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Getting to Enough

 
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karma
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Joined: 31 Jul 2003
Posts: 65

PostPosted: Mon Feb 07, 2005 4:51 am    Post subject: Getting to Enough Reply with quote

What does it take to FIRE? I'm going to concentrate on the analysis here :)and I'm only going to talk about my own experience, because everybody's situation is different. I hope others add on about their experiences,

I started thinking seriously about FIRE about 1992. I was just realizing that the work environment was not working for me. For starters, though
- I had always maxed my retirement account
- We never cared about the Jones, so LBYM came pretty naturally. When I became serious about FIRE, I started budgeting so I could see where the money was going. That was an eye-opener that allowed me to save more to after-tax accounts.
- I had a small after-tax account where I would periodically stuff money
- My husband enjoys learning about stocks and has his own little method of determining if a stock is at a good buy point. He isn't always right, of course, but he's bought some pretty nifty stocks early on (Microsoft would be one). So I have my own built-in stock advisor.

As I started to get into FIRE-mode, I fired up the spreadsheets and started keeping track of my portfolio, retirement accounts, etc. I also read Your Money or Your Life. Just the exercise that forces you to compute your real wage (after taking out travel time, wear and tear, work clothes, etc) was worth the price of the book. The main thing, though, was that these people had retired early. Not sold on their financial advice, though.

In 1995, I received a small inheritance. While not large, it did jumpstart my thinking about when to retire. I switched to consulting, and doubled my salary in 1997. I immediately opened 2 Keoghs with Fidelity so I could once again max my retirement funds. I rolled my 403b from TIAA/CREF into a Vanguard Rollover IRA. I also started seriously adding to my after-tax fund. In 1998, I discovered The Retire Early Homepage ( http://www.retireearlyhomepage.com/ )which had a lot less stuff than it does now. It did, however, have famous study about the 4% SWR. I poured over that, downloaded the spreadsheet and played.

Let me put a word in for playing with spreadsheets. They allow you to do "what-if" scenarios where you can put in data that is relevant to you. Of course, the results are only as good as what you put in. No sense putting in 10 years longevity just to get a 8.5% spendout rate. I have always felt that the REHP study was fine within the limits of the study. People who try to use it inappropriately are going to get burned. I also have only used it or any other study as one piece of data among many used to come up with the decision that it was relatively safe to quit working. I'll also say that I was never a big fan of number crunching in the sense of moving data around to give you better results. The amount of error attached to any such SWR would swamp the benefits of slicing and dicing the data. I don't think fine-tuning works in this case. So I use the SWR as a mildly interesting rule of thumb.

I was getting pretty tired of work. I knew that according to the Schiller data, a SWR of about 3.5% would get me through 40 years. And that's just a worst case scenario, according to the data. If I could entertain a little more risk (95% level), the SWR could be about 4%. I thought I'd get a second opinion, so I ask my husband. He just looked a kind of average inflation rate and an average rate of return and came up with 5%. So I was home-free, because I could do the 4% amount (realizing that I don't have the same asset mix, and so on as the REHP study). Remember, to me it is one piece of information - a rule of thumb. I also relied heavily on knowing what my budget would be, the steadyness of my various assets, the fact that I heavily padded the budget just in case, and so on.

So I quit!

For the record, since 1999, I've taken out 20% of my assets as stated in 1999, but my actual loss of assets is only 6%. This swag was done in constant dollars. My spendout ranged between 2.9-4% (the high end were expected one time large expenses). And my portfolio is something like 51% equities, 41% mutual funds (retirement accounts), 1% REITS (recently sold some) and 7% money market funds. I've been naughty and never set up a CD ladder or the like. Oh, well.

So I can do a little analysis. Wink

karma


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hocus2004
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Joined: 10 Jun 2004
Posts: 752

PostPosted: Mon Feb 07, 2005 5:51 am    Post subject: Reply with quote

That's an outstanding post, Karma.

In my experience on the boards, the type of post that people seem to most appreciate is the one that describes personal experiences in the quest for financial freedom. I think it's because we can't get that sort of thing from any other source.

