FIRE

Including Financial Independence and Retiring Early (FIRE)
toofast2live
2 Lemon pips
Posts: 101
Joined: November 4th, 2016, 2:24 pm

Re: FIRE

Postby toofast2live » November 11th, 2016, 1:30 pm

My old college professor of Finance 101 used to say that there is no value in asking someone how much they want in retirement because the answer will always be "as much as possible". The only meaningful question is "how much do you need?". But that itself is not easy to answer.

I retired at 48, some 13 years ago, and I must admit that, after a life of LBYM, my biggest problem is being reckless and spending the money. As a for example we can afford to fly business class on long haul trips but it still brings tears to my eyes to pay £4,000 for a ticket rather than £700. On the other hand what pleasure does it give looking at the bank balance? Realising that we are not going to live forever means that we are much more indulgent now than when we first retired. (Disclaimer: no kids and no desire to leave anything other than donations to charity.) Especially as the last 13 years seem to have flown by. To think that that is the same time span as my leaving primary school and receiving a Masters degree!

I do sometimes miss the stimulation of wo*k but I decided long ago that unless I could work my choice of hours, at my choice of location for my choice of clients then my decision would be to miss out on that. I don't regret it!

Wizard
2 Lemon pips
Posts: 166
Joined: November 7th, 2016, 8:22 am

Re: FIRE

Postby Wizard » November 11th, 2016, 6:50 pm

dspp wrote:
pbarne wrote:
thebarns wrote:I further guess the majority will look for somewhere around £750K- £1.5M.


A rough and ready reckoner of income in retirement discussed a few times on the other place was:

12K for a very basic existence
24K for a moderate lifestyle
36K for a good lifestyle with some luxuries

Assuming a range of 3% to 4% drawdown that would equate to a range of 300K to 1.2M.

All assuming your "pot" would need to finance all your income.


Glancing through https://en.wikipedia.org/wiki/Income_in ... ed_Kingdom and http://visual.ons.gov.uk/uk-perspective ... in-the-uk/ it seems that median UK incomes are somewhere in the £21k - £25k range depending on factors such as whether it is household or individual, earnings or income, etc. Assume £22k @ 4% total return (after inflation) and you need a £550k pot, which is median individual gross earnings for all, inc part time & full time. But if you take off state pension of £6k you need a £400k pot. Further knock off the fact that by the time most people would retire they've got the mortgage to zero (avge mortgage is £85k, so avge payment will be about £8k/yr) so needs are £22k - £6k - £8k = £8k/yr from private savings, which is £200k. So if you wish to retire early, after paying off mortgage but before receiving state pension, then calculate #years of gap x £6k/yr and add to £200k. And that is before taking into account the fact that many who might be contemplating this will likely have some level of private pension provision and can obtain extra income from e.g. spare room rental.

It really is possible at quite modest levels of saving provided of course one is willing to live a median lifestyle.

regards, dspp


May I ask if this means you operate on the basis of an assumed level of inflation of 0%? You state "4% (after inflation)" then take £22k and divide it through by 4% to arrive at £550k, so where does inflation get dealt with? So twenty years after retirement as you have had to spend every penny to get the median lifestyle nothing has been reinvested, so income is still £22k. But that will be nothing like median income then.

Terry.

ap8889
2 Lemon pips
Posts: 124
Joined: November 4th, 2016, 10:55 am

Re: FIRE

Postby ap8889 » November 11th, 2016, 7:15 pm

Umm 4% is the real return...

zxspectrum48k
Posts: 3
Joined: November 6th, 2016, 11:16 pm

Re: FIRE

Postby zxspectrum48k » November 11th, 2016, 11:52 pm

thebarns wrote:£5 million for FIRE and pay the children''s schooling/uni !
For 60k pa.
Strikes me as an enormous sum, well beyond the attainment of your average or indeed considerably above average investor and would put off the vast majority from ever considering FIRE !
I appreciate these are particular to your own circumstances ..
I am sure many at or contemplating FIRE will be looking at considerably smaller capital sums.


