KF's simple rules to achieve FI [Financial Independence]

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KlangFool
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KF's simple rules to achieve FI [Financial Independence]

Post by KlangFool » Fri Apr 20, 2018 2:53 pm

Folks,

The followings are some of the rules that I used. It may work for some folks. On this thread, I will compile some of them and provide the reasoning and thought behind those rules. You should adjust them based on your own circumstances.

I am an engineer. So, I am biased towards my income and circumstances, And, I am limited by my life experience.

Rule #1
Save 1 year of your current annual expense every year. Then, you could be FI in about 25 years even with 0% real growth.

Rule #2

Do not overspend on house, car, and college education. At engineer's income level, as long as he/she do not overspend on those large expenses, he/she can save 1 year of annual expense every year.

Rule #3

Use "Pay Yourself First" saving method. Auto-deduct from your paycheck and save and invest the proper amount. Spend the rest.

Rule #4

Contribute as much as possible to the tax-deferred accounts. Put the tax savings to the Roth IRAs and the taxable account.

Rule #5

Do not save for college education

Rule #6

Invest using all-in-one funds such as lifestrategy or target retirement fund. Do not go into slice and dice until your portfolio is 6 figures or bigger.

Rule #7

Pick an asset allocation between 70/30 to 30/70. At this saving level, it is good enough.

KF Rule for buying a house.

1) 20% down payment plus 30 years fixed rate mortgage. The PITI monthly payment has to be 20% to 30% lower than monthly rent.

2) The net worth excluding house has to be at least 2.5 times the price of the house.

Some of the parameters to be adjusted for the individual circumstances.

A) Targeted FI numbers -> 25 to 50 times your current annual expense depending on when you want to be FI. In my case, I use 25 times because I am older. And, if and when I withdraw social security, it could cover about 50% of my annual expense.

B) The annual saving rate in term of your current annual expense -> I use 100% because I have no job security. You could pick a lower number if you have better job security and you could expect to work longer

C) The return rate -> I use 0% real return. You could use a more optimistic number of 1% or higher.

For my housing rule.

1) I use PITI at 20% to 30% lower than rent in order to account for the additional financial risk and maintenance cost of house ownership.

2) I use net worth excluding the house at 2.5 times of the house purchase price. You could use a lower number if you believe you are at a lower risk.

KlangFool
Last edited by KlangFool on Sat Apr 21, 2018 7:25 pm, edited 4 times in total.

Pigeye Brewster
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Re: KF's simple rules to achieve FI

Post by Pigeye Brewster » Fri Apr 20, 2018 3:31 pm

KlangFool wrote:
Fri Apr 20, 2018 2:53 pm
Folks,

The followings are some of the rules that I used. It may work for some folks. On this thread, I will compile some of them and provide the reasoning and thought behind those rules. You should adjust them based on your own circumstances.

I am an engineer. So, I am biased towards my income and circumstances, And, I am limited by my life experience.

Rule #1
Save 1 year of your current annual expense every year. Then, you could be FI in about 25 years even with 0% real growth.

KlangFool
I'm looking forward to the rest of the KF Rules. :beer

lostdog
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Re: KF's simple rules to achieve FI

Post by lostdog » Fri Apr 20, 2018 3:37 pm

Great post. Haven't thought of it that way.
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invst65
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Re: KF's simple rules to achieve FI

Post by invst65 » Fri Apr 20, 2018 3:39 pm

KlangFool wrote:
Fri Apr 20, 2018 2:53 pm
Rule #1
Save 1 year of your current annual expense every year. Then, you could be FI in about 25 years even with 0% real growth.
Not sure how that works mathematically speaking. If I save my annual expenses every year for 25 years with 0% real growth (which I'm assuming you mean no ROI + no inflation - or basically a wash between the two) then it seems to me that in 25 years you would have accumulated 25 years worth of financial independence only.

All well and good if you don't plan on living any longer than 25 years.

Or am I missing something?

(Actually, I think your plan probably works but not with the 0% real growth assumption).
Last edited by invst65 on Fri Apr 20, 2018 3:49 pm, edited 4 times in total.

John Doe 123
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Re: KF's simple rules to achieve FI

Post by John Doe 123 » Fri Apr 20, 2018 3:40 pm

KlangFool wrote:
Fri Apr 20, 2018 2:53 pm
Folks,

The followings are some of the rules that I used. It may work for some folks. On this thread, I will compile some of them and provide the reasoning and thought behind those rules. You should adjust them based on your own circumstances.

I am an engineer. So, I am biased towards my income and circumstances, And, I am limited by my life experience.

Rule #1
Save 1 year of your current annual expense every year. Then, you could be FI in about 25 years even with 0% real growth.

KlangFool
Isn't this pretty much the same as saying "save at least 50% of your annual income."

Hardly practical advice for most folks.

Reminds me of Steve Martin's steps to become a millionaire. "First, get a million dollars..."

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JoMoney
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Re: KF's simple rules to achieve FI

Post by JoMoney » Fri Apr 20, 2018 3:42 pm

invst65 wrote:
Fri Apr 20, 2018 3:39 pm
... If I save my annual expenses every year for 25 years with 0% real growth ... then it seems to me that in 25 years you would have accumulated 25 years worth of financial independence only.
I'm not sure if I could make it 25 years on 25 years of expenses. Seems like having 50x would be safer :D
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triceratop
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Re: KF's simple rules to achieve FI

Post by triceratop » Fri Apr 20, 2018 3:44 pm

John Doe 123 wrote:
Fri Apr 20, 2018 3:40 pm
KlangFool wrote:
Fri Apr 20, 2018 2:53 pm
Folks,

The followings are some of the rules that I used. It may work for some folks. On this thread, I will compile some of them and provide the reasoning and thought behind those rules. You should adjust them based on your own circumstances.

I am an engineer. So, I am biased towards my income and circumstances, And, I am limited by my life experience.

