What's Your Number & Safe Withdrawal Rate?
  • For early retirement/financial independence, what's your proposed nut & SWR? I propose > $5m & 2%...with a balanced portfolio of @ 20% RE, 35% Stocks, 35% Bonds, 10% Cash? You say?
  • $5 million is probably a good nut to have. With the 10-year yield at 2.2%, that would be $110,000 a year until perpetuity.

    I'm an advocate of a withdrawal rate that does not touch principal (http://www.financialsamurai.com/2013/05/08/the-ideal-withdrawal-rate-for-retirement-doesnt-touch-principal/) and a similar net worth allocation split.
  • I often wonder if at retirement I'll be content to just collect a risk free yield. Because I'm getting so engaged in my finances now, will I just be able to turn that off when I get older? Will old age quell my curiosity? If that happens, will I enjoy the rest of my life. I think I'll always be shooting for a high return regardless of age. Then again, I can't see what the future holds. I'm shooting for about a $3 million nut at 65 years of age across all investments. It's going to take hard work to get there :)
  • $5 Million? That is a tough bar to achieve. Honestly, how many "real" people can

    I am a lawyer-- fairly well paid and I think that number is impossible. Assuming no interest (just for arguments sake)-- that means saving $166,666/year every single year for 30 years. From the day you turn 30 years old till you turn 60! $166K every year banked?


    Help me understand how that is feasible.

    I thought my number was closer to $1-2 million plus a pension and social security. And the $1-2 million is no cup of tea either. Call it $1 Million at 5%-- that $50K per year. Plus social security ( yes i think i will get *something*) at a few grand a month-- thats $24K per year. Plus a small pension for $30K per year. That gives me $104K/annum.
    I only spent $50-$75 now if you back out savings and the mortgage.

    Am I off?
  • Jnew - $1 million sounds fine too at 5% a year + social security. It all depends on where one lives. The median home in SF is anywhere from $800,000 - $1,000,000 depending which report you ask, and that' not even for a great home. Where do you live?

    Everybody's nut is different. No one size fits all. The great thing is we can move around the world!
  • I'm into real estate pretty heavily, so in that case, "withdrawal rate" and "what's your number" isn't a meaningful concept. But, regardless of the investment, I always boil things down to cashflow; monthly income vs. monthly expenditures.

    My current goal is to get 4k / month coming in so that all my expenses are paid. Then if I can increase my passive income by 1k / month each year, I'll be doing great.

    Jnew, I feel your pain - saving for retirement is very hard and you always feel like everyone else is ahead of you by MILES. Lord knows, it makes me crazy when I think about it. But, I think where you miss the boat is that you're thinking about how much you can personally save. No-one gets to the 5m+ point by working for a living and saving it, you've got to invest.

    Here's a quick example. Can you save 20k in one year if you really tried? If you can, you can buy a 100k property with 20% down. How about the next year? Can you buy another one? Do this for 10 years straight, you'll control 1M worth of real estate. But that's only the start - check this out:

    Now let's count all the cashflow over those 10 years.

    Now let's factor in all the tax writeoffs, depreciation, and mortgage deductions.

    Now let's assume that the properties have gone up in value somewhat

    Now let's assume that you've saved the cashflow from the rentals so you could accelerate your buying rate.

    More likely, you'll be sitting on quite a bit more than 1M when all is said and done. Plus, you'll have a nice little tax-sheltered income stream going on. Extend that out until you're 65, I can see you blowing past the 5M mark no problem.

    Basically, Jnew, forget about your salary. No matter HOW much you make, it's not a source of true wealth. All it amounts to is seed money to get things rolling.
  • I like my job, so I am not looking to retire as such :)

    I would like to ensure we have enough passive income to live on, which I think is about $2500 per month in today's money. I figure 3% is a reasonable withdrawal rate so we need about $1mm. Hmmm.

    As I like my job and intend to continue working anyway, no rush.
  • @sendaiben - I used to like my job too, but as you get older, your perspective changes and time becomes less friendly. My advice is to start preparing for a "work optional" life and if you really enjoy working, then you can continue. But, after that, if you don't, just get into the lifeboat and set sail to sunnier shores.

    BTW, if you were to go for a real estate investment, 2500 / month cash flow amounts to about 8 rentals. With a mortgage on each, that's only about 160-180k invested.
  • @jason I know I don't have the temperament for property, and Japan is a horrible place to be a landlord, so that's out :)

    Right now I have three jobs: university teacher, educational consultant, and run a language school with my wife. Could probably get by on any of those, but for now we're trying to save as much as possible for the next 5-10 years.

    We're mostly in index funds (70-30 stocks/bonds) with a small dividend stock portfolio and some P2P lending on the side. I'm interested in learning about other options, but just to play with on the side.

    After the earthquake/tsunami thing, I'm really aware of how fragile things can be. Having a decent financial buffer makes everything easier to cope with.
  • @Jason One of the things that make me smile is how often younger folks tell me they love their job and would never quit. They've got barely 5 years under their belt and so full of enthusiasm vs us saltier folks with more experience. I always tell them to come back to me after 10 years of doing the same thing to see how they feel. Several have come back to me after just a couple years and want out!
  • It is great to love one's job. And it is also nice to have choices. There were many days I did not love my job, but had no choice but to suit up and go the next day; the consequences for quitting, telling off the boss, and otherwise "showing them" were just to great in relation to continuing to receive a paycheck.

