My expenses will be in the 2-4% range. I'd let it reach 5% in unusual circumstances. This is of the networth, readjusted each year, not of inflation adjusted starting principle.
Money is a tool to improve life. The amount changes based on desires, etc. As long as it's workable, it's okay.
If I need to earn some more or decrease expenses, there are many options available if the need arises.
I suspect that for most who focus a lot on their spending and have it optimized to something sustainable, their investments will likely return far more than they need. Personally I let this money accumulate on top of what I have when it returns in excess of what I need.
Admittedly, I got into the habit for a while to spend more when I had more but that created a little chaos.
Generally I would be comfortable with increasing spending by a reasonable amount if I see some real benefit to it and as long as spending did not exceed a 3% withdrawal rate at this stage of the business cycle (comfortable with 4% if stock and bond prices were closer to historical norms).
My goal is to ER after having about $550k, at which point we would be able to live on 4% if my wife quit or lost her job, and if we had a kid or two to pay for as well. However, my wife will probably not stop working completely, so we will probably really be starting with a 0-2% withdrawal depending on how much she is still working. At the same time, I will be trying to make money on my own but expect to be making $0 at least the first couple of years due to insufficient skills, doing things like creating games or writing a book. Also, we're not expecting to be parents just yet.
So at the $500k range, we would need up to 4% (but probably much less to start) and still be trying to make money through a combination of hourly work and self-employment. I would feel the urge to increase our net worth and I would worry about our investments.
At $1M, we could both quit and might only withdraw about 2%, but honestly I would bump up our budget to 2.5% or 3%, even if we don't end up spending that much. We have some great local restaurants and I would look forward to going to them more often. We would go on more trips and not have to be super cheap about it, for example going on a road trip and staying in AirBnBs instead of limiting ourselves to van camping or crashing at a friend's place. I would not worry so much about investments or how much money I would be able to make via hobbies. I wouldn't really care if our net worth wasn't growing year after year.
At $2M, 1% would cover our base expenses and 1.5% would cover a lot of fun money. At this point, we would struggle to spend even 2% year after year.
We would be able to comfortable invest a lot of our wealth into an entrepreneurial endeavor or a rental property, but I'm not sure I would want to do something like that, even if I could with no risk. Maybe in 10 or 20 years I will feel differently, but for now I think I would rather throw financial support at entrepreneurial ideas of others. However I would still try to avoid spending down this amount, and instead use dividends and capital gains to fund projects and support family members if needed, while keeping the principal intact.
At $4M... hard to imagine what I would do. A 3% withdrawal would be spending $10k per month. I don't think I would get any more enjoyment out of this much vs. $1-2 million, so I would probably make it a point to give back to the community, my family, and others in need, at least some amount each year while still keeping the capital intact. I would get the most benefit by improving not my own life/house/property but the lives and environment in the surrounding community.
I like MMM's take - first get FI, then get rich! Have the 500K, then be an entrepreneur doing whatever you want. You have to entertain yourself somehow after FI. FI people tend to be smart professionals too. You'll likely make 10-20K/year eventually, which means you won't have to withdraw from the portfolio. Or your businness could make much more over time, like his did.
It's often the people who don't need the 9-6 that have the time or capital to execute interesting ideas or businesses.
Through trial-and-error essentially I've determined a spending level I'm very comfortable with. I have several years worth of accurate data to back it up. It is not the lowest level possible for me. Looking towards ER I've adjusted it based on how I anticipate things will change and tossed in a little bit of a cushion. That adjusted figure is what I sized my nest egg for, rather than adjusting expenses to fit the stash. I like that approach because:
1. I have spent the last ~5 years (by ER it will be about 7 years) auditioning my ER lifestyle as it pertains to finances, so I have a degree of confidence it is suitable for me.
2. I have room to adjust lifestyle expenses downward a little to help weather a rough patch should I encounter one.
3. I have sized my stash conservatively and anticipate an average withdrawal rate between 1% and 2%. As a result I anticipate a high probability of being able to safely raise my lifestyle spending in the future if my planned spending begins to feel constraining. Alternately, the conservative sizing will allow me to come to the aid of family if events warrant such action.
I don't pay a lot of attention to MMM, but in the spirit of what THF says above, I've set things up so that I have reasonable expectation of being on a trajectory of increasing wealth throughout retirement. That is primarily driven by my having legacy goals, but has the secondary benefit of giving me a lot of flexibility/freedom.
$500K vs $4M? For me, $500K is too low of a figure to allow me to ER and sleep well at night. I'll probably never reach $4M (in 2017 dollars) but if I did I imagine I'd loosen up a bit, or maybe take $2M and set up trusts for my daughters and live off the rest. I don't anticipate scaling my spending up, but who knows.
The wife and I could sustain ourselves on 3% of what we own currently, but like Dave I'm not really into the idea of having no buffer.
So we will plan for a comfortable life at 2.5% WR approximately*, in order to have multiple buffers.