I agree with a good number of the points you made. One on which I particularly agree is the one where you note the value of playing with different scenarios by plugging different numbers into a spreadsheet. I can't put together a spreadsheet, but I have on occasion used FIRECalc (a tool developed by Dory36 that makes use of the data in the REHP study) to play with different scenarios, and I found that to be a big help.

You touched on a delicate area with your comments about use of the REHP study as a "rule of thumb" analysis. You worded that part fairly, in my view. I wanted you to know that I noticed that and that I appreciate you taking the effort it took you to word it in the way in which you did.


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ben
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Joined: 17 Feb 2003
Posts: 231
Location: The world is not enough

PostPosted: Mon Feb 07, 2005 8:21 am    Post subject: Reply with quote

Good post Karma (again).
I started thinking about reaching FI 6 years ago working in Africa an an expat. Being a natural LBYM I was surprised to see how much of my (mid manager level) salary I could actually put aside when I did not get caught up in the expat-spending-trap (I can write a complete post about that alone).

Also it fitted with some good years of return in the market so I started up my first spreadsheet (based on a steady 10% return - ah, I was so optimistic those days Very Happy- was however not inflation adjusted but 6.5% real is still ambitious! ).

Investing became a hobby and a slightly more realistic 4.5% real return got calculated based on: historical avg. returns equity 10-11%, bonds 5-6% so a 50/50% portfolio would do 8% minus 3.5% to inflation.

Later the many studies and discussion have taught me about valuations and the impact of volatility/diversified portfolios so I started adjusting towards a very diversified portfolio as the nos grew.

I knew I would want lots of buffer (double up actually) in the budget and that my lowest budget would be around $20k/year (single or with girlfriend working. Living in mostly Thailand).

Based on the above I realized that my end target would be about $1M. I recently "upped" that to $1M + paid housing in Home country and Thailand and I am on track to reach that in 1 year.

My biggest hurdle is no longer to be FI as I for sure already am. It is rather to DARE to take the jump from a satisfying and well paid job. I will certainly not rush it (only if becomes too Dilbert) but will on the other hand not lose out on the many other things I want to do and accomplish in FIRE.

To me it IS a scary thought to have to live of my investments only. Having the 2 apartments take some of that fear out of the equation but when the day comes (max 3-4 years being my current posting) I will STILL be nervous I believe.

Cheers, Ben



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karma
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Joined: 31 Jul 2003
Posts: 65

PostPosted: Mon Feb 07, 2005 12:50 pm    Post subject: Reply with quote

Quote:
To me it IS a scary thought to have to live of my investments only. Having the 2 apartments take some of that fear out of the equation but when the day comes (max 3-4 years being my current posting) I will STILL be nervous I believe.


I was really nervous the first 3 years - that would be about 1999-2001 - after the big run up and then crash and burn. Now for some reason I'm not. Obviously 6+ years isn't enough data for a trend, but I'm holding my own, and pretty much have every year. That's comforting.

I think it's scary because you are really on your own, with no corporate nanny to fall back on. Early retirement takes getting used to in many ways.

karma


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ben
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Joined: 17 Feb 2003
Posts: 231
Location: The world is not enough

PostPosted: Mon Feb 07, 2005 1:58 pm    Post subject: Reply with quote

Fully agree. I also already now have pushed the "how much is enough" number once, and foresee that I could do it again...and again...and...

If I do this posting for 4 years I should, depending on a lot of "if's" reach the magic $2M(Incl. real estate). Even in my wildest imagination I can not see myself ever needing more.

I doubt I will ever have this kind of savings potential again in my life. Every month working adds several months of FIRE to the equation. Also; not touching the dividends/interest of the portfolio (which I plan to live of -about 3%) adds a great boost to the investing return/compounding as we all know.

Taking the jump will be difficult for sure. Afterwards I understand that most FIREd asks themselves; "why did I not do it before?".

Cheers, Ben



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peteyperson
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Joined: 26 Nov 2002
Posts: 525

PostPosted: Wed Feb 09, 2005 1:55 pm    Post subject: Reply with quote

Hi Karma,

Excellent post.

