Funding FIRE with fish & therealchips

Financial Independence/Retire Early -- Learn How!
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peteyperson
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Funding FIRE with fish & therealchips

Post by peteyperson »

Recently Chips has been discussing a few snippets of ideas on the utility of time in relation to the time it takes to save for FIRE vs how much time you have to enjoy FIRE if you wait until your nest egg is large enough. At least I thought that is what he might be getting at as he hasn't fleshed his thinking out a great deal on this issue thus far.


One Chips-like proposal could be the following:


- A FIRE budget which covers essentials for living.

- Retiring at 55 with a 45x multiple of your reduced, basics lifestyle budget.
(A smaller sum than it might first appear because your taxes might be lower at that w/d level and the budget is lower, in my case 40% lower).

- Accepting a longest lifespan of age 100. Acknowledging that in your 80s and 90s you may spend less that in the earlier years of FIRE if only the medical costs issue can be resolved adequately.

- Spending one year's budget out of your nest egg a year, reducing the balance down at an even pace. Investing in a spread of diversified assets to attempt to deliver a less volatile return for every 5-10 year investment cycle.

- Using investment returns above inflation to first plug drops in your net worth due to temporary investment losses and secondly to fund non-essential expenses in the good years (the potential upside would be higher in the earlier years as your nest egg would be a higher multiple and lower in the latter years which may match spending patterns). Having a spouse that understands that this compromise is a choice instead of working ten more years to have more every year guaranteed. Having made the choice, you don't get to complain about a lack of niceties in the bad investment years. Nor does your significant other (if you have one that is).

- Having the option to save an extra sum, say $50k to cover the first 10 years of extra planned non-essential expenses, travel and other niceties that you don't want to not enjoy because of a possible 10 bad early years of FIRE. This is a compromise option which still allows earlier FIRE but affords the things that people dream of early in retirement.

This sort of plan would also serve to turn FIRE from an impossible distant dream to a possible reality because the inital basic FIRE budget sum needed would be considerably less. It will then be up to you to choose whether to fund more travel early on with a single extra sum of money or to work longer to fund annual extras automatically which to use myself as an example would require almost half as much again.

Thoughts Chips & others?

Petey
therealchips
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Post by therealchips »

Recently Chips has been discussing a few snippets of ideas on the utility of time in relation to the time it takes to save for FIRE vs how much time you have to enjoy FIRE if you wait until your nest egg is large enough. At least I thought that is what he might be getting at as he hasn't fleshed his thinking out a great deal on this issue thus far.


Petey, I'll have to respond to the many ideas in your post one at a time. Some of what I was talking about was the utility of money to people and how much that varies depending on what someone already has. I prove that the value of the same amount of money is not the same for everyone by this simple observation: the prospect of a job paying another ten thousand a year is attractive to the man making ten thousand a year, but not to the man making a hundred thousand a year. I proposed considering that idea in financial planning and retirement planning. I elaborated this point at
http://www.nofeeboards.com/boards/viewtopic.php?t=956
The point you raise, the tradeoff between time and money, is another issue which I will address soon.

(Part of my point, of course, in the earlier thread was to address people who say that retirement planning is worthless if it omits any relevant factor. I offered mathematical proofs that anyone's personal utility function for money is a relevant factor, as is his life expectancy. The logical conclusion would be that omitting utility theory makes retirement planning useless. I don't go that far, rather I reject the first premise. Instead I say that retirement planning is generally improved by including additional relevant factors. <------ I consider this claim to be the very soul of modesty, althought it did not impress my opponent in the debate who gave not an inch. :D)

In brief: Additional relevant factors in retirement planning, beyond investment performance and inflation, are income taxes, personal utility function for money, pensions, and the planner's life expectancy.
He who has lived obscurely and quietly has lived well. [Latin: Bene qui latuit, bene vixit.]

Chips
therealchips
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Post by therealchips »

Spending one year's budget out of your nest egg a year, reducing the balance down at an even pace. Investing in a spread of diversified assets to attempt to deliver a less volatile return for every 5-10 year investment cycle.

