Checkpoints to determine retirement readiness

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loukycpa
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Checkpoints to determine retirement readiness

Post by loukycpa »

Revised:

Financial Independence (FI) and Early Retirement (RE) Checkpoints

Decide How Much You Need to Get Paid in Retirement

You will need to have a firm grasp on what you plan to spend annually in retirement. This is a critical number, as it will drive all of your financial planning for retirement.

No magical thinking allowed. If you are going to choose not to work at all soon after you reach FI (you don’t plan to work past FI to increase your wealth and lifestyle), you will need to be content with the lifestyle you have funded. For example, if the retirement you have funded is somewhere in the range of middle-class America, then you shouldn't anticipate being able to live higher than this. If you or your spouse are still striving to travel more, have more stuff, or otherwise experience a higher standard of living than your nest egg is going to allow, you are not ready to FIRE. This is perfectly ok by the way! You will just need to be willing to work longer to get there.

Take care to make sure this spend goal is large enough to maintain your home and other property (replace the roof, etc.). Remember you will eventually need to replace not only your clothes, but also your vehicles and all the other things you use in your daily life!

Before you FIRE, consider your housing budget carefully. If you are dreaming of purchasing a dream home, make sure the retirement you are funding takes this into account. Will you or your spouse have regrets if you wind up “stuck” in your current home? If the word “stuck” is remotely applicable here for you, consider whether you need to retire with a larger portfolio to accommodate.

Similarly, college as well as any desired launch or legacy expense for your kids must be fully and separately funded. If you haven’t funded your kid’s education, you may very well find yourself in a position where you can’t help very much. Could you live with this? If not, you need to fund it before you FIRE.

Note that it is imperative to figure out a solution with respect to health insurance (buy it through ACA, work part time, etc.) before you FIRE. Unexpected catastrophic health costs have the potential to ruin even the best financial plan. You absolutely have to insure against this kind of bad scenario. The cost of this insurance (plus deductibles, out of pocket max, etc.) must fit comfortably within your annual spend budget. You should also have a contingency plan for potential government policy changes with respect to health care in the future.

Finally, you should build some cushion into your budget. This will give you the flexibility to reduce spending a bit for a period of time in the event returns in your portfolio are low.

How You Will Pay Yourself in Retirement

You need to create a large enough nest egg to be capable of permanently replacing your paycheck(s) and meeting your annual spend needs when you FIRE. You can think of this nest egg as being divisible into two distinct buckets (BRIDGE FUND and GROWTH FUND).

Until you draw Social Security, you will be taking a paycheck from both funds. When you begin to draw Social Security, you will be finished taking a paycheck from your BRIDGE FUND (this bucket will be exhausted and retired at this point), and a paycheck from Social Security will take its place. Meanwhile you will be continuing to take a paycheck for life from GROWTH FUND (this bucket will be designed to be sustainable for as long as you live).

Retirement Paycheck #1 – BRIDGE FUND

A portion of your nest egg will create a BRIDGE bucket until you draw Social Security. A significant portion of this side of the portfolio should be invested in low-risk assets (how much in fixed income driven by the length of the bridge in terms of years). Your goal with returns from this side of the portfolio is to at least match inflation while preserving principal. This bucket (and later Social Security) will provide you with a solid and secure floor of income you can reasonably count on no matter what is occurring in the financial markets.***

Retirement Paycheck #2 – GROWTH FUND

The remainder of your nest egg is a GROWTH bucket and a significant portion of this side of the portfolio should be invested in equities or other assets you can reasonably expect to generate real returns over inflation over the long term. You may live a long time (40+ years) after you FIRE, and to ensure you don’t outlive your money it is imperative you have enough GROWTH assets in your portfolio.

Consider using the Variable Percentage Withdrawal method, created by Boglehead poster longvest, to draw down your portfolio during retirement. VPW incorporates the BRIDGE bucket into your annual draws prior to drawing SS (and any other pensions).

Have a Plan to Keep Your Tax and Health Insurance Spend as Low as Possible

You should consider how to place and create your paychecks from your nest egg in the most tax-efficient manner (tax-free, tax-deferred, vs. taxable space). Make sure any income taxes generated by your draw down strategy are reflected in your annual spend budget. If you are using the ACA for health insurance, not doing your homework and planning here can end up dramatically impacting your health care spend.


*** Social security (and defined benefit pensions if you have them, but most don’t these days) can be your firewall and a backstop that will protect you from the really bad scenarios in your old age. (This is exactly what the program was designed for by the way. It is fundamentally a longevity risk financial insurance program for the elderly.)

