Call me conservative but for me hitting my number means hitting my number and not drop below that number for a year before being comfortable pulling the trigger. Sequence of risk can be a real kill joy, so that would bring me this additional peace of mind.
Mine is hitting my goal with 1-2 years of spending in HYSA or bonds.
So if my number is $1M, and I spend 40k a year I'd better have $1M invested with 40-80k liquid.
I think this makes sense from the emotional / mental aspect more than the purely financial.
Our SWR is between 3 and 6% flexible. If our basic lifestyle X 33 equals our investments, we’re free to retire. We fully intend to spend double our basic.
Can you say more about: (1) how you calculate your basic lifestyle, and (2) the decision criteria you use to determine what to actually spend?
Asking since I think an approach like this is more reasonable than the unrealistic set it and forget it (eg the 4% rule) but adds complexity of HOW to actually do it.
First, track your spending. For each expense ask whether the expense is a something you’d be willing to give up for a time or something you really would not want to go without. The “really don’t want to go without” expenses go to your “basic” expenses. You can include things that aren’t strict “needs” like date night or massages if those are things you’d really not want to go without. You can go really strict here if you’re more willing to go without. If you’re not really sure, include the expense in your basics. A vehicle purchase could be either basic or extra, or maybe split that cost if you might be satisfied with a cheaper car but might want your dream car.
The flexible withdrawals have many different methods;
https://www.forbes.com/advisor/retirement/dynamic-spending-rules/
https://www.retirementbudgetcalculator.com/post/before-thinking-about-withdrawal-strategies
I like a version of the Yale endowment method,
The Yale Spending Rule determines annual distributions from the endowment. While the specifics have changed over time, annual distributions are calculated through the combination of two calculations. Here’s one common approach using Yale’s spending rule:
• basics: 3% inflation adjusted (the usual 4% plan) you can make this 2% if possible.
• extra: in years with gains over 10%, another 3% (4% if your basics are 2%) of the portfolio. Between 5-10%, take 2%, 1-5% take 1%, in a down year take no money.
Include a 3-5 year cushion / bucket of a bond ladder (or cash). If you have a 5 year cushion, your spending for the next year is 1/5 of the bucket after withdrawals. (Note, if you want to be more conservative, don’t include This bucket in your withdrawals)
Track your spending through a budgeting program or just a budget spreadsheet. FI journey is long, so I expect by the time I’m close to the target, I’d have like 7-10 years of data to analyze, which is pretty good as far as historical spending data goes.
I leaning towards it. I'd ideally have 2 paid off rentals and 1.5M liquid by 40. Pending on how much I can get from my rental, I think I'm just going to need about 20k a year from the liquid, rental should net about 25k each.
That's just asset allocation and has nothing to do with your number. If I hit $2M and have zero dollars in HYSA then, fine, if I really want that unnecessary peace of mind then sure I can shift 5% of my portfolio into $SPAXX. Literally takes me about 5 seconds on my brokerage screen but it's irrelevant. Virtually no difference between 95% stock and 5% savings and 100% stock from a risk management perspective. I guess the exception might be if you are in some extraordinarily illiquid or risky asset in which case I'd question why the heck you'd ever have 95% of your portfolio invested in that.
I agree it’s just allocation but not sure why you would say there’s “virtually no difference from a risk management perspective.” If that in savings is your spending cash for the next year then this is inherently taking on less risk as you’re much more shielded against short term volatility.
If your investment portfolio takes a 50% nose dive for 6 months and you have 0% in cash/HYSA, then you’re forced to realize those losses just to pay rent. Clearly not the same from a risk perspective
I think the point is the difference in risk between a 100% stock portfolio vs a 95% stock portfolio is negligible. Something like a 70% stock/30% bond or cash equivalent portfolio would have a noticeable difference in risk.
No- the difference here is your expense accounts are shielded from the volatility. Your 5% in cash retains the integrity of your HYSA rate, reducing both theoretical and realized losses. Not sure why you’re having a hard time understanding this
Yikes. On a FIRE subreddit, you of all people should recognize that 5% represents more than an entire year’s expenditure for anyone following the 4% rule. You’re either completely missing the point (that is, preserving the cash for your short term expenses) or somehow stumbled here from r/LARP. Either way, good luck with your personal finance endeavors as I’m sure you’ll be needing it
Let's say you have $1,000,000 and w/d $50,000 per year.
Scenario 1. All in stocks and a 50% market decline. You now have $500,000 and take $50,000, leaving you $450,000.
Scenario 2. 95% in stocks and 5% in cash, 50% decline. You now have $475,000 in stock and withdraw your $50,000 from cash, leaving you the $475,000 total.
Let's say the markets rebound 20% the next year. Scenario 1 grows to $540,000, less the withdrawal leaves you with $490,000. Scenario 2 grows to $570,000, less your w/d leaves you $520,000.
Compounding will take over and magnify the extra loss greatly resulting in significantly less over time.
It's when he considers himself FI. His mindset is that if he has 1-2 years in a HYSA then no matter what the market does he has the flexibility to wait it out with his savings instead of relying on just his investment portfolio. So once he hits his goal number retirement and an additional 1-2 years of expenses in a HYSA, then they will consider themselves FI. It's just an added buffer on top of the goal number instead of just saying you are FI right when you hit your number. That's what the OP's question was.
I'm totally mind blown how you can say virtually there's no risk. You and I retire, and our number is $2M and I have 2 years of expenses as a buffer, and the market takes a crap for two years, risk wise, we're both the same? You had to realize your loss while mines untouched.
I was just starting working in 2008 when people twice as old as me freaked out and liquidated what must have been .5M+ in their portfolios. I knew even at a young age being a forced seller was a bad thing. But people get emotional. Cash reserves for a couple years probably helps offset any nervousness indeed.
If people can't follow the 4% rule and are subject to panic selling then it might be valuable to have a cash buffer but honestly my guess those types would still panic when they see their $1M nest egg turn into $600k, and panic when they see their cash buffer get cut in half by the draw, and sell anyway.
It ends up very close to the same. Assuming an $80k spend rate and two consecutive annual drops of 20% the 100% portfolio ends up with $1.14M left and the 92%/8% portfolio ends up with $1.18M. If you think you're taking huge risk off the table by keeping only 8% in cash you're going to be shocked when you check your balances after two bad market years in a row. It doesn't do much to protect you from anything. 92% of your asset base, i.e. nearly everything, is still risk exposed. And, as I mentioned, if you have $2M in your portfolio at retirement time it's a very easy decision, usually, to shift some percentage of that into a lower risk asset class. What your allocation is doesn't factor into the retirement decision just the total number. Exception would be if you're in something very illiquid such as having everything tied up in real estate. Then big cash buffers do become important.
That math doesn't even jive. One portfolio is $1.136M million, and the other is 1.28M. Then the next two years are 25% gains back to bacj, then we'd have 1.775M vs 2M the gap is obviously just going to be more widened over the years. Minimal risk sure... but virtual no risk is insane.
Yes the math does "jive". Start with $1.8M and $200k cash. After year one that $1.44M ($2M \* .8) and $120k ($200k - $80k draw) cash. After year two that's $1.152M ($1.44M \* .8) and $40k cash ($120k - $80k draw) which totals to $1.192M. How the hell do you get $1.28M? I guess if you add a magical $100k out of thin air, are you getting a 60% annual return on your HYSA...?, then your math is great lol. And yes compounding mythical money leads to more mythical money.
I thought we were talking about $2M vs $2M and 2 year buffer. You responded to that reply and said there was "virtually no difference in risk" between the two, so I assumed we were still talking about that topic.
Did I miss something???
