Early retiree: 3% SWR or 4% SWR for planning purposes?

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jjunk
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Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by jjunk »

I'm 42, DW is 41. We feel like we're "close" when it comes to retiring from our stressful tech jobs but the closer we get, the scarier it is. We currently spend 3500/mo in a HCOL area (on a 4k/mo budget) and we're likely to move to a LCOL area in the west or mid-west when we retire. Our current budget includes ~500/mo of "fun" stuff for ourselves which also would serve as a buffer for downturns. Rent today is 55% of my monthly expenses.

Our retirement budget in today's dollars is planned for 4500/mo or 54k/yr. This includes all of the money we'd anticipate needing in retirement for the lifestyle we'd like to live. We dont have kids, dont have plans for kids and dont have family to leave a legacy to. We'll leave any additional money to charity.

Initially, I had planned on saving cash for a purchase of a home but we've since decided that home ownership early in retirement isnt something we're interested in. We'll rent and move around the country as our expenses/interests dictate. My budget accounts for us being renters and not home owners.

Based on a 4% SWR, I would need 1.35M
Based on a 3% SWR, I would need 1.62M

Neither of us plan (or want) to live past 80 so I'm essentially looking at a 35yr time-frame. I like the 4% SWR scenario because thats close to my asset values today and if I were to work another year, I could likely sock away 100k as a cash buffer for downturns. The 3% SWR scenario is appealing because I feel like its more secure overall but given that I my job stress is likely pulling years from my life and getting to this number is another 4yrs of work, I'm not sure if it's worth the toll it will take.

We will likely work PT in retirement somewhere we enjoy to make a small amount of income, up to the amount where we can optimize our ACA subsidies. Otherwise, this is all the money we'd have (I dont count SS in my planning). Are there any other early retirees that have done this type of planning? If so, what SWR are you using to guesstimate your expenses?
AlohaJoe
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by AlohaJoe »

jjunk wrote:Neither of us plan (or want) to live past 80 so I'm essentially looking at a 35yr time-frame.
I don't know how any of us gets much say in the matter. As a couple, you have a 79% chance that at least one of you will be alive past 80. That seems like a lot of risk to take on-board, even if you have family history and poor personal health.

There seems to be a consensus that a long retirement (40 or 50 years) knocks about 0.5% off whatever safe withdrawal rate you think applies to a 30-year retirement. If you think 4% SWR holds then 3.5% is likely fine. If you think current conditions are uniquely unfavorable then maybe that means something less than 3.5%.

But if you hate your jobs, you could probably quit today and live off of 3% of your current nest egg. Lots of people learn to live within budgets that are smaller than they might prefer. They just make compromises in what they get out of life.
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Just sayin...
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by Just sayin... »

I am 55 with retirement planned in the next 2 to 9 months. I have setteled on a 3% SWR for the first three years, then re-evaluating whether or not to bump the SWR to 3.5% - depending on portfolio performance. This will help to partially side-step sequence of returns risk during the first few years. If things are neutral to positive in ten years, I plan on bumping my SWR up to 4% and spending like a drunken sailor! That said, I'm forecasting a 35-year retirement..,but I am a lot older than you.
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siamond
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by siamond »

For this kind of scenario, an SWR logic makes little sense. Yeah, some people would extract one single point from history where a lemming would fall off a cliff by stubbornly sticking to a fixed (inflation-adjusted) withdrawal for 40+ years, and those people would say "you need an SWR less than 3.4567%", but... this isn't real life.

You guys are young, obviously bright and adaptive, you will retain human capital for a while, and thinking in such fixed terms is just not for you. You'd better consider a variable withdrawal methodology that essentially allows you to hover around an average budget while preserving your capital till your 80s at least (while tolerating significant ups and downs along the way). This could be a variation of Guyton-Klinger, a variation of VPW (please use an expected longevity of at least 90), or some other similar scheme, but the key point is to not be shy to spend your money while being adaptive (when the stock market is down, live more frugally; when the stock market is up, enjoy life more liberally). And do factor in the fact that you'll make some side-money at one point or another, again, you're bright folks, you'll find some fun (yes!) small jobs here and there, if only to keep you busy.

The other advice is to NOT listen to people who equate retirement with 'load up with bonds'. Reasonings that apply to a 70-years-old retiree are simply completely out of touch with what applies to early retirees. You absolutely need to keep a strong motor of growth in your asset allocation for your capital to last for 4 or 5 decades (if not more, don't neglect the fact that medicine will have made tremendous progress by the time you turn 80). I am not saying to be 100% in stocks, your exact AA is your own decision based on personal philosophy and circumstances, but do keep a high exposure to equities (preferably by being balanced between domestic and international). This AA choice is the single biggest determinant of your average budget on the long term, as easily demonstrated by backtesting with tools like cFIREsim or Firecalc.

Bottomline: you'll do fine with the 4% SWR math, but do plan to be adaptive, keep enough stocks in your AA, include some cushion in your plan, and don't live under a shell...

PS. I'm 54, I retired 2 years ago after decades spent in high-stress high-tech job environment, and if I were to follow a 3% 'lemming' logic, I would still be slaving away. Instead, I'm enjoying my freedom, planning for a 5% average withdrawal, without any 2nd thought about it.
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by sport »

jjunk wrote:Neither of us plan (or want) to live past 80...
Most people who reach the age of 80 do not feel this way.
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by newbogleheader1 »

4% seems too risky to me.

For comparison: sounds like we might be similar in terms of planned early retirement age and nest egg. I'm thinking that I could be financially independent if the market is kind and I hit $1.5M at 45. However, my expenses are less than yours, I'm thinking to work part time or just part of the year between 45 and 50 and I'm thinking of starting with SWR of 2.5% @50 before ramping up a bit depending how things go. I want to be conservative because I think going back into the workforce if things don't work out could be risky.