60k pa is about what we spend each year excluding school fees (which takes us to £90-100k). So I'm just targeting our current spending level which is comfortable but hardly luxurious (we only have one 9 year old car and it's not as though we take business class flights on holiday). This spending level turns into a large sum of £4mm (£5mm including school/uni fees) due to my assumption of a relatively low real yield (2-3%) on my asset portfolio, a relatively high return volatility, and explicit assumption on inflation volatility. This creates a realistic simulated level of sequence of return risk.

The assumption of a lower level of real yields, compared to historic levels, is driven by two factors. First, that long-dated global bond yields are at incredibly low yield levels. As these act as the risk-free discount factor on all other risky assets, I'm concerned that current asset valuations include a substantial amount of upfront PVing of future cashflows.

Second, I'm also influenced by discussions with some of my own clients who are running multi-billion US$ endowments (charitable or US universities). They attempt to run their portfolio as a perpetuity, and only spend cashflows in excess of the inflation-adjusted value. Their issue is that CPI is poor metric of how to protect the purchasing power of their portfolio over many decades. While it may adjust for the cost of living, it does not adjust for the trend improvement in the standard of living; freezing your standard of living in a normal retirement of 15-20 year may be acceptable but it's less so if it might be 60y+. They also note that many types of services/products they need to purchase are not well reflected in the typical CPI basket. This can apply to families aswell. An example is private school fees which inflate at a rate way greater than CPI. The bottom-line is these endowments tend to assume CPI +2% is required to maintain their purchasing power. As a result a real yield of say 4-5% is only effectively 2-3% once you adjust for this impact. If you're going to retire early I think it's important to understand what your likely inflation basket will look like and not just assume it's RPI or CPI.

TheRIT
Lemon Pip
Posts: 76
Joined: November 4th, 2016, 10:44 pm

Re: FIRE

Postby TheRIT » November 12th, 2016, 10:36 am

kodokan wrote:Talking of geographical arbitrage, this popped up in my newsfeed this morning and I thought of you, RIT.

https://www.theearthawaits.com

It's a calculator where you can plug in how much you have to spend monthly, desired standard of living, number of family members, acceptable to you levels of crime and pollution, etc, and then it tells you where in the world you could live. I can currently live in quite a few places in Mexico, and most of Eastern and some of Southern Europe, which is nice to know :)


I quite like that, thanks. Plugging some details in for my situation, including a modest lifestyle, low pollution and low crime then sorting into quality of life order I get the top 10 as:
- 5 x Spain
- 2 x Portugal
- 2 x Greece
- 1 x Germany

Looks like someone agrees with my own research that a Mediterranean lifestyle is for me,

TheRIT
Lemon Pip
Posts: 76
Joined: November 4th, 2016, 10:44 pm

Re: FIRE

Postby TheRIT » November 12th, 2016, 10:44 am

zxspectrum48k wrote:...
Based on those assumptions, then for a 90% success rate, the Monte Carlo throws out a required investment portfolio of around £4.2mm, plus £800k for school/uni fees for a nice round £5mm target. ...

Wow, that is a lot of capital. I feel I'm incredibly fortunate to have found a way to work myself up to be a 1% UK earner but even with those earnings my spreadsheet tells me that even at age 60 I'd still be nowhere near £5m.

Of course we're all different and it's one of the reasons I stay blogging but all I'll say is I'm going FIRE with a lot lot less as I'm a believer that you're a long time dead.

TheRIT
Lemon Pip
Posts: 76
Joined: November 4th, 2016, 10:44 pm

Re: FIRE

Postby TheRIT » November 12th, 2016, 10:48 am

TopOnePercent wrote:
thebarns wrote:£5 million for FIRE and pay the children''s schooling/uni !

For 60k pa.

Strikes me as an enormous sum, well beyond the attainment of your average or indeed considerably above average investor and would put off the vast majority from ever considering FIRE !
...
I am sure many at or contemplating FIRE will be looking at considerably smaller capital sums.


Out of interest, would any posters close to or post FIRE care to divulge the minimum capital sum they'd consider necessary?

