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    Financial Independence Daily FI discussion thread - February 08, 2020

    February 08, 2020

    Financial Independence Daily FI discussion thread - February 08, 2020

    Daily FI discussion thread - February 08, 2020

    Posted: 08 Feb 2020 12:08 AM PST

    Please use this thread to have discussions which you don't feel warrant a new post to the sub. While the Rules for posting questions on the basics of personal finance/investing topics are relaxed a little bit here, the rules against memes/spam/self-promotion/excessive rudeness/politics still apply!

    Have a look at the FAQ for this subreddit before posting to see if your question is frequently asked.

    Since this post does tend to get busy, consider sorting the comments by "new" (instead of "best" or "top") to see the newest posts.

    submitted by /u/AutoModerator
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    What other income sources can i create aside from my job?

    Posted: 08 Feb 2020 02:59 PM PST

    Hi!

    I am 20 years old and I'm currently taking advantage of living at home just so i can work and invest as much as possible but my workplace won't allow me to work as much as i want. I work 40 hours/week and sometimes they offer overtime and then i can reach a maximum of 52 hours/week but overtime is not offered every week. Last year i worked 212h and 11m in overtime. Currently i'm at 24h 36m but it's not enough.

    I have a decent salary, last year i had an average income of $2 987/month after taxes and i invested a total of $26 544 but it's not enough. I want to work atleast 80 hours/week and achieve my dreams faster, i want to double my current growth but i can't see any options. I've done some side-hustling but it's not enough, i need something i can spend enormous amount of time with and that can generate a decent income.

    If it's about creating something i'm willing to take that risk, usually it takes time in the beginning to get that snowball effect but what options do i have, do you know how i can generate money during my spare time?

    My idea is to find something that i can do after work, that generates money so i can invest more into the stock market since that's where my interest lays. My current net worth is: $53 686 and i'm really proud but it's not enough.. I want more..

    submitted by /u/BeMyLoverLaBouche
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    How to Calculate Your FIRE Number When You Have a Mortgage (with Spreadsheet!)

    Posted: 07 Feb 2020 05:13 PM PST

    Update 2020-02-08 0852 MST: Lots of good feedback, and I've realized that /u/gnomeozurich made an excellent point that is going to require me to change my calculations. Working on an update, check back in an hour!

    Update 2020-02-08 1320 MST: Updated the sheet to include two new scenarios: * You pay off your mortgage in full ASAP after reaching your non-mortgage FIRE target * You do a simple estimate by adding your original mortgage to your non-mortgage FIRE target

    Intro

    >Should I include my house in my net worth calculations for FIRE?

    This question has been beaten to death on this subreddit, and the best answer is usually along the lines of:

    >You can include your house's principal in your total net worth, but what matters for calculating your FIRE number is the amount of investible assets which will generate the returns to fuel your spending in retirement. Even if your house appreciates in value, those assets aren't giving you a liquid return unless you take out a loan against them, which probably isn't the best idea for your primary dwelling.

    But I've never liked this answer, for the reason that eventually your mortgage will be paid off and your monthly housing expenses will drop. This throws a wrench in using your current monthly spending to estimate how much money you will need to spend in retirement, and it annoyed me enough at work today that I figured I'd solve it. This post is an attempt to give the best approximation I can to how you should really account for a mortgage when planning for FIRE, and just how many years of your life you are leaving on the table if you don't do this.

    Once a Mortgage is Gone, It's Gone

    Say that you buy a $500k house, and put $100k down in order to avoid PMI. You get a 30 year mortgage at 4.25% APR. Your monthly mortgage payment will be:

    $400 000 * (0.0425/12)/(1-(1+0.0425/12)^(-(30*12))) = $1968

    If we assume a 4% safe withdrawal rate, the amount we have to save to cover our mortgage payments using the standard SWR calculation tells us that in order to FIRE we need to accumulate:

    $1968 * 12 / 0.04 = $590 328

    For context, your total payments over the life of the mortgage will be $1968 * 30 * 12 = $708 393, entirely generated by that invested sum, and this is a good bit more than just paying the entire $400 000 balance of the outstanding principal outright!

    But I contend that this is a silly way to do things, since this means you will be have that $1968 every month in perpetuity. A "safe" way perhaps, but considering that a) that is a huge amount of money to save up (more than the total purchase price of the house!) and b) the greatest sequence of returns risk is in the early years of FIRE and 30 years down the road the extra padding will likely not be needed, this is unnecessarily conservative.

    So how should we account for things instead? I would argue that the portion of your monthly spending allocated to mortgage payments should be accounted for in your FIRE budgeting using draw-down calculations. In other words, you should spend your mortgage-allocated invested assets at a rate such that they reach a value of 0 on your last mortgage payment, while still accounting for the fact that they will be generating returns throughout that entire time.

    Luckily this is pretty easy in a spreadsheet – it's precisely the formula for calculating the Present Value of an asset. Assuming a 7% investment return, here's how much you need to save using the draw-down method:

    =PV(0.07/12, 30*12, -$1968, $0) = $295 769

    This is half of what the SWR calculation would tell you!

    You can check out my spreadsheet here to see the calculation in action, check the formula against a manual month-by-month calculation, and make a copy of the spreadsheet to try out your own values. Cells in yellow mark the inputs.