Europeans who bank on the 4% rule (which is USA based) should probably look into taxation in their own country, as it could have a significant impact on expected WR.
Anywhere substantially above what we need we would probably start giving more proportionally, and maybe add the only luxury that I can think of that increases my quality of life: business class flying on intercontinental flights with significant time zone difference.
So that would equate to an additional $4k tops per year in expenses.
As for the rest, there is absolutely nothing that we need and want that we don't buy. We just have little needs and wants.
So a bigger stash would not entertain any further change.
If we somehow won 100M in the lottery (even more unlikely than usual, since we don't buy lottery tickets) I dont think we would change anything.
DW and I have embraced ERE-lite easily mostly because we naturally agree with the underlying principles (for us, on the consumption side, they could be summarized with "enough is plenty enough"), not only out of some self imposed discipline, so we are extremely lucky in the sense that we feel zero deprivation.
I would say we are more of the MMM type: slightly above average income + below average spending.
*that will never be a set number: if the stock market tanked 70% tomorrow, we would be fine with 4%, while if the market went 1990s Japan on us (CAPE 100) we would not be comfortable with 1.5%.
I've started to hit the transition point, where there's not a financial reason to spend carefully. I have tried to find places to spend more with good reason.
My experience is the patterns required to reach this point, make spending more very uncomfortable. I feel taken advantage of handing over 2X or 10X, when I know X would get me something good enough. I was never compelled by status, but sometimes exceptional quality would drive me. Now, when I can have pretty much anything, I care even less about the best things. I just buy the cheap one, if it isn't good enough, I pass it on and get a better one.
There are also only so many hours in a day to spend. If you want a good X, you still need to learn what the important features are, then find one. That has a time cost, which constrains spending anyway.
The area I could potentially see a run away portfolio being directed, is charity work that makes me feel good. As in use money to directly help someone or some group with need that I am personally interacting with. Or prop up efforts I believe in - a well done podcast, a local yoga studio, invest in a business that is what I want to see in the field, support some kick starters that need to exist, etc. I do a very tiny bit of this now, but simply don't have the time while still working.
The other side of getting to that run away portfolio position, is you might get attached to the work you are doing. I have a little of that right now. I've invested so much energy and time into my profession, that I don't want to just throw it away. It is fun to be valued and respected for the skill you worked hard to develop. In my case, it's also the best access I have, to undertake significant efforts with intellectual peers, especially in my age and social demographic. Changing to more spendy patterns, while keeping old patterns for the majority of my time, feels weird.
frugal, I'm not certain I completely understand what you are asking, but if I do the answer is that I'll likely do both at different times. Right now I'm still accumulating for a while, so I haven't thought the mechanics through in complete detail yet.
I have investments in a taxable account and the distributions (dividends, interest, and capital gains distributions) from them will be one of the first places I go for living expense money. I collect all of those in a money market and reinvest them now, but in the future I would transfer some from the money market to my bank account. I also have a fair amount of money in a 401(k) account. For it, taking distributions once a year seems customary and the most convenient way to do it. But that's likely to be a long way down the road for me.
brute isn't sure, but he thinks that his spending would probably fluctuate with net worth to a degree, while the qualitative change in life quality would not be huge.
the things brute cares about are basically: good food, good coffee, friends, a few creative things that involve typing fast (through which he currently earns his salary), going fast, and some type of personal improvement/skill learning, often times physical (working out), intellectual (learning a language), or even computer games.
most of these can be had very cheap, and brute has comfortable lived extremely cheaply while being quite content. brute isn't sure if he could pull of the 1 jacob level of spending, but he's flexible enough geographically that he's spent <$200/mo in rent comfortably. he's also socially flexible (read: anti-social) enough to live in a place where nobody looks like brute and brute doesn't speak the language well or at all.
as an example, this is pretty much the cheapest brute has ever lived:
- $150/mo rent for a 2BR apartment with great kitchen
- maybe another $150/mo for groceries, most of which were outrageous and luxurious (loads of dark chocolate, coconut oil, steak)
- random small amounts for bus fare, internet, phone
- friends and creative endeavors were free
- workouts consisted of push-ups, air squats, and some jump rope - pretty much free
- learning the local language was a $10 smartphone app + annoying the shopkeepers
- no going fast in this one
he's also lived on the other side of the earth for slightly higher rent, higher social costs (going out for food, travel), and about another $50-100/mo for renting a scooter: going fast. part of that time he spent another $200/mo for 6x/wk martial arts classes, and at time, $200/mo for language classes (this language was a bit harder).
currently, he's paying absurd rent, goes fast on a vehicle about 10x the price of the rental, eats lots of expensive steak, and indulges in expensive workout gear like barbells and iron. increased appetite goes along with it. going out for dinner with friends costs closer to $100 than to $0, though brute doesn't do that often. going for coffee is typically >$4, he does that a bit more often. the creative outlet is the big one in this, as it is brute's job. 75% or so of the job is creative and fun, with 25% busywork/not-so-fun stuff that comes with it.