That's a bit of a how long is a piece of string question as we're all different. In my case I've blogged about the assumptions, calculations, alternate countries and risks ad infinitum. I always end up requiring a little over 7 digits.

TheRIT
Lemon Pip
Posts: 76
Joined: November 4th, 2016, 10:44 pm

Re: FIRE

Postby TheRIT » November 12th, 2016, 10:53 am

TopOnePercent wrote:...
On one hand then I may need 10 more years rather than 5. On the other, assuming 2.5% income from the assets, I could FIRE today on the very basic existence level. I'm fortunate in that I enjoy what I do for a living, even though ageism will see me out of a career sooner rather than later, but with children to see through school & university, I'll probably still be working in 15 years :-O
...

A 2.5% withdrawal was what I also settled on as one that could give a long FIRE for a level of risk appropriate to me.

TUK020
Posts: 14
Joined: November 5th, 2016, 7:41 am

Re: FIRE

Postby TUK020 » November 12th, 2016, 10:56 am

Lot's of discussion about the 4% rule for FI.
How do people adapt this for inflation?
We have been living in a low inflation era for a while, but should not assume that it continues this way

TheRIT
Lemon Pip
Posts: 76
Joined: November 4th, 2016, 10:44 pm

Re: FIRE

Postby TheRIT » November 12th, 2016, 11:01 am

ap8889 wrote:I think getting your expenses under control is the key to FIRE. As many FIRE bloggers have pointed out, optimising expenses to give you the lifestyle you choose is a double whammy because the capital required is much lower with much lower expenses.

I think with paid off housing one needs very little to live a good life. If I get 36k a year post tax that will be more than plenty for us as a couple: I dont need much to be happy, an Internet connection, a kettle and tea, and I am set.

My biggest investment area that I think I need to work on before retirement is building social capital in the form of friends and family nearby. My mother in law passed away unexpectedly last week, having never left her hometown. At the funeral and wake it was really brought home to me that all the people she kept close with in her life had made it rich, full of good times, despite sometimes little money and serious health issues.

You can have too much financial capital, but I don't think you can ever have too much social capital.

Great post and I 100% agree with you. FIRE is only possible (IMHO) if you earn significantly more than you spend so you need to find ways to earn more and spend less in parallel. I ran some numbers this week looking at 'The Miracle of Compound Interest' based on what I've seen since 2007 and the news isn't good. If you're an average saver and investor you're going to be waiting a long long time - in the example I ran it was 46 years which ain't going to be FIRE. Even an average saver who knocks it out of the park investment wise (I assumed twice the return I've physically seen) took 28 years. In contrast my high saving rate allowed me to do reach FI in 9 years.

TheRIT
Lemon Pip
Posts: 76
Joined: November 4th, 2016, 10:44 pm

Re: FIRE

Postby TheRIT » November 12th, 2016, 11:07 am

TUK020 wrote:Lot's of discussion about the 4% rule for FI.
How do people adapt this for inflation?
We have been living in a low inflation era for a while, but should not assume that it continues this way

The 4% Rule assumes that you take 4% of the capital value in year 1 as your 'salary' and then in subsequent years uplift that 'salary' for inflation. So you're actually only ever likely to be 4% in year 1.

Be careful with it though and definitely read all the small print. Personally, as a UK based investor looking to live in The Med I think it's way too bullish for a FIRE'ee.

1nv35t
2 Lemon pips
Posts: 239
Joined: November 4th, 2016, 8:18 pm

Re: FIRE

Postby 1nv35t » November 12th, 2016, 11:34 am

TheRIT wrote:
TUK020 wrote:Lot's of discussion about the 4% rule for FI.
How do people adapt this for inflation?
We have been living in a low inflation era for a while, but should not assume that it continues this way

The 4% Rule assumes that you take 4% of the capital value in year 1 as your 'salary' and then in subsequent years uplift that 'salary' for inflation. So you're actually only ever likely to be 4% in year 1.

Be careful with it though and definitely read all the small print. Personally, as a UK based investor looking to live in The Med I think it's way too bullish for a FIRE'ee.