Of course, who knows what happens over the next 10 years and who knows what will happen over the course of your retirement. Bottom line would be to err on the safe side and be flexible. Others will chime in on variable withdraw rates.
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by vitaflo »

I'm personally using 3.5% as a target to get my "number" for early retirement (regardless of how long). Note that's not a hard and fast rule for what I get to spend in retirement, it's just to help me know when I have "enough". The biggest key is to get a handle on your actual expenses (include taxes).

Once I hit my number I'll decide then what makes sense. Until then I just keep plugging along. As long as you're on track no need to worry about it until it actually becomes a reality.
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by cherijoh »

AlohaJoe wrote:
jjunk wrote:Neither of us plan (or want) to live past 80 so I'm essentially looking at a 35yr time-frame.
I don't know how any of us gets much say in the matter. As a couple, you have a 79% chance that at least one of you will be alive past 80. That seems like a lot of risk to take on-board, even if you have family history and poor personal health.
That was exactly my reaction!

The spanner in the works is health care expenses. We cannot speculate about future legislation, but I certainly wouldn't be building in the assumption that the ACA model will be in force for 20+ years. In addition, what happens if one of you needs long-term care? That could leave the other one in pretty bad financial shape. In general, I believe your home equity isn't included in the calculation of qualifying for Medicaid to pay for nursing home care. I'm not sure what would happen as renters.

Instead of retiring, I think you should consider finding lower stress FT positions NOW in a lower cost of living area and then reevaluating early retirement in a few years.
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goingup
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by goingup »

[quote="jjunk"
Neither of us plan (or want) to live past 80 so I'm essentially looking at a 35yr time-frame. [/quote]
I used to think that way. It's just not realistic though, so it's better to plan for a different scenario--at least 90.
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by soboggled »

With the accelerating advances in medical science, one or both of you has a good chance of living another 50 years, whether you like it or not (and you probably would). There is no guarantee that ACA or anything like it will be around even a year from now. So you are likely half way through life and 25 years from medicare. The spectre of the need for long term care which might well bankrupt you is nothing to sneeze at. I personally would be very nervous about retiring so young with just $1.5M, even if I had much lower living standards. Most people need some money to fill up their time. The consolation: You are both young enough I suppose you could make mid-course corrections if things didn't go according to plan (and I wouldn't be surprised if they didn't).
Edit: I apologize if I was too cavalier about the state of your health.
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jjunk
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by jjunk »

Thanks for the replies everyone, the discussion is helpful. I wont go into the 80yr old thing but suffice it to say neither of us will be around :D

As for variable withdrawals, thats definitely how I'm planning on living. Right now, given our target areas for retirement, our bills are likely to decrease anywhere from 400-800/mo. So, we'll already be living on close to 3k/mo when we start in retirement and thats including the 500/mo buffer we have to fun stuff. We can always pull that in and get by with just internet access if we needed to.

The larger concern brought up here which I'd given thought to, but maybe not enough, was the ACA. I'm working on the assumption right now that if Clinton wins the WH, then the ACA likely isnt going anywhere. Maybe I'm being naive but it would seem to be a bad idea politically to remove millions of people after 10+yrs in the program. I guess I need to plan for that though.

I was more trying to ballpark my number than anything else. Looks like 1.5M would put me close to the 3.5% SWR from a planning perspective. Thats also likely doable in the next year and a half if I'm ok with less cash on hand for a buffer.
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by halfnine »

At 25x expenses, I'd probably walk away from the full time gigs. Look at withdrawing 4% for the time being and offset it by whatever part time work. Although, if I was to hit the second bend point in Social Security (takes at least 20 years to get there at max contribution) I wouldn't much bother working part time. At that point you'd be looking at around 24K/yr in Social Security (adjusted by inflation for the time you retire). That coupled with whatever is left of your investments will likely see you through.
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siamond
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by siamond »

jjunk wrote:I was more trying to ballpark my number than anything else. Looks like 1.5M would put me close to the 3.5% SWR from a planning perspective. Thats also likely doable in the next year and a half if I'm ok with less cash on hand for a buffer.
$1.5M is VERY comfortable (and safe) for your expense level if you follow the principles I explained. I do agree that you need to be careful with the ACA, Mrs Clinton being elected or not, lots of things can change in the coming decades in this respect, but you have plenty of cushion with a $1.5M plan already.

The thing that bugs me a tad though is the home aspect. I totally understand the desire for the flexibility of renting, but you have to be aware of the fact that renting costs can increase faster than inflation for long periods of time (same for medical costs, by the way). And at some point, you'll probably want to stabilize and buy something. Getting a loan by then, without stable wages, might be a tad difficult, and buying in cash would be out of question, this would impact your investment capital way too much. Even if you do get a loan, this might end up being more expensive than your usual rental costs. Finally, having a home paid in full is an indirect way to self-insure for LTC (you can reverse-mortgage it, or sell), and LTC is wicked expensive (and LTC insurances are just not worth it, imho).

Still... there are limits to what you can plan for, by the time you're 60, I strongly suspect your picture will be very different from what we can foresee right now... Notably if you start on a 3.5% SWR basis, which is kind of ridiculously conservative for any reasonably equity-exposed AA.
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by jjunk »

Thanks siamond, all good points. I guess I should have mentioned our allocation, we're 70/30 (50US/20Intl) for our AA and we plan to keep this exposure until we die. We may change it slightly when we hit our 60s and see what SS looks like.

