What's your retirement number?

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IlliniDave
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Re: What's your retirement number?

Post by IlliniDave »

JamesR wrote:What's with the paid off house fetish among retirees? Forget about that, and don't include it in your retirement number. Instead, just include the monthly cost of shelter in your living expenses and use that to derive your retirement number.
I'm not sure what you're saying. My retirement "number" does not include any equity for real estate I intend to live in, just invested assets. My anticipated retirement expenses include the ongoing costs associated with housing. I think it's a bit of a stretch to classify a person's desire to own their home a "fetish".

Tyler9000
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Re: What's your retirement number?

Post by Tyler9000 »

I prefer to avoid specific numbers, but I do find one phenomenon pretty interesting. When I first calculated my "number" about four years ago, it was 2.5x the ultimate number that I'm very comfortably retiring on today. And counterintuitively, my margin of safety is even higher today than I assumed back then. Once you switch the mindset from traditional consumerism to maximizing happiness on minimum cash flow, things really do change for the better in measurable ways.

jacob
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Re: What's your retirement number?

Post by jacob »

@Tyler9000 - Yes, that! That!!

JamesR
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Re: What's your retirement number?

Post by JamesR »

@Matty

By the way, you seem to be making an assumption that the only way to bring in additional income during your semi-ERE is to trade your time for money in a strictly linear manner. Surely there's other non-linear income streams you can explore during your semi-retirement, within your passions & hobbies.

@Jacob

Just looked at the CAPE chart and it's clearly missing something, whether that's a lack of compensation for interest rates or something else. Are there any good alternatives or fixed versions of CAPE that you can suggest?

@all

I suppose if you're going to have a house, it may make some sense to have it paid off. Should that add to the retirement number though? If you would be paying $600/mo for rent on the equivalent house, that means you'd need about $210k to support that income, and you could buy the house in full for that amount anyways.

However, the disadvantage of having a paid off house means you've got all that capital stuck in the house, and it's not working for you. If you had a mortgage at a low rate and invested that money you would come out ahead. There's also the tax write offs with real estate, and that could reduce taxes on capital gains, etc.

When I hear "paid off house" it just makes me sad because it seems like there's a missing opportunity in investing.

--

Perhaps we should all just automatically retire after hitting a savings of 5 times the last 5 years average on our annual salaries. So if your last 5 years salary was on average 65k then automatically retire when you hit $325k, no ifs, ands, or buts. After all, 5 years is pretty much the ERE rule isn't it? :P

Retire first then figure out how to survive on 3.5% of that. True "extreme retirement!" :D

This could even be a tv show. Extreme Retirees. These dauntless souls suddenly find themselves expected to live and thrive on 3.5% of the sum of their last 5 years salary - can they do it?! *spooky theme music*

chicago81
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Re: What's your retirement number?

Post by chicago81 »

When I hear "paid off house" it just makes me sad because it seems like there's a missing opportunity in investing.
It all depends on your level of comfort with leverage and debt. When I hear someone would keep a mortgage so that they have more funds available to invest, I equate it with investing on margin at a broker. (I think Jacob, or perhaps another blogger wrote an article about "You are born 'short' a house.")

I suppose the long term performance of portfolios with a higher risk tolerance have historically outperformed mortgage rates -- but there is more risk involved. For someone who wants to be financially independent and minimize the chance that they would ever feel like they "have" to go back to work, a paid-off-home makes sense.


------

As for my number... I'm currently aiming for a paid off primary residence (have got it already) along with investments that generate a passive income stream in the neighborhood of 2k to 3k dollars per month. Right now my investments generate approximately 1k per month, some of which comes from a rental property that I eventually want to sell so I can invest the proceeds in an even-more-passive investment (dividend growth stocks), albeit at a slightly less yield on capital.

Tyler9000
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Re: What's your retirement number?

Post by Tyler9000 »

JamesR wrote: When I hear "paid off house" it just makes me sad because it seems like there's a missing opportunity in investing.
Well that depends on your mindset and point in the accumulation journey. Today, my house is less than 20% of my net worth and the other 80% can support me indefinitely. I feel securely well-invested, and see a mortgage at this point as unnecessarily adding risk for theoretical returns I really don't need. I'm happy to minimize cash flow and turn my optimization games to other challenges.

I did carry a mortgage saving up to FI for many of the reasons discussed. Different life stages may call for different strategies.

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GandK
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Re: What's your retirement number?

Post by GandK »

Tyler9000 wrote:I feel securely well-invested, and see a mortgage at this point as unnecessarily adding risk for theoretical returns I really don't need. I'm happy to minimize cash flow and turn my optimization games to other challenges.
Exactly. Me too.