25 times spending (4%) does work on average, but with considerable deviation around that. If your retirement coincides with a negative side deviation you could end up eating dog-food. Better to target 50 times (2%) IMO by saving more/working longer for that added security. 4% is ok'ish perhaps if you have no intent to leave a inheritance. Drawdown towards zero at a 4% rate is more acceptable if no heirs.

If you pre-load 30 years of 2% i.e. 60% into relatively safe ideally inflation pacing (or better) then that spending is relatively assured. Leaving 40% initial allocation to growth/accumulation. If that growth pot grows at 3.1% annualised real then at the end of 30 years you have the same inflation adjusted amount as at the start. Or rather than two buckets (drawdown and growth), you might simply apply the average, 60% initial bonds (safe), 0% final; 40% initial stock (growth), 100% final, averages 70/30 stock/bonds.

You can create a ladder of spending, adding in anticipated occupational and state pensions as/when they are due to come on line to calculate your own particular figures. i.e. other sources of income reduce the amount of loading into bonds (and final FI figure).

On average if you target a 50x (2% Safe Withdrawal Rate), then more often (on average) you'll see results during retirement that exceed that, such that additional amounts might be periodically top sliced out for 'luxuries' (such as a additional 2% on top). So 50x spending FI target figure can be a measure against most basic (get by) living expenses.

1nv35t
2 Lemon pips
Posts: 239
Joined: November 4th, 2016, 8:18 pm

Re: FIRE

Postby 1nv35t » November 12th, 2016, 11:56 am

Take a example of a just turned 50 year old who owns their own home (so roof over head, all 'rent' prepaid (liability matched)) who frugally could get by with 12K net income/year that might be fully covered in later years by state and occupational pensions come age 68. They'd need 12K x 18 years = 216K in safe inflation pacing to cover that. Assuming no heirs then that could be sufficient for FI. But has nothing/little in the way of security (cost of a new roof or whatever) or lifestyle (frugal basic living). Working and saving for a further 5 years, perhaps expanding that 216K by 10% combined savings/growth during those years = 60% more (216 x 1.6 = 345K), and with fewer years to cover before state/occupational pension (13 years x 12K = 156K). More security and potential ongoing income (better retirement).

ap8889
2 Lemon pips
Posts: 124
Joined: November 4th, 2016, 10:55 am

Re: FIRE

Postby ap8889 » November 12th, 2016, 7:12 pm

I think a pessimistic 2% withdrawal rate is wonderful in theory, very safe, just ignores the reality that one may die of old age before achieving the required capital. Like I said earlier, you can have too much financial capital, in the sense that one obtains that capital by swapping your finite life time for money via work.

pbarne
Posts: 18
Joined: November 4th, 2016, 7:03 pm

Re: FIRE

Postby pbarne » November 12th, 2016, 10:28 pm

Wizard wrote:May I ask if this means you operate on the basis of an assumed level of inflation of 0%? You state "4% (after inflation)" then take £22k and divide it through by 4% to arrive at £550k, so where does inflation get dealt with? So twenty years after retirement as you have had to spend every penny to get the median lifestyle nothing has been reinvested, so income is still £22k. But that will be nothing like median income then.
Terry.


ap8889 wrote:Umm 4% is the real return...


Actually the 4% rule as originally conceived was the initial level you could withdraw (and adjust every year for inflation) and still not use up all your capital after 30 years (i.e. if you have 1p left you have succeeded). If you model this using the PMT formula you only actually need an average real return of 1.3% which is way lower than long-term market returns - the reason for this conservatism is to allow for hitting the worst historic sequence of returns (bad returns in the early years).

zxspectrum48k
Posts: 3
Joined: November 6th, 2016, 11:16 pm

Re: FIRE

Postby zxspectrum48k » November 13th, 2016, 9:07 am

TheRIT wrote:... I feel I'm incredibly fortunate to have found a way to work myself up to be a 1% UK earner but even with those earnings my spreadsheet tells me that even at age 60 I'd still be nowhere near £5m.
Of course we're all different and it's one of the reasons I stay blogging but all I'll say is I'm going FIRE with a lot lot less as I'm a believer that you're a long time dead.

