceries are bought at Costco, car and home repairs are done by him.

“People always assume there’s an external circumstance: ‘Oh, you must have received an inheritance,’” Mr. Jensen said. “We’ve just chosen to live far below our means. That itself is a radical idea.”

nope, no way...couldn't do it.

Most FIRE folks aren't talking about retiring in the sense of no longer having any income outside of investments. They mostly mean quitting their corporate job and finding ways of making money without sacrificing freedom and the ability to do what they want, when they want.

[Michael]

My FIRE number is different, but I disagree that 1m in investable assets is crazy low when you consider their house is paid off. That's roughly 35k a year without a mortgage payment (personally I think a 4% withdrawal rate is too aggressive). There's a lot of families in America that would love that situation. The huge rub is health insurance. Most people who FIRE with that kind of income from their investiments get subsidies via the ACA which helps.

Most FIRE folks aren't talking about retiring in the sense of no longer having any income outside of investments. They mostly mean quitting their corporate job and finding ways of making money without sacrificing freedom and the ability to do what they want, when they want.

Yeah, the "retirement" word gets the headlines, but financial independence is the real key. Most people who quit their jobs via FIRE at an early age end up earning money doing something else within 2 years. Not because they need the money but they are interested in working.

[IMADreamer]

Obviously it depends on where you live but with my house paid for I live on less than 25k a year. I want for nothing. Everything I make over that just goes into my investment accounts. I don't think I've withdrawn anything close to 4 percent yet. Plus after the first year doesn't the 4 percent rate adjust for inflation?

[Michael]

Obviously it depends on where you live but with my house paid for I live on less than 25k a year. I want for nothing. Everything I make over that just goes into my investment accounts. I don't think I've withdrawn anything close to 4 percent yet. Plus after the first year doesn't the 4 percent rate adjust for inflation?

Yes, here's how it works:

For those who wonder, if I have X amount of dollars when I retire, what can I safely withdraw each year? A guy named Bill Bengen looked in to this and he determined a 4% withdrawal rate (later modified to 4.5%) adjusted for inflation is very safe over a 30 year period. He recently did a pretty good AMA, where he explains the concept:

Thanks for your question. Before I answer it specifically, why don't we dispense with some preliminaries, so we are all on the same page?
The "4% rule" is actually the "4.5% rule"- I modified it some years ago on the basis of new research. The 4.5% is the percentage you could "safely" withdraw from a tax-advantaged portfolio (like an IRA, Roth IRA, or 401(k)) the first year of retirement, with the expectation you would live for 30 years in retirement. After the first year, you "throw away" the 4.5% rule and just increase the dollar amount of your withdrawals each year by the prior year's inflation rate. Example: $100,000 in an IRA at retirement. First year withdrawal $4,500. Inflation first year is 10%, so second-year withdrawal would be $4,950. Now, on to your specific question. I find that the state of the "economy" had little bearing on safe withdrawal rates. Two things count: if you encounter a major bear market early in retirement, and/or if you experience high inflation during retirement. Both factors drive the safe withdrawal rate down. My research is based on data about investments and inflation going back to 1926. I test the withdrawal rates for retirement dates beginning on the first day of each quarter, beginning with January 1, 1926. The average safe withdrawal rate for all those 200+ retirees is, believe it or not, 7%! However, if you experience a major bear market early in retirement, as in 1937 or 2000, that drops to 5.25%. Add in heavy inflation, as occurred in the 1970's, and it takes you down to 4.5%. So far, I have not seen any indication that the 4.5% rule will be violated. Both the 2000 and 2007 retirees, who experienced big bear markets early in retirement, appear to be doing OK with 4.5%. However, if we were to encounter a decade or more of high inflation, that might change things. In my opinion, inflation is the retiree's worst enemy. As your "time horizon" increases beyond 30 years, as you might expect, the safe withdrawal rate decreases. For example for 35 years, I calculated 4.3%; for 40 years, 4.2%; and for 45 years, 4.1%. I have a chart listing all these in a book I wrote in 2006, but I know Reddit frowns on self-promotion, so that is the last I will have to say about that. If you plan to live forever, 4% should do it.