Rule #1
Save 1 year of your current annual expense every year. Then, you could be FI in about 25 years even with 0% real growth.

KlangFool
Isn't this pretty much the same as saying "save at least 50% of your annual income."

Hardly practical advice for most folks.

Reminds me of Steve Martin's steps to become a millionaire. "First, get a million dollars..."
It's even worse, because if one's income increases one cannot spend more with saving even more. When KF says "save 1 year of your current annual expense every year" he really means "save 1 year of your year 0 annual expense every year to be FI with an annual expense at the year-0 level".
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

stuper1
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Re: KF's simple rules to achieve FI

Post by stuper1 » Fri Apr 20, 2018 3:45 pm

invst65 wrote:
Fri Apr 20, 2018 3:39 pm
KlangFool wrote:
Fri Apr 20, 2018 2:53 pm
Rule #1
Save 1 year of your current annual expense every year. Then, you could be FI in about 25 years even with 0% real growth.
Not sure how that works mathematically speaking. If I save my annual expenses every year for 25 years with 0% real growth (which I'm assuming you mean no ROI + no inflation - or basically a wash between the two) then it seems to me that in 25 years you would have accumulated 25 years worth of financial independence only.

All well and good if you don't plan on living any longer than 25 years.

Or am I missing something?
Yeah, that's a weird way to look at it. Assumes 0% real growth for first 25 years, and then 4% thereafter.

As a segue, let me recommend the Financial Independence calculator at portfoliocharts.com. For a 50% savings rate with a 60/40 portfolio, it predicts you would have reached financial independence in 12 to 19 years using all the historical data back to 1970.

LiterallyIronic
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Re: KF's simple rules to achieve FI

Post by LiterallyIronic » Fri Apr 20, 2018 3:46 pm

invst65 wrote:
Fri Apr 20, 2018 3:39 pm
KlangFool wrote:
Fri Apr 20, 2018 2:53 pm
Rule #1
Save 1 year of your current annual expense every year. Then, you could be FI in about 25 years even with 0% real growth.
All well and good if you don't plan on living any longer than 25 years.

Or am I missing something?
Wouldn't be "all well and good if you don't plan on being retired for any longer than 25 years"? That sounds about right to me. Finish college, work for 25 years, be retired for 25 years, die.

mhalley
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Re: KF's simple rules to achieve FI

Post by mhalley » Fri Apr 20, 2018 4:06 pm

I would think there are several assumptions kf hasn't mentioned yet.
1. The money you save will be invested, not in cash.
2. The money you save will go up with inflation, etc, so your saving rate will increase over time.

KlangFool
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Re: KF's simple rules to achieve FI

Post by KlangFool » Fri Apr 20, 2018 4:16 pm

triceratop wrote:
Fri Apr 20, 2018 3:44 pm
John Doe 123 wrote:
Fri Apr 20, 2018 3:40 pm
KlangFool wrote:
Fri Apr 20, 2018 2:53 pm
Folks,

The followings are some of the rules that I used. It may work for some folks. On this thread, I will compile some of them and provide the reasoning and thought behind those rules. You should adjust them based on your own circumstances.

I am an engineer. So, I am biased towards my income and circumstances, And, I am limited by my life experience.

Rule #1
Save 1 year of your current annual expense every year. Then, you could be FI in about 25 years even with 0% real growth.

KlangFool
Isn't this pretty much the same as saying "save at least 50% of your annual income."

Hardly practical advice for most folks.

Reminds me of Steve Martin's steps to become a millionaire. "First, get a million dollars..."
It's even worse, because if one's income increases one cannot spend more with saving even more. When KF says "save 1 year of your current annual expense every year" he really means "save 1 year of your year 0 annual expense every year to be FI with an annual expense at the year-0 level".
triceratop,

I am not sure what you mean by year 0. What I meant was if a person makes 100K this year and pay 20K of taxes this year (Social Security, Medicare, Federal, State, and local so on), he spends 40K and saves 40K.

<<if one's income increases one cannot spend more with saving even more.>>

If one's income increases, he pays taxes. Then, he spends 50% and saves 50%.

KlangFool

KlangFool
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Re: KF's simple rules to achieve FI

Post by KlangFool » Fri Apr 20, 2018 4:20 pm

Folks,

Rule #2

Do not overspend on house, car, and college education. At engineer's income level, as long as he/she do not overspend on those large expenses, he/she can save 1 year of annual expense every year.

KlangFool

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triceratop
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Re: KF's simple rules to achieve FI

Post by triceratop » Fri Apr 20, 2018 4:21 pm

Yes but if I make $50k for 24 years and $100k the last year and then apply your simple rule, I've really only saved for the annual expense I had during the first 24 years even though in each year I saved the requisite amount. That is an extreme example, but it also applies if one gradually makes more over the years and increases spending rates while increasing savings rates. The degree to which your simple rule still applies depends on other variables.

I prefer to avoid simple rules. Life is complex.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: KF's simple rules to achieve FI

Post by KlangFool » Fri Apr 20, 2018 4:23 pm

LiterallyIronic wrote:
Fri Apr 20, 2018 3:46 pm
invst65 wrote:
Fri Apr 20, 2018 3:39 pm
KlangFool wrote:
Fri Apr 20, 2018 2:53 pm
Rule #1
Save 1 year of your current annual expense every year. Then, you could be FI in about 25 years even with 0% real growth.
All well and good if you don't plan on living any longer than 25 years.

Or am I missing something?
Wouldn't be "all well and good if you don't plan on being retired for any longer than 25 years"? That sounds about right to me. Finish college, work for 25 years, be retired for 25 years, die.
LiterallyIronic,

1) The goal is Financial Independence. It is not retirement. Hence, a person may choose to work, not work, or spend more money, or do something in between.

2) At the worst case, aka the investment has 0% real return. It only keeps up with the inflation, the person will reach the number in 25 years. But, in the average case, the person will reach the number much earlier.

