Planning for “enough” for FIRE

Who doesn’t like a good waffle?

I tend to waffle back and forth on how much we actually require for FIRE. Save too much and I risk working too long. Save too little and I end up scrambling for work late in life for a lower-wage job.

By knowing our retirement income sources and expenses, I see what we need for our “enough”.

Many authors suggest that for a 30-year retirement, a portfolio withdrawal rate of 4% is safe (maybe even too conservative).

For an early retirement where our portfolio will need to last upwards of 55-years, I am convinced that a withdrawal rate of 3.5% is adequate and 3% is very safe.

With this in mind, my targeted retirement “number” falls into these standard SWR’s or safe withdrawal rates and depends on a combination of interest and dividends from our investment portfolio, rental income and part-time work income.

 

            SWR~ 3% investment interest/dividends plus rental and part-time   income

            SWR ~ 3.5% investment interest/dividends plus rental income

            SWR ~ 4% investment interest/dividends

 

Our current plan  calls for a SWR of 3.5% and derives income from investment interest and dividends plus rental income. If Mr. TJL’s art business pulls in income at current levels, we will be at 3% SWR.

 

Asset Allocation after FIRE

What’s your ideal balance?

80/5/10/5 (stock/ bond/ rental real estate/ cash ratio)

Stock will be held at a high percentage to drive the growth of the portfolio long term, leading to a higher overall portfolio success rate, especially considering our extended retirement of 55+ years.

I consider real estate and cash to be “safe” bond-like investments. This mixed ratio serves essentially as an 80/20 stock to bond asset allocation with regular income from the rental real estate.

Cash will be held at between $40,000 – $50,000, for use in the event of a bear market. Part-time work and real-estate income would supplement cash withdrawals during bad stock market years.

 

Save enough to cover the house or pay it off?

I have been mulling over this dilemma for a while. Currently, the plan is to pay off the rental house right before FIRE. I have no desire to pay it off any sooner due to the tax deduction we get from the interest. This lowers our tax bill now while my income is high. However, post-FIRE I will no longer need this deduction to keep my tax bill at $0 (or at least very low), but I will need the cash flow.

At the moment, I intend to keep the mortgage on the primary house. The interest rate is 3.77%, a very low rate. I do not want all my cash tied up in equity. I would rather have it earning 7-8% annually in index funds.

However, I have considered working after FI until I have paid off my mortgage. This would lower my SWR to 1.4%. A possibility of portfolio failure would be rare indeed, but it would extend my working life by 3 years.

Considering that I am already itching to get out of the corporate world, I don’t think I could work longer. But….if I was offered a part-time consulting gig for three years (as long as it is remote work), I would likely put all that income toward the mortgage and pay that baby off. Otherwise, nobody really needs a SWR of 1.4%.

 

Small unexpected expenses after FIRE

Household replacement costs such as furnace, water heater and roof, have been added in to my expected retirement expenses .

I hope to keep a stash of travel reward points to cover any unexpected trips. But, there is always something. Remember “the tree” I have been talking about all year???

Unless the unexpected expenses are over $5,000 (large unexpected expenses), I am not worried about it. We can shift expenses, and cut out vacations one year. I can sell something valuable or get some work. More importantly, with so much free time, I will be able to save significantly on certain expenses by employing a DIY strategy. Competency is the foundation of any FIRE plan.

 

Contingencies for major market and life events

Not every inevitability is a catastrophe

I would be remiss if I did not plan for big financial events, ones that take years to recover from or adjust for. These are life changers.

 

Market drops 50%

We would lower spending and increase income by acquiring part-time work. We could easily rent out our primary and rental home and travel for a few years.

Alternatively, we could sell our primary home to buy stocks at reduce prices, then travel or live in the rental at greatly reduced expense.

 

 

Health costs increase or major health issue arises (like cancer or major surgery)

We will start FIRE with an HSA balance of nearly $50,000, and plan to contribute to the HSA post-FIRE when possible. This starting balance should soften the blow if any major health issue arises soon after FIRE.

We plan to purchase a high-deductible health plan, but not so high that we couldn’t cover our share of the costs in any given year. We consider it catastrophic insurance and will self-insure on the small medical expenses. Worst-case scenario is that one or both of us acquire full-time work.

We have little idea of what health insurance will look like in the future. If possible (for non-emergency medical event), we could practice medical geographic arbitrage and get treatment in significantly cheaper countries.

 

Expenses increase significantly due to above average inflation or other reason

We are masters at keeping inflation in check.