but the quality of life is pretty much the same in all of these scenarios: reasonable accommodation, good to great food, good to great coffee, working out, learning languages or other skills, hanging out with friends, some degree of creative outlet.
if brute had $5M in the bank, he might spend $50k of it on a VERY FAST vehicle. but he'd probably only be a tiny bit more happy than on the $100/mo scooter. he might eat USDA Prime steak every meal instead of Choice most weekends. but he's fine even with ground pork and stew. working out with expensive weights is great, but doing push-ups and pull-ups is not significantly worse.
brute has been thinking a lot about his medium to long-term plan, and isn't sure he has one. the most difficult things for brute are actually friends and creative outlets, because those are tied to geographical locations to a degree. sure, there's email and remote work, but they don't offer the same bandwidth and quality that face to face does, most of the time. so brute might continue paying outrageous rent in the future, just to be able to hang around his friends and work at an interesting job. or he might get tired of the work, might lose his circle of friends, and move somewhere much cheaper. hard to tell.
We're exiting the typical 9-5 around the $500k mark with the intention to cover expenses with 5-10 hours of work a week and that's all with the primary goal being, reduce working hours NOW, increase do whatever we want hours NOW. Therefore our resource usage won't change as we accumulate in the short term...However, let's make a happy hypothetical scenario where we made $1.5M more than we expected to in the next 5 years (fuck yeah), yes, I would anticipate we'd be looser with our wallets in relation to social functions and adventuring. But I more anticipate it would simply cut down our for-profit hours to even less (or none) as our safety margins increased and our daily expenses would stay relatively the same.
Rearing/living cost of the nth child will be less than n-1 th child
due to economies of scale,
provided n not equal to 1.
Where living costs are food, clothing and shelter and not education and transport.
The rent gets divided by one more person occupying the same space, reducing the per head cost.
Clothes can be reworn by the younger siblings once the elder grows out of them. Gender of the child does not matter for reusing clothes until they reach puberty.
Marginal cost for cooking the same food in greater quantity for 1 more person is low.
brute would like to learn how the cost of the -2nd child relates to the cost of the -3rd child.
I'm sure you are jesting, but just to put it out there and spell it out, it's obvious n belongs to the set of natural numbers. So also no fractional children.
I'm in the MMM entrepreneur camp with @TopHatFox but am aiming for a higher number before stepping over fully to entrepreneurial work. This past month, I incorporated my first business with a partner. So far, that is going well but has a long way to go until it can replace my day job.
So my plan is:
* save up a big lump sum to be financially independent
* keep on working but now solely on businesses I have a stake in and/or maybe some consulting and spend more time with my family
* let the big lump sum compound
So I would spend based on what I and/or my spouse can bring in.
Last edited by SavingWithBabies on Fri Oct 06, 2017 11:22 pm, edited 1 time in total.
b) After ERE you should keep your savings in a conservative LAZY PORTFOLIO
c) After ER, it is better to find a part time and happy activity that generates some money >>> difficult to find in my opinion or in my small country at least
d) After ER keep every hour of your days with something to do, "calendarize".
a) This is a total WAG and changes depending on which community you're talking to. The Dave Ramsey crew things 7% is ok, the Trinity study devotees and mustache men say 4% is safe as houses and over here at ERE-land, if 2-3% seems widely accepted. I keep hearing people say things like 'well under this CAPE' or 'in the current climate xx% is safe, but in other scenarios only yy% will do' but it's not as if things like acceptable P/E is ever truly known or one could know at this instant if the market is verifiably under/over-valued. IMO, >4% is playing with fire and <2% is overly cautious. Beyond that, it's risk tolerance and how comfortable you are with adjusting your spend in boom/bust cycles, i.e. how resilient you are to passive income fluctuations.
b) Why? If we're retiring super-early, we need it to stretch out over a much longer time scale so it would seem that investing in something too lazy, like a collection of bonds leaves a lot on the table. Jim Collins, just says to put it all in VTSAX and let it ride.
c) In my experience, nearly anything done to make money ends up sucking the fun right out of it, even if it's not the primary objective. If you can some up with something that earns you money and you truly enjoy every aspect of it, kudos to you. I had an ex who really wanted to run a eco-tourism company. Eventually we got to the point that what she really wanted to do was be an eco-tourist waaaay more than she wanted to run the business and manage the cleaners and front of house operations, etc. I like cars and used to think it'd be fun to own a speed shop. Much better to hang out at speed shops and putz around shooting the shit when I have the time/inclination without the headache.
d) After ER, I'm going to be very very glad to be rid of Outlook and calendars full of meetings and appointments and having to book time with myself to get shit done. I don't think I'll be diarizing much, but do agree that lapsing into lethargy is a risk.
In response to the original question.
500K - Not enough for this dude's lifestyle
1M - getting closer.... Not yet if this is net worth, but nearly there if it's invested assets.
2M - abundance for ages, have a rock solid will and estate plan
4M - probably the result of living on <3% SWR for longer than needed