KlangFool

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Re: KF's simple rules to achieve FI

Post by KlangFool » Fri Apr 20, 2018 4:27 pm

triceratop wrote:
Fri Apr 20, 2018 4:21 pm
Yes but if I make $50k for 24 years and $100k the last year and then apply your simple rule, I've really only saved for the annual expense I had during the first 24 years even though in each year I saved the requisite amount. That is an extreme example, but it also applies if one gradually makes more over the years and increases spending rates while increasing savings rates. The degree to which your simple rule still applies depends on other variables.

I prefer to avoid simple rules. Life is complex.
triceratop,

Okay. So, what are your annual expenses in the first 24 years and the annual expense in year 25? Let's calculate the numbers and show why it does not work.

KlangFool

invst65
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Re: KF's simple rules to achieve FI

Post by invst65 » Fri Apr 20, 2018 4:50 pm

KlangFool wrote:
Fri Apr 20, 2018 4:23 pm
1) The goal is Financial Independence. It is not retirement. Hence, a person may choose to work, not work, or spend more money, or do something in between.
It's hard for me to see the difference between being able to choose not to work and retirement - financially speaking.

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Re: KF's simple rules to achieve FI

Post by KlangFool » Fri Apr 20, 2018 5:01 pm

Folks,

Rule #3

Use "Pay Yourself First" saving method. Auto-deduct from your paycheck and save and invest the proper amount. Spend the rest.

Rule #4

Contribute as much as possible to the tax-deferred accounts. Put the tax savings to the Roth IRAs and the taxable account.

Rule #5

Do not save for college education

Rule #6

Invest using all-in-one funds such as lifestrategy or target retirement fund. Do not go into slice and dice until your portfolio is 6 figures or bigger.

Rule #7

Pick an asset allocation between 70/30 to 30/70. At this saving level, it is good enough.

KlangFool

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Re: KF's simple rules to achieve FI

Post by jriding » Fri Apr 20, 2018 5:02 pm

triceratop wrote:
Fri Apr 20, 2018 4:21 pm
I prefer to avoid simple rules. Life is complex.
I prefer to avoid complex rules. Life is short.

Perhaps KF's rules will only be useful to the simpletons among us. :beer

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Re: KF's simple rules to achieve FI

Post by Dantes » Fri Apr 20, 2018 5:05 pm

invst65 wrote:
Fri Apr 20, 2018 4:50 pm
KlangFool wrote:
Fri Apr 20, 2018 4:23 pm
1) The goal is Financial Independence. It is not retirement. Hence, a person may choose to work, not work, or spend more money, or do something in between.
It's hard for me to see the difference between being able to choose not to work and retirement - financially speaking.
I could have chosen not to work a few years before I did stop working. We would have been ok, financially. I chose to keep working in the hope of being able to be a little bit more than ok when I retired. That's my interpretation of the difference between financial independence and retirement.

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Re: KF's simple rules to achieve FI

Post by jriding » Fri Apr 20, 2018 5:07 pm

KlangFool wrote:
Fri Apr 20, 2018 5:01 pm
Rule #5

Do not save for college education
Alright, you're going to have to elaborate on #5. I sleep better at night knowing I've got most of my kids in-state college expenses in a 529. We'll have to cash flow some and they'll have to work some, but it will be, um, simple.

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sergeant
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Re: KF's simple rules to achieve FI

Post by sergeant » Fri Apr 20, 2018 5:07 pm

I don't think everyone needs to save 50% of their after tax income. For some early in their careers it might make more financial sense to pay down student loans...For others it might make sense to enjoy their early years by travelling more and enjoying their increased freedom before marriage or children.

Title does say "simple" so I guess for simple rules it's ok, just not doable for most.
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KlangFool
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Re: KF's simple rules to achieve FI

Post by KlangFool » Fri Apr 20, 2018 5:20 pm

jriding wrote:
Fri Apr 20, 2018 5:07 pm
KlangFool wrote:
Fri Apr 20, 2018 5:01 pm
Rule #5

Do not save for college education
Alright, you're going to have to elaborate on #5. I sleep better at night knowing I've got most of my kids in-state college expenses in a 529. We'll have to cash flow some and they'll have to work some, but it will be, um, simple.
jriding,

<< I sleep better at night knowing I've got most of my kids in-state college expenses in a 529. >>

Why?

I sleep better when I know that I could be permanently under-employed or unemployed and I could still feed my family.

At this saving level, the person could "cash flow" the college education if he/she is employed long enough. If the person is not employed long enough, he/she would need the money to feed the family.

I am "cash flowing" my 2 kids' college education now. My portfolio is at 20 times my current annual expense. I could save nothing for the next few years and reach my FI.

KlangFool

P.S.: I was unemployed for more than 1 year a few times.
Last edited by KlangFool on Fri Apr 20, 2018 5:51 pm, edited 1 time in total.

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Re: KF's simple rules to achieve FI

Post by corn18 » Fri Apr 20, 2018 5:36 pm

I saved for college. Now that I am paying for college, I am cash flowing it. Best of both worlds.

JBTX
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Re: KF's simple rules to achieve FI

Post by JBTX » Fri Apr 20, 2018 5:52 pm

My situation is fairly unique, so I am not sure I have simple rules. Any such rules would not be applicable to most others. From what I have read of KFs situation, it is somewhat unique in its own right. Thus I don’t know if his rules are useful to most others either.

If you only spend 40% of Gross income excluding taxes and max retirement savings vehicles of course you will be able to achieve financial independence at an accelerated rate. But I don’t think that is a reasonable expectation for most people.

I do agree that college savings is secondary to retirement savings . But I don’t take it so far to say don’t save for college.

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Re: KF's simple rules to achieve FI

Post by delamer » Fri Apr 20, 2018 6:14 pm

KlangFool wrote:
Fri Apr 20, 2018 4:20 pm
Folks,

Rule #2

Do not overspend on house, car, and college education. At engineer's income level, as long as he/she do not overspend on those large expenses, he/she can save 1 year of annual expense every year.