Meat prices go up at the market? I plan meals around less expensive food or use meat in a way that it goes farther, like soups or tacos.

Electricity price increases? I start hanging the clothes to dry and become a light switch Nazi.

Water price increases? Sorry lawn, you die. Sorry friends, we shower twice a week.

Gasoline skyrockets? Don’t care, will walk.

Note: We are not really bikers in this camp, but we are avid walkers, especially down alleys. I love alleys.

The point is that we are good at deflating our living expenses when forced to. Inflation affects us less than others.

That said, we are not adverse to part-time work. Little Miss TJL will be in school for at least 7 years after FIRE and I have several friends who would be glad to have my help in their businesses. I can also become self-employed as a geological consultant or clean houses. I really don’t care, as long as I don’t have someone screaming at me or being a complete douchebag elitist.

In fact, even if inflation and our costs stay manageable, I might pursue work anyway .

How does touring with summer events in Colorado sound? “Yes, ma’am, I’ll take your ticket.”

How does cooking for a rafter’s camp sound? Like super fun, actually!

How does working a festival booth sound? Kinda, boring, but you can’t win them all!

Oh, but yes I can! Being FI means I get to choose how I spend my time, how much money I want to make in exchange for time. Do I want to volunteer and get paid nothing? My choice. After FIRE, I will no longer be a beggar.

 

Summary

I desperately want to avoid working too long. To ensure we have enough, I will work until we meet the plan for a SWR of 3.5%. This includes income from investment interest, dividends and rental income to cover all of our retirement expenses.

If we encounter a prolonged bear market or some other financial crisis, flexibility is key to our financial longevity.

 

Lower the SWR

No doubt that “life will happen” sometime over the next 55-60 years. However, I am not pessimistic, nor can I identify anything in our FIRE plan contingencies that will signal the end of the world (except maybe the literal end of the world).

Most foreseeable issues can be handled a varieties of ways:    

                        Lower SWR to 3% by earning $10,000 per year

                        Lower SWR to 2% by earning $20,000 per year

Neither of these would be t00 difficult with two properties and two able-bodied adults (not to mention the eventual teenager!). A SWR of 3% with an 75/25 asset allocation has a 100% success rate over 60 years!

 

Sell property and use equity to buy stock on sale

I would not want to sell if the property lost significant value, but we live in a stable area for housing prices. In fact, home values leveled off but did not drop significantly in the 2008 housing crisis. Chances are that we could sell at a good profit if it came to that. Ideally, we will keep the home, but it is an asset I am willing to leverage or sell if need be or opportunity arises!

 

Rent both properties and travel

We could practice geographic arbitrage for cost of living and healthcare savings. Concurrently, we could be taking advantage of depressed currencies and see the world!

 

Earn income the old-fashioned way!

Ideally, we could take advantage of this lousy scenario by learning new exciting skills! We could help a friend! We could try our hand at an unrealized dream. Green-framing is totally useful in this situation.

Chances are that employment will likely be temporary, so we know that the endless slog will indeed end!

 

How have you calculated for your “enough” number in FIRE?

 

 

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3 Responses to Planning for “enough” for FIRE

  1. I struggle with this exact issue myself. I’ve done some calculations and analysis and I’ve decided that a 3% withdrawal rate is what I feel comfortable with. The problem with higher withdrawal rates is that if your plan is going to fail you won’t know it’s going to fail until later in life when you’re much less able to get part-item work.

    Another concern I have – the idea of getting a part-time job if the event of a stock market drop sounds good, but the reality is that a stock market drop usually coincides with an economic downturn. That means higher unemployment and a lot more competition for part-item jobs. It would be especially hard to get a part-time job if you’ve been out of the job market for a while.

    I’m probably overthinking it, but I’m delaying retirement by a few years to add an additional margin of safety to ensure I never NEED to get a job after retirement.

    • ska@thejollyledger.com says:

      To never need a job after retirement is ideal, for sure. However, you can never be sure. I am comfortable with a WR of 3.5%, but since our spending is so low, I would only need to make $5000 per year to get it down to 3%. Between my husband and I, we could handle that even in a recession. The part-time job isn’t our only backup either. I just don’t want to get trapped into a rigid mindset but a creative one, where the challenges create opportunity and I am lucid enough to recognize it. Now onto the great unknown!

      • Good point. In addition, I have to keep reminding myself that you don’t necessarily need to actually make $5,000 in extra income every year. You could make $0 one year and then $10,000 the next year and it would work out to more or less the same thing. This is important because if there’s a recession and jobs are hard to find you can just not work for a year or two, then work more hours when jobs are available.

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