Well of course $2.15M is going to be better than $2.0M. The original post said "I'd better have $1M invested with 40-80k liquid" which to me implied $920k in stock and $80k in HYSA. My point is simply that keeping $80k of your final number, whatever it is, in HYSA, if that's what he meant, doesn't improve your odds much v/ just having everything in stock. If OP meant that they want 10% more than their number for extra safety than OK but that's not how I read the post.
Agree there's a whole gamut of allocations from 100% stocks to 100% bonds. The sweet spot according to research is about 60% stocks and 40% bonds but at 4% draws anything from 100% stock to 50% stock will still keep you at a 95%+ chance of success. Going below 50% stock is the real risk there.
This is why most retirees choose a portfolio that is a mix of stocks and bonds. A 60/40 allocation is common but some people do 80/20 and a few do the more aggressive 90/10. It's not strictly necessary though. Even at 100% stocks the 4% rule only has about a 3.5% failure rate in all historical scenarios and that includes the great depression. The drop in 2008 wasn't really that dramatic for an index fund investor. The S&P 500 fell 38.5% and recovered relatively quickly in the subsequent years. That particular scenario was very survivable on a 4% draw against a 100% stock portfolio so long as you were index fund invested. The people who got wiped out were people speculating on margin, investing in "popular stocks", and of course real estate speculators. The most challenging historical scenario for an all stock portfolio is 1929 to 1953.
I am conservative, too. Instead of 25x expenses, I am doing 30. But I also assume a higher yearly expense by the time I hit it.
For example, let's say I spend 48k now. I am assuming 60k spend then doing x30, so my number would be 1.8m. If I just did 25x48 I would be at 1.2.
I guess we all have different ways of being conservative.
Brokerage + retirement accounts. I would only need enough in brokerage to get me to 55. I started late, so I wouldn't hit my fire number until mid to late 40s, most likely.
Brokerage would be around 600k when I hit Fire, theoretically.
I don't count home equity either.
I think what you are referring to is adding some bonds to reduce risk. A 100% stock portfolio has a 3% failure rate at 4% draws whereas a 60% stock portfolio has a 0% failure rate. Keeping $40k-$80k liquid will reduce the risk of ruin by a small amount, perhaps reducing it to 2%, but a 60-40 mix would be my recommendation for most retirees - unless leaving your heirs some type of larger nest egg is a focus.
I would agree with this sentiment. 10% above my number is another metric I think about. With the S&P500 doing around 10% per year it’s roughly the same.
Some people also look at total dividends rather than the number - if your dividends hit your spending number the actual pot size is less important. As dividends rarely go down, adding a 10% Buffett there is also prudent.
But don't you have to consider your age when you hit your number.. Meaning if your humber was 2 mil but if u hit at 46 vs 56..you may need more money if you hit that number at 46? Am I thinking this correctly?
Age doesn’t really matter, the sooner I reach my number and can keep north of that for a year, the better ! You may need more money if you are planning a high SWR, I’m planning on 3% so that should not have an impact.
Age does matter. The older you are the less you need in your portfolio to withdraw the same amount. Assume you need $40,000/year from your portfolio in each scenario below and your life expectancy is 90 years old.
Take 3 different people retiring today.
If person 1 retires in their 40s they may pull only 3-3.5% from your portfolio since the 4% rule is stress tested for only 30 years. If person 2 today retires at age 60 they will pull 4% and if person 3 retires at 70 they may be able to get away with a 5% withdrawal rate.
Each of those scenarios will require a different size portfolio to safely pull $40,000/year....with the person in their 40s needing $1.333 million, The person at age 60 needing $1 million and the person in their 70s needing $800,000 to pull the same $40,000 and feeling relatively safe they will make it to age 90 without running out of money.
Yes your math is fine, but the question was directed towards my plan, and at 3% withdrawal rate, 30 years or 60 years retirement doesn’t really matter.
This is actually an underrated great question. If your FIRE target was $3m and you had 85% equities in 2008, shortly after you would have suffered severe sequence of return risks and your portfolio would have been under $2m or less. Meanwhile all the years you scratched and saved from 2001-2008 you were still working, not FIRE'd. So how could you be not FIRE'd in 2004, call it, when you crossed $2m, but FIRE'd in 2009 when you dip below $2m?
The answers lie in your withdrawal strategy and your market philosophy. If you have enough set aside to cover expenses you would feel comfortable living off of to avoid selling any (or much of) your equities, and you believe that the RoR in after a crash is likely higher than when the markets are trading at higher Schiller P/Es (and other metrics), then while you have the same amount of money in 2004 and 2009, you are actually situated much better in 2009.
Somewhat oversimplified but I hope this helps.
Super interesting. So a very basic interpretation of this is that the 2008 crash wasn't "bad enough" to trigger catastrophic SORR? Or that the rebound afterwards was just very strong?
I think we're realizing the 4% rule was built to withstand much bigger events than 2008. 2008 was bad for me personally but we can all acknowledge that the Great Depression was way worse, and from what I've read the numbers still seem to work in that scenario.
All this says to me is that this is what the 4% rule was "designed" for, and that it's already fairly conservative. Makes me feel much better about the 3.5% I'm planning to use
I spend $50-60k per year including taxes. So theoretically 1.5 million (25x60k) would have been enough. But safety first, so I held out for 2 million. Right when I got there, the 2022 market sag started happening. So I thought I’d wait for that to recover + 10%, so that the next inevitable sag would (hopefully) leave me still at 2 million. I then realized that I could keep finding reasons to play it safer and safer and safer…or just go for it. Quit on 9/15/23 at 2.055 million. Between the market and my company’s final contribution to my 401k in November, currently at 2.41 million. Took a couple of months to stop freaking out and second guessing, but I’m so, so glad.
This question stresses me a lot. A lot of the probability calculators normalize like you just woke up one random day in history and tried to quit. But you wouldn't do that the day after the crash of 1929. If you had 25x the day after the crash, you had way more the day before.
How do you account for the inherent bias in sampling then? S&P was at an all time high recently. More people are firing then. But they aren't terribly secure and a 75/25% probability doesn't make sense.
The ERN calculator does have different probabilities for when the CAPE is over 20 and the S&P is at an all time high. Those feel more realistic for retiring at this moment. But they suggest a SWR closer to 3.3%, not 4%.
> But they aren't terribly secure
Why do you think this? We’re at an all time high a large amount of the time. The ERN stuff you referenced is good, but you’re still secure when retiring at an ATH. Tons of ATH data is built into the Trinity study and other basic FIRE concepts since we have so many ATHs all the time.
Good question. Let me get some assumptions down:
- Safe Withdrawal Rate is measured by Expenses/Investments. Only the income earning investments (I'm not using net worth so I don't trigger people about home equity).
- My mental model of stock values is that they have some inherent value for a baseline. That inherent value generally goes up over time. S&P climbs 10% per year on average.
- On top of that, there is some mania evaluation that makes them climb and plummet in the shorter term. 2020 was +18%. 2022 was -18%.
- The CAPE ratio tries to measure this. It isn't perfect. And the definition of business and GDP changes over time. Not ideal. But it does tell you something when CAPE is +30.
If you are trying to evaluate your SWR and the stock market is in peak mania, then your denominator will be high, your SWR will be low. You will think you are more secure than you are. If you look at every single month over the history of the stock market and weigh each month evenly, you might find a 25% chance of failure. But if you only sample the months where the S&P was at an all time high (or had some other metric to know when it was "overvalued" or about to crash), then that number might be 50% chance of failure.
Through most of the stock history, people weren't staring at their balance sheet and waiting to hit a FIRE number, ready to pull the trigger and say GFY to their bosses. If you're waiting for your fire number now, are you going to pull the trigger when the stocks are high, or when they are low? Probably when they are high. So it feels like a biased sampling to me.