KlangFool
So how do you define “overspend” in terms of the items above?

I know that you have a townhouse ($400K) and that a lot of your friends bought single family homes ($600K), which caused them financial stress during the recession.

But how did you decide that $400K was the right figure for you (or whatever you actually paid for your townhouse)?

KlangFool
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Re: KF's simple rules to achieve FI

Post by KlangFool » Fri Apr 20, 2018 6:30 pm

delamer wrote:
Fri Apr 20, 2018 6:14 pm
KlangFool wrote:
Fri Apr 20, 2018 4:20 pm
Folks,

Rule #2

Do not overspend on house, car, and college education. At engineer's income level, as long as he/she do not overspend on those large expenses, he/she can save 1 year of annual expense every year.

KlangFool
So how do you define “overspend” in terms of the items above?

I know that you have a townhouse ($400K) and that a lot of your friends bought single family homes ($600K), which caused them financial stress during the recession.

But how did you decide that $400K was the right figure for you (or whatever you actually paid for your townhouse)?
delamer,

KF Rule for buying a house.

1) 20% down payment plus 30 years fixed rate mortgage. The PITI monthly payment has to be 20% to 30% lower than monthly rent.

2) The net worth excluding house has to be at least 2.5 times the price of the house.

KlangFool

delamer
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Re: KF's simple rules to achieve FI

Post by delamer » Fri Apr 20, 2018 6:40 pm

KlangFool wrote:
Fri Apr 20, 2018 6:30 pm
delamer wrote:
Fri Apr 20, 2018 6:14 pm
KlangFool wrote:
Fri Apr 20, 2018 4:20 pm
Folks,

Rule #2

Do not overspend on house, car, and college education. At engineer's income level, as long as he/she do not overspend on those large expenses, he/she can save 1 year of annual expense every year.

KlangFool
So how do you define “overspend” in terms of the items above?

I know that you have a townhouse ($400K) and that a lot of your friends bought single family homes ($600K), which caused them financial stress during the recession.

But how did you decide that $400K was the right figure for you (or whatever you actually paid for your townhouse)?
delamer,

KF Rule for buying a house.

1) 20% down payment plus 30 years fixed rate mortgage. The PITI monthly payment has to be 20% to 30% lower than monthly rent.

2) The net worth excluding house has to be at least 2.5 times the price of the house.

KlangFool

The first rule seems reasonable.

With the second rule, almost everyone would be renters until they were in their 40’s or 50’s. You’d have to be a millionaire to afford a $400,000 house.

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Re: KF's simple rules to achieve FI

Post by DesertDiva » Fri Apr 20, 2018 6:41 pm

It would be interesting to get KlangFool's take on relationships and family life.

KlangFool
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Re: KF's simple rules to achieve FI

Post by KlangFool » Fri Apr 20, 2018 6:48 pm

JBTX wrote:
Fri Apr 20, 2018 5:52 pm
My situation is fairly unique, so I am not sure I have simple rules. Any such rules would not be applicable to most others. From what I have read of KFs situation, it is somewhat unique in its own right. Thus I don’t know if his rules are useful to most others either.

If you only spend 40% of Gross income excluding taxes and max retirement savings vehicles of course you will be able to achieve financial independence at an accelerated rate. But I don’t think that is a reasonable expectation for most people.

I do agree that college savings is secondary to retirement savings . But I don’t take it so far to say don’t save for college.
JBTX,

<<If you only spend 40% of Gross income excluding taxes and max retirement savings vehicles of course you will be able to achieve financial independence at an accelerated rate. >>

1) I do not use saving rate based on income because it could lead to complication in the calculation.

A) The amount available for spending and saving increases when someone saves at this level. The effective tax rate can be very low.

B) How would somebody calculate the "income" with employer matching contribution and so on?

Saving rate based on annual expense is a lot simpler and straightforward.

<<But I don’t think that is a reasonable expectation for most people. >>

2) Most people do not aim for FI. They aim for retirement.

3) I do not know what is reasonable anymore.

A) Is it reasonable to assume that a person will be continuously fully-employed until retirement age?

B) Is it reasonable to assume that the portfolio real return will be 2% or more?

C) Is it reasonable to assume that a person could save and employed for 20+ years?

I just do not know. This simple rule has enough safety margin that it will work in low return and imperfect employment environment.

KlangFool

KlangFool
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Re: KF's simple rules to achieve FI

Post by KlangFool » Fri Apr 20, 2018 6:52 pm

delamer wrote:
Fri Apr 20, 2018 6:40 pm
KlangFool wrote:
Fri Apr 20, 2018 6:30 pm
delamer wrote:
Fri Apr 20, 2018 6:14 pm
KlangFool wrote:
Fri Apr 20, 2018 4:20 pm
Folks,

Rule #2

Do not overspend on house, car, and college education. At engineer's income level, as long as he/she do not overspend on those large expenses, he/she can save 1 year of annual expense every year.

KlangFool
So how do you define “overspend” in terms of the items above?

I know that you have a townhouse ($400K) and that a lot of your friends bought single family homes ($600K), which caused them financial stress during the recession.

But how did you decide that $400K was the right figure for you (or whatever you actually paid for your townhouse)?
delamer,

KF Rule for buying a house.

1) 20% down payment plus 30 years fixed rate mortgage. The PITI monthly payment has to be 20% to 30% lower than monthly rent.

2) The net worth excluding house has to be at least 2.5 times the price of the house.

KlangFool

The first rule seems reasonable.

With the second rule, almost everyone would be renters until they were in their 40’s or 50’s. You’d have to be a millionaire to afford a $400,000 house.
delamer,

<<You’d have to be a millionaire to afford a $400,000 house.>>

And, what is wrong with that? There is no reason why we must buy a house.