George the original one
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Re: What's your retirement number?

Post by George the original one »

Tyler9000 wrote:I did carry a mortgage saving up to FI for many of the reasons discussed. Different life stages may call for different strategies.
+1

IlliniDave
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Re: What's your retirement number?

Post by IlliniDave »

George the original one wrote:
Tyler9000 wrote:I did carry a mortgage saving up to FI for many of the reasons discussed. Different life stages may call for different strategies.
+1
+2.

The reason investment produces reward is because it comes with risk. Taking the risk is essentially what we get paid for. At a certain point in our journeys (for some of us at least), it's a boost to quality of life to disentangle the place we sleep from all of that as much as possible.

A person's house does "work" for them. There's an imputed income equal to the profit of renting the place (if you rented it from someone you'd pay all the expenses plus a profit with your rent payment). A house also behaves somewhat like a commodity in that it generally preserves its value relative to inflation over the long term. These aren't the greatest returns possible, but they're something. So, it's not like the money is buried out back in a Mason jar and forgotten.

I don't count my house as an investment when looking at my retirement (therefore not part of my "number"), but it's certainly an asset.

steveo73
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Re: What's your retirement number?

Post by steveo73 »

IlliniDave wrote:I don't count my house as an investment when looking at my retirement (therefore not part of my "number"), but it's certainly an asset.
I do this as well however I live in Sydney Australia and my house must now be worth close to $1 million AUD. Its a crazy price. I also owe about 95k on the house right now.

My retirement amount is 700 to 900k excluding the house. It sounds a lot and it is however I have 3 kids and I am basing this off current spending. Our spending is honestly pretty good. We will have saved 70% of our income last year and we are aiming for 75% next year.

JL13
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Re: What's your retirement number?

Post by JL13 »

Good question, despite being into this for a few years now, I never did figure it out exactly. I guess it's been roughly whatever 25x whatever my current expenses were, so in that case:

2011: $500,000
2012: $375,000
2013:$300,000
2014: $250,000
2015: $200,000?

My lack of patience with office work is pushing me to open up to concepts that would make $175k work, let's hope I can last that long. Hell, maybe I'll get smart and figure out how to do $125,000 and jump ship in a few months!

JamesR
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Re: What's your retirement number?

Post by JamesR »

chicago81 wrote: I suppose the long term performance of portfolios with a higher risk tolerance have historically outperformed mortgage rates -- but there is more risk involved. For someone who wants to be financially independent and minimize the chance that they would ever feel like they "have" to go back to work, a paid-off-home makes sense.
I can see there is some increased "risk" but this is part of what ERE is about. In ERE, the risk is controlled through other dimensions rather than over-compensating on the money dimension. In the long run, the nest egg catches up and it becomes a non-issue.

If people wait to cover the house before retiring, then perhaps it's merely RE (or plain R) and not ERE.

Perhaps this is rude to point out or quibble over. I just find it someone ironic that many people hang out on these wonderful forums but rationalize various reasons to aim for the old school version of retirement (paid off house, never working, super nice cushy lifestyle, the american dream).

--
As Tyler9000 pointed out, "Different life stages may call for different strategies."

I agree.

Perhaps true "ERE" style retirement requires a rather specific life stage such as not having kids and being younger than 35. Kids and age definitely change things.

--
@J_L13

I'm sure people would love to help you figure that out, as would I. Sounds like an interesting challenge! ;)

Depending on your age & capabilities to generate some income streams or do the occasional contract job online, you might consider a withdrawal rate of 5%, that would give you $520/mo which is doable depending on how & where you live.

IlliniDave
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Re: What's your retirement number?

Post by IlliniDave »

JamesR wrote:
chicago81 wrote:
Perhaps this is rude to point out or quibble over. I just find it someone ironic that many people hang out on these wonderful forums but rationalize various reasons to aim for the old school version of retirement (paid off house, never working, super nice cushy lifestyle, the american dream).

--
As Tyler9000 pointed out, "Different life stages may call for different strategies."

I agree.

Perhaps true "ERE" style retirement requires a rather specific life stage such as not having kids and being younger than 35. Kids and age definitely change things.

--
Yep, aside from different life stages, where exactly you start is a driver too. When you're already a 50 year old debt-free homeowner with a decent nest egg a handful of years shy of traditional retirement benefits and the like before you ever even hear of Jacob or ERE, it's kind of hard to go back and be 25 again and re-institute one's college lifestyle, and largely pointless (unless that happens to be where one's happy point lies). It's ER rather than ERE--just plain early retirement. Although it's different, many of the ERE "principles" are valid and useful. There's an online investing community where I participate, and one of the prominent personalities there likes to say, "There are many roads to Dublin." Similarly there are many ways to early financial independence towards the frugal end of the continuum.