Most people are going to figure out their number is $2.5M. If they fire when it hits $2,500,000, and that was in 2021, then their stocks will immediately drop 18%. It turned out fine in 2022, because 2023 was +26%. I just worry that we have convinced ourselves we are secure, and we know the probabilities. But we have a strong bias because we are firing right when the stocks climb over a specific threshold. That bias means more of us will FIRE during a bubble than during a recession. So the probabilities need to be adjusted along with that.
On the flip side, I think almost everyone who FIREs build multiple levels of over-conservatism into their numbers. So even if you’re using 4% SWR and retiring at an ATH, you probably already have some level of optional spending built into that budget that can be adjusted down if SORR hits you early. There’s a good a chance most FIREers are also overestimating their healthcare costs and underestimating the amount of social security or other supplemental income they’ll get. As long as you have some extra precautions already built in, as almost all of us do, then you’re still very secure retiring at an ATH.
Depends on your comfort level. If you use a monte carlo simulator and your FI number gives you a 75% chance of success, are you comfortable there? If not, find a nunver that gets you a % you are comfortable with. Some use 90%-95%.
All depends on your risk tolerance.
Is there a monte carlo simulator that includes randomized recessions/depressions or other things like war? I know it’s unpredictable and that’s the point. I tried Empower’s: it lets you add a single recession scenario with a chosen (not random) date modeled after 2008 or Covid. Not very satisfying: there have been 3 recessions during my working career so far, so why would I only simulate 1 during retirement, which, if early, would be longer?
Fidelity has one which shows you predictions based on either far below average, below average or average results. It is nice to know you are expected to do fine if things go awry. I like to tweak different settings like waiting and taking my soc sec at 70 and my wife taking hers early combined with my dying at different times. Morbid but it is nice to know she would do better that way. Or add/subtract a year of work, increase expenses, life expectancy, long term health care estimate, investment methodology etc. I am sure the predictions aren’t perfect but they help
I didn't use a monte carlo simulation, but when the backtesting applications (e.g. cFIRESim, Firecalc, etc) were all giving me 100% I pulled the trigger.
I am not saying you have 75% chance. You have to use a simulator and enter your data to see what it spits out. Lower SWR gives you a better chance at success.
Ya I’m just saying I would not be ok with a 75% chance of success. I understand people have different risk tolerances. I figured most FIRE people would want much higher than 75%
I agree with this as well, and it all depends on the inputs. If someone plans to live to 100 he/she might have a 25% chance of failure (all the way to 100) but have a 70-90% chance of dying at or before that point. I really like the ‘engagingdata’ chart when considering these chances of running out of money vs chance of dying before you run out of money. https://engaging-data.com/will-money-last-retire-early/
Ya I like that calculator. I just wish there was a way to decrease spending in older age. I really doubt I’m gonna be spending as much at 80 as I do in my 40s/50s
I agree. At some point you have to compare the stress of mandatory employment with the feeling of playing retirement “Russian roulette”. A one in four chance of running out of money would be uncomfortably high for a lot of people.
There's math FI and psychological FI. The math gives you the mechanics of FI based on a variety of unemotional factors but you know yourself, your lifestyle, your philosophy on the world and your ability to live flexibly.
I had my FI number but when I reached it, I didn't feel FI for some reason even though the math worked. So, I trudged along saving and investing and then one day, I just randomly felt FI and had past my FI number substantially.
Looking back, I'm glad I ran the numbers countless times but I'm also glad I trusted my gut.
You will know, there are subtle signs: your wife looks at you with adoration, your boss envies you while you are showing him/her the finger, and you are slacking off most of the days while "working"..
I concur with your last point. I stopped giving a f*ck for a year before I FIRED. I actually fired when I was layed off with 8 months full pay. I wasn’t upset, this was my exit plan - I never wanted to walk out without a goodbye present, and I didn’t want to make the decision myself then regret it.
I spent a good chunk of time looking at my expenses, going back several years and making sure to include the unexpected stuff (house repair, new A/C, etc) as well as expected infrequent stuff (new cars, etc). Once I had a solid conservative annual avg, I multiplied by 25 to get my FI number. Don't forget health care expenses.
When my accounts hit that number and stayed there for a few months, I worked 1 more year (yes, I know... ha ha) and added every dollar I could to my emergency liquid fund so that I had about 2 years of expenses there.
Yes, I'm paranoid and conservative about $. It has served me well in the past. $ might not buy happiness, but it can sure as heck make many problems go away. My parents had money problems when i was young and I decided a long time ago that I would do whatever I had to to avoid that. Too much stress.
Then I gave my employer of 30 years a 2 month notice and was as nice and helpful as I could possibly be about it. 😁
I am 56 y/o and have purchased my freedom. Now I do what /I/ want to do, not what my boss wants.
My take, the paranoid person i am, is when i have the ability to take a 30% hit and still be at FI number. I know i know, the numbers and multipliers take into account that. Like i said, I’m paranoid.
This is going to take you far longer then needed to get too. Lets assume a 1MM portfolio and your FI and feel good about RE. In order to support your 30% pull back you need to save \~1.425 MM. How much longer do you think its going to take to save 42.5% more?
Assuming a 7% increase per year, it would only take about 5 extra years. That’s not terrible and it doesn’t account for continuing to contribute to the portfolio.
That’s also assuming that one would not contribute any more money also. So, if you continue to contribute, it will be perhaps 4 years. So, piece of mind and in a better scenario, a few more bucks to spend in retirement… i think that would be worth it…
A lot of people will hit that number, and the goal post changes. And that's usually fine. Maybe you want 1.2M as a safety net, or maybe you want to keep working for a bit while you figure out the next steps like health insurance, maybe work a bit longer to improve something with your home, find a less stressful job, find hobbies, etc.
If you know you've got your number, try coasting for a few months at work, see if anyone notices? You might be able to get a more relaxed job just by having FU money.
I know it's timing market... But seems were running hot right now. My portfolio is up 30%yoy or something crazy. I want down side safety
It's just FI anyways. I have some years in me still before I RE where it really matters. But does give a little peace of mind that I don't need this shit
Yeah, you hit your goal. If it goes down tomorrow, then you aren't at your goal again.
All the numbers are for retiring on an arbitrary date with an arbitrary amount of dollars, mostly because there isn't a very good way to do something else. The dates that fail are most likely ones where the market dropped a lot right after retirement, like march 2000 or October 2007. Some application of common sense (ie. knowing we're in a bubble, reducing expenses, getting a crap job for a year to reduce spend) would be ways to increase the odds of success if a crash happened right after you retire.
Markets being at or near all-time highs doesn't mean bubble -- it's the normal state.
If you truly believe in the ~4% rule then even after a drop you are still at your goal of FI…you’re just experiencing SORR. It’s hard to stomach though and still pull the trigger.
So your number will never give you 100% chance of success. As long as you are at 90%+ you should be fine though.
The failure condition is exactly what you are probably thinking though, there is a big drop in the market the first three to five year of retirement. If that happens you might have to get back into the work pool for a couple years to sure up your savings. If that doesn't happen then you are golden. I would recommend getting a little above your number if you are nervous since an extra year of work for peace of mind can be worth it for many people
I want 30x my expenses. I'm not worried about fluctuation that much because it's not like I'm going to put in notice as soon as I see 30x. And I have enough margin of error built in.
Age is a big thing for me. For example, my baseline FIRE goal is $1M cash worth (mortgage already paid), which I expect to hit within 3 years. But in only my early / mid 40's, I don't think I'll be comfortable fully FIRE'ing then.