My learning about FIRE really came out of reading books in personal finance. I was never happy with the few small chapters on investing. I came to it slowly. If had been investing in 1997 I would have bought wall-to-wall tech and got blown away. I didn't know an awful lot back then. I know far far more now.

I have worked for others for many years and I have worked for myself. When you work for yourself that can be scary at first but you get used to the different feel of the normal day. It is not unlike being FIRE'd I expect. You have additional freedoms like being able to go down to the shops outside of your lunch hour. Little things but they are more freedom than the conventional job.

I have learnt about investing and FIRE through a number of sources. Most have followed the efficient markets, efficent frontier, modern portfolio theory and so forth. Some have been reading about Buffett and other value investors thru time. The latter have had a much greater influence despite reading less. Contrarian thinking seems to come naturally, I have never been one to be in the 'in crowd' and follow the herd. I am a bit of a contrarian myself. My life is not anything like I would have predicted and will continue to confound initial expectations but I have grown to like both myself and having my own way of living. It is very tailored to me. My interests and the time I spend on them I thoroughly enjoy. I like being able to discuss them online because in real life there are few people who are able to talk knowledgably about investing and fewer still who could get into the detail we discuss on the boards.

I am paying off debts incurred starting a small IT business a few years ago. Once that matter is resolved I intend to investing a concentrated portfolio of value stocks, along with a handful of funds managed in a way I am happy with. All are expected to provide a value premium above the index fund returns, which make the SWR papers a bit of a mockery to me. Returns from concentrated portfolios and the value style far outstrip the returns from the index and so my SWR expectations are better than one would imagine. I am actually quite cautious in my estimates but I am finding good opportunities even in this "bad" market where every asset class is said to be overvalued. This is very encouraging.

While I am paying down debt, I have been taking the opportunity of the time to study investing in some depth. I first read general investing books, but have since started to drill down into individual asset classes, valuing stocks and concentrated portfolio investing. I spent some time learning about timberland and now commercial real estate. Oil & Gas is also an area I am slowly learning about, as is commodities. So I am gradually widening my circle of competence and am happy with my progress. I can see where clear opportunities were in the marketplace over the past few years and how I would have discovered them quite easily. I understand how to value asset classes and when it is smarter to sell one down in favor of something else with a better expected return. To not be too rigid in planning what to place in different asset classes as different opportunities will present themselves that cannot be expected ahead of time.

I am also enjoying considering the softer side of FIRE planning. What I should like to do in the future, how I would like to live my life, how much I'll need & why, and where I should like to live. Ben has helped considerably in this area. I think I would like to achieve some level of financial freedom - at least to be able to cover essential expenses - and I have some plans of areas I would like to gradually move into careerwise. I am slowly working on those now, rather than waiting to FIRE to do so. FIRE can be a long way off for many and I don't want to live my life just to achieve it. One can get consumed by that and forget to live & enjoy today! So I think in terms of each step to increasing levels of either personal freedom or financial freedom. I see that as a journey and plan to celebrate each step along the way. I try not to see it as an end upto itself otherwise one is likely to get there and find only an empty feeling. I shape my life, the one that I want to live, as I go along these days. I certainly like the idea of transitioning into other things and already feel that I am in some ways doing that. Though I would not choose to do things quite as Rob has, I think he is on the right track. One also has to be very careful to not develop a life which is incompatible with your FI planning. It is easy to add that expensive place, the nice car and fancier restaurants. It is easy to date a woman who desires the frequently mentioned in personal ads " a man who knows how to treat a lady " which invariably is less about being polite and more about wining & dining at the man's expense. I mean no offense with that comment. Finding a mate who is more conservative with money or at least the impact of her choices can be constrained in how they affect my savings rate are what I look for. Not into the ' high maintenance ' ladies which seems to translate into 'great looking but knows it', 'never spends a dime, expects you to though!' & 'she's never gonna be happy'. Instead I find the simpler intelligent woman to be happy with a less fussy lifestyle that I enjoy more. More modestly priced restaurants, a non-attachment to designer clothing labels and inexpensive things like a walk in the park. So I think the choice of mate while accumulating quietly is quite important too.

