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How do you know when you have reached FIRE number?

Posted: Sun Feb 10, 2019 10:35 pm
by RL1013
Say my FIRE Target is 2 million and after years of saving and investing, my total investment reached 2 million. But markets go up and down all the time and the 2 million can reduce to say 1.9 million due to a correction the next day. How will one know when to pull the plug and retire? How will one go about calculating the buffer amount we need to add to the FIRE number?

Re: How do you know when you have reached FIRE number?

Posted: Sun Feb 10, 2019 10:38 pm
by sambb
one can never really know - look at japan from the 80s

Re: How do you know when you have reached FIRE number?

Posted: Sun Feb 10, 2019 10:44 pm
by retiringwhen
Study this Blog Series from a guy named Early Retirement Now. It is exhaustive. There is no one answer, but you can get some pretty good ideas on what is a true minimum required if you take the past as prologue. Meaning if you believe the next 40-60 years will be no WORSE than the worst period in the past 150 years, you can get a good idea.

ERN actually gives you some ideas on how to look at the the "what if the market drops after I hit my FIRE number too." Look at what happens to withdrawal rates after the market drops 10, 20 or 30%. It is re-assuring that hitting a number at a top is not the worst thing that can happen.

But to get a FIRE #, you need do know your long-term spending rates, your age of retirement, etc.... those are the relatively hard things to do....


https://earlyretirementnow.com/2016/12/ ... t-1-intro/

Re: How do you know when you have reached FIRE number?

Posted: Sun Feb 10, 2019 10:47 pm
by David Jay
RL1013 wrote:
Sun Feb 10, 2019 10:35 pm
Say my FIRE Target is 2 million and after years of saving and investing, my total investment reached 2 million. But markets go up and down all the time and the 2 million can reduce to say 1.9 million due to a correction the next day. How will one know when to pull the plug and retire? How will one go about calculating the buffer amount we need to add to the FIRE number?
This is where one’s Asset Allocation comes in. Holding a number of years worth of expense funds in bonds allows the stock funds time to recover.

This is also where the SWR studies are useful. They use the worst sequences from the past to give you a relatively safe path. If one uses a 4% withdrawal rate, most people in most circumstances will end up with a huge pile of money in their estate. Only the very worst circumstances will result in marginal conditions.

Re: How do you know when you have reached FIRE number?

Posted: Sun Feb 10, 2019 11:36 pm
by Watty
RL1013 wrote:
Sun Feb 10, 2019 10:35 pm
How will one go about calculating the buffer amount we need to add to the FIRE number?
A key thing to realize is that there are multiple levels of financial independence.

For example "financial independence" could mean;
1) Frugal place to live in a marginal area with enough that I don't go hungry and my kid does not need to support me.
2) A better place to live but not a lot of extras.
3) A very comfortable place to live and a few extras like modest domestic travel.
4) My current standard of living and some nice extras like occasional international travel.
5) A better standard of living and within reason enough money to do anything I want.
6) Dang, I should have spent more when I was young.

I was not in finance or anything like that but during the 2008 financial meltdown I realized that if things got even worse and I lost my job I could move to a nice low cost college town in the midwest where I once went to school and buy a cheap decent house for cash and live a comfortable enough life with minimal savings and Social Security. Sort of like if I needed to hunker down during the great depression. That would have been a step or two above a mobile home but that is not how I would want to live but just knowing that the "worst case" was not all that bad felt surprisingly good. In retrospect it was because I had hit the most basic level of financial independence.

These are not engraved in stone either. It was rough but when I retired I was about 85% sure that I could be in level "4", my current standard of living, with maybe a 5% chance that we might drop a notch later on and about a 10% chance we would move up a level. I was also young enough that if I needed to I could have found some part time job that was relatively enjoyable to supplement my income if I needed to.

I am not anywhere near as experienced a traveler as many posters here but in my travels I have gotten out of the tourist areas enough to appreciate how people live in some parts of the world(and in the US). That makes me appreciate just how well off a stereotypical middle class american lifestyle really is.