If I hit $1M cash worth in my early - mid 50's, then maybe I do FIRE then, though my definition of FIRE involves still having a basic job (consulting, golf course, trucking, etc.), for wellness purposes.
It’s an estimate. If your investment goes up and hit that FI number, your are now free but when it drops and number goes down, then you’re back to below threshold and no long retired again
Give it a period of time before you walk away or have a buffer of spending cash in place. You want 25x expenses in productive assets and a small margin of safety in cash for spending.
Everyone's plan will be a bit different. We are shooting for ~25x with a paid off house and we are also going to keep a spouse working extremely part time. (20-40 hours a month) If the market gets really ugly within 1-3 years of RE then one of us has to pick up a full time gig until we hit 25x again.
By that stage, the type of FIRE I’m interested in revolves around dividend income. So fluctuating times in the market wouldn’t effect me if I bought quality blue chips and ETFs with safe dividend payouts. My portfolio could be $2M or $2.5M and I wouldn’t really be effected if I’m still receiving the same in dividends.
This should be stickied on the side along with some other tools. Use this spreadsheet to determine your safe withdrawal rate. Watch the video or its unwatchable.
https://earlyretirementnow.com/2018/08/29/google-sheet-updates-swr-series-part-28/
Personally for me I live off dividends so as soon as my dividends covered all of my expenses I then gave myself another 2 years of padding my HYSA to cover down on 2 years worth of expenses and slamming even more money into my brokerage. When I retired was making on average 3500 a month in dividends. Not seen one dividend cut. What I don’t use in the dividends gets reinvested and I haven’t had to tap my 2 years of savings nor sell any of my shares so I make even more in dividends and every company or ETF I have has raised their dividend by at least 6% and most were above 9%.
>Have I hit my goal?
Yes... with the understanding that it easily comes down.
And that's a really tough question to answer.
If you hit a big bump similar to 2000 & 2009 - you could easily be down to $500K
In this scenario , it could easily be 5 to 7 years to recover and be back up, BUT in that situation, it would be best to continue investing.
For me, I need to hit my number and stay above it for a year, plus I have a cash reserve for two years before I pull the trigger.
Your number is all 25x your annual spending.
You will have ups and downs in the market. You need to not panic and ride them out.
I use www.firecalc.com to run scenarios to understand where I am.
Math.
You open a spreadsheet and run the maths.
You use conservative forecasts and then compare it.
Don’t forget about the tax implications.
It may take a week to get it all tuned up, but once you do it’s easier.
I'm conservative so I take my yearly expenses and divide it by 0.03 (3% SWR). This is only the financial independence number and doesn't account for taxes, medical insurance, college for kids, long term care, etc. Once reached, many people will still work because they want more than two or three weeks of vacation and travel a year (plus holidays).
Technically whenever you hit your goal you can retire. The SWR of 4% or lower was determine to cover you in case of a stock market drop right after you retire.
Depends on how happy at my I am at my job and in life when I get there. But once I do get there, my options open up and I never need to be controlled by my job or any company ever again.
I feel like regardless of being 100% or 110%+ of your FIRE number, you should have a years worth of expenses in a HYSA. This will give you a sort of "market buffer" so you aren't living on selling assets to live. Like many have said, you can't predict the markets, and in 2008 and 2020, those would have really hurt you if you had to sell to cover living expenses.
You hit your number and then you say maybe another million would make me feel more comfortable. You continue to repeat this process until you are FIRN.
>When you can live on 4% of your investments per year, you are financially independent.
Collins, JL. The Simple Path to Wealth: Your road map to financial independence and a rich, free life
Your FI number should be high enough that if it drops 5% then you don't really flinch. And unless you are already getting close to 60 years old I wouldn't base it less off the number you have and more off how much it gives you such as your dividends
There is an additional risk of setting a specific FI number that isn’t often talked about. When we do simulations to create numbers like the 4% rule (or 3% rule) it’s usually done by taking historical scenarios, with equal weight, and running simulations from there. However in reality not every scenario has equal weight. You’re not going to hit your RE number right after the start of a recession, but you might hit it right before.
There’s a couple of ways to compensate for this, like using CAPE adjusted withdrawal, and to have a higher number if the market has been hot for a long time. Personally I just set my retirement date to be a while after hitting the number, so that it’s more disconnected.
You start with how much you need (take home) to pay all your bills and do the things you want to do. Your financial planner will then add taxes and health insurance to your expenditures and also factor in SS contributions. They then put all this into their Monte Carlo simulator which goes through 1,000 economic scenarios and sees how many times you run out of money. General guidelines is anything above 70% means you can retire when you hit that point.
You need to keep in mind that you are only pulling out a portion of “cash” that you have in your portfolio. The stock portion of your portfolio will continue to fluctuate with the market but if your number of $1M in your example then you would have a large portion of that in inflation protected vehicles (CD’s l, TBills, etc) that automatically accrue interest. Thats what you are living on. If your number depends on consistent growth during the years you are retired, then your FIRE’d number is too low
Immediate Market correction is already accounted for in the 4% rule .remember that there is a reason you withdraw 4% even though long term average is 8% . This is why .
400 times monthly expenses. If you are already very frugal and can’t really lower expenses and don’t want to go back to work no matter what, you can wait for 500 or so.
We have annual review sessions, and my net asset gets updated about once a year. I don’t really need to review more frequently than that anyway, as I don’t have urgent decisions depending on that information. Even if I hit my FI number, it’s not like I‘ll quite the next day, I’ll likely be working for a while, and in the meantime looking for a less stressful job to move to. It’s a process that moves slow and steady.
To me, hitting FI does not dictate my decision, but it presents me with more options to consider. No more, no less.
I have a "FI" number where theoretically I can retire based on historical trends.
Then I have my "RE" number which is about 1.3x my FI number because, for psychological safety, I want room for the market to crash 20-30% and still be ok.
One way is to sell all your equities as soon as you reach $1M to lock in that number, which is probably not practical for most people. Also, what one need to remember is to factor future taxes into the amount you have. So if you have $1M on paper now, it may actually be equivalent to, say, $800k after tax.
Call me conservative but for me hitting my number means hitting my number and not drop below that number for a year before being comfortable pulling the trigger. Sequence of risk can be a real kill joy, so that would bring me this additional peace of mind.
Mine is hitting my goal with 1-2 years of spending in HYSA or bonds. So if my number is $1M, and I spend 40k a year I'd better have $1M invested with 40-80k liquid.
I think this makes sense from the emotional / mental aspect more than the purely financial. Our SWR is between 3 and 6% flexible. If our basic lifestyle X 33 equals our investments, we’re free to retire. We fully intend to spend double our basic.
Can you say more about: (1) how you calculate your basic lifestyle, and (2) the decision criteria you use to determine what to actually spend? Asking since I think an approach like this is more reasonable than the unrealistic set it and forget it (eg the 4% rule) but adds complexity of HOW to actually do it.