I have great admiration for those who make a go of it with much slimmer finances and more reliance on their own skills and wit, the true ERE-ers.

jacob
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Re: What's your retirement number?

Post by jacob »

In my case 100% homeownership (no mortgage) is also part of "this complete investment portfolio". I never had it as a goal per se but given the current market environment and my/our personal circumstances I thought it prudent to convert paper assets to bricks.

There's not really any simply number-answer that makes it easy to compare numbers for everyone. It all comes down to personal circumstance. The most important thing I realized is that whatever model I use, it tends to change with assets as well as age ... well, in general, just personal circumstances.

A number is just a first order approximation. But that is fine.

chicago81
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Re: What's your retirement number?

Post by chicago81 »

With very few exceptions, most people will need to do one of the following:
1. Live in a paid off home
2. Live in a mortgaged home
3. Pay rent to live in an apartment or rent someone's spare room
4. Live in their car/van, live on the streets, or be a beach bum (e.g. not living in 'structure')

I would suspect, even among the ERE crowd, that options 1, 2, and 3 are the overwhelmingly most common choices.
Given that, most people either have to have a paid off home, or pay rent/mortgage. I think it would be naive to consider a "retirement number" without regard for figuring out whether or not it included the place where you live!

JL13
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Re: What's your retirement number?

Post by JL13 »

@JamesR

I'm interested in talking more about this (are we at risk of hijacking this thread?). Rent and utilities are covered where I am for $500/mo, groceries for me have averaged $125/mo so that puts us at $7,500/year @5% WR = $150,000. This is a bit risky as this is 100/0 needs/wants breakdown. I would need the ability to get income from another source, and let it be something I could crank up/down as needed.

I need to get some side income going somewhere, but not sure how to go about this. I don't want to be stuck geographically?

plantingourpennies
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Re: What's your retirement number?

Post by plantingourpennies »

chicago81 wrote:
Perhaps this is rude to point out or quibble over. I just find it someone ironic that many people hang out on these wonderful forums but rationalize various reasons to aim for the old school version of retirement (paid off house, never working, super nice cushy lifestyle, the american dream).
I come for the inspiration! Our number is embarassingly high-maybe 1.2M in net worth.

old_fart
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Re: What's your retirement number?

Post by old_fart »

If I had $15000 in expenses and a $10,000 pension would I just need $5000 x 35 ($175,000) to be good for life or will I need to have $15,000 x 35 ($525,000) even with the pension? The $178,000 is sitting in an account getting 1/2 percent interest, I don't want to invest it, I'm paranoid and won't to keep it 100% safe even if it's not growing.

chicago81
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Re: What's your retirement number?

Post by chicago81 »

old_fart wrote:If I had $15000 in expenses and a $10,000 pension would I just need $5000 x 35 ($175,000) to be good for life or will I need to have $15,000 x 35 ($525,000) even with the pension? The $178,000 is sitting in an account getting 1/2 percent interest, I don't want to invest it, I'm paranoid and won't to keep it 100% safe even if it's not growing.
I'm not a financial advisor, so feel free to take my advice with a grain of salt --

But there is risk in keeping it just in cash. Inflation risk. Inflation is going to erode purchasing power of that over the next 35 years that you're projecting for.

Seeing that you only need to generate $5000 a year (and presumably will want that amount to increase annually to keep up with inflation), and that you have 178K in savings, you only need to have your money earn 2.8%/yr (+inflation). In my opinion, that return on capital is extremely attainable with a portfolio of some stocks of high quality companies and some bonds.

George the original one
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Re: What's your retirement number?

Post by George the original one »

old_fart wrote:If I had $15000 in expenses and a $10,000 pension would I just need $5000 x 35 ($175,000) to be good for life or will I need to have $15,000 x 35 ($525,000) even with the pension? The $178,000 is sitting in an account getting 1/2 percent interest, I don't want to invest it, I'm paranoid and won't to keep it 100% safe even if it's not growing.
If the pension gets cost of living increases and is guaranteed not to be legislated away (or go bankrupt), then yes.

However, you need to invest the $175k... even if you put it in CDs or government bonds earning 2.5-3%, you'd be 5x-6x better off than your current 0.5% situation! Inflation is eating that money away as it sits... you've already lost 11% in the last 5 years to CPI inflation during the lowest inflation period we've had!

If you really, really want to play it safe, buy an annuity. They are designed for people who are afraid to invest.

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