One thing you might do is to do a "fire drill" and assume that you found out that you could not work anymore and you had to live the rest of your life on "just" the 2 million dollars that you have today. (You could also factor in any home equity and Social Security too.) Play with the number and write out what your budget would be and what you life would be like.

Re: How do you know when you have reached FIRE number?

Posted: Sun Feb 10, 2019 11:47 pm
by RL1013
retiringwhen wrote:
Sun Feb 10, 2019 10:44 pm
Study this Blog Series from a guy named Early Retirement Now. It is exhaustive. There is no one answer, but you can get some pretty good ideas on what is a true minimum required if you take the past as prologue. Meaning if you believe the next 40-60 years will be no WORSE than the worst period in the past 150 years, you can get a good idea.

ERN actually gives you some ideas on how to look at the the "what if the market drops after I hit my FIRE number too." Look at what happens to withdrawal rates after the market drops 10, 20 or 30%. It is re-assuring that hitting a number at a top is not the worst thing that can happen.

But to get a FIRE #, you need do know your long-term spending rates, your age of retirement, etc.... those are the relatively hard things to do....


https://earlyretirementnow.com/2016/12/ ... t-1-intro/
Thank you. I will go through it.

Re: How do you know when you have reached FIRE number?

Posted: Sun Feb 10, 2019 11:50 pm
by JustinR
RL1013 wrote:
Sun Feb 10, 2019 10:35 pm
Say my FIRE Target is 2 million and after years of saving and investing, my total investment reached 2 million. But markets go up and down all the time and the 2 million can reduce to say 1.9 million due to a correction the next day. How will one know when to pull the plug and retire? How will one go about calculating the buffer amount we need to add to the FIRE number?
Simply put, 4% is the absolute minimum.

After you reach that, you should aim for 3.5% or even better, 3%. Then you can be more confident in retiring.

Re: How do you know when you have reached FIRE number?

Posted: Sun Feb 10, 2019 11:54 pm
by RL1013
David Jay wrote:
Sun Feb 10, 2019 10:47 pm
RL1013 wrote:
Sun Feb 10, 2019 10:35 pm
Say my FIRE Target is 2 million and after years of saving and investing, my total investment reached 2 million. But markets go up and down all the time and the 2 million can reduce to say 1.9 million due to a correction the next day. How will one know when to pull the plug and retire? How will one go about calculating the buffer amount we need to add to the FIRE number?
This is where one’s Asset Allocation comes in. Holding a number of years worth of expense funds in bonds allows the stock funds time to recover.

This is also where the SWR studies are useful. They use the worst sequences from the past to give you a relatively safe path. If one uses a 4% withdrawal rate, most people in most circumstances will end up with a huge pile of money in their estate. Only the very worst circumstances will result in marginal conditions.
Thanks for your feedback. Are you suggesting the asset allocation should be bond heavy? And when we draw 4%, should we draw from only bonds and leave stocks alone? Still to maintain that asset allocation we would have to sell stocks to rebalance at some point don't we?

But that aside, what I was trying to understand was if it is ok to pull the plug once I got the fire number with my bond heavy asset allocation or should there be buffer? Sorry if my question was not clear.

Re: How do you know when you have reached FIRE number?

Posted: Sun Feb 10, 2019 11:56 pm
by RL1013
Watty wrote:
Sun Feb 10, 2019 11:36 pm
RL1013 wrote:
Sun Feb 10, 2019 10:35 pm
How will one go about calculating the buffer amount we need to add to the FIRE number?
A key thing to realize is that there are multiple levels of financial independence.

For example "financial independence" could mean;
1) Frugal place to live in a marginal area with enough that I don't go hungry and my kid does not need to support me.
2) A better place to live but not a lot of extras.
3) A very comfortable place to live and a few extras like modest domestic travel.
4) My current standard of living and some nice extras like occasional international travel.
5) A better standard of living and within reason enough money to do anything I want.
6) Dang, I should have spent more when I was young.