As for the home ownership piece, I actually agree with you on a fundamental basis. It's something we've looked at quite a bit with our original plan to keep the 1.3M we've saved to this point as our retirement funds and then socking away another 200-300k to pay cash for a home in a targeted area. The problem is, DW and I disagree on that area :oops:

I'm wanting to move back to the Midwest, somewhere like Ohio, where the healthcare is excellent and the housing isnt crazy. The taxes there are a little higher though and the ACA is more expensive there than her targeted areas in the West like Idaho. Idaho is much cheaper across the board but also a little more sparse. Goods and bads to each. I feel like we could move to Idaho today, buy a small ranch and likely live on less than 2k/mo without much of an issue. Ohio is a little harder to do. So, we wanted the flexibility to move around until we chose to settle down.

The issue becomes if I stick with 1.3M in investments and say 250K in cash for a home purchase later, I'm losing money to inflation and, if we dont buy, I'm losing money on that cash which isnt invested. I'm not sure which way makes the most sense so I've started holding cash just to give us options while we work through it all.
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siamond
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by siamond »

jjunk wrote:Thanks siamond, all good points. I guess I should have mentioned our allocation, we're 70/30 (50US/20Intl) for our AA and we plan to keep this exposure until we die. We may change it slightly when we hit our 60s and see what SS looks like.

[...] So, we wanted the flexibility to move around until we chose to settle down.

The issue becomes if I stick with 1.3M in investments and say 250K in cash for a home purchase later, I'm losing money to inflation and, if we dont buy, I'm losing money on that cash which isnt invested. I'm not sure which way makes the most sense so I've started holding cash just to give us options while we work through it all.
By all means, you should travel around while you're young and energetic enough, this is NOT a decision to be rushed. Take your time to experiment, forget the end goal for a little while, enjoy the journey of living in different environments, and I'm sure sure you guys will find yourself in agreement about the ideal location at some point. You are going to be free as birds in 12 or 18 months, enjoy the ride!

About the home, ok, got it. Then I would suggest to not over-engineer the plan. Invest it all according to your AA. A good chunk of your 30% bonds could be viewed as a form of emergency/short-term investment funds, more than enough to allow to buy the home when times come, whenever it comes. Keep it simple.
Last edited by siamond on Sun Jul 17, 2016 1:37 pm, edited 2 times in total.
delamer
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by delamer »

At the risk of being a killjoy, have you thought about what would happen if one of you died prematurely? I won't bore you with the sad stories I know personally, but people are killed in car accidents, die of undiagnosed medical conditions, etc. every day of every week. This is an argument for retiring early on the one hand, but also for one of thinking about whether a ranch in Idaho is a good idea for a surviving spouse.
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by ryman554 »

jjunk wrote:Thanks siamond, all good points. I guess I should have mentioned our allocation, we're 70/30 (50US/20Intl) for our AA and we plan to keep this exposure until we die. We may change it slightly when we hit our 60s and see what SS looks like.

As for the home ownership piece, I actually agree with you on a fundamental basis. It's something we've looked at quite a bit with our original plan to keep the 1.3M we've saved to this point as our retirement funds and then socking away another 200-300k to pay cash for a home in a targeted area. The problem is, DW and I disagree on that area :oops:

I'm wanting to move back to the Midwest, somewhere like Ohio, where the healthcare is excellent and the housing isnt crazy. The taxes there are a little higher though and the ACA is more expensive there than her targeted areas in the West like Idaho. Idaho is much cheaper across the board but also a little more sparse. Goods and bads to each. I feel like we could move to Idaho today, buy a small ranch and likely live on less than 2k/mo without much of an issue. Ohio is a little harder to do. So, we wanted the flexibility to move around until we chose to settle down.

The issue becomes if I stick with 1.3M in investments and say 250K in cash for a home purchase later, I'm losing money to inflation and, if we dont buy, I'm losing money on that cash which isnt invested. I'm not sure which way makes the most sense so I've started holding cash just to give us options while we work through it all.
Jumping in late:

Are you accounting for taxes with this money? I know that $54k/year probably has virtually zero taxes for a married couple, so likely not an issue.

Does you budget take into account non-planned expenses? LIke a new car which you *will* need in the midwest from time to time. Or a trip?

I've done similar calculations, and like to over-estimate things, but your idea of a 1.6M nest egg supporting a 60k/year retirement in perpetuity looks reasonable at the 70/30 allocation. It just doesn't give you a whole lot of wiggle room for future unexpected expenses. And it looks a *lot* less reasonable if you need to rent/buy a house. I would have that in place before you call it quits / have the part time gig lined up to provide those funds.

Personally, if you are really burnt out and just need to quit, then you are likely at your number. I'll be there in another (long) 4-5 years or so if I downsize significantly.

My walk-away immediately rate is some 2M higher than that -- 3.5M or so, which would be a "safer" WR with a *huge* buffer for extra travel and expenses. The intent of this statement is that you may want to have a buffer when you retire and not have to watch you finances like a hawk monthly, which you might need to do at your minimum funding level.

Good luck!
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siamond
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by siamond »

OP, I gave a quick run with VPW, assuming a retirement at 44, using your AA, planning till you're 99 (to be cautious, and -more importantly- as an indirect way to protect your capital until you're in the LTC years), and $1.5M would provide $66k of (gross) income for the coming year, while $1.3M would provide $57k. US stocks are currently high though, so do NOT view this as a guaranteed income for the rest of your life... This is all based on being adaptive.