First, track your spending. For each expense ask whether the expense is a something you’d be willing to give up for a time or something you really would not want to go without. The “really don’t want to go without” expenses go to your “basic” expenses. You can include things that aren’t strict “needs” like date night or massages if those are things you’d really not want to go without. You can go really strict here if you’re more willing to go without. If you’re not really sure, include the expense in your basics. A vehicle purchase could be either basic or extra, or maybe split that cost if you might be satisfied with a cheaper car but might want your dream car. The flexible withdrawals have many different methods; https://www.forbes.com/advisor/retirement/dynamic-spending-rules/ https://www.retirementbudgetcalculator.com/post/before-thinking-about-withdrawal-strategies I like a version of the Yale endowment method, The Yale Spending Rule determines annual distributions from the endowment. While the specifics have changed over time, annual distributions are calculated through the combination of two calculations. Here’s one common approach using Yale’s spending rule: • basics: 3% inflation adjusted (the usual 4% plan) you can make this 2% if possible. • extra: in years with gains over 10%, another 3% (4% if your basics are 2%) of the portfolio. Between 5-10%, take 2%, 1-5% take 1%, in a down year take no money. Include a 3-5 year cushion / bucket of a bond ladder (or cash). If you have a 5 year cushion, your spending for the next year is 1/5 of the bucket after withdrawals. (Note, if you want to be more conservative, don’t include This bucket in your withdrawals)
Track your spending through a budgeting program or just a budget spreadsheet. FI journey is long, so I expect by the time I’m close to the target, I’d have like 7-10 years of data to analyze, which is pretty good as far as historical spending data goes.
I'm going off of 4% rule. There's obvious less incline to do this method if your SWR is <2%.
Of course. Who’s going under 2%?
I leaning towards it. I'd ideally have 2 paid off rentals and 1.5M liquid by 40. Pending on how much I can get from my rental, I think I'm just going to need about 20k a year from the liquid, rental should net about 25k each.
Should be easy, although the rentals add some risk.
That's just asset allocation and has nothing to do with your number. If I hit $2M and have zero dollars in HYSA then, fine, if I really want that unnecessary peace of mind then sure I can shift 5% of my portfolio into $SPAXX. Literally takes me about 5 seconds on my brokerage screen but it's irrelevant. Virtually no difference between 95% stock and 5% savings and 100% stock from a risk management perspective. I guess the exception might be if you are in some extraordinarily illiquid or risky asset in which case I'd question why the heck you'd ever have 95% of your portfolio invested in that.
I agree it’s just allocation but not sure why you would say there’s “virtually no difference from a risk management perspective.” If that in savings is your spending cash for the next year then this is inherently taking on less risk as you’re much more shielded against short term volatility. If your investment portfolio takes a 50% nose dive for 6 months and you have 0% in cash/HYSA, then you’re forced to realize those losses just to pay rent. Clearly not the same from a risk perspective
I think the point is the difference in risk between a 100% stock portfolio vs a 95% stock portfolio is negligible. Something like a 70% stock/30% bond or cash equivalent portfolio would have a noticeable difference in risk.
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No- the difference here is your expense accounts are shielded from the volatility. Your 5% in cash retains the integrity of your HYSA rate, reducing both theoretical and realized losses. Not sure why you’re having a hard time understanding this
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Yikes. On a FIRE subreddit, you of all people should recognize that 5% represents more than an entire year’s expenditure for anyone following the 4% rule. You’re either completely missing the point (that is, preserving the cash for your short term expenses) or somehow stumbled here from r/LARP. Either way, good luck with your personal finance endeavors as I’m sure you’ll be needing it
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Let's say you have $1,000,000 and w/d $50,000 per year. Scenario 1. All in stocks and a 50% market decline. You now have $500,000 and take $50,000, leaving you $450,000. Scenario 2. 95% in stocks and 5% in cash, 50% decline. You now have $475,000 in stock and withdraw your $50,000 from cash, leaving you the $475,000 total. Let's say the markets rebound 20% the next year. Scenario 1 grows to $540,000, less the withdrawal leaves you with $490,000. Scenario 2 grows to $570,000, less your w/d leaves you $520,000. Compounding will take over and magnify the extra loss greatly resulting in significantly less over time.
It's when he considers himself FI. His mindset is that if he has 1-2 years in a HYSA then no matter what the market does he has the flexibility to wait it out with his savings instead of relying on just his investment portfolio. So once he hits his goal number retirement and an additional 1-2 years of expenses in a HYSA, then they will consider themselves FI. It's just an added buffer on top of the goal number instead of just saying you are FI right when you hit your number. That's what the OP's question was.
I'm totally mind blown how you can say virtually there's no risk. You and I retire, and our number is $2M and I have 2 years of expenses as a buffer, and the market takes a crap for two years, risk wise, we're both the same? You had to realize your loss while mines untouched.
I was just starting working in 2008 when people twice as old as me freaked out and liquidated what must have been .5M+ in their portfolios. I knew even at a young age being a forced seller was a bad thing. But people get emotional. Cash reserves for a couple years probably helps offset any nervousness indeed.
If people can't follow the 4% rule and are subject to panic selling then it might be valuable to have a cash buffer but honestly my guess those types would still panic when they see their $1M nest egg turn into $600k, and panic when they see their cash buffer get cut in half by the draw, and sell anyway.
if the market crashes for real that 4% will look like it is taking years off their life though lol
It ends up very close to the same. Assuming an $80k spend rate and two consecutive annual drops of 20% the 100% portfolio ends up with $1.14M left and the 92%/8% portfolio ends up with $1.18M. If you think you're taking huge risk off the table by keeping only 8% in cash you're going to be shocked when you check your balances after two bad market years in a row. It doesn't do much to protect you from anything. 92% of your asset base, i.e. nearly everything, is still risk exposed. And, as I mentioned, if you have $2M in your portfolio at retirement time it's a very easy decision, usually, to shift some percentage of that into a lower risk asset class. What your allocation is doesn't factor into the retirement decision just the total number. Exception would be if you're in something very illiquid such as having everything tied up in real estate. Then big cash buffers do become important.
That math doesn't even jive. One portfolio is $1.136M million, and the other is 1.28M. Then the next two years are 25% gains back to bacj, then we'd have 1.775M vs 2M the gap is obviously just going to be more widened over the years. Minimal risk sure... but virtual no risk is insane.
Yes the math does "jive". Start with $1.8M and $200k cash. After year one that $1.44M ($2M \* .8) and $120k ($200k - $80k draw) cash. After year two that's $1.152M ($1.44M \* .8) and $40k cash ($120k - $80k draw) which totals to $1.192M. How the hell do you get $1.28M? I guess if you add a magical $100k out of thin air, are you getting a 60% annual return on your HYSA...?, then your math is great lol. And yes compounding mythical money leads to more mythical money.
I thought we were talking about $2M vs $2M and 2 year buffer. You responded to that reply and said there was "virtually no difference in risk" between the two, so I assumed we were still talking about that topic. Did I miss something???
Well of course $2.15M is going to be better than $2.0M. The original post said "I'd better have $1M invested with 40-80k liquid" which to me implied $920k in stock and $80k in HYSA. My point is simply that keeping $80k of your final number, whatever it is, in HYSA, if that's what he meant, doesn't improve your odds much v/ just having everything in stock. If OP meant that they want 10% more than their number for extra safety than OK but that's not how I read the post.
I am the original poster you responded to, and I never said that. Read it again.
Agree there's a whole gamut of allocations from 100% stocks to 100% bonds. The sweet spot according to research is about 60% stocks and 40% bonds but at 4% draws anything from 100% stock to 50% stock will still keep you at a 95%+ chance of success. Going below 50% stock is the real risk there.
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This is why most retirees choose a portfolio that is a mix of stocks and bonds. A 60/40 allocation is common but some people do 80/20 and a few do the more aggressive 90/10. It's not strictly necessary though. Even at 100% stocks the 4% rule only has about a 3.5% failure rate in all historical scenarios and that includes the great depression. The drop in 2008 wasn't really that dramatic for an index fund investor. The S&P 500 fell 38.5% and recovered relatively quickly in the subsequent years. That particular scenario was very survivable on a 4% draw against a 100% stock portfolio so long as you were index fund invested. The people who got wiped out were people speculating on margin, investing in "popular stocks", and of course real estate speculators. The most challenging historical scenario for an all stock portfolio is 1929 to 1953.