Yes, it is a lot of capital. However, I'm assuming £60k living costs for two adults and two children for the next 15-20 years (plus £30-40k for school/uni fees) and then £60k for just the two adults. I read your blog, and it's not totally clear, but I think you are assuming around £20k+/annum for just yourself. I don't like SWRs (the modelling by academics of this is very weak, even Wade Pfau) but my SWR is effectively just 1.5%. In comparison yours is closer to 2.5%.

I think both of us are skeptical of the 4% rule (international SWRs are nowhere need 4%) but I'm more skeptical because I've spent quite a bit of my life understanding inflation baskets. The bifurcation in good/services inflation in the the typical G4 inflation basket is likely to result in most people needing to grow their wealth at CPI+2% just to stand still. Many FIRE types don't explicitly think about the liability side of the equation, and just focus on the returns on their assets . You only have to look at a bloggers crowing about their returns this year due to Sterling's fall but who don't reprice their forward liability curve. That's just intellectually weak. My case is particularly bad since school fees have risen 550% since 1990, while CPI has risen just 200%. So school fees are a liability rising at around CPI+3%. School fees will rise even faster with a weaker Sterling rate (foreigners will find UK schools cheaper). You have to model these liabilities, you can't just assume a blanket CPI flat rise.

One other point, is that obviously I'm making significant provision for my children (school fees, uni fees, house deposit/purchase, inheritance etc). I always feel that children are ignored in FIRE blogs. My view is that while my partner and I can attempt FIRE, I have no right to expect my children to see FIRE as a good idea. They may want to compete for high paid/high hour jobs, love consumerism etc etc. So I need to provide the maximum level of optionality so they can choose.

toofast2live
2 Lemon pips
Posts: 101
Joined: November 4th, 2016, 2:24 pm

Re: FIRE

Postby toofast2live » November 13th, 2016, 9:44 am

Why the hell have school fees rocketed? Surely their major costs are building maintenance and teacher salaries. Both of which should be rising at no more than cpi.

Buy a house near a decent state school may be worth considering.

£1,200 a week seems quite a lot for two people in a paid for house.

TheRIT
Lemon Pip
Posts: 76
Joined: November 4th, 2016, 10:44 pm

Re: FIRE

Postby TheRIT » November 13th, 2016, 10:33 am

zxspectrum48k wrote:Yes, it is a lot of capital. However, I'm assuming £60k living costs for two adults and two children for the next 15-20 years (plus £30-40k for school/uni fees) and then £60k for just the two adults. I read your blog, and it's not totally clear, but I think you are assuming around £20k+/annum for just yourself. I don't like SWRs (the modelling by academics of this is very weak, even Wade Pfau) but my SWR is effectively just 1.5%. In comparison yours is closer to 2.5%.

I think both of us are skeptical of the 4% rule (international SWRs are nowhere need 4%) but I'm more skeptical because I've spent quite a bit of my life understanding inflation baskets. The bifurcation in good/services inflation in the the typical G4 inflation basket is likely to result in most people needing to grow their wealth at CPI+2% just to stand still. Many FIRE types don't explicitly think about the liability side of the equation, and just focus on the returns on their assets . You only have to look at a bloggers crowing about their returns this year due to Sterling's fall but who don't reprice their forward liability curve. That's just intellectually weak. My case is particularly bad since school fees have risen 550% since 1990, while CPI has risen just 200%. So school fees are a liability rising at around CPI+3%. School fees will rise even faster with a weaker Sterling rate (foreigners will find UK schools cheaper). You have to model these liabilities, you can't just assume a blanket CPI flat rise.

One other point, is that obviously I'm making significant provision for my children (school fees, uni fees, house deposit/purchase, inheritance etc). I always feel that children are ignored in FIRE blogs. My view is that while my partner and I can attempt FIRE, I have no right to expect my children to see FIRE as a good idea. They may want to compete for high paid/high hour jobs, love consumerism etc etc. So I need to provide the maximum level of optionality so they can choose.