About the point made by the last poster, yes, having a tax strategy is really important. I'd venture to guess that your savings are a mix of (tax-deferred) 401k and (tax-exposed) securities. I'd venture to guess that you have a good chunk of the latter. Then (if I am correct with my assumptions!), it might be really cool in the short-term, you will probably not pay any federal tax whatsoever, staying in the 15% bracket and living on capital gains. But you do need to plan for the longer-term, when you'll withdraw from the tax-sheltered account(s), including the SSA and RMD years. Yes, I know, this might sound far away, but... take my cue, do some math. You are probably a very good candidate for a slow conversion process from your tax-sheltered accounts to a Roth-IRA over the coming couple of decades. Which will save you a bundle down the road. If you're not familiar with this topic, do some research on the Web, plenty of literature. I'd suggest you start by this page, then follow the links inside.
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by sport »

I know you are not including SS in your calculations. However, you should be aware that SS calculates your benefit based on your average adjusted SS earnings in your 35 highest years. If you have less than 35 years of paying into SS, the missing years count as -0- when the average is calculated.
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by jjunk »

delamer wrote:At the risk of being a killjoy, have you thought about what would happen if one of you died prematurely? I won't bore you with the sad stories I know personally, but people are killed in car accidents, die of undiagnosed medical conditions, etc. every day of every week. This is an argument for retiring early on the one hand, but also for one of thinking about whether a ranch in Idaho is a good idea for a surviving spouse.
Not a killjoy at all, this is something we've talked about a lot actually. We're prepared for a premature death and in a slightly dark way, somewhat expecting that will be me given the stress I've been under the last 3-4 yrs at work. As for my wife in Idaho, I dont know what she's thinking there but thats her first choice. Maybe she's trading up for a cowboy after i"m gone :happy
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by jjunk »

siamond wrote:OP, I gave a quick run with VPW, assuming a retirement at 44, using your AA, planning till you're 99 (to be cautious, and -more importantly- as an indirect way to protect your capital until you're in the LTC years), and $1.5M would provide $66k of (gross) income for the coming year, while $1.3M would provide $57k. US stocks are currently high though, so do NOT view this as a guaranteed income for the rest of your life... This is all based on being adaptive.
Thanks for this (and your other advice as well). The market being where it is happens to be one of the reasons I'm not looking to retire. I feel like we're already close but we're close with an " * " next to it because of the current performance. If I could, I'd prefer to work another 3-5 yrs and sock away even more money, and as a result, security. I just dont know that I can, I'll have to see.

As for my AA and account placement, you'd be correct. Right now 70% is taxable and 30% is tax deferred accounts. I've read GCC and some other blogs on conversion and it is definitely something I plan to do on "good" years where we wont need to pull out much from our accounts to make ends meet. It also has the added advantage of acting as MAGI for the ACA. Since we're planning to live below 200% of the FPL, I wont be able to convert a ton (10-15k/yr) but its better than nothing. Over 17 yrs I'll have converted a big portion of it and it wont be taxable to me, which is good.

I'd feel a lot better about our overall situation if I saw the markets correct a decent amount and then flatline for a little bit, it sounds so weird to say that but it's true.
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by jjunk »

sport wrote:I know you are not including SS in your calculations. However, you should be aware that SS calculates your benefit based on your average adjusted SS earnings in your 35 highest years. If you have less than 35 years of paying into SS, the missing years count as -0- when the average is calculated.
Yup, I'm aware of this. Luckily I'm bumping up against the second bend point right now, having been working for 27yrs already. Even though I didnt make a lot when I was younger, I've maxed out SS for a while now. The 0's would still hurt me and usually when I do add SS, I figure in ~15k/yr starting at 67. I feel thats a reasonable expectation given potential changes to the program and accounting for the lack of income. Appreciate you bringing that up.
delamer
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by delamer »

jjunk wrote:
delamer wrote:At the risk of being a killjoy, have you thought about what would happen if one of you died prematurely? I won't bore you with the sad stories I know personally, but people are killed in car accidents, die of undiagnosed medical conditions, etc. every day of every week. This is an argument for retiring early on the one hand, but also for one of thinking about whether a ranch in Idaho is a good idea for a surviving spouse.
Not a killjoy at all, this is something we've talked about a lot actually. We're prepared for a premature death and in a slightly dark way, somewhat expecting that will be me given the stress I've been under the last 3-4 yrs at work. As for my wife in Idaho, I dont know what she's thinking there but thats her first choice. Maybe she's trading up for a cowboy after i"m gone :happy
Hah! Personally, I'd go with Australia because it seems to turn out a disproportionally high number of handsome men, but to each her own.
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by jjunk »

ryman554 wrote:
jjunk wrote:Thanks siamond, all good points. I guess I should have mentioned our allocation, we're 70/30 (50US/20Intl) for our AA and we plan to keep this exposure until we die. We may change it slightly when we hit our 60s and see what SS looks like.

As for the home ownership piece, I actually agree with you on a fundamental basis. It's something we've looked at quite a bit with our original plan to keep the 1.3M we've saved to this point as our retirement funds and then socking away another 200-300k to pay cash for a home in a targeted area. The problem is, DW and I disagree on that area :oops:

I'm wanting to move back to the Midwest, somewhere like Ohio, where the healthcare is excellent and the housing isnt crazy. The taxes there are a little higher though and the ACA is more expensive there than her targeted areas in the West like Idaho. Idaho is much cheaper across the board but also a little more sparse. Goods and bads to each. I feel like we could move to Idaho today, buy a small ranch and likely live on less than 2k/mo without much of an issue. Ohio is a little harder to do. So, we wanted the flexibility to move around until we chose to settle down.