Arguably one benchmark on the FI path is getting past the second “bend” point for Social Security. Reaching this benchmark means you have paid enough into the program to ensure you will get a substantial chunk (not all, but a significant portion) of the maximum amount of Social Security a person can draw at Social Security retirement age. Working and paying FICA tax beyond this point will still increase your benefit, but not nearly at the same rate as your earlier contributions (this is why it referred to as a “bend” point). Even with max SS earnings you will need at least 18 years full time work to get there. Typically, one doesn’t make max SS earnings early in their career, so more often it takes more than 20 years even for a high earner. So realistically we are talking to someone who is at least 45 years old.

Whatever you think about Social Security as a program, there is less risk of a bad outcome for someone who sets themselves up to substantially benefit from Social Security in retirement. This is why I am less comfortable telling a person under 45 they can FIRE, unless they have significantly more money saved, versus someone older (it is certainly possible under 45 if you have saved enough money, but these are rarer cases in my opinion).

In the vast majority of cases, the game is about how early you can get there (checking all the boxes) as far in advance of their Social Security full retirement age as possible. This will typically be at least age 45, and often much later.
Last edited by loukycpa on Sun Jan 16, 2022 7:21 am, edited 12 times in total.
SnowBog
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Re: Checkpoints to determine retirement readiness

Post by SnowBog »

Many of these align with the general https://www.bogleheads.org/wiki/Boglehe ... philosophy.

For #1, while I think it adds a safety margin, I'm not sure "home ownership" is required. Some people will never own a home, and for those with the benefit to relocate easily, they can adapt to changes to retain an affordable housing situation.

For #3, you should check out https://www.bogleheads.org/wiki/Variabl ... withdrawal, especially the spreadsheet created by longinvest. It has the concept of "bridge" portfolio already there.

As for the 10-30% in equities in the bridge portfolio, here I'll disagree. I think the duration of the bridge is missing and relevant. If someone retires at 45 and plans to delay social security until 70, they have 25 years they need to fund - and inflation is likely to eat into that heavily with only 10-30% equities. One could argue for TIPS/I Bonds, and that could be a good option. But I'm not sure I'd advise someone to bank on 70-90% of nominal bonds holding their purchase power for up to 25 years...

It might need some extra input on target savings rates, as to FIRE generally means saving a large portion of income (you are trying to fund retirement in less years than most people). Here again the VPW spreadsheet may be of interest, as it has an "accumulation" tab for working years with a recommended savings amount. (My only issue is its based on "income" assuming that you need to replace a standard amount of income in retirement, and may not work as well for high income or ultra FIRE types, but it's better than nothing, and once you understand how it works you can adapt).

Overall, nice post! :beer
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loukycpa
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Re: Checkpoints to determine retirement readiness

Post by loukycpa »

SnowBog wrote: Mon Jan 10, 2022 4:52 pm Many of these align with the general https://www.bogleheads.org/wiki/Boglehe ... philosophy.

For #1, while I think it adds a safety margin, I'm not sure "home ownership" is required. Some people will never own a home, and for those with the benefit to relocate easily, they can adapt to changes to retain an affordable housing situation.

For #3, you should check out https://www.bogleheads.org/wiki/Variabl ... withdrawal, especially the spreadsheet created by longinvest. It has the concept of "bridge" portfolio already there.

As for the 10-30% in equities in the bridge portfolio, here I'll disagree. I think the duration of the bridge is missing and relevant. If someone retires at 45 and plans to delay social security until 70, they have 25 years they need to fund - and inflation is likely to eat into that heavily with only 10-30% equities. One could argue for TIPS/I Bonds, and that could be a good option. But I'm not sure I'd advise someone to bank on 70-90% of nominal bonds holding their purchase power for up to 25 years...

It might need some extra input on target savings rates, as to FIRE generally means saving a large portion of income (you are trying to fund retirement in less years than most people). Here again the VPW spreadsheet may be of interest, as it has an "accumulation" tab for working years with a recommended savings amount. (My only issue is its based on "income" assuming that you need to replace a standard amount of income in retirement, and may not work as well for high income or ultra FIRE types, but it's better than nothing, and once you understand how it works you can adapt).

Overall, nice post! :beer
Home ownership - I see that point and agree. Probably too much of my own thinking here and ok for others to see this differently.

VPW - I have looked at it quite a bit and I am a fan. I would use it myself and encourage others to do it. I would want to make sure I could live on the amount of the reduced spend following a crash (forget the terminology), so I would emphasize when I recommend to others. Agree it incorporates the bridge in the calculations and I like that.

Bridge portfolio - I see your point and generally agree. Duration should drive the allocation. I will probably redraft along those lines.

In my mind I am envisioning someone using either Vanguard LifeStrategy Retirement Income (20/80) or Vanguard Life-Strategy Conservative Growth (40/60) for the bridge. Choice here could be based on duration. For the growth side, Vanguard LifeStrategy Moderate Growth (60/40) or Vanguard LifeStrategy Growth (80/20). Thoughts? Certainly I bond or EE bond ladder could be incorporated into the bridge also.