I give quite a lot away and so my anonymity remains important (at least for now). I therefore always stay away from the children discussion however what I will say is that I would be/am <delete as appropriate> happy for my children to be educated in non-private schools. I was and I turned out ok. It's also because I would happily personally provide further assistance/tutoring to help them further if gaps were appearing.

The reducing spending piece is one of the most important elements enabling FIRE (and I wrote extensively about it yesterday on the blog) as it not only increases your savings rate during the accumulation phase but it also reduces the actual wealth you'll need in FIRE. Apologies, if I have not come across clear previously. Let me try again:
- In TheRIT household I am responsible for all family running costs and my own discretionary spending. They are the numbers I declare. MrsRIT just covers off her discretionary spending. So a family holiday or the leccy bill I cover but a new lipstick she covers. Ie her spending is actually pretty small.
- In the last rolling twelve months (the accumulation phase) my total spending has been £26,800 however that needs some clarification:
-- We rent in a particularly expensive part of the country as that gives me the best opportunity to maximise savings (earnings-spending). If we net rent off (we'll buy in FIRE and yes I acknowledge I'll have home maintenance costs which I'll cover later) and also net work costs off (won't have those in FIRE) I'm down to £9,800 per annum.
-- This year we've also spent £3,100 of that £9,800 on the ground researching FIRE locations (specifically multiple visits to Herefordshire and Cyprus).
-- So we no longer spend very much...

In FIRE I am budgeting:
- If we go the Cyprus with a home purchase I am budgeting annual spending of EUR22,300. I use an exchange rate of 1.123 in my planning so that's £19,800 which is the £20k you reference. That includes expected home maintenance costs and car replacement costs. 31% of it is also purely discretionary spend (eating out, travel, etc) and we don't currently spend anywhere near that but I acknowledge we'll also have more time to spend.
- If we go the Herefordshire route I think we need a little more. Around £21,100.

So compared to the accumulation my FIRE budget allows us enough margin to live like royalty (in our opinion). This is because when I FIRE I want paid work to become 100% optional forever while also acknowledging that my spending profile may change as I could be FIRE'd for a lot of years. It is also (IMHO) important to add that all my modelling is based on historic worst case sequence of returns and even with one of these our life will be all we desire. If I just get an average sequence I am going to end up with so much wealth than I don't currently know what to do with it all. A position I'm pretty happy to be in.

I would be interested at the top level drivers that make you use CPI+2%. You mention private school fees but what are you seeing after that as I typically just use RPI in my modelling which has of course been higher than CPI for a long time (forever?)? In the spirit of transparency I've kept very accurate spending profiles for myself since 2013. Comparing 2013 to an annualised 2016 I've actually seen a nominal spend reduction of 10%. This may not however be so helpful to the discussion as over that time I've been learning how to increase quality of life while learning how to spend less and I acknowledge that at some time in the future my spend will minimise then start to be hit by inflation.

FredBloggs
2 Lemon pips
Posts: 183
Joined: November 12th, 2016, 8:42 am

Re: FIRE

Postby FredBloggs » November 13th, 2016, 12:32 pm

A very interesting thread. I'm not FIRE-ing, but I'm fortunate enough to have accrued over 40 years experience in an in demand engineering niche.

I now find work to be like a paid holiday in the main. Since 2003 I have not been an employee, I work on projects for a spell then I move on. I get paid for what I know, not what I do. I have never yet had job where the client/employer didn't benefit many, many times more than my cost to him/them.

Not FIRE, but not too bad?

Fred.

Wizard
2 Lemon pips
Posts: 166
Joined: November 7th, 2016, 8:22 am

Re: FIRE

Postby Wizard » November 13th, 2016, 4:49 pm

ap8889 wrote:Umm 4% is the real return...


OK my misunderstanding. I saw previously people using the 4% as a gross number, or at least that what I interpreted it as.

Terry.


Return to “Retirement Investing (inc FIRE)”

Who is online

Users browsing this forum: Woodview and 2 guests