The issue becomes if I stick with 1.3M in investments and say 250K in cash for a home purchase later, I'm losing money to inflation and, if we dont buy, I'm losing money on that cash which isnt invested. I'm not sure which way makes the most sense so I've started holding cash just to give us options while we work through it all.
Jumping in late:

Are you accounting for taxes with this money? I know that $54k/year probably has virtually zero taxes for a married couple, so likely not an issue.

Does you budget take into account non-planned expenses? LIke a new car which you *will* need in the midwest from time to time. Or a trip?

I've done similar calculations, and like to over-estimate things, but your idea of a 1.6M nest egg supporting a 60k/year retirement in perpetuity looks reasonable at the 70/30 allocation. It just doesn't give you a whole lot of wiggle room for future unexpected expenses. And it looks a *lot* less reasonable if you need to rent/buy a house. I would have that in place before you call it quits / have the part time gig lined up to provide those funds.
All good points here, thanks for bringing them up. Yes, our numbers reflect paying for things like taxes (which I expect to be minimal) and new car purchases over time. We're going to have a new, used car to start off retirement when I sell off my current car at the time we decide to do all of this. So, we'll hopefully be good on that front for a little while but it's still something on the radar. You're right in that we're cutting it close. Thats partially intentional since we dont want to leave a lot of money around when we're gone. Neither I, nor DW, have living relatives to leave it to so we might as well spend it since I earned it. :sharebeer
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by siamond »

jjunk wrote:I'd feel a lot better about our overall situation if I saw the markets correct a decent amount and then flatline for a little bit, it sounds so weird to say that but it's true.
I hear you, but SWR assumptions are based on historical scenarios which were much worse than where we seem to be right now (plus no flexibility whatsoever in one's annual spend, which is silly). You mentioned severe stress quite a few times now. I think I know what you mean, having worked in high-tech for a long time. Don't kill yourself for the sake of being overly cautious. Again, it is clear to me that you'll supplement your retirement income with a few side-gigs every now and then. And if the coming few years are close to Armageddon, you'll still have the skills to come back to the workforce at some point, way different than a 70yrs old retiree.

Overall, the more you post, the clearer it is that you really thought hard about it, and prepared your move really well. Just... go for it. Soon.
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by jjunk »

So it's clear I'm a little stressed at work? :P

Appreciate all the advice and pointers, lots to think about in the thread and lots of good advice. I'm going to do a check on where we are at the end of the year and then plan things from there. Really appreciate your insight here, thanks!
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by joebh »

jjunk wrote:Neither of us plan (or want) to live past 80 so I'm essentially looking at a 35yr time-frame.
Hmm, that's an interesting plan.
Do you have a plan for how you'll end things at 80?
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by mac808 »

I early retired from the tech field a little younger than you two. I used a 3% SWR. Looking at pre-ww2 and global data, I was just not comfortable with 4% and figured it was better to err on the conservative side. I have since gone back to work part time for non financial reasons (easier to do in tech than other fields, I think) so keep in mind you may get bored and naturally want to work part time or start up a hobby that brings in some minimal income.
jjunk wrote:Neither of us plan (or want) to live past 80 so I'm essentially looking at a 35yr time-frame.
This seems short-sighted given 40 years of medical advances between now and then. I would plan to live to at least 90 regardless of your family histories. Between CRISPR, stem cell therapies and lab-grown organs we are closing in on a significant number of game-changing breakthroughs. I'm helping take care of an elderly family member in their 90s right now and have learned a couple things: first, you can have a really high quality of life >80 and even >90 if you have peers and entertainment, and second, you REALLY do not want to run out of money at the end of your life, when a few thousand/month for the nicer assisted living facility/concierge MD/other activities can make a huge difference in QOL.
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by jjunk »

joebh wrote:
jjunk wrote:Neither of us plan (or want) to live past 80 so I'm essentially looking at a 35yr time-frame.
Hmm, that's an interesting plan.
Do you have a plan for how you'll end things at 80?
Probably too dark a topic for an investment forum. Given my family history, its not likely I"m around past 70 as it is.
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by TravelGeek »

sport wrote:
jjunk wrote:Neither of us plan (or want) to live past 80...
Most people who reach the age of 80 do not feel this way.
My parents are visiting us this weekend. My dad will turn 80 later this year and we are planning to celebrate his birthday on a warm sunny island. My mom isn't far behind. Right now they are both doing crossword puzzles while drinking Mai Tais in my backyard, to "recover" from a day of sightseeing.

I see a significant difference in lifestyle compared to, say, my grandparents, and I plan to extrapolate for my own 70s and 80s from that (major diseases / accidents permitting).
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by curmudgeon »

jjunk wrote:So it's clear I'm a little stressed at work? :P

Appreciate all the advice and pointers, lots to think about in the thread and lots of good advice. I'm going to do a check on where we are at the end of the year and then plan things from there. Really appreciate your insight here, thanks!
I would give real consideration to taking a "gap year", and just stepping away from the zoo for a while. Especially if you don't have mortgage or home ownership tying you down right now. Take a break to decompress and evaluate your priorities. Keep your expenses down as if you had retired. After a year, think about what the "ideal" job would look like for you, and see if you can find it (or if you would want it if you did find it). It's pretty easy to re-enter the tech world after a year; if you let it go 3-4 years that would be a much bigger challenge. I did this myself, and realized that the right job with the right people made life a lot better and the prospect of working a few more years became something positive. Now I'm looking at retiring for real, and the budget has a lot more flexibility.
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by jjunk »