That % doesn't include social security. Also, this is based on retiring with a 50/50 bond to equity ratio. Obviously no one knows what the future will bring, but I like this concept to help with planning.

My take on these withdrawal rules:

The Trinity Study (where the 4% rule comes from) was updated for 2018 with data through 2017. They also added failure rates up to 40 years and changed the analysis to use treasury bond rather than corporate bonds.

I think withdrawal strategies are a good starting point for retirement planning, but they are more of an ax than a scalpel. You have to weigh your own specific situation against these withdrawal rules. I think the 4% rule will help me to know when I'm getting close to the money I need, but when I actually retire I'll most likely use something closer to the variable percentage withdrawal methodology.

For FIRE I'm targeting something closer to 3.5%, which I acknowledge is conservative.

It's worth noting, you have to consider taxes with withdrawal rules. Meaning, the 40k generated on 1m in investable assets will be subject to taxes.

[Arthur Dent]

I'm not as hardcore as MMM or the folks in the article, but my hope is to FIRE in about 10 years. For me, FIRE may mean stop working completely, changing careers or staying the course. The important part is living my life on my terms as much as possible.

Can I ask what percent of your income you’re saving to implement this?

[MAGA]

obv, just my opinion, but that sounds awful...$1 million is nothing if you retire in your 30's...

In retirement, Mr. Jensen and his wife and two daughters plan to live on roughly $40,000 a year generated from investments. Because his wife currently works, they have yet to draw on those accounts. But already, it’s a life rich on time but short on luxuries: Groceries are bought at Costco, car and home repairs are done by him.

“People always assume there’s an external circumstance: ‘Oh, you must have received an inheritance,’” Mr. Jensen said. “We’ve just chosen to live far below our means. That itself is a radical idea.”

nope, no way...couldn't do it.

Yeah, not spending the Saturday in the garage with the laptop open looking for the correct YouTube tutorial is worth a lot to me.

[Michael]

I'm not as hardcore as MMM or the folks in the article, but my hope is to FIRE in about 10 years. For me, FIRE may mean stop working completely, changing careers or staying the course. The important part is living my life on my terms as much as possible.

Can I ask what percent of your income you’re saving to implement this?

Not including my wife's earnings, around 35-40%.

That number doesn't include mortgage payments I make every month without my wife's help (she pays for other things like real estate taxes), which partially pays down the principle. I'll be finished paying off our condo in a little over 9 years.

My wife saves less, but without getting in to specific details, I'm not too worried about her retirement accounts. For convenience we keep our finances fairly separate, but she's on board with my approach. She'll most likely start working part time around the time I FIRE. Hopefully we'll get to travel, etc.

That said, the best-laid plans of mice and men often go awry. 10 years is a long time and a lot can change.

[Arthur Dent]

Can I ask what percent of your income you’re saving to implement this?

Not including my wife's earnings, around 35-40%.

That number doesn't include mortgage payments I make every month without my wife's help (she pays for other things like real estate taxes), which partially pays down the principle. I'll be finished paying off our condo in a little over 9 years.

My wife saves less, but without getting in to specific details, I'm not too worried about her retirement accounts. For convenience we keep our finances fairly separate, but she's on board with my approach. She'll most likely start working part time around the time I FIRE. Hopefully we'll get to travel, etc.

That said, the best-laid plans of mice and men often go awry. 10 years is a long time and a lot can change.

Hmmm. Looking at this myself, my conclusion is that at 37, it's already too late to really move my planned retirement/FIRE date too much without a huge effort. My overall savings rate is ~27% but moving up retirement a single year would require a ~5% bump. The marginal utility of that consumption over a couple decades seems way higher.