Financial Independence Daily FI discussion thread - Monday, January 04, 2021 |
- Daily FI discussion thread - Monday, January 04, 2021
- A valuation approach to the safe withdrawal rate
- Feeling RE on many days now despite working full time
- Weekly “Help Me FIRE!” thread. Post your detailed information for highly specific advice - January 04, 2021
- Re-thinking maxing out all retirement plans: 401k, Roth & Trad IRAs
- 4% Withdrawal vs Distributing ETF
- The tipping point - FIRE calculator
- How many early retirees continue to contribute to advantaged accounts after ‘retirement’?
- My FI Journey
| Daily FI discussion thread - Monday, January 04, 2021 Posted: 04 Jan 2021 04:00 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. [link] [comments]  |
| A valuation approach to the safe withdrawal rate Posted: 04 Jan 2021 08:17 AM PST So I put together a white paper of sorts for a study I did on safe withdrawal rates and how they're affected by market valuations. I had previously taken a more qualitative look at it (HERE), but I wanted to expand on the idea and actually see if it were possible to formulate a SWR forecast. Links to the paper are listed below. In the paper, I shared my methodology as well as proposed a variable withdrawal strategy based on this new valuation approach. I think it's worth the read (and it's not very long with lots of pictures), but I'll share some of the findings below. Quick Intro I calculated the actual SWR for every year from 1928 to 1990. I compiled these SWR's along with the CAPE (Shiller PE) and 10 year treasury yield for each starting period, and performed a linear regression analysis on the data. The resulting equation showed good correlation (R2 = 0.72). Refer to the paper for more details on the methodology. All data in the study is for a 70/30 portfolio. Findings The 95% confidence formula for SWR based on this valuation approach is as follows: SWR_predicted = 0.55597 × (Implied Yield) + 0.11051 × (Spread) + 0.0082319 where, Implied Yield = 0.7 × (1/CAPE) + 0.3 × (Treasury Yield) Spread = 1/CAPE - (Treasury Yield) Variable Withdrawal Method In the paper, I looked at one way to implement this valuation approach and compared it to the trinity study. The basis was simply withdraw the amount based on the predicted SWR and portfolio value at the start of each year. I set a withdrawal floor at the minimum of 40k or the 1st years withdrawal amount. Setting a floor is important from a practical sense as any methodology that could leave you withdrawing at the poverty level isn't very useful. Performing a back test, this method never failed in any 30 year period, and also reduces the likelihood of massive portfolio expansion like trinity study has in the past (1980's for example). Withdrawals taken from year to year are also relatively smooth with the variable approach. In the paper, I shared portfolio performance and withdrawal summaries for some interesting years: 1929, 1966, 1982, 2000. Current State of Affairs To kick off 2021, the current projected SWR is projected to be between 2.35% - 4.81% (likely a little higher after this morning). The lower bound of 2.35% ties the year 2000 as the lowest predicted SWR of all years in this study. [link] [comments]  |
| Feeling RE on many days now despite working full time Posted: 04 Jan 2021 06:33 AM PST I (F26) used to be extremely frugal and wouldn't let myself enjoy anything in the present. I decided that a better approach to building wealth is to change jobs and grow my income (+get married to split the rent), so I changed jobs, negotiated pretty aggressively, got married, and generally try to do well so I can good performance bonuses. This enabled me to take a pretty slow, wasteful & blasphemous approach to it. Things I do that will give any traditional FIRE devotee anxiety:
It's lifestyle inflation, but I'm so happy now it's totally worth it for me. I swim in the rooftop pool 3 times a week and feel much healthier than before. Things I do well: 1. Hate shopping. Buy clothes once in a decade. Not a fan of jewelry and just stuff in general. 2. Eat very little and pretty cheaply. I don't like the process of eating very much and also not a fan of meat (though not vegetarian), so I eat a lot of trail mix and eggs and some frozen veggies. 3. Use the Libby app for free books and audiobooks through my library card. 4. Repair stuff at home with glue and sewing. 5. Negotiate when changing jobs. This made me go from 68K in 2016 to 104K in 2018 to 142K now (this is inclusive of performance bonuses). 