I was not in finance or anything like that but during the 2008 financial meltdown I realized that if things got even worse and I lost my job I could move to a nice low cost college town in the midwest where I once went to school and buy a cheap decent house for cash and live a comfortable enough life with minimal savings and Social Security. Sort of like if I needed to hunker down during the great depression. That would have been a step or two above a mobile home but that is not how I would want to live but just knowing that the "worst case" was not all that bad felt surprisingly good. In retrospect it was because I had hit the most basic level of financial independence.

These are not engraved in stone either. It was rough but when I retired I was about 85% sure that I could be in level "4", my current standard of living, with maybe a 5% chance that we might drop a notch later on and about a 10% chance we would move up a level. I was also young enough that if I needed to I could have found some part time job that was relatively enjoyable to supplement my income if I needed to.

I am not anywhere near as experienced a traveler as many posters here but in my travels I have gotten out of the tourist areas enough to appreciate how people live in some parts of the world(and in the US). That makes me appreciate just how well off a stereotypical middle class american lifestyle really is.

One thing you might do is to do a "fire drill" and assume that you found out that you could not work anymore and you had to live the rest of your life on "just" the 2 million dollars that you have today. (You could also factor in any home equity and Social Security too.) Play with the number and write out what your budget would be and what you life would be like.
Thank you.

Re: How do you know when you have reached FIRE number?

Posted: Sun Feb 10, 2019 11:59 pm
by RL1013
JustinR wrote:
Sun Feb 10, 2019 11:50 pm
RL1013 wrote:
Sun Feb 10, 2019 10:35 pm
Say my FIRE Target is 2 million and after years of saving and investing, my total investment reached 2 million. But markets go up and down all the time and the 2 million can reduce to say 1.9 million due to a correction the next day. How will one know when to pull the plug and retire? How will one go about calculating the buffer amount we need to add to the FIRE number?
Simply put, 4% is the absolute minimum.

After you reach that, you should aim for 3.5% or even better, 3%. Then you can be more confident in retiring.
So, should I still go with my plan if 2 million mark was hit yesterday close of market and it goes down by 1 or 2% today?

Re: How do you know when you have reached FIRE number?

Posted: Mon Feb 11, 2019 12:50 am
by JustinR
RL1013 wrote:
Sun Feb 10, 2019 11:59 pm
JustinR wrote:
Sun Feb 10, 2019 11:50 pm
RL1013 wrote:
Sun Feb 10, 2019 10:35 pm
Say my FIRE Target is 2 million and after years of saving and investing, my total investment reached 2 million. But markets go up and down all the time and the 2 million can reduce to say 1.9 million due to a correction the next day. How will one know when to pull the plug and retire? How will one go about calculating the buffer amount we need to add to the FIRE number?
Simply put, 4% is the absolute minimum.

After you reach that, you should aim for 3.5% or even better, 3%. Then you can be more confident in retiring.
So, should I still go with my plan if 2 million mark was hit yesterday close of market and it goes down by 1 or 2% today?
Should you? That's only a question you can answer, based on your comfort.

The 4% rule is based on historical data and a 30 year retirement period. If you believe that the next 30 years will be no worse than the last 200 years, then yes you should be fine retiring today at 4%.

But obviously the future is not the past, and it could turn out to be worse. So if you want to be safer, and/or your retirement period is longer than 30 years, then you need to build a buffer and aim for 3.5% or 3%.

Re: How do you know when you have reached FIRE number?

Posted: Mon Feb 11, 2019 12:55 am
by MiddleOfTheRoad
I had the same question a while back.

viewtopic.php?f=10&t=257706&p=4095268#p4095268

Re: How do you know when you have reached FIRE number?