curmudgeon wrote:
jjunk wrote:So it's clear I'm a little stressed at work? :P

Appreciate all the advice and pointers, lots to think about in the thread and lots of good advice. I'm going to do a check on where we are at the end of the year and then plan things from there. Really appreciate your insight here, thanks!
I would give real consideration to taking a "gap year", and just stepping away from the zoo for a while. Especially if you don't have mortgage or home ownership tying you down right now. Take a break to decompress and evaluate your priorities. Keep your expenses down as if you had retired. After a year, think about what the "ideal" job would look like for you, and see if you can find it (or if you would want it if you did find it). It's pretty easy to re-enter the tech world after a year; if you let it go 3-4 years that would be a much bigger challenge. I did this myself, and realized that the right job with the right people made life a lot better and the prospect of working a few more years became something positive. Now I'm looking at retiring for real, and the budget has a lot more flexibility.
Thanks for the suggestion. I'd thought about doing this but it's unlikely that I'd be able to easily re-enter the workforce after a year off given my skillset. I'd likely be able to get a job but not at my current pay or within my area of expertise (which is very narrow). I could use the year to expand that skillset though and open up other options. It's worth considering for sure.
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Plan for a long and happy life

Post by Taylor Larimore »

Neither of us plan (or want) to live past 80 so I'm essentially looking at a 35yr time-frame.
jjunk:

I had to chuckle when I read the above.

First of all, you don't know your time-frame for retirement investing unless you know when you and your spouse will die--and that's impossible.

Second, there are numerous statistics showing people (who are financially prepared), generally become happier as they grow older. I'm 93, and have seldom been happier.

Plan for a long and happy life. You will be there before you know it.

Best wishes.
Taylor
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by jcar »

I'm prepared to retire any week now and feel I'm well prepared. As an example I will use my older sister who retired 12 years ago with 1.0m. No Pension just SS and only 1400 month. She pulls 60k per year from Investments every year no problem. Her current balance in a 50-50 portfolio is now 1.4mm. I think we worry to much about having enough. I believe it is partially caused by financial outfits encouraging us to be overly concerned. I got a brochure last week from an annuity mill filled with doomsday forecast that could only be prevented by buying their high priced products. Thats the trap to avoid. You would not believe the negative graphs they included. According to them there was no way out. Anyway, I'm sure you will do well no matter how long you live. Enjoy!
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by Watty »

You will have a LOT more free time so your costs could go up a lot in the initial years of retirement as you find things to fill the free time.

It would likely be a lot better to find something to retire too instead just getting away from a high stress job so I would focus on that more than your finances.
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by panhead »

jjunk wrote: Our retirement budget in today's dollars is planned for 4500/mo or 54k/yr. This includes all of the money we'd anticipate needing in retirement for the lifestyle we'd like to live.

Based on a 4% SWR, I would need 1.35M
Based on a 3% SWR, I would need 1.62M

my job stress is likely pulling years from my life and getting to this number is another 4yrs of work, I'm not sure if it's worth the toll it will take.

We will likely work PT in retirement Otherwise, this is all the money we'd have. Are there any other early retirees that have done this type of planning? If so, what SWR are you using to guesstimate your expenses?
Very timely post as I have started looking seriously at these questions again as work has (again) been negatively affecting my health. I usually like my job, but the stress level, especially in the last year, has been huge. I got about 4 years on you and a net worth (includes some real estate) probably proportional to what you would have with that additional 4 years of savings. I'm also single, so I have no concerns about the longevity of a surviving spouse. My original plan was to work until I was 50, get all my ducks in a row the way I want, then pull the plug. Lately, I've been looking at if I might feel safe pulling out sooner. The more I look at this the more I like VPW, though I'm still not sure how I want to apply this as the recommended method for applying VPW is to use an income "floor", ie, SS and an annuity for the bare minimum of expenses. No way I'm buying an annuity at 46. So that means the taxable portion has to last until I'm at least 62, and preferably 70 or whenever I start SS. My current thinking (and there is probably more on this in the VPW thread but I havent' looked recently) using a VPW approach on the entire portfolio value, but with a cap on the taxable portion. Using your numbers, say you have 1.6M, if VPW says you can withdraw 4% per year, and maybe you put a 3% cap on your taxable account, you take 4%(1.6M) or 3%(taxable accounts), whichever is less. As soon as you are eligible for SS, take a look at the market and your account balances and start a strategy on when to take it, and possibly purchase an annuity. Not counting SS IMHO is a mistake, though discounting it 25% or so is perfectly reasonable. For you, that means you have to get to somewhere between 62-70 with enough money left to purchase an annuity that will supplement SS and cover all your necessary expenses. Hopefully you will have a house as well at this point to cover the surviving spouses LTC costs, or you need to figure out another safety net here. Life insurance maybe?

Because you and I don't have anyone to leave money to, I think an annuity (possibly plural) is a great idea in the distant future, and it reduces the uncertainly of planning for these 40-50 year retirement timeframes. In less than 30 years you will both be 70. Plan to use a SWR which gives you enough capital so that you can purchase an annuity to supplement SS which will cover all your critical costs.

This is not a complete plan, just what I have been thinking lately. The main issue is how to tap the egg until SS age. After that, I believe things will be clearer.

Can't wait to hear from others!

-Pan-


edited to add: by "annuity" here I mean a SPIA.
Last edited by panhead on Sun Jul 17, 2016 11:21 pm, edited 2 times in total.
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by panhead »

Watty wrote:You will have a LOT more free time so your costs could go up a lot in the initial years of retirement as you find things to fill the free time.

It would likely be a lot better to find something to retire too instead just getting away from a high stress job so I would focus on that more than your finances.

These points also need to be considered carefully and have been on my mind.

To the first point, I know what my current spending is and I currently have a mortgage. In retirement, I want to have at a minimum of that same amount of spending, but with the house paid off. The difference should cover my health care costs as well as a significant bump in fun money.