KlangFool

marcopolo
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Re: KF's simple rules to achieve FI

Post by marcopolo » Fri Apr 20, 2018 6:58 pm

KlangFool wrote:
Fri Apr 20, 2018 5:20 pm
jriding wrote:
Fri Apr 20, 2018 5:07 pm
KlangFool wrote:
Fri Apr 20, 2018 5:01 pm
Rule #5

Do not save for college education
Alright, you're going to have to elaborate on #5. I sleep better at night knowing I've got most of my kids in-state college expenses in a 529. We'll have to cash flow some and they'll have to work some, but it will be, um, simple.
jriding,

<< I sleep better at night knowing I've got most of my kids in-state college expenses in a 529. >>

Why?

I sleep better when I know that I could be permanently under-employed or unemployed and I could still feed my family.

At this saving level, the person could "cash flow" the college education if he/she is employed long enough. If the person is not employed long enough, he/she would need the money to feed the family.

I am "cash flowing" my 2 kids' college education now. My portfolio is at 20 times my current annual expense. I could save nothing for the next few years and reach my FI.

KlangFool

P.S.: I was unemployed for more than 1 year a few times.
This rule might be OK if your current savings is not sufficient to fill up all tax-advantaged vehicles (401k, Roth, IRA, HSA, etc.). But if you are filling all of those, and still have money to save AND you anticipate you will likely have to pay for at least some of your kids educational expenses, it seems foolish to live in fear of not being able to eat, at the price of giving up TAX-FREE growth on that money.

The odds of having to pay for college FAR exceeds the odds of having to tap the 529 plan to feed the family. Even if that were to occur, the cost is the 10% penalty. Weigh that against the almost certain likelihood of having college expenses, makes saving in 529 plan a much better financial bet.
Once in a while you get shown the light, in the strangest of places if you look at it right.

marcopolo
Posts: 954
Joined: Sat Dec 03, 2016 10:22 am

Re: KF's simple rules to achieve FI

Post by marcopolo » Fri Apr 20, 2018 7:02 pm

You were unemployed for extended period of time. If you had put away some money into 529 plans would you have been forced to liquidate them, or would you have had other resources to support yourself during that time? If you have been saving 50% over many years, it seems unlikely that you would have had to tap the 529 to eat.
Once in a while you get shown the light, in the strangest of places if you look at it right.

DVMResident
Posts: 1247
Joined: Mon Aug 01, 2011 8:15 pm

Re: KF's simple rules to achieve FI

Post by DVMResident » Fri Apr 20, 2018 7:04 pm

KlangFool wrote:
Fri Apr 20, 2018 6:52 pm
delamer wrote:
Fri Apr 20, 2018 6:40 pm
KlangFool wrote:
Fri Apr 20, 2018 6:30 pm
delamer wrote:
Fri Apr 20, 2018 6:14 pm
KlangFool wrote:
Fri Apr 20, 2018 4:20 pm
Folks,

Rule #2

Do not overspend on house, car, and college education. At engineer's income level, as long as he/she do not overspend on those large expenses, he/she can save 1 year of annual expense every year.

KlangFool
So how do you define “overspend” in terms of the items above?

I know that you have a townhouse ($400K) and that a lot of your friends bought single family homes ($600K), which caused them financial stress during the recession.

But how did you decide that $400K was the right figure for you (or whatever you actually paid for your townhouse)?
delamer,

KF Rule for buying a house.

1) 20% down payment plus 30 years fixed rate mortgage. The PITI monthly payment has to be 20% to 30% lower than monthly rent.

2) The net worth excluding house has to be at least 2.5 times the price of the house.

KlangFool

The first rule seems reasonable.

With the second rule, almost everyone would be renters until they were in their 40’s or 50’s. You’d have to be a millionaire to afford a $400,000 house.
delamer,

<<You’d have to be a millionaire to afford a $400,000 house.>>

And, what is wrong with that? There is no reason why we must buy a house.

KlangFool
Even as a follow anti-buying person, this second house rule is silly. There are so many markets where buying is cheaper than renting.
If buying is cheaper than renting, buying can help you stablize COL and achieve Rule #1: Save 1 year of your current annual expense every year.

KlangFool
Posts: 9468
Joined: Sat Oct 11, 2008 12:35 pm

Re: KF's simple rules to achieve FI

Post by KlangFool » Fri Apr 20, 2018 7:12 pm

marcopolo wrote:
Fri Apr 20, 2018 6:58 pm

This rule might be OK if your current savings is not sufficient to fill up all tax-advantaged vehicles (401k, Roth, IRA, HSA, etc.). But if you are filling all of those, and still have money to save AND you anticipate you will likely have to pay for at least some of your kids educational expenses, it seems foolish to live in fear of not being able to eat, at the price of giving up TAX-FREE growth on that money.

The odds of having to pay for college FAR exceeds the odds of having to tap the 529 plan to feed the family. Even if that were to occur, the cost is the 10% penalty. Weigh that against the almost certain likelihood of having college expenses, makes saving in 529 plan a much better financial bet.
marcopolo,

<< at the price of giving up TAX-FREE growth on that money. >>

1) If you are at 24% or above tax bracket, it may make sense to you. But, for me, my taxable account investment is highly tax-efficient.

2) My portfolio breakdown is 45/45/10 (Tax-deferred/Taxable/Roth). A large taxable account will help me to lower my tax rate when I early retire.

<< The odds of having to pay for college FAR exceeds the odds of having to tap the 529 plan to feed the family. >>

What odds?

3) At this saving rate, if I am fully-employed for 10 to 20 years, I can "cash flow" the college education.

4) Meanwhile, many of my peers are permanently unemployed or under-employed in their 40s and 50s.

There are only 2 possible outcomes for me.

Now, your circumstances might be totally different from me. But, this was the situation that I have to deal with.