Posted: Mon Feb 11, 2019 12:56 am
by RL1013
JustinR wrote:
Mon Feb 11, 2019 12:50 am
RL1013 wrote:
Sun Feb 10, 2019 11:59 pm
JustinR wrote:
Sun Feb 10, 2019 11:50 pm
RL1013 wrote:
Sun Feb 10, 2019 10:35 pm
Say my FIRE Target is 2 million and after years of saving and investing, my total investment reached 2 million. But markets go up and down all the time and the 2 million can reduce to say 1.9 million due to a correction the next day. How will one know when to pull the plug and retire? How will one go about calculating the buffer amount we need to add to the FIRE number?
Simply put, 4% is the absolute minimum.

After you reach that, you should aim for 3.5% or even better, 3%. Then you can be more confident in retiring.
So, should I still go with my plan if 2 million mark was hit yesterday close of market and it goes down by 1 or 2% today?
Should you? That's only a question you can answer, based on your comfort.

The 4% rule is based on historical data and a 30 year retirement period. If you believe that the next 30 years will be no worse than the last 200 years, then yes you should be fine retiring today at 4%.

But obviously the future is not the past, and it could turn out to be worse. So if you want to be safer, and/or your retirement period is longer than 30 years, then you need to build a buffer and aim for 3.5% or 3%.
Thanks. That makes sense.

Re: How do you know when you have reached FIRE number?

Posted: Mon Feb 11, 2019 12:58 am
by retire2022
RL1013 wrote:
Sun Feb 10, 2019 10:35 pm
Say my FIRE Target is 2 million and after years of saving and investing, my total investment reached 2 million. But markets go up and down all the time and the 2 million can reduce to say 1.9 million due to a correction the next day. How will one know when to pull the plug and retire? How will one go about calculating the buffer amount we need to add to the FIRE number?
RL1013

What is your annual expenses?
How old are you?
Are you willing to let 2 million sit idle?
If inflation moves at 2% you may want 4% to break even if so,
How conservative are you?
Do you want any future growth?

Re: How do you know when you have reached FIRE number?

Posted: Mon Feb 11, 2019 1:09 am
by HomerJ
Watty wrote:
Sun Feb 10, 2019 11:36 pm
RL1013 wrote:
Sun Feb 10, 2019 10:35 pm
How will one go about calculating the buffer amount we need to add to the FIRE number?
A key thing to realize is that there are multiple levels of financial independence.

For example "financial independence" could mean;
1) Frugal place to live in a marginal area with enough that I don't go hungry and my kid does not need to support me.
2) A better place to live but not a lot of extras.
3) A very comfortable place to live and a few extras like modest domestic travel.
4) My current standard of living and some nice extras like occasional international travel.
5) A better standard of living and within reason enough money to do anything I want.
6) Dang, I should have spent more when I was young.

I was not in finance or anything like that but during the 2008 financial meltdown I realized that if things got even worse and I lost my job I could move to a nice low cost college town in the midwest where I once went to school and buy a cheap decent house for cash and live a comfortable enough life with minimal savings and Social Security. Sort of like if I needed to hunker down during the great depression. That would have been a step or two above a mobile home but that is not how I would want to live but just knowing that the "worst case" was not all that bad felt surprisingly good. In retrospect it was because I had hit the most basic level of financial independence.

These are not engraved in stone either. It was rough but when I retired I was about 85% sure that I could be in level "4", my current standard of living, with maybe a 5% chance that we might drop a notch later on and about a 10% chance we would move up a level. I was also young enough that if I needed to I could have found some part time job that was relatively enjoyable to supplement my income if I needed to.

I am not anywhere near as experienced a traveler as many posters here but in my travels I have gotten out of the tourist areas enough to appreciate how people live in some parts of the world(and in the US). That makes me appreciate just how well off a stereotypical middle class american lifestyle really is.

One thing you might do is to do a "fire drill" and assume that you found out that you could not work anymore and you had to live the rest of your life on "just" the 2 million dollars that you have today. (You could also factor in any home equity and Social Security too.) Play with the number and write out what your budget would be and what you life would be like.
Great post Watty.

Re: How do you know when you have reached FIRE number?

