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Goals for FIRE and SWRs

September 23rd, 2014 at 02:09 pm

How much does one need to retire securely?

I've been trying to answer this age-old question ever since I learned how to spreadsheet. In fact, my Google Drive is littered with the desiccated remains of various retirement projection spreadsheets that I've attempted over the years, but could never figure out how to finish. Usually, it ends with me throwing up my hands and going, "It's a pointless crapshoot to try to guess 40 years into the future, but it's impossible to overshoot it at this juncture, so just maximize the sh*t out this, and you can figure out the details later."

That has been a pretty good approach up to now, but if I really want to FIRE it up in the next decade or so, I need to set actual goals and criteria for success.

I know that the standard guideline for having enough retirement savings is the 4% rule. So if your expenses total no more than 4% of your nest egg, then your nest egg can sustain you indefinitely, assuming a 7% rate of return with inflation at 3%.

And that's where I start getting twitchy. Can you really count on 7% returns in perpetuity? I know that's (more or less) the historical long-term stock market average, but there's no way to know for sure what future returns will look like. Plus, I would need to be sustained for many decades longer than a normal retiree, which makes projections even more difficult to make. I don't want to run out of money, especially given the fact that I can easily continue working and I don't have to take early retirement at all in the first place.

What I'm getting at is that I am very risk-averse and financially conservative. And I don't mean risk-averse in the sense of investing; on the contrary, I'm fairly risk-tolerant there because I know my timelines are flexible. I'm risk-averse in the sense that my mind always jumps to worst-case scenarios. I don't like being on the edge. My natural tendency is to save and save and save, because I don't know what could happen tomorrow and I might need that cushion. I could lose my job. (Actually, been there, done that. :P) Or come down with cancer. A tree (or a meteor) could fall on the house. The SO's Beetle could get creamed by a Mack truck. The possibilities for catastrophe are endless.

As a result of this rampant paranoia, I need to build in a large safety margin. I need to know that I can survive anything, and I'm not decreasing my financial resilience by giving up a fairly nice income. But I also want to be somewhat realistic and not let irrational fears and rampant goal inflation make FIRE unattainable, even though the honest truth is that I'd be terrified.

But I'm gonna force myself to come up with something just to get the ball rolling.

My current thought process is that I have two criteria that must be fulfilled before I would feel comfortable declaring FIRE -- a paid-off house, and two million in assets.

The paid-off house is pretty straightforward. As detailed in my recent spending review, the mortgage is by far our largest fixed expense, and knocking that out alone would drop our annual spending from $40K down to $25K, with another $5K being shaved off when I stop renting in and driving to/from NY. Furthermore, the mortgage is something that needs to be done sooner or later. We're already paying extra towards the mortgage every month, and we're on track to paying it off in about ten years.

As for the two million in assets... We already have $1M, which, according to a 4% withdrawal rate, could already (in theory, with proper allocations, etc.) support our current $40K in annual expenses. But as I've already said, I don't feel even remotely safe enough with a 4% SWR. With a two million dollar portfolio and ~$20K in expenses, that would be a 1% SWR, which I think is conservative enough. And even if something horrible were to happen to the SO, I should still be able to handle a 2% SWR on my half of the two million. And there's even wiggle room to increase spending if it really came to that.

So I think the preliminary goals for FIRE should be no mortgage and $2M. I would not be too surprised if I chicken out and raise/revise it later, but this seems reasonable for the time being. I'm already thinking that home equity and inaccessible retirement vehicles shouldn't be included in the $2M, but we'll cross that bridge when we come to it.

And I've also got some time before we reach the goal to work on emotional readiness and all that jazz.

3 Responses to “Goals for FIRE and SWRs”

  1. Petunia 100 Says:

    Sounds like a great plan. Smile

  2. snafu Says:

    If you continue to worry and wait for the next storm, you miss the current sunshine. Yes, you need to save for retirement but by staying up to date with the current thinking is surely sufficient. The world and technology are changing so fast in 40 years you may be starting your 3rd or 4th career.

    I'm hoping something in your life will offer you a more positive outlook and put to rest the such a long list of negatives. You will be surprised at how easy it is to make lemonade when life challenges hands you lemons.

  3. amberfocus Says:

    Thank you, @snafu, for your perspective. I really appreciate it.

    You're absolutely right, of course, and I do know that deep down. The chances of a catastrophic occurrence is quite low, and even if it does happen, that's what insurance is for. Truth be told, I'm actually not unhappy at all, at least certainly not about our current financial situation. It's just that the diehard overachiever in me loves to churn out endless what-if scenarios for motivation.

    The larger issue here, though, is that I'm not exactly treading in well-known territory. I'm hoping to FIRE in a decade (or less), not in 30 or 40 years, and believing that one can weather the next half century without any wages requires either a large leap of faith, airtight planning, math, and reasoning, or both. The stakes are quite a bit higher, and thus the anxiety levels follow. I am also acutely aware of the planning fallacy, and I may overcompensate for that a bit. But I'd still rather overcompensate than undercompensate. I suspect that most regular folks would find the goal of FIRE by age 40 to be an impossible and downright hubristic goal, and I don't want to prove them right.

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