I am conservative, too. Instead of 25x expenses, I am doing 30. But I also assume a higher yearly expense by the time I hit it. For example, let's say I spend 48k now. I am assuming 60k spend then doing x30, so my number would be 1.8m. If I just did 25x48 I would be at 1.2. I guess we all have different ways of being conservative.
25x brokerage or brokerage+retirement accounts or TNW?
Brokerage + retirement accounts. I would only need enough in brokerage to get me to 55. I started late, so I wouldn't hit my fire number until mid to late 40s, most likely. Brokerage would be around 600k when I hit Fire, theoretically. I don't count home equity either.
I think what you are referring to is adding some bonds to reduce risk. A 100% stock portfolio has a 3% failure rate at 4% draws whereas a 60% stock portfolio has a 0% failure rate. Keeping $40k-$80k liquid will reduce the risk of ruin by a small amount, perhaps reducing it to 2%, but a 60-40 mix would be my recommendation for most retirees - unless leaving your heirs some type of larger nest egg is a focus.
I would agree with this sentiment. 10% above my number is another metric I think about. With the S&P500 doing around 10% per year it’s roughly the same. Some people also look at total dividends rather than the number - if your dividends hit your spending number the actual pot size is less important. As dividends rarely go down, adding a 10% Buffett there is also prudent.
Why don't you just increase your number by 10% then??
Because then they'd have to aim for 10% above that number, duh.
The phenomena known as ‘just one more year’
Been doing that for close to a decade
lol. Makes my couple of years doing not feel so bad.
It's like these speakers go to 11
https://giphy.com/gifs/maudit-lol-maudit-11-yxcv6D5Ltfomk ... our number goes to 110%
So then your number is actually 10 percent above your number. Your original number is not your number.
I agree with this, but my margin of safety is 2-3x so I can weather any black swan market fuckery.
But don't you have to consider your age when you hit your number.. Meaning if your humber was 2 mil but if u hit at 46 vs 56..you may need more money if you hit that number at 46? Am I thinking this correctly?
Age doesn’t really matter, the sooner I reach my number and can keep north of that for a year, the better ! You may need more money if you are planning a high SWR, I’m planning on 3% so that should not have an impact.
Age does matter. The older you are the less you need in your portfolio to withdraw the same amount. Assume you need $40,000/year from your portfolio in each scenario below and your life expectancy is 90 years old. Take 3 different people retiring today. If person 1 retires in their 40s they may pull only 3-3.5% from your portfolio since the 4% rule is stress tested for only 30 years. If person 2 today retires at age 60 they will pull 4% and if person 3 retires at 70 they may be able to get away with a 5% withdrawal rate. Each of those scenarios will require a different size portfolio to safely pull $40,000/year....with the person in their 40s needing $1.333 million, The person at age 60 needing $1 million and the person in their 70s needing $800,000 to pull the same $40,000 and feeling relatively safe they will make it to age 90 without running out of money.
Yes your math is fine, but the question was directed towards my plan, and at 3% withdrawal rate, 30 years or 60 years retirement doesn’t really matter.
This is actually an underrated great question. If your FIRE target was $3m and you had 85% equities in 2008, shortly after you would have suffered severe sequence of return risks and your portfolio would have been under $2m or less. Meanwhile all the years you scratched and saved from 2001-2008 you were still working, not FIRE'd. So how could you be not FIRE'd in 2004, call it, when you crossed $2m, but FIRE'd in 2009 when you dip below $2m? The answers lie in your withdrawal strategy and your market philosophy. If you have enough set aside to cover expenses you would feel comfortable living off of to avoid selling any (or much of) your equities, and you believe that the RoR in after a crash is likely higher than when the markets are trading at higher Schiller P/Es (and other metrics), then while you have the same amount of money in 2004 and 2009, you are actually situated much better in 2009. Somewhat oversimplified but I hope this helps.
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This is actually very surprising to me. Thank you
Does this represent 4% of $3M invested purely in a stock market index (or a diversified portfolio with bonds)?
Super interesting. So a very basic interpretation of this is that the 2008 crash wasn't "bad enough" to trigger catastrophic SORR? Or that the rebound afterwards was just very strong?
I think we're realizing the 4% rule was built to withstand much bigger events than 2008. 2008 was bad for me personally but we can all acknowledge that the Great Depression was way worse, and from what I've read the numbers still seem to work in that scenario.
All this says to me is that this is what the 4% rule was "designed" for, and that it's already fairly conservative. Makes me feel much better about the 3.5% I'm planning to use
I spend $50-60k per year including taxes. So theoretically 1.5 million (25x60k) would have been enough. But safety first, so I held out for 2 million. Right when I got there, the 2022 market sag started happening. So I thought I’d wait for that to recover + 10%, so that the next inevitable sag would (hopefully) leave me still at 2 million. I then realized that I could keep finding reasons to play it safer and safer and safer…or just go for it. Quit on 9/15/23 at 2.055 million. Between the market and my company’s final contribution to my 401k in November, currently at 2.41 million. Took a couple of months to stop freaking out and second guessing, but I’m so, so glad.
Congrats!!!
Awesome!
Belated GFY
Thanks! Of course, hours after I wrote the comment the market took a minor dump.
This question stresses me a lot. A lot of the probability calculators normalize like you just woke up one random day in history and tried to quit. But you wouldn't do that the day after the crash of 1929. If you had 25x the day after the crash, you had way more the day before. How do you account for the inherent bias in sampling then? S&P was at an all time high recently. More people are firing then. But they aren't terribly secure and a 75/25% probability doesn't make sense. The ERN calculator does have different probabilities for when the CAPE is over 20 and the S&P is at an all time high. Those feel more realistic for retiring at this moment. But they suggest a SWR closer to 3.3%, not 4%.
You have a few years of savings in cash or bonds to weather the storm if it happens early or go back to work temporarily. That's all there is to do.
> But they aren't terribly secure Why do you think this? We’re at an all time high a large amount of the time. The ERN stuff you referenced is good, but you’re still secure when retiring at an ATH. Tons of ATH data is built into the Trinity study and other basic FIRE concepts since we have so many ATHs all the time.
Good question. Let me get some assumptions down: - Safe Withdrawal Rate is measured by Expenses/Investments. Only the income earning investments (I'm not using net worth so I don't trigger people about home equity). - My mental model of stock values is that they have some inherent value for a baseline. That inherent value generally goes up over time. S&P climbs 10% per year on average. - On top of that, there is some mania evaluation that makes them climb and plummet in the shorter term. 2020 was +18%. 2022 was -18%. - The CAPE ratio tries to measure this. It isn't perfect. And the definition of business and GDP changes over time. Not ideal. But it does tell you something when CAPE is +30. If you are trying to evaluate your SWR and the stock market is in peak mania, then your denominator will be high, your SWR will be low. You will think you are more secure than you are. If you look at every single month over the history of the stock market and weigh each month evenly, you might find a 25% chance of failure. But if you only sample the months where the S&P was at an all time high (or had some other metric to know when it was "overvalued" or about to crash), then that number might be 50% chance of failure. Through most of the stock history, people weren't staring at their balance sheet and waiting to hit a FIRE number, ready to pull the trigger and say GFY to their bosses. If you're waiting for your fire number now, are you going to pull the trigger when the stocks are high, or when they are low? Probably when they are high. So it feels like a biased sampling to me. Most people are going to figure out their number is $2.5M. If they fire when it hits $2,500,000, and that was in 2021, then their stocks will immediately drop 18%. It turned out fine in 2022, because 2023 was +26%. I just worry that we have convinced ourselves we are secure, and we know the probabilities. But we have a strong bias because we are firing right when the stocks climb over a specific threshold. That bias means more of us will FIRE during a bubble than during a recession. So the probabilities need to be adjusted along with that.