    Your Money or Your Life

    What does this mean in terms of how long you have before reaching FIRE? I'll grab my NPER() calculation from an older post of mine, Tips and Tricks for your FIRE Spreadsheets so check there for how I calculated these times. Note also that since you pay down the mortgage through this time, there is a circular calculation that has to happen to update the

    Assume you have $60k / yr in non-mortgage spending, $50k / yr in investment savings (a post-tax SR of 37% after including the $1968 * 12 = $26.3k /yr towards the mortgage), and current invested assets of $0. Now we calculate the time needed to hit the targets needed to cover the mortgage by putting all our savings towards it:

    SWR Method: $590 k, 8.9 years Pay off in Full: $400 k, 6.6 years Draw-down Method: $296 k, 5.1 years

    But you probably have investments already, and you probably have a FIRE number in mind. Assume that you instead have $500k already invested, and with a SWR of 4%, your recurring spending makes a non-mortgage FIRE number of $1.5MM. We calculate our time to reach that using the NPER() method, and find that it will take us 8.9 years. Since we've been paying down the mortgage over that time, we now calculate our remaining principal using the CUMPRINC() function:

    $400 000 + cumprinc(0.0425/12, 30*12, $400 000, 1, 11.2*12, 1) = $327 297

    There are two sensible options once you reach this point - route your savings to paying off the mortgage in full, or save less and retire earlier by using the draw-down method. I'll also throw in the now obviously absurd SWR method, and a "Simple Sum" method for comparison which simply adds our current mortgage to our non-mortgage FIRE number. We calculate the additional money & time needed for each method as before, and apply it to our original FIRE target to get final calculations:

    SWR Method: $2.090 MM, 12.4 years Simple Sum: $1.900 MM, 11.3 years Pay off in Full: $1.827 MM, 10.9 years Draw-down Method: $1.760 MM, 10.5 years

    By using a more realistic calculation for the invested assets required to cover our mortgage, we realize that we can retire 1.5 - 1.9 full years earlier than expected! This is of course specific to this scenario that I made up, but play around with the numbers for your own situation and you should see just how significant a difference this makes.

    One last takeaway - I played with a few different toy scenarios, and the benefit at FIRE of using the drawdown method over paying off your mortgage is only a few months in all of them. Fully paying of your primary home's mortgage is probably worth the reduction of risk for those extra few months of working.

    Notes

    Assumptions I'm using here:

    • You are not paying PMI because you put at least 20% down (though you could incorporate this by extending the methods presented here).
    • You will stay in your house for your full duration of your mortgage.
    • Your spending and savings are constant until you hit FIRE, and your spending remains constant thereafter.
    • There are no market fluctuations. It would be good for someone to run this through an analysis to figure out what multiplier you need to add onto these results counteract sequence of returns risk. Just spitballing, add +20% if shooting for an exact number makes you nervous.

    Some more things to note:

    • "But there's no way that I'm going to live in this house for 30 years!" No, you're probably going to move a few times. But this method will give you an apples-to-apples comparison of how exactly your FIRE target will change when moving to a new house, and until then should give you an accurate estimate. And thinking it through, if you move to an equally priced home and your investment returns are higher than your mortgage interest, then the lowering of your mortgage payments due to the refresh of the 30 years means that the amount of investments you need allocated to your mortgage should drop. Maybe enough to cover closing costs?
    • All spending/saving/FIRE numbers are in current-year real dollars. The mortgage payments are in nominal dollars. Market returns are after inflation. The calculations aren't quite apples-to-apples since the mortgage balance will devalue due to inflation over time in real terms. But this is a conservative approach, so consider it a safety factor - a more rigorous calculation would be crystal clear about nominal vs real terms and reach targets quicker.
    • You should include non-mortgage housing costs such as insurance, taxes, upkeep, etc. in your monthly spending, since those will persist after you pay off the mortgage.
    • Critiques very much welcome. :)
    submitted by /u/scottshambaugh
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    2-3 Months away from FI - Now what?

    Posted: 08 Feb 2020 03:44 PM PST

    It's hard to believe, but due to a strong professional year last year (big commission payout), as well as continued growth in the stock market, I'm now just a few months away from very stable FI. (Target 2.285M * 3.5% = 80k per year.) I'm almost 43.

    So what does that mean for me and my family? Honestly, nothing in the short term. But as I've been mulling over it for the last few months, I've come up with a few items:

    1. The company I work for isn't doing well. My year (heavily commissioned) is looking terrible, but I'm not too worried about it. If they lay me off, I'll probably get severance. Otherwise, I'll probably just ride it for a year and see what happens. I'm not actively applying anywhere else.
    2. My manager just resigned. I could apply for his job, but honestly, I don't want it. Not even for a nice raise. His job is way more stressful than mine.
    3. I'll continue to take money off the table and maintain a very conservative portfolio. I have the portfolio of a 60 year old -- because I figure once you've won, why keep playing.
    4. If I stay employed for another 1-2 years, and if the stock marketing doesn't implode, I'll be beyond my goals -- and this is extra padding/security.

    So I don't know what the point of this post is. It's not something I can talk about with many people. I really don't have any intention of "retiring," but being this close to FI does bring security. On the other hand, it also brings self-questioning around "what am I doing with my life?" and "How can I do something that matters?"

    Any constructive insights?

    submitted by /u/moneyminded14
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