To the second point, this is likely more important than the first. I was unemployed for a while (> 1 year) and for me it was like a fish to water. I had no problem finding fun activities to fill my days, but then I have lots of hobbies. Since you are a married couple, you will both want to take this into careful consideration.
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by kermit »

For what it's worth I'm using 2.33% as my early SWR. It's a "perpetual" withdrawal rate that's thrown around quite a bit and used by foundations/pensions/trusts/etc. It pushes my target retirement year out only 2 years compared to 3%.
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by EnjoyIt »

OP,
There are many pessimistic people on this forum who will say 4% is not enough. Some will go as low as 2% is a real SWR. Hogwash. You have already pointed out that you have a $500/month buffer. If crap hits the fan you can always downsize. Plus, you will likely make a little money here and there, and finally at some point you will collect some SS. 4% is a perfectly fine SWR for your age and your plans.

If you are interested in purchasing piece of mind and security, have you considered requesting going part time at work? This will allow you to save a little more, and more importantly let you wealth grow for a few more years while you are less burnt out.

Another consideration is maybe going on unemployment for 6 months giving you a little extra income cushion your first year.

Lastly, have you considered looking for easier work in Ohio or wherever you decide to move. Having a job that will give you living expenses will allow your wealth to grow and again keep you from burning out.

BTW, have you checked out any of the early retirement forums out there? Many of which are geared in cutting expenses down to retire as soon as possible. One of my favorite is www.mrmoneymustache.com I bet if you really wanted to, you can retire today and never look back as long as you are able to have a good handle on expenses.

Good luck. But I am pretty sure you'll be just fine.
A time to EVALUATE your jitters: | https://www.bogleheads.org/forum/viewtopic.php?f=10&t=79939&start=400#p5275418
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by jjunk »

EnjoyIt wrote:OP,
There are many pessimistic people on this forum who will say 4% is not enough. Some will go as low as 2% is a real SWR. Hogwash. You have already pointed out that you have a $500/month buffer. If crap hits the fan you can always downsize. Plus, you will likely make a little money here and there, and finally at some point you will collect some SS. 4% is a perfectly fine SWR for your age and your plans.

If you are interested in purchasing piece of mind and security, have you considered requesting going part time at work? This will allow you to save a little more, and more importantly let you wealth grow for a few more years while you are less burnt out.

Another consideration is maybe going on unemployment for 6 months giving you a little extra income cushion your first year.

Lastly, have you considered looking for easier work in Ohio or wherever you decide to move. Having a job that will give you living expenses will allow your wealth to grow and again keep you from burning out.

BTW, have you checked out any of the early retirement forums out there? Many of which are geared in cutting expenses down to retire as soon as possible. One of my favorite is http://www.mrmoneymustache.com I bet if you really wanted to, you can retire today and never look back as long as you are able to have a good handle on expenses.

Good luck. But I am pretty sure you'll be just fine.
Thanks for the encouragement :happy

My wife and I are pretty realistic when it comes to what we plan to do in retirement. We're likely to spend a lot of time at zoo's/animal shelters volunteering. I'm likely to spend an inordinate amount of time on fantasy sports (now that I have time for research) and I'm sure I'll finally have time to learn more code related skills just for fun. Our ideal retirement isn't likely to fit the mold of most where travel and entertainment are large portions of the budget. We are natural homebodies who simply like one anothers company. Luckily, that's cheap <G>.

I have considered doing something considerably less stressful and at lower pay, the issue becomes one of finding a job that has decent insurance even if the pay isn't great. I wouldn't mind working at a place like Costco where they treat people pretty well across the board, hell maybe even Starbucks.
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by Taylor Larimore »

In retirement, I want to have at a minimum of that same amount of spending, but with the house paid off.
Panhead:

Think about this:

I am in late retirement and don't want to leave my home equity for my heirs to sell and maybe fight over while they wait. Accordingly, I took out a large low-interest (deductible) mortgage and have started giving the proceeds to my heirs when they need it most.

Everyone is happy!

Best wishes.
Taylor
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by Theoretical »

Taylor Larimore wrote:
In retirement, I want to have at a minimum of that same amount of spending, but with the house paid off.
Panhead:

Think about this:

I am in late retirement and don't want to leave my home equity for my heirs to sell and maybe fight over while they wait. Accordingly, I took out a large low-interest (deductible) mortgage and have started giving the proceeds to my heirs when they need it most.

Everyone is happy!

Best wishes.
Taylor
Taylor, I wish all of my clients were as thoughtful about these issues as you are in this post and other ones on estate issues.
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by panhead »

Taylor Larimore wrote:
In retirement, I want to have at a minimum of that same amount of spending, but with the house paid off.
Panhead:

Think about this:

I am in late retirement and don't want to leave my home equity for my heirs to sell and maybe fight over while they wait. Accordingly, I took out a large low-interest (deductible) mortgage and have started giving the proceeds to my heirs when they need it most.

Everyone is happy!

Best wishes.
Taylor
Hi Taylor,

Thanks for this, I always appreciate your posts.
My situation appears a bit different however as I have no heirs. I view a paid off home as my LTC insurance policy for myself.
That being said, I always come back to your statement about how in retirement you just spent what you had to and adjusted fire as need be.
I believe I have more than enough to do that now, but I am stuck on OMY and figuring out how to spend down my assets as can probably be seen from my post, lol!

Giving help to your heirs when they most need it and you are still alive to see them enjoy and appreciate it is truly a generous act, good for you!

-Pan-
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Thoughts about home equity.