My mathematical optimization picks a budget for me which will hold the purchasing power of the investment stash approximately level over thirty years, rather than reducing that stash, while giving me a constant standard of living, after income tax. I don't plan on reducing the balance over the long term, but the market will determine whether the stash increases or decreases in value over that term. If you strip out the effects of market volatility, my plan shows slightly increasing real value of my stash for the next ten years, a plateau for the following ten years, and a slight decline for the decade after that. I didn't plan that explicitly; it fell our as a mathematical consequence of the large income taxes I have to plan for when mandatory IRA distributions begin for me in about six years.

I am diversified in the sense of having most of my investments in S&P500 or total stock market index funds and some in actively-managed funds and individual stocks too. I am not at all diversified in the sense of holding commodities or real-estate or stocks outside the US or bonds or annuities or sector funds to give extra weight to areas that may have low valuations currently. The volatility of my stash is bound to be quite close to the volatility of the total US stock market, which is fine with me.

More later . . .
He who has lived obscurely and quietly has lived well. [Latin: Bene qui latuit, bene vixit.]

Chips
therealchips
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Post by therealchips »

- Accepting a longest lifespan of age 100. Acknowledging that in your 80s and 90s you may spend less that in the earlier years of FIRE if only the medical costs issue can be resolved adequately.

If I thought I could live to be 100 in good health, I wouldn't just accept the idea, I'd rejoice in it. For one thing, it would give me a chance to find out if raddr's gloomy predictions for the long-term future of the American economy come true. At present, I think the pessimism unwarranted.

People has given travel as an example of an area of spending that will decrease in advanced old age. That could be, but I saw plenty of old people on ocean cruises. The medical cost issue is an important one, certainly, but another issue is the possibility that, as age weakens us, we will buy services we now provide ourselves. I'm thinking of things like driving, housework, yardwork, and even personal care. I advanced an argument for your consideration that says that planning on a declining standard of living with advancing age is a sensible way to deal with not knowing when we will die. That argument is based in expected utility theory, standard mortality tables, and mathematical optimization. I claim that that argument is sound mathematically, but I don't buy it for myself. As I have developed the optimal plan so far, it omits market volatility and the costs of becoming weakened by age as elements of the planning. I'm still planning on a constant after-tax standard of living for the next thirty odd years while allowing for gummy-style high life during periods of high market returns.
He who has lived obscurely and quietly has lived well. [Latin: Bene qui latuit, bene vixit.]

Chips
peteyperson
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Joined: Tue Nov 26, 2002 6:46 am

Post by peteyperson »

Yes, I was tempted to budget for lower expenses in the later FIRE years but like you I believe that may not be correct. I now plan an ever distribution. We do get one benefit here in so much as we get a couple of hundred pounds more of tax-free income when over 65.

Petey
therealchips wrote: If I thought I could live to be 100 in good health, I wouldn't just accept the idea, I'd rejoice in it. For one thing, it would give me a chance to find out if raddr's gloomy predictions for the long-term future of the American economy come true. At present, I think the pessimism unwarranted.

People has given travel as an example of an area of spending that will decrease in advanced old age. That could be, but I saw plenty of old people on ocean cruises. The medical cost issue is an important one, certainly, but another issue is the possibility that, as age weakens us, we will buy services we now provide ourselves. I'm thinking of things like driving, housework, yardwork, and even personal care. I advanced an argument for your consideration that says that planning on a declining standard of living with advancing age is a sensible way to deal with not knowing when we will die. That argument is based in expected utility theory, standard mortality tables, and mathematical optimization. I claim that that argument is sound mathematically, but I don't buy it for myself. As I have developed the optimal plan so far, it omits market volatility and the costs of becoming weakened by age as elements of the planning. I'm still planning on a constant after-tax standard of living for the next thirty odd years while allowing for gummy-style high life during periods of high market returns.
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