    @Jason, your description of your mindset is something I can really empathize with. Burnout is real; discouragement with the status quo, lack of opportunity/respect/possibility for improvement can really wear one down. For decades I have attempted to be "like the stone at the bottom of the riverbed, letting it pass by while I remain still and stoic". But even the hardest stone is eventually worn smooth.:-) Keeping good thoughts for you, as you navigate FIRE.
  • @FS, "$5 million is a good nut to have." Yes, no argument!:-) Reminds me of a conversation David Letterman had with guest Donald Trump....
    Dave: "So, what are you thinking about investments in this economy?"
    Trump: "Now is a good time to have cash."
    Dave: "When is it NOT a good time to have cash?!?!!"*throws pencil*

    In 2005, one could get a risk-free CD paying 6%; today just eight years later, 1/3 of that. So that $5mm nut would have only had to be $1.7mm just 8 years ago. It is nice if one has the opportunity to accumulate that amount, outside of daily living expenses. But those numbers can change pretty quickly; I am reminded of a conversation with a pal in 1998, where he told me he was going to get $300K, and live off the 10% interest. Crazy, right? In 1999, three people I worked with quit their jobs to "day-trade" and you can guess how that turned out. In 2006, a colleague told me he would be "content" with 15% returns for the rest of his life. In my own 'retirement calculator model', my return (net of inflation) has declined from 9% (when I first built it in 1996) down to 0% (today). btw, that is really the same as the figure you use for the 10-yr, net of inflation and taxes.

    But to answer the question of this thread, I am using a 2.5% withdrawal rate.
  • @JayCeezy - It's great to have dreams eh? It's because of the decline in interest rates where I'm thinking $5 million is a good target. I'm aiming for the withdrawal rate to equal the risk free rate so 2.5% is not that far off at all. We shall see!
  • I agree that the withdraw rate shouldn't touch the principal, that number as a percentage though is a little funny to actually come up with. For example if you have paid for rentals that are throwing off net $15k/month free cash flow does that is before you've withdrawn a penny from any savings accounts. I'm planning for a $20-25k monthly burn, too much fun stuff to do out there that costs money!
  • @FS, something tells me you are living the dream.:-) It is a good target, for someone other than me. I'm done chasing the mechanical rabbit. A bunch of '80s PF books (i.e. "Wealth Without Risk" by Charles J. Givens) used to harp on the 'Rule of 72' concept (your money would double with some combination of interest/years that multiplied to 72). When interest rates were 7.2%, it was a slam dunk for your money to double in 10 years. But with interest rates now at 2%, I find myself unable to wait 36 years for the double. I've had it go backwards, too, and am unable to accept the other side of the risk. Nice as it may be to never "ideally" touch principal, a lot can happen and I have to make my nut last 50 years. I do wish everyone well in their pursuit!

    @ol1970, not sure why it would be funny to come up with a percentage; seems like it would simply be your annual ROI. How far along are you on your program?
  • @JayCeezy, I guess why I say it is funny is because do you count free cash flow rental income or distributions from paid from investments against your percentage you are withdrawing from your nut? These debt free assets pay way higher than 2% return. As far as how far along the program I am, I guess I'm already there. I haven't retired yet because I still really enjoy what I do, I sort of act semi-retired if there is something fun to do I do it and I don't let the occasional bad day get to me. So interesting question back to you, there has to be a $ amount that would send you back to chasing the mechanical rabbit for 1 or 2 more years? I sort of use that as my benchmark, if I were not making much doing what I enjoy, I would retire, I guess I'm pretty lucky right now.
  • @ol1970, I see what you mean. One way of comparing "apples-to-apples", is to take a 'cashflow' like a pension and/or S.S., and back out the principal required to produce that cashflow. i.e., a pal has a City of LA pension, retired at 60, paying $105K/yr, plus medical and a spousal death-benefit. Something like that is categorized as a 'shadow asset'; the 'shadow asset' principal required to throw off $125K/yr is $1.7mm (@7%) to $6.2mm (@2%).

    For a passive-income cashflow, a similar calculation is performed: cashflow (i.e. a $1mm home rents for 50K/yr, = 5%). Even if you paid $200K for the home some time ago (a 25% return, not 5%), the home is still valued at current market. Just a thought, it can be tough to figure and there is always a variance between 'value' and 'price'. And you are being a bit humble, calling yourself 'lucky'; nobody gets themselves in a situation where they own investment property outright and do work they enjoy.

    To answer your question, yes. However, things have changed so dramatically in the working environment in the past few years that it is hard for me to believe. I did attempt to improve my situation for a number of years, and had a number of negotiations stall out when I could not get a higher title, more money, or more advantageous working circumstance. I would have jumped for just one of those three things, but couldn't make it happen. I don't blame the potential employers, at this point there is just a fraction of the work going on now that was happening 10 years ago, and they can get somebody 15 years younger with 'good-enough' skills for half my price. Maybe an H-1B visa worker, willing to work uncompensated evenings and weekends. Plenty of skilled and strong performers out of work, and willing to take jobs today they were doing 20 years ago. If I was the employer, I would take advantage of the available labor pool, too. Anyway, there is a disconnect between 'my value' and 'my price'.:-) Continued success to you ol1970!
  • I'm currently invested in stocks and bonds and will move my allocation more towards bonds (includes all fixed income) as I get to 45. Then I plan on buying a SPIA which will give me a defined income stream based on my current (and future projected) living expenses. When I'm dead the money is gone. So my financial nut needed is smaller. Appreciate if anyone can let me know if this is not a feasible plan.
  • @JayCeezy, yeah I hear you on the whole changing of the landscape. I can definitely see it happening in my business since it is very technical, but right now its fun to try and stay ahead of the curve. Things are way different for me than they were 10 years ago, and I know 10 years will be different as well. I strongly suspect that the day will come where I cross the line as well and I'll be happier golfing and fishing more days than doing what I do. Until then I keep plugging away and trying to enjoy life as much as possible!
  • what is a SPIA?

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