Post by Taylor Larimore »

My situation appears a bit different however as I have no heirs. I view a paid off home as my LTC insurance policy for myself.

Pan:

Converting your home equity to cash (at an older age) for your Long Term Care, will be more practical than having non-liquid equity in your home .

It seems to me that if you have no heirs or charity bequests, it does not make sense to leave a large home equity if you can take-out a mortgage and enjoy the equity yourself.

Another consideration for you might be a SPIA (Single Premium Immediate Annuity)taken out around age 80 and paid for with cash from a mortgage (I own two SPIAs). You will then have no more worries about bear markets or running out of money before running out of life.

Best wishes
Taylor
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Re: Early retiree: 3% SWR or 4% SWR for planning purposes?

Post by J295 »

Regarding healthcare, OP may likely qualify for premium tax credits under current law. Sure, the law can change and no doubt will in various ways, but OP is adaptable and will find a way to make healthcare and other things workout. I transitioned to very part time at 53 and we have been under ACA since then and I don't lose a wink of sleep over health care costs. As it and other things change we will adjust accordingly.
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Re: Thoughts about home equity.

Post by panhead »

Taylor Larimore wrote:
My situation appears a bit different however as I have no heirs. I view a paid off home as my LTC insurance policy for myself.

Pan:

Converting your home equity to cash (at an older age) for your Long Term Care, will be more practical than having non-liquid equity in your home .

It seems to me that if you have no heirs or charity bequests, it does not make sense to leave a large home equity if you can take-out a mortgage and enjoy the equity yourself.

Another consideration for you might be a SPIA (Single Premium Immediate Annuity)taken out around age 80 and paid for with cash from a mortgage (I own two SPIAs). You will then have no more worries about bear markets or running out of money before running out of life.

Best wishes
Taylor
I don't think we are derailing the thread as my circumstances and the OPs are extremely similar, and I appreciate these comments.

I am almost positive I will buy SPIAs later in life, probably about the time I take SS which I am planning to defer to age 70. I may buy a SPIA earlier than 70 depending on what the market looks like. Probably too much detail, but I plan on doing Roth conversions of almost my entire deferred balance and buying a SPIA with the Roth as this appears very beneficial from a tax standpoint.

Your point about accessing the equity in the house for LTC is an important one and one I had not thought about. I always assumed I would just sell the house. But I suppose I could do a HELOC (currently have one with 0 balance on my home), reverse mortgage for a lump sum, or refinance if selling the house is an issue (which is unlikely considering the location). My biggest concern about all this is cognitive ability as I age. I have my estate set up and friends that will hopefully be able to help with this if it becomes a problem (durable POA, etc).

This is what I was trying to convey to the OP: we both have some sizeable assets that we could live on until 70, and after that, SPIAs make a lot of sense for us. The trick is how to safely and confidently get to 70. This is where I start over-planning and come back to your basic simple principle of spend what you need and tighten up when it makes sense. At a 4% draw, I'm about double my austerity level of survival, so I'm pretty sure I'd be fine, and I know the OP has room to cut back as well.

OP: I hope this isn't a derailment. Our situations are very, very similar and except for the wife, you will be where I am in 4 years if you continue to work and save. (Who knows, maybe I'll pick up a wife along the way ;-))

Taylor, thank you as always, and if you have any more suggestions for the OP and myself about how to feel confident about getting to that SS age, please let us have em'!
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Re: Thoughts about home equity.

Post by panhead »

Taylor Larimore wrote:
Another consideration for you might be a SPIA (Single Premium Immediate Annuity)taken out around age 80 and paid for with cash from a mortgage (I own two SPIAs). You will then have no more worries about bear markets or running out of money before running out of life.
Taylor
I didn't read this clearly the first time. This is something else I hadn't considered. I think what you are saying is take out a reverse mortgage for a lump sum at 80 and buy a SPIA with it? My assumption here is that there is large arbitrage here due to one's age. This is VERY interesting...
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Reverse or Conventional Mortgage?

Post by Taylor Larimore »

I think what you are saying is take out a reverse mortgage for a lump sum at 80 and buy a SPIA with it? My assumption here is that there is large arbitrage here due to one's age. This is VERY interesting...
panhead:

Reverse mortgages are costly. I was referring to a conventional mortgage.

What I didn't mention is another option: Sell the home and rent. Either choice should give you a large amount of cash to do with as you want.

Best wishes.
Taylor
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Re: Thoughts about home equity.

Post by jjunk »

OP: I hope this isn't a derailment. Our situations are very, very similar and except for the wife, you will be where I am in 4 years if you continue to work and save. (Who knows, maybe I'll pick up a wife along the way ;-))
No worries at all, the more the merrier and it's done nothing but add to the discussion. I'm not sure if I can make it another 6mos, let alone 3.5yrs but we'll see. :mrgreen:
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Re: Thoughts about home equity.

Post by panhead »

jjunk wrote:
OP: I hope this isn't a derailment. Our situations are very, very similar and except for the wife, you will be where I am in 4 years if you continue to work and save. (Who knows, maybe I'll pick up a wife along the way ;-))
No worries at all, the more the merrier and it's done nothing but add to the discussion. I'm not sure if I can make it another 6mos, let alone 3.5yrs but we'll see. :mrgreen:
I SO know how you feel......
I'm hoping to get re-energized for the push to 50, then look around and see what the world looks like.
If by some chance I get laid off, I very well might just try and make it work.

As much as this topic comes up, and us much as so many of us over-think it, I think a reasonable solution (notice I didn't say safe) is to take somewhere between 3% and 4% and re-evaluate each year to see how the market and the economy works.
See, pretty much came back to Taylor's advice after all of that!
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