Posted: Mon Feb 11, 2019 1:15 am
by HomerJ
RL1013 wrote:
Sun Feb 10, 2019 11:54 pm
David Jay wrote:
Sun Feb 10, 2019 10:47 pm
RL1013 wrote:
Sun Feb 10, 2019 10:35 pm
Say my FIRE Target is 2 million and after years of saving and investing, my total investment reached 2 million. But markets go up and down all the time and the 2 million can reduce to say 1.9 million due to a correction the next day. How will one know when to pull the plug and retire? How will one go about calculating the buffer amount we need to add to the FIRE number?
This is where one’s Asset Allocation comes in. Holding a number of years worth of expense funds in bonds allows the stock funds time to recover.

This is also where the SWR studies are useful. They use the worst sequences from the past to give you a relatively safe path. If one uses a 4% withdrawal rate, most people in most circumstances will end up with a huge pile of money in their estate. Only the very worst circumstances will result in marginal conditions.
Thanks for your feedback. Are you suggesting the asset allocation should be bond heavy? And when we draw 4%, should we draw from only bonds and leave stocks alone? Still to maintain that asset allocation we would have to sell stocks to rebalance at some point don't we?

But that aside, what I was trying to understand was if it is ok to pull the plug once I got the fire number with my bond heavy asset allocation or should there be buffer? Sorry if my question was not clear.
It should definitely not be 100% stock near retirement. The 4% "rule" doesn't work with 100% stocks. It was based around 60/40 stocks/bonds I think...

I will be 50/50 stocks/bonds in retirement.

I'll get 2% of my 4% just from the dividends from both sides (bond yields are going up, so maybe 2.5% of the 4%) Then I'll withdraw another 1.5% from the side that is doing better, and rebalance back to 50/50.

If stocks go up, I'll sell enough of my stock index funds to cash out 1.5%, and buy my bond index fund until I'm back to 50/50.

If stocks go down, I'll sell enough of my bond index funds to cash out 1.5%, and buy my stock index fund until I'm back to 50/50.

This way, if there is a stock crash, you sell from the bond side, and give the stock side a chance to recover.

Re: How do you know when you have reached FIRE number?

Posted: Mon Feb 11, 2019 1:37 am
by fennewaldaj
Watty wrote:
Sun Feb 10, 2019 11:36 pm
RL1013 wrote:
Sun Feb 10, 2019 10:35 pm
How will one go about calculating the buffer amount we need to add to the FIRE number?
A key thing to realize is that there are multiple levels of financial independence.

For example "financial independence" could mean;
1) Frugal place to live in a marginal area with enough that I don't go hungry and my kid does not need to support me.
2) A better place to live but not a lot of extras.
3) A very comfortable place to live and a few extras like modest domestic travel.
4) My current standard of living and some nice extras like occasional international travel.
5) A better standard of living and within reason enough money to do anything I want.
6) Dang, I should have spent more when I was young.

I was not in finance or anything like that but during the 2008 financial meltdown I realized that if things got even worse and I lost my job I could move to a nice low cost college town in the midwest where I once went to school and buy a cheap decent house for cash and live a comfortable enough life with minimal savings and Social Security. Sort of like if I needed to hunker down during the great depression. That would have been a step or two above a mobile home but that is not how I would want to live but just knowing that the "worst case" was not all that bad felt surprisingly good. In retrospect it was because I had hit the most basic level of financial independence.

These are not engraved in stone either. It was rough but when I retired I was about 85% sure that I could be in level "4", my current standard of living, with maybe a 5% chance that we might drop a notch later on and about a 10% chance we would move up a level. I was also young enough that if I needed to I could have found some part time job that was relatively enjoyable to supplement my income if I needed to.

I am not anywhere near as experienced a traveler as many posters here but in my travels I have gotten out of the tourist areas enough to appreciate how people live in some parts of the world(and in the US). That makes me appreciate just how well off a stereotypical middle class american lifestyle really is.