KlangFool

KlangFool
Posts: 9468
Joined: Sat Oct 11, 2008 12:35 pm

Re: KF's simple rules to achieve FI

Post by KlangFool » Fri Apr 20, 2018 7:16 pm

DVMResident wrote:
Fri Apr 20, 2018 7:04 pm

Even as a follow anti-buying person, this second house rule is silly. There are so many markets where buying is cheaper than renting.
If buying is cheaper than renting, buying can help you stablize COL and achieve Rule #1: Save 1 year of your current annual expense every year.
DVMResident,

I live in a recourse loan state. If I buy too much house, a housing crash could wipe out all my net worth. House in my area had not recovered up to the 2004/2005 level.

KlangFool

wrongfunds
Posts: 1728
Joined: Tue Dec 21, 2010 3:55 pm

Re: KF's simple rules to achieve FI

Post by wrongfunds » Fri Apr 20, 2018 8:16 pm

Welcome back KF! Last few weeks at BH were just not the same with your absence.

Where is that popcorn smiley gone?

DVMResident
Posts: 1247
Joined: Mon Aug 01, 2011 8:15 pm

Re: KF's simple rules to achieve FI

Post by DVMResident » Fri Apr 20, 2018 8:25 pm

KlangFool wrote:
Fri Apr 20, 2018 7:16 pm
DVMResident wrote:
Fri Apr 20, 2018 7:04 pm

Even as a follow anti-buying person, this second house rule is silly. There are so many markets where buying is cheaper than renting.
If buying is cheaper than renting, buying can help you stablize COL and achieve Rule #1: Save 1 year of your current annual expense every year.
DVMResident,

I live in a recourse loan state. If I buy too much house, a housing crash could wipe out all my net worth. House in my area had not recovered up to the 2004/2005 level.

KlangFool
Buying too much house is a different issue. Home ownership can and often is a path to FI. Ownership is often cheaper than rent.

The second rule is just too dismissive of a perfectly rationale option. It's like justifying buying a fund with a higher ER because the index performed worse last decade. Why pay more to rent if your job/location is stable and you have enough liquidity (ER fund)?

KlangFool
Posts: 9468
Joined: Sat Oct 11, 2008 12:35 pm

Re: KF's simple rules to achieve FI

Post by KlangFool » Fri Apr 20, 2018 8:29 pm

DVMResident wrote:
Fri Apr 20, 2018 8:25 pm
KlangFool wrote:
Fri Apr 20, 2018 7:16 pm
DVMResident wrote:
Fri Apr 20, 2018 7:04 pm

Even as a follow anti-buying person, this second house rule is silly. There are so many markets where buying is cheaper than renting.
If buying is cheaper than renting, buying can help you stablize COL and achieve Rule #1: Save 1 year of your current annual expense every year.
DVMResident,

I live in a recourse loan state. If I buy too much house, a housing crash could wipe out all my net worth. House in my area had not recovered up to the 2004/2005 level.

KlangFool
Buying too much house is a different issue. Home ownership can and often is a path to FI. Ownership is often cheaper than rent.

The second rule is just too dismissive of a perfectly rationale option. It's like justifying buying a fund with a higher ER because the index performed worse last decade. Why pay more to rent if your job/location is stable and you have enough liquidity (ER fund)?
DVMResident,

<<Why pay more to rent if your job/location is stable and you have enough liquidity (ER fund)?>>

My job/location is not stable. 3 years after I bought the house, I was laid off and unemployed for more than 1 year.

KlangFool

JBTX
Posts: 3577
Joined: Wed Jul 26, 2017 12:46 pm

Re: KF's simple rules to achieve FI

Post by JBTX » Fri Apr 20, 2018 9:18 pm

KlangFool wrote:
Fri Apr 20, 2018 6:48 pm
JBTX wrote:
Fri Apr 20, 2018 5:52 pm
My situation is fairly unique, so I am not sure I have simple rules. Any such rules would not be applicable to most others. From what I have read of KFs situation, it is somewhat unique in its own right. Thus I don’t know if his rules are useful to most others either.

If you only spend 40% of Gross income excluding taxes and max retirement savings vehicles of course you will be able to achieve financial independence at an accelerated rate. But I don’t think that is a reasonable expectation for most people.

I do agree that college savings is secondary to retirement savings . But I don’t take it so far to say don’t save for college.
JBTX,

<<If you only spend 40% of Gross income excluding taxes and max retirement savings vehicles of course you will be able to achieve financial independence at an accelerated rate. >>

1) I do not use saving rate based on income because it could lead to complication in the calculation.

A) The amount available for spending and saving increases when someone saves at this level. The effective tax rate can be very low.

B) How would somebody calculate the "income" with employer matching contribution and so on?

Saving rate based on annual expense is a lot simpler and straightforward.

<<But I don’t think that is a reasonable expectation for most people. >>

2) Most people do not aim for FI. They aim for retirement.

3) I do not know what is reasonable anymore.

A) Is it reasonable to assume that a person will be continuously fully-employed until retirement age?

B) Is it reasonable to assume that the portfolio real return will be 2% or more?

C) Is it reasonable to assume that a person could save and employed for 20+ years?

I just do not know. This simple rule has enough safety margin that it will work in low return and imperfect employment environment.

KlangFool
For you it is reasonable. Your parameters are to reach financial independence prior to retirement on only one income with long periods of unemployment scattered in between. That’s a fairly unique set of parameters.

DVMResident
Posts: 1247
Joined: Mon Aug 01, 2011 8:15 pm

Re: KF's simple rules to achieve FI

Post by DVMResident » Fri Apr 20, 2018 9:24 pm

KlangFool wrote:
Fri Apr 20, 2018 8:29 pm
DVMResident wrote:
Fri Apr 20, 2018 8:25 pm
KlangFool wrote:
Fri Apr 20, 2018 7:16 pm
DVMResident wrote:
Fri Apr 20, 2018 7:04 pm

Even as a follow anti-buying person, this second house rule is silly. There are so many markets where buying is cheaper than renting.
If buying is cheaper than renting, buying can help you stablize COL and achieve Rule #1: Save 1 year of your current annual expense every year.
DVMResident,

I live in a recourse loan state. If I buy too much house, a housing crash could wipe out all my net worth. House in my area had not recovered up to the 2004/2005 level.