I find an idea by a Fool poster to an be appealing one with regards to saving for FIRE. She worked out what her withdrawal rate was (4%), took her budget and multiplied each item by 25x to get the amount pre-tax needed to cover it. This meant she have mini-FIRE goals along the way as she was able to fund part of her annual food budget and then a little more and then eventually all of it. So she knew she was free from having to worry about ever not being to afford food again. She then moved onto the next item on the list. I think that is a good way to approach a savings goal which may take 15-30 years to achieve. It reduces the rather large number one can work out one needs to something more meaningful. It also provides more motivation to add more money in the form of new investments. What I plan to do is have a budget and a saving plan, but to put all savings made from spending below budget into a specific high returning investment. I plan to keep track of the progress of such investments so I can really see the benefit of foregoing luxuries many of which really don't matter to me at the end of the day. I still will enjoy buying things I do get a lot of value from but it gets me to focus on what those are far more. I do that now but I think that is a neat way to make it pay. One way one might do that is to budget of rthat pair of Nikes but buy a cheaper, no brand pair of sneakers if you are the type of person who really doesn't care about labels. This becomes a direct reduction of your clothing budget and you can take the difference and put it away all in one place and keep track of that little pool of money, see if grow. I like the idea of that.

Lastly, I am considering the idea for the future of buying a small condo in somewhere like Bangkok, Thailand. Securing a cheap FIRE property might make a lot of sense and also may make staying for longer periods and visa applications go more smoothly. Investments in their country seem to go a long way towards being considered a worthwhile long-term visitor. I would need to spend a considerable amount of time out there to fully weigh this idea up, but I am not opposed to it fundamentally. I have plans to take a professional evening course on 'preparation of ingredients & cooking' from a Chinese cookery school that has a focus on eastern cooking along with the more mainstream cooking. I also have started on learning other languages to make both my travel and future relocation far more petey-friendly!

Petey


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Sundowner
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Joined: 03 Dec 2002
Posts: 1
Location: Louisiana

PostPosted: Thu Feb 10, 2005 7:38 am    Post subject: Enough and Health Insurance Reply with quote

Excellent topic Karma,

Enough seems to be a difficult amount to determine for some.
There are so many unknowns for many. The biggest I believe
being health insurance. For those of us who are not part of a pension
plan providing health insurance it will probably be one of the biggest
expenses we will incur. I think I am getting a handle on all of my
other expenses, but am not sure how to approach the insurance
issue.

Any ideas?

Sundowner


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karma
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Joined: 31 Jul 2003
Posts: 65

PostPosted: Thu Feb 10, 2005 9:08 am    Post subject: Reply with quote

Healthcare insurance is definitely the big unknown. It is certainly something you should get smart on way ahead of retiring. Even with HIPAA (Health Insurance Portability and Accountability Act) in effect, programs, coverage and prices differ wildly state by state. Also consider COBRA (Consolidated Omnibus Budget Reconciliation Act) as a short term (18 months) coverage. I believe in order to qualify for HIPAA you must exhaust your COBRA benefits first. However, if you can get coverage without using HIPAA, it is usually cheaper.

Find your state at the following URL and see how they approach the insurability problem.
http://www.healthinsuranceinfo.net/
It's a bit of work, but worth figuring out.

karma


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unclemick
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Joined: 12 Jun 2004
Posts: 231
Location: LA till Katrina, now MO

PostPosted: Thu Feb 10, 2005 12:46 pm    Post subject: Reply with quote

I did not and do not carry health insurance (since 1992), age 49 - 61 now.

Health insurance costs would have derailed my retirement.

I DO NOT RECOMMEND THIS COURSE FOR ANYONE ELSE!

We had 300k in financial assets between us (me and girlfriend). She had health coverage through the union.

The story would not fit neatly on a spreadsheet - but it worked.

I also do not/cannot carry homeowners insurance - fishcamps over water are a no no nowadays - especially in hurricane alley(LA).

Insurance like real estate varies so much from location to location -it's difficult to generalize.

The point - if there is one - consider 'your individual ER situation' - planned lifestyle and be prepared to take prudent risks to achieve it.

Don't let the tail wag your dog - er ER. Try and get your arms around what you can hedge against and what you can't control.


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