One thing you might do is to do a "fire drill" and assume that you found out that you could not work anymore and you had to live the rest of your life on "just" the 2 million dollars that you have today. (You could also factor in any home equity and Social Security too.) Play with the number and write out what your budget would be and what you life would be like.
This is great. One can likely use these guidelines when selecting a variable withdrawal strategy. Usually they have a floor withdrawal (say 2.5% of initial portfolio balance inflation adjusted) Basically one can look at the withdrawal floor and figure out what kind of lifestyle that affords and decide if you are ok with that.

Re: How do you know when you have reached FIRE number?

Posted: Mon Feb 11, 2019 1:58 am
by RL1013
retire2022 wrote:
Mon Feb 11, 2019 12:58 am
RL1013 wrote:
Sun Feb 10, 2019 10:35 pm
Say my FIRE Target is 2 million and after years of saving and investing, my total investment reached 2 million. But markets go up and down all the time and the 2 million can reduce to say 1.9 million due to a correction the next day. How will one know when to pull the plug and retire? How will one go about calculating the buffer amount we need to add to the FIRE number?
RL1013

What is your annual expenses?
How old are you?
Are you willing to let 2 million sit idle?
If inflation moves at 2% you may want 4% to break even if so,
How conservative are you?
Do you want any future growth?
Annual expense is around 80,000 but expecting lower expense during retirement as I am planning to payoff mortgage.

We are 35 and 37. 7 year old daughter
Not willing to let 2 million sit idle
Not extremely conservative. At retirement, planning for 60/40 allocation.
Future growth is good to have.

Re: How do you know when you have reached FIRE number?

Posted: Mon Feb 11, 2019 2:31 am
by RL1013
HomerJ wrote:
Mon Feb 11, 2019 1:15 am
RL1013 wrote:
Sun Feb 10, 2019 11:54 pm
David Jay wrote:
Sun Feb 10, 2019 10:47 pm
RL1013 wrote:
Sun Feb 10, 2019 10:35 pm
Say my FIRE Target is 2 million and after years of saving and investing, my total investment reached 2 million. But markets go up and down all the time and the 2 million can reduce to say 1.9 million due to a correction the next day. How will one know when to pull the plug and retire? How will one go about calculating the buffer amount we need to add to the FIRE number?
This is where one’s Asset Allocation comes in. Holding a number of years worth of expense funds in bonds allows the stock funds time to recover.

This is also where the SWR studies are useful. They use the worst sequences from the past to give you a relatively safe path. If one uses a 4% withdrawal rate, most people in most circumstances will end up with a huge pile of money in their estate. Only the very worst circumstances will result in marginal conditions.
Thanks for your feedback. Are you suggesting the asset allocation should be bond heavy? And when we draw 4%, should we draw from only bonds and leave stocks alone? Still to maintain that asset allocation we would have to sell stocks to rebalance at some point don't we?

But that aside, what I was trying to understand was if it is ok to pull the plug once I got the fire number with my bond heavy asset allocation or should there be buffer? Sorry if my question was not clear.
It should definitely not be 100% stock near retirement. The 4% "rule" doesn't work with 100% stocks. It was based around 60/40 stocks/bonds I think...

I will be 50/50 stocks/bonds in retirement.

I'll get 2% of my 4% just from the dividends from both sides (bond yields are going up, so maybe 2.5% of the 4%) Then I'll withdraw another 1.5% from the side that is doing better, and rebalance back to 50/50.

If stocks go up, I'll sell enough of my stock index funds to cash out 1.5%, and buy my bond index fund until I'm back to 50/50.

If stocks go down, I'll sell enough of my bond index funds to cash out 1.5%, and buy my stock index fund until I'm back to 50/50.

This way, if there is a stock crash, you sell from the bond side, and give the stock side a chance to recover.
Thank you. Now I have a template to prepare a plan that suits my family.

Re: How do you know when you have reached FIRE number?

Posted: Mon Feb 11, 2019 4:47 am
by BeBH65
The moment that you switch from a working career to retirement is very sensitive to market changes.

Do a Google search on "sequence of return" risk and "bond tent"