KlangFool
Buying too much house is a different issue. Home ownership can and often is a path to FI. Ownership is often cheaper than rent.

The second rule is just too dismissive of a perfectly rationale option. It's like justifying buying a fund with a higher ER because the index performed worse last decade. Why pay more to rent if your job/location is stable and you have enough liquidity (ER fund)?
DVMResident,

<<Why pay more to rent if your job/location is stable and you have enough liquidity (ER fund)?>>

My job/location is not stable. 3 years after I bought the house, I was laid off and unemployed for more than 1 year.

KlangFool
Your job-not everyone's. Each individuals' circumstances are just way too variable to generalize like this.

KlangFool
Posts: 9468
Joined: Sat Oct 11, 2008 12:35 pm

Re: KF's simple rules to achieve FI

Post by KlangFool » Fri Apr 20, 2018 9:40 pm

DVMResident wrote:
Fri Apr 20, 2018 9:24 pm

Your job-not everyone's. Each individuals' circumstances are just way too variable to generalize like this.
DVMResident,

I agree with that statement. But, if it works even in this kind of situation, it will work in a better environment. As I had said at the beginning of this thread, adjust the parameters to suits your own circumstances.

KlangFool

bling
Posts: 265
Joined: Sat Jan 21, 2012 12:49 pm

Re: KF's simple rules to achieve FI

Post by bling » Fri Apr 20, 2018 9:48 pm

simple rules necessitate simple situations -- life is more complex.

my biggest gripe with a lot of these rules is that they do not take location into account at all. i live and work in a VHCOL state. i have no intention of retiring here. i can follow various "rules" and work here for the next 20-30 years or do it in half the time if i move to a lower cost area afterwards.
KlangFool wrote:
Fri Apr 20, 2018 6:30 pm
2) The net worth excluding house has to be at least 2.5 times the price of the house.
pretty much impossible for HCOL areas. so i guess people in SF are already financially independent at the beginning of their career?

KlangFool
Posts: 9468
Joined: Sat Oct 11, 2008 12:35 pm

Re: KF's simple rules to achieve FI

Post by KlangFool » Fri Apr 20, 2018 9:56 pm

bling wrote:
Fri Apr 20, 2018 9:48 pm
simple rules necessitate simple situations -- life is more complex.

my biggest gripe with a lot of these rules is that they do not take location into account at all. i live and work in a VHCOL state. i have no intention of retiring here. i can follow various "rules" and work here for the next 20-30 years or do it in half the time if i move to a lower cost area afterwards.
KlangFool wrote:
Fri Apr 20, 2018 6:30 pm
2) The net worth excluding house has to be at least 2.5 times the price of the house.
pretty much impossible for HCOL areas. so i guess people in SF are already financially independent at the beginning of their career?
bling,

1) Why buying a house is necessary or a wise financial decision?

2) It is a gamble to put most of your money into a house. It may or may not work out.

KlangFool

KlangFool
Posts: 9468
Joined: Sat Oct 11, 2008 12:35 pm

Re: KF's simple rules to achieve FI

Post by KlangFool » Fri Apr 20, 2018 10:05 pm

Folks,

As I had said right at the beginning of the thread, the difference between saving at a high level or not comes down to the big purchases: house, car, and college education. This is true for many folks.

At my level, it is usually the house.

KlangFool

Dottie57
Posts: 3921
Joined: Thu May 19, 2016 5:43 pm

Re: KF's simple rules to achieve FI

Post by Dottie57 » Fri Apr 20, 2018 10:05 pm

Klangfool,

I bought a condominium which was built for first time home buyers in the late 80's. The complex had no swimming pool, exercise room, guest suite or library. Very plain jane type of setup.

The price was 2.5 times my salary with a 10% mortgage rate. I could barely afford the home.

I've lived in the same condo. Never upgraded to a mor expensive place. Now my housing costs are 1/2 to 1/3 of a comparable apartment. The home I could not afford wound up being very affordable as I age in place.

Sometimes it works out well.

Dottie

KlangFool
Posts: 9468
Joined: Sat Oct 11, 2008 12:35 pm

Re: KF's simple rules to achieve FI

Post by KlangFool » Fri Apr 20, 2018 10:08 pm

Dottie57 wrote:
Fri Apr 20, 2018 10:05 pm
Klangfool,

I bought a condominium which was built for first time home buyers in the late 80's. The complex had no swimming pool, exercise room, guest suite or library. Very plain jane type of setup.

The price was 2.5 times my salary with a 10% mortgage rate. I could barely afford the home.

I've lived in the same condo. Never upgraded to a mor expensive place. Now my housing costs are 1/2 to 1/3 of a comparable apartment. The home I could not afford wound up being very affordable as I age in place.

Sometimes it works out well.

Dottie
Dottie57,

You have a stable job environment for a very long time.

KlangFool

bling
Posts: 265
Joined: Sat Jan 21, 2012 12:49 pm

Re: KF's simple rules to achieve FI

Post by bling » Fri Apr 20, 2018 10:12 pm

KlangFool wrote:
Fri Apr 20, 2018 9:56 pm
bling,

1) Why buying a house is necessary or a wise financial decision?

2) It is a gamble to put most of your money into a house. It may or may not work out.

KlangFool
1) IMO, buying a house is almost never a wise financial decision (compared to what else you could do with that money). i bought my house to get access to a good school system for my kids. in fact, if you want to be FI fast just don't have kids and don't get married. rent a room with like 3 other people and then you can save 90%+ of your income.