6. Worked for most of the time I was in college. 7. I use every phone and laptop for years and years until literally they don't turn on anymore. More detailed compensation breakdown: Salary 110K. Last bonus was 27K and last raise was 10% without a promotion, so hopefully there will be a similar raise in January. The bonus should be bigger because I got a higher performance rating this year than last year. My NW is 162K. 35% of it is in my 401k. This doesn't include equity in my car. Hope to buy a house in a different state in the next 7 years, but not in a hurry for that & motherhood. Just wanted to share that it's ok to be a spender on things that are important for your physical and mental well being (for me it's family, and the place I live in). FIRE will come later, but the present feels great in the meantime. Maybe the feeling of FIRE is more of a spectrum and spoiling yourself in the present can make you feel semi-FIRE or pseudo-FIRE while you work on true FIRE. [link] [comments]  |
| Posted: 04 Jan 2021 04:00 AM PST Need help applying broader FIRE principles to your own situation? We're here for you! Post your detailed personal "case study" and ask as many questions as you like, or help others who've done the same. Not sure if your questions pertain? Post them anyway…you might be surprised. It'll be helpful to use our suggested format. Simply copy/paste/fill in/etc. But since everybody's situation is different, feel free to tailor your layout to your needs. -Introduce yourself -Age / Industry / Location -General goals -Target FIRE Age / Amount / Withdrawal Rate / Location -Educational background and plans -Career situation and plans -Current and future income breakdown, including one-time events -Budget breakdown -Asset breakdown, including home, cars, etc. -Debt breakdown -Health concerns -Family: current situation / future plans / special needs / elderly parents -Other info -Questions? [link] [comments]  |
| Re-thinking maxing out all retirement plans: 401k, Roth & Trad IRAs Posted: 04 Jan 2021 02:34 PM PST I don't have 401k match. I also don't have a deep understanding of these different plans, I only know that I "need" to max them out and:
Every year I max out 401k and Roth IRA, and then when I no longer qualify for Roth, I max out 401k and then Trad IRA. Now I am starting to rethink my retirement plans. I don't see a reason to keep contributing to Trad IRA anymore because I do not get tax deductions, since I already have a 401k. So what is the point of contributing to trad IRA anymore? I don't get deductions and when I withdraw I get taxed again. My index fund so far has a 27% ROI. So the tax free growth doesn't feel like it's worth it. Why don't I just max out 401k and then dump everything else in my index fund? that way i get more ROI and can withdraw whenever. Any reason for me to keep contributing to my Trad IRA? What am I missing? Definitely feel like I am committing a FIRE sin by not maxing out everything. Do you also max out everything? Why/Why not? [link] [comments]  |
| 4% Withdrawal vs Distributing ETF Posted: 04 Jan 2021 12:01 AM PST Once the retirement moment comes, the 4% withdrawal rule (or a more conservative 3.25%) should be used to provide a regular stream of cash to cover the living expenses expenses. I see a potential problem with this: in a typical FIRE portfolio the stock portion is large, and even larger now that bonds do not provide any return. Hence, in case of market swings, the total value of the retirement portfolio could get a negative drop (e.g. last March with the Covid crash). QUESTION: in a retirement phase, shall the FIRE portfolio move to a more conservative mix and how to do so? As alternative, what about migrating the growth portfolio used to reach the retirement new worth to a retirement portfolio based on distributing ETF? Just to give some examples on these latter products that I found (the dividend value is just an indication, not in real time with markets): - GLDV >> dividend ~4% - IAPD >> divident ~4% -STHE >> divident ~5% - EMLOC >> dividend ~5% The above distributing ETF should provide a more stable conservation of the retirement capital, compared to a growth portfolio too pushed towards the stocks market in order to get. I might be wrong, hence happy to discuss here - especially with people already in the RE phase. [link] [comments]  |