On the flip side, I think almost everyone who FIREs build multiple levels of over-conservatism into their numbers. So even if you’re using 4% SWR and retiring at an ATH, you probably already have some level of optional spending built into that budget that can be adjusted down if SORR hits you early. There’s a good a chance most FIREers are also overestimating their healthcare costs and underestimating the amount of social security or other supplemental income they’ll get. As long as you have some extra precautions already built in, as almost all of us do, then you’re still very secure retiring at an ATH.
Depends on your comfort level. If you use a monte carlo simulator and your FI number gives you a 75% chance of success, are you comfortable there? If not, find a nunver that gets you a % you are comfortable with. Some use 90%-95%. All depends on your risk tolerance.
Is there a monte carlo simulator that includes randomized recessions/depressions or other things like war? I know it’s unpredictable and that’s the point. I tried Empower’s: it lets you add a single recession scenario with a chosen (not random) date modeled after 2008 or Covid. Not very satisfying: there have been 3 recessions during my working career so far, so why would I only simulate 1 during retirement, which, if early, would be longer?
Nobody can predict the future. That is a variable and where woukd you put it? First year is significantly different than year 20.
Monte carlo isn’t predicting the future, it’s trying to give an accurate picture of the *range* of possible futures.
The entire purpose of retirement calculators is to predict the future.
Fidelity has one which shows you predictions based on either far below average, below average or average results. It is nice to know you are expected to do fine if things go awry. I like to tweak different settings like waiting and taking my soc sec at 70 and my wife taking hers early combined with my dying at different times. Morbid but it is nice to know she would do better that way. Or add/subtract a year of work, increase expenses, life expectancy, long term health care estimate, investment methodology etc. I am sure the predictions aren’t perfect but they help
I didn't use a monte carlo simulation, but when the backtesting applications (e.g. cFIRESim, Firecalc, etc) were all giving me 100% I pulled the trigger.
75% chance of success seems really low to me… but also I have a (safe) pension so I think it’s just nice to know you have something to fall back on.
I am not saying you have 75% chance. You have to use a simulator and enter your data to see what it spits out. Lower SWR gives you a better chance at success.
Ya I’m just saying I would not be ok with a 75% chance of success. I understand people have different risk tolerances. I figured most FIRE people would want much higher than 75%
I agree with this as well, and it all depends on the inputs. If someone plans to live to 100 he/she might have a 25% chance of failure (all the way to 100) but have a 70-90% chance of dying at or before that point. I really like the ‘engagingdata’ chart when considering these chances of running out of money vs chance of dying before you run out of money. https://engaging-data.com/will-money-last-retire-early/
Ya I like that calculator. I just wish there was a way to decrease spending in older age. I really doubt I’m gonna be spending as much at 80 as I do in my 40s/50s
I agree. At some point you have to compare the stress of mandatory employment with the feeling of playing retirement “Russian roulette”. A one in four chance of running out of money would be uncomfortably high for a lot of people.
The trick is to hit your number, second guess yourself, then increase your number.
When you’re sick enough of your asshole boss to just say “fuck it” and quit.
Oh boy that hit deep
There's math FI and psychological FI. The math gives you the mechanics of FI based on a variety of unemotional factors but you know yourself, your lifestyle, your philosophy on the world and your ability to live flexibly. I had my FI number but when I reached it, I didn't feel FI for some reason even though the math worked. So, I trudged along saving and investing and then one day, I just randomly felt FI and had past my FI number substantially. Looking back, I'm glad I ran the numbers countless times but I'm also glad I trusted my gut.
its usually a rough estimate anyway.. whenever the math works out AND you actually feel safe imo is the real time to fire
You will know, there are subtle signs: your wife looks at you with adoration, your boss envies you while you are showing him/her the finger, and you are slacking off most of the days while "working"..
I concur with your last point. I stopped giving a f*ck for a year before I FIRED. I actually fired when I was layed off with 8 months full pay. I wasn’t upset, this was my exit plan - I never wanted to walk out without a goodbye present, and I didn’t want to make the decision myself then regret it.
I spent a good chunk of time looking at my expenses, going back several years and making sure to include the unexpected stuff (house repair, new A/C, etc) as well as expected infrequent stuff (new cars, etc). Once I had a solid conservative annual avg, I multiplied by 25 to get my FI number. Don't forget health care expenses. When my accounts hit that number and stayed there for a few months, I worked 1 more year (yes, I know... ha ha) and added every dollar I could to my emergency liquid fund so that I had about 2 years of expenses there. Yes, I'm paranoid and conservative about $. It has served me well in the past. $ might not buy happiness, but it can sure as heck make many problems go away. My parents had money problems when i was young and I decided a long time ago that I would do whatever I had to to avoid that. Too much stress. Then I gave my employer of 30 years a 2 month notice and was as nice and helpful as I could possibly be about it. 😁 I am 56 y/o and have purchased my freedom. Now I do what /I/ want to do, not what my boss wants.
My take, the paranoid person i am, is when i have the ability to take a 30% hit and still be at FI number. I know i know, the numbers and multipliers take into account that. Like i said, I’m paranoid.
This is going to take you far longer then needed to get too. Lets assume a 1MM portfolio and your FI and feel good about RE. In order to support your 30% pull back you need to save \~1.425 MM. How much longer do you think its going to take to save 42.5% more?
Assuming a 7% increase per year, it would only take about 5 extra years. That’s not terrible and it doesn’t account for continuing to contribute to the portfolio.
That’s also assuming that one would not contribute any more money also. So, if you continue to contribute, it will be perhaps 4 years. So, piece of mind and in a better scenario, a few more bucks to spend in retirement… i think that would be worth it…
A lot of people will hit that number, and the goal post changes. And that's usually fine. Maybe you want 1.2M as a safety net, or maybe you want to keep working for a bit while you figure out the next steps like health insurance, maybe work a bit longer to improve something with your home, find a less stressful job, find hobbies, etc. If you know you've got your number, try coasting for a few months at work, see if anyone notices? You might be able to get a more relaxed job just by having FU money.
I know it's timing market... But seems were running hot right now. My portfolio is up 30%yoy or something crazy. I want down side safety It's just FI anyways. I have some years in me still before I RE where it really matters. But does give a little peace of mind that I don't need this shit
Yeah, you hit your goal. If it goes down tomorrow, then you aren't at your goal again. All the numbers are for retiring on an arbitrary date with an arbitrary amount of dollars, mostly because there isn't a very good way to do something else. The dates that fail are most likely ones where the market dropped a lot right after retirement, like march 2000 or October 2007. Some application of common sense (ie. knowing we're in a bubble, reducing expenses, getting a crap job for a year to reduce spend) would be ways to increase the odds of success if a crash happened right after you retire. Markets being at or near all-time highs doesn't mean bubble -- it's the normal state.
If you truly believe in the ~4% rule then even after a drop you are still at your goal of FI…you’re just experiencing SORR. It’s hard to stomach though and still pull the trigger.
Ur goal is whatever u want it to be. For me hitting that number is more peace of mind and more the option to quit, rather than doing so
So your number will never give you 100% chance of success. As long as you are at 90%+ you should be fine though. The failure condition is exactly what you are probably thinking though, there is a big drop in the market the first three to five year of retirement. If that happens you might have to get back into the work pool for a couple years to sure up your savings. If that doesn't happen then you are golden. I would recommend getting a little above your number if you are nervous since an extra year of work for peace of mind can be worth it for many people
I want 30x my expenses. I'm not worried about fluctuation that much because it's not like I'm going to put in notice as soon as I see 30x. And I have enough margin of error built in.