2) of course it's bad to put all your eggs in one basket, but life happens. 2.5x net worth is very conservative and you're basically saying to a lot of people to wait until they're 40 to start having kids.

Dottie57
Posts: 3921
Joined: Thu May 19, 2016 5:43 pm

Re: KF's simple rules to achieve FI

Post by Dottie57 » Fri Apr 20, 2018 10:12 pm

KlangFool wrote:
Fri Apr 20, 2018 10:08 pm
Dottie57 wrote:
Fri Apr 20, 2018 10:05 pm
Klangfool,

I bought a condominium which was built for first time home buyers in the late 80's. The complex had no swimming pool, exercise room, guest suite or library. Very plain jane type of setup.

The price was 2.5 times my salary with a 10% mortgage rate. I could barely afford the home.

I've lived in the same condo. Never upgraded to a mor expensive place. Now my housing costs are 1/2 to 1/3 of a comparable apartment. The home I could not afford wound up being very affordable as I age in place.

Sometimes it works out well.

Dottie
Dottie57,

You have a stable job environment for a very long time.

KlangFool
But not a lucrative one until the last 8 years. Lucrative means > 90k a year.

marcopolo
Posts: 954
Joined: Sat Dec 03, 2016 10:22 am

Re: KF's simple rules to achieve FI

Post by marcopolo » Fri Apr 20, 2018 10:14 pm

KlangFool wrote:
Fri Apr 20, 2018 7:12 pm
marcopolo wrote:
Fri Apr 20, 2018 6:58 pm

This rule might be OK if your current savings is not sufficient to fill up all tax-advantaged vehicles (401k, Roth, IRA, HSA, etc.). But if you are filling all of those, and still have money to save AND you anticipate you will likely have to pay for at least some of your kids educational expenses, it seems foolish to live in fear of not being able to eat, at the price of giving up TAX-FREE growth on that money.

The odds of having to pay for college FAR exceeds the odds of having to tap the 529 plan to feed the family. Even if that were to occur, the cost is the 10% penalty. Weigh that against the almost certain likelihood of having college expenses, makes saving in 529 plan a much better financial bet.
marcopolo,

<< at the price of giving up TAX-FREE growth on that money. >>

1) If you are at 24% or above tax bracket, it may make sense to you. But, for me, my taxable account investment is highly tax-efficient.

2) My portfolio breakdown is 45/45/10 (Tax-deferred/Taxable/Roth). A large taxable account will help me to lower my tax rate when I early retire.

<< The odds of having to pay for college FAR exceeds the odds of having to tap the 529 plan to feed the family. >>

What odds?

3) At this saving rate, if I am fully-employed for 10 to 20 years, I can "cash flow" the college education.

4) Meanwhile, many of my peers are permanently unemployed or under-employed in their 40s and 50s.

There are only 2 possible outcomes for me.

Now, your circumstances might be totally different from me. But, this was the situation that I have to deal with.

KlangFool

I am still not understanding your reasoning.

1) You seem to be almost pathologically fearful of job loss, yet you advice to plan on cash flowing college expenses.
What happens if you save diligently for 20 years, at or close to FI, and then you are out of work? Do you tell your kids they are on their own?
More likely, you tap some of your savings to pay for college. Not having taken advantage of 529 plan, you now incur more taxes.

2) most people with enough income to save 50% are likely in a high tax bracket such that even tax-efficient taxable accounts are not as efficient as 529 tax-free growth.

My kids college education will span both my working years and unemployed (retired) years.

During working years, i enjoyed being able to pull tax-free money out of college savings to pay for college. I could have avoided 529 plans and cash-flowed it, but that would have reduced my tax-advantaged savings space over the years.

During early retirement, i will be REALLY glad to have the 529 plans because not only are the withdrawals tax-free, but they do NOT add to MAGI, which makes it a lot easier to manage my income to stay below ACA cliff, saving thousands of dollars in taxes each year. If i were drawing from taxable accounts, they would have sizable capital gains. Even if i could keep them at 0% rate (unlikely), they still add towards MAGI, putting the ACA cliff at real risk.

Can you explain the advantages of employing a strategy where you avoid tax-free college savings vehicles? For people who anticipate paying for college, they seem to only apply in very narrow circumstances.
Once in a while you get shown the light, in the strangest of places if you look at it right.

delamer
Posts: 5464
Joined: Tue Feb 08, 2011 6:13 pm

Re: KF's simple rules to achieve FI

Post by delamer » Fri Apr 20, 2018 10:16 pm

KlangFool wrote:
Fri Apr 20, 2018 6:52 pm
delamer wrote:
Fri Apr 20, 2018 6:40 pm
KlangFool wrote:
Fri Apr 20, 2018 6:30 pm
delamer wrote:
Fri Apr 20, 2018 6:14 pm
KlangFool wrote:
Fri Apr 20, 2018 4:20 pm
Folks,

Rule #2

Do not overspend on house, car, and college education. At engineer's income level, as long as he/she do not overspend on those large expenses, he/she can save 1 year of annual expense every year.

KlangFool
So how do you define “overspend” in terms of the items above?

I know that you have a townhouse ($400K) and that a lot of your friends bought single family homes ($600K), which caused them financial stress during the recession.

But how did you decide that $400K was the right figure for you (or whatever you actually paid for your townhouse)?
delamer,

KF Rule for buying a house.

1) 20% down payment plus 30 years fixed rate mortgage. The PITI monthly payment has to be 20% to 30% lower than monthly rent.

2) The net worth excluding house has to be at least 2.5 times the price of the house.

KlangFool

The first rule seems reasonable.

With the second rule, almost everyone would be renters until they were in their 40’s or 50’s. You’d have to be a millionaire to afford a $400,000 house.
delamer,

<<You’d have to be a millionaire to afford a $400,000 house.>>

And, what is wrong with that? There is no reason why we must buy a house.

KlangFool
What is wrong is that setting a rule that 98% of the population would not be able to achieve will make your FI system unusable.

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