| The tipping point - FIRE calculator Posted: 04 Jan 2021 08:29 AM PST I am attempting to build a model to determine the point of 'income independence', i.e. when an individual can afford to walk away from a regular job, assuming an existing investable corpus (attained either by way of savings, inheritance or windfall gain). Most retirement calculators found online are designed to calculate a target retirement corpus, assuming current income and existing savings (if any). What they do not typically show is the exact point in time, at which the accumulated value of savings/investments is greater than the potential earnings from a job that are yet to be realised. This, in my mind atleast, represents the point of "true" income independence, as any future earnings are lower than the investment nest-egg in PV terms. I have not yet factored in expenses or tax considerations yet, as I wanted to see if the basic premise here is logically sound. Would love to hear this sub's thoughts on the validity of this approach so that I can address any flaws in the logic or assumptions. Link to spreadsheet here - https://drive.google.com/file/d/1S28W2WnqaGa0urMPpdMrQjsIiE4p1r0E/view?usp=drivesdk [link] [comments]  |
| How many early retirees continue to contribute to advantaged accounts after ‘retirement’? Posted: 03 Jan 2021 05:36 PM PST I'm Early 40s. Partner is mid 30s. We built a retirement portfolio in rental property. The cash flow basically covers living expenses and inflation adjusts. In 15ish years cash flow will boom again when mortgages start to go away. I work a government job and have a pension coming at 55. I also have ss coming. She has ss coming and a growing 401k from corporate life. She left her corporate job 2 years ago and is a realtor now. It was supposed to be pre-tirement but even working part time she is making 3x our annual expenses. The taxes are brutal. We set up a sepp and she is pretty close to maxing that out annually. Add into this the fact that I flip houses occasionally and those hit as ordinary income. So if I leave my w-2 and business continues to be good do people typically continue to 'save for retirement' when retired? Is there a point when income is already on track to be way more than enough by classic retirement age? I suppose the obvious answer is work less. But the money is pretty easy, frankly. We had been growing the At this point we just pay the taxes and accelerate pay down on properties so we have more money now rather than a huge boom later? What is efficient? [link] [comments]  |
| Posted: 03 Jan 2021 09:42 AM PST TL;DR: grew up in poverty (financially only, plenty of love and plenty to be happy for), worked hard, valued education, and now I'm getting by. Components of my dashboard are -linked- within the post. Enjoy and critique! Background I'm 27, male, single, grew up in poverty in the rural Midwest. I'm first generation college along with my 2 siblings, state school educated, and tend to think I live below my means. I've been introduced as "the cheapest a-hole you'll ever meet." While I am frugal, I always pay more than my fair share, feed guests and provide alcohol, volunteer my time, and tip generously when services are provided (haircuts, meals out, ice cream). I won't apologize for any privilege. My parents are hard working, loving people who dedicate their lives to our family. There was no family college or direct financial assistance. One of my earliest memories was asking my father if we were rich. His response, "we are rich in love." Growing up, we were 5 people living the American Dream, as far as I'm concerned. I'm employed as an System Admin within the Federal Government. I'm IT by trade only; I majored in a physical science (BS & MS), and gravitated toward statistics and computer science within my field. My earnings/location by year:
I've been tracking money in and money out since starting grad school in Sept 2015. I'm talking every receipt, categorized (split & figure tax/item if, say, making a Walmart run purchasing variety of goods) and entered into excel. My approach will certainly seem excessive to some, but it takes me < 1 min to enter the data usually, and I find it fun and worthwhile. Different strokes for different folks. I've collectively spent MANY untracked hours tracking my economy and developing this tool. It's an ever-changing tool that was originally based off of this rudimentary budget, and grew in inspiration of many of the financial tools I've come across in this sub. I have linked to graph inspirations for those looking to replicate. -Assets- My spreadsheet is driven by this Data-Assets