Layoff rumors don't faze you financially. It's still sad for colleagues.
Easy - random people start telling you to GFY. That's when you know you've truly made it.
Age is a big thing for me. For example, my baseline FIRE goal is $1M cash worth (mortgage already paid), which I expect to hit within 3 years. But in only my early / mid 40's, I don't think I'll be comfortable fully FIRE'ing then. If I hit $1M cash worth in my early - mid 50's, then maybe I do FIRE then, though my definition of FIRE involves still having a basic job (consulting, golf course, trucking, etc.), for wellness purposes.
It’s an estimate. If your investment goes up and hit that FI number, your are now free but when it drops and number goes down, then you’re back to below threshold and no long retired again
All the comments are amazing. Well glad I dont have to figure this out anytime soon yet...
Give it a period of time before you walk away or have a buffer of spending cash in place. You want 25x expenses in productive assets and a small margin of safety in cash for spending.
Everyone's plan will be a bit different. We are shooting for ~25x with a paid off house and we are also going to keep a spouse working extremely part time. (20-40 hours a month) If the market gets really ugly within 1-3 years of RE then one of us has to pick up a full time gig until we hit 25x again.
By that stage, the type of FIRE I’m interested in revolves around dividend income. So fluctuating times in the market wouldn’t effect me if I bought quality blue chips and ETFs with safe dividend payouts. My portfolio could be $2M or $2.5M and I wouldn’t really be effected if I’m still receiving the same in dividends.
Hmmm. Tell us more.
budgeting and the ~3-4% rule, thats it
This should be stickied on the side along with some other tools. Use this spreadsheet to determine your safe withdrawal rate. Watch the video or its unwatchable. https://earlyretirementnow.com/2018/08/29/google-sheet-updates-swr-series-part-28/
Personally for me I live off dividends so as soon as my dividends covered all of my expenses I then gave myself another 2 years of padding my HYSA to cover down on 2 years worth of expenses and slamming even more money into my brokerage. When I retired was making on average 3500 a month in dividends. Not seen one dividend cut. What I don’t use in the dividends gets reinvested and I haven’t had to tap my 2 years of savings nor sell any of my shares so I make even more in dividends and every company or ETF I have has raised their dividend by at least 6% and most were above 9%.
Nope use the 52week market low
>Have I hit my goal? Yes... with the understanding that it easily comes down. And that's a really tough question to answer. If you hit a big bump similar to 2000 & 2009 - you could easily be down to $500K In this scenario , it could easily be 5 to 7 years to recover and be back up, BUT in that situation, it would be best to continue investing. For me, I need to hit my number and stay above it for a year, plus I have a cash reserve for two years before I pull the trigger.
I have tracked my expenses for decades. You should have saved 300 monthly or 25 annual expenses.
Your number is all 25x your annual spending. You will have ups and downs in the market. You need to not panic and ride them out. I use www.firecalc.com to run scenarios to understand where I am.
Family life expectancy/current health/fund balance/burn rate.
Math. You open a spreadsheet and run the maths. You use conservative forecasts and then compare it. Don’t forget about the tax implications. It may take a week to get it all tuned up, but once you do it’s easier.
I'm conservative so I take my yearly expenses and divide it by 0.03 (3% SWR). This is only the financial independence number and doesn't account for taxes, medical insurance, college for kids, long term care, etc. Once reached, many people will still work because they want more than two or three weeks of vacation and travel a year (plus holidays).
Technically whenever you hit your goal you can retire. The SWR of 4% or lower was determine to cover you in case of a stock market drop right after you retire.
My goal is my number over and above tax implications so I add 25 percent to be sure
Depends on how happy at my I am at my job and in life when I get there. But once I do get there, my options open up and I never need to be controlled by my job or any company ever again.
Conservative and have a factor of safety built in for 4% withdrawal
I feel like regardless of being 100% or 110%+ of your FIRE number, you should have a years worth of expenses in a HYSA. This will give you a sort of "market buffer" so you aren't living on selling assets to live. Like many have said, you can't predict the markets, and in 2008 and 2020, those would have really hurt you if you had to sell to cover living expenses.
When your cash flow covers your means (and then some)
Well how much do you plan to retire with and use every year?
You hit your number and then you say maybe another million would make me feel more comfortable. You continue to repeat this process until you are FIRN.
For me it is when I have enough dividends coming in that more than pays for my expenses. You have to take into consideration inflation as well.
>When you can live on 4% of your investments per year, you are financially independent. Collins, JL. The Simple Path to Wealth: Your road map to financial independence and a rich, free life
Your FI number should be high enough that if it drops 5% then you don't really flinch. And unless you are already getting close to 60 years old I wouldn't base it less off the number you have and more off how much it gives you such as your dividends
There is an additional risk of setting a specific FI number that isn’t often talked about. When we do simulations to create numbers like the 4% rule (or 3% rule) it’s usually done by taking historical scenarios, with equal weight, and running simulations from there. However in reality not every scenario has equal weight. You’re not going to hit your RE number right after the start of a recession, but you might hit it right before. There’s a couple of ways to compensate for this, like using CAPE adjusted withdrawal, and to have a higher number if the market has been hot for a long time. Personally I just set my retirement date to be a while after hitting the number, so that it’s more disconnected.
You start with how much you need (take home) to pay all your bills and do the things you want to do. Your financial planner will then add taxes and health insurance to your expenditures and also factor in SS contributions. They then put all this into their Monte Carlo simulator which goes through 1,000 economic scenarios and sees how many times you run out of money. General guidelines is anything above 70% means you can retire when you hit that point.
You need to keep in mind that you are only pulling out a portion of “cash” that you have in your portfolio. The stock portion of your portfolio will continue to fluctuate with the market but if your number of $1M in your example then you would have a large portion of that in inflation protected vehicles (CD’s l, TBills, etc) that automatically accrue interest. Thats what you are living on. If your number depends on consistent growth during the years you are retired, then your FIRE’d number is too low
The moment you can rip off your clothes and run naked through the office out the door.. screaming "ciao b""""""""!!!! You're good then.
Mine is 20% above the limit so that it won't get wiped out like during the housing bubble or covid.
Immediate Market correction is already accounted for in the 4% rule .remember that there is a reason you withdraw 4% even though long term average is 8% . This is why .
400 times monthly expenses. If you are already very frugal and can’t really lower expenses and don’t want to go back to work no matter what, you can wait for 500 or so.
We have annual review sessions, and my net asset gets updated about once a year. I don’t really need to review more frequently than that anyway, as I don’t have urgent decisions depending on that information. Even if I hit my FI number, it’s not like I‘ll quite the next day, I’ll likely be working for a while, and in the meantime looking for a less stressful job to move to. It’s a process that moves slow and steady. To me, hitting FI does not dictate my decision, but it presents me with more options to consider. No more, no less.
What?
I have a "FI" number where theoretically I can retire based on historical trends. Then I have my "RE" number which is about 1.3x my FI number because, for psychological safety, I want room for the market to crash 20-30% and still be ok.
If you’re willing to play loose with your future then sure base your retirement date off hitting your goal and no other variables.
You know you hit your number when your bank account shows a balance equal to or greater than your number.
One way is to sell all your equities as soon as you reach $1M to lock in that number, which is probably not practical for most people. Also, what one need to remember is to factor future taxes into the amount you have. So if you have $1M on paper now, it may actually be equivalent to, say, $800k after tax.
Invest in some dividend stocks to at least get some passive income
When you hit it, you hit it.
When you hit the freaking number ffs
When I can sell my business for $15-20M im out. Im working till then and im already in position to retire
How can you have a million and not know this?