timeline. In this snapshot, the timeline spans my period of record, Sept 2015 - Dec 2020. The blocks on the left are fairly self-explanatory. "Returns" are shown over the course of the timeline and for the last month (Dec 2020 in this case). "Balance" is the Asset balance for the last month of the timeline, and the Net/In/Out is the money in/out during that month. I count investments as money out, so the 'net' is money that didn't have a destination (didn't pay bills/groceries/get invested/etc). "Savings Rate' donuts are for the last month of the timeline (dark green, 77% for Dec) and the year of the month (light green, 27% for 2020). This savings rate is: ((Take home pay - non savings spending) / take home pay). "Financial Independence" was an effort to track FI, though there is a lot of variability. "Inflation Rate" is non-savings/non-tax spending compared to the year before. This helps keep my lifestyle inflation in check. I moved cross-country and purchased a vehicle in cash in 2020, which contributed to the 2020 personal inflation. Here is what the graph on the right represents:
The IRA/TSP/HSA donuts are used to see where I am in terms of contributions vs limits. Don't worry, the surplus $233 in IRA and $250 in HSA are 2020 contributions to the 2019 IRA/HSA. -Expenses- "Past 12 months" are sparkline columns representing the relative proportion of the category over the past 12 months (right-most column is darker and is the last month of the timeline, Dec 2020 here). The categories are: taxes, housing, savings, transportation, food, utilities, medical, personal (clothing/toiletries/etc), alcohol, and entertainment. The actual vs expected graph (based on this) shows what percent I spent on a category relative to my Net (after tax) Income (except I use Gross for savings and taxes). This doesn't add to 100 since I use a different basis for comparing 2 categories. This Savings rate calculation is dedicated-savings only, which differs from the one in the 'Assets' section. I need to revisit, pick one way to calculate, and run with that. A note on transportation. Prior to tracking, I owned a 1990 98 Oldsmobile regency and then a 1986 Ford Ranger. These vehicles cost $500 and $550 cash, and I paid that and insurance. And they broke down a lot and I spent a lot on repairs (though my dad and I did many of them at home). I lived car-free from 2015-mid2020. I bought a used Japanese car in Sept 2020 in cash when I moved to Indiana. I hope to keep it for many years. The graph on the right is one of my favorites. I use GETPIVOTDATA to populate the table and create a heat-map of the selected category/sub-category. I can select as many subcategories to compare as I want. The graph is annual cumulative expenses based off the dynamic table. The gray lines are previous years, the bold black line is the average of the previous years, and the red line is the current year. The text (2020: $XXX, Average: $XXX) shows the current month vs average spending to date. This graph has really opened my eyes to the evolution of my spending habits. As a proud Wisconsinite, I've selected my alcohol-related expenses to compare in this image. "Alcohol" is liquor store purchases, and "bars" is money spent at bars. In 2016, I was studying a lot and mostly pre-gaming and riding the buzz. Also, it was cheap to get drunk in Wisconsin (25 cent beer nights). I spent a lot of time in DC bars being a reckless 20-something. I only drink socially, so consumption is down in 2020 thanks to COVID. -Loans- The home and vehicle loans are placeholders for whenever I might get those types of loans. My student loans were subsidized. I qualified for academic, community, and need-based scholarships and grants. They paid for my tuition and fees in full, and then some. I was a work-study student, which gave me an edge when applying for on-campus jobs. I averaged 25 hours of work per week, and volunteers 5 hours a week. I was enrolled full-time with 16-18 credit hours per semester. I graduated with a 3.8 GPA undergrad, and 3.9 GPA grad from a great Big 10 school. I worked my ass off and wasn't truly burdened by student loans, knowing I could pay off the loans I took at any time. The money I did borrow went toward living expenses and into the bank, since it was interest-free while enrolled. The amortization graphs are based on this. These are just annual scorecards with much of the data from above, just annualized. [link] [comments]  |
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