If one used these funds as I describe, they would be effectively managing sequence risk through a bond tent strategy. Starting perhaps 50/50 when they retire. But gradually increasing to either 60/40 or 80/20 when they reach SS age (as only the growth bucket would be remaining). Maybe not for everyone, but this is what I anticipate doing, since I expect deferred SS to cover much of my spend and can afford to take more risk at that point.

Thx for comments!
sailaway
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Re: Checkpoints to determine retirement readiness

Post by sailaway »

This is an odd mix of processes to get there and actual milestones. Earn and persevere are processes, but then you drag the SS milestone into it. Very confusing. Perhaps you really want two separate lists to address both?


Currently, it looks like you would have to work ~18 years at the max level to reach the bend point. But full time work is not a guarantee of the max, especially at the beginning of a career. That distinction should be made that it is about 20 years contributing at the highest level to reach the second bed point. On the other end, a very high earner could well save enough for a lifetime well before reaching that 20 year mark.

And yes, many early retirees here mention ignoring SS, not because we expect it to be gone, but because our plans have to survive 20-30+ years before we start to collect, so they better be robust enough even without SS. Ignoring SS might mean someone in their late 50s or 60s ends up working too long, but for someone closer to 45, insisting on that second bend point might lead to them working at a high stress career longer than they had to.
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loukycpa
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Re: Checkpoints to determine retirement readiness

Post by loukycpa »

sailaway wrote: Mon Jan 10, 2022 6:19 pm This is an odd mix of processes to get there and actual milestones. Earn and persevere are processes, but then you drag the SS milestone into it. Very confusing. Perhaps you really want two separate lists to address both?


Currently, it looks like you would have to work ~18 years at the max level to reach the bend point. But full time work is not a guarantee of the max, especially at the beginning of a career. That distinction should be made that it is about 20 years contributing at the highest level to reach the second bed point. On the other end, a very high earner could well save enough for a lifetime well before reaching that 20 year mark.

And yes, many early retirees here mention ignoring SS, not because we expect it to be gone, but because our plans have to survive 20-30+ years before we start to collect, so they better be robust enough even without SS. Ignoring SS might mean someone in their late 50s or 60s ends up working too long, but for someone closer to 45, insisting on that second bend point might lead to them working at a high stress career longer than they had to.
Thanks sailaway for feedback. I see what you mean and agree. I have reworked and I'll post revised. Second bend point for SS is kind of ancillary and perhaps just a personal feeling/preference. I demoted to a footnote.
Last edited by loukycpa on Wed Jan 12, 2022 11:08 am, edited 1 time in total.
Topic Author
loukycpa
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Re: Checkpoints to determine retirement readiness

Post by loukycpa »

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Last edited by loukycpa on Fri Jan 14, 2022 2:46 pm, edited 4 times in total.
muffins14
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Re: Checkpoints to determine retirement readiness

Post by muffins14 »

"1) Secure and Provide – before you FIRE, you should own a home you would be happy living out your days in with no mortgage. You should be completely debt free. "

I think I disagree with that as well. Sure, it might be inflation hedge, but there are benefits to renting as well. I don't see ownership as a necessity to FIRE, and in some cases it might be a hinderance, since renting allows one to move to cheaper locations, too
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sailaway
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Re: Checkpoints to determine retirement readiness

Post by sailaway »

Owning a home is certainly not imperative, much less owning your home free and clear. The only imperative is having being very clear about your expenses, as you do state well in the preceding paragraphs. Owning a home is a very traditional way to do so, but not by any means necessary.


Err, looks like someone beat me to it, but it bears pointing out that two people were typing a similar response independently.
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loukycpa
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Re: Checkpoints to determine retirement readiness

Post by loukycpa »

muffins14 wrote: Wed Jan 12, 2022 11:08 am "1) Secure and Provide – before you FIRE, you should own a home you would be happy living out your days in with no mortgage. You should be completely debt free. "

I think I disagree with that as well. Sure, it might be inflation hedge, but there are benefits to renting as well. I don't see ownership as a necessity to FIRE, and in some cases it might be a hinderance, since renting allows one to move to cheaper locations, too
I can see that point. Probably one of those things that seems very necessary to one style of living, while not necessary or even a disadvantage if living another kind of life (more nomadic).

If going this route though you better be sure about it. Thinking you can change your mind and decide you want to buy a home down the road doesn't align with the FIRE decision.
DangerDad
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Re: Checkpoints to determine retirement readiness

Post by DangerDad »

Maybe I missed it (?) but I don’t see anything re Your Number.
This is IMHO the key concept re FI and retirement readiness.
Cheers,
DangerDad
marcopolo
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Re: Checkpoints to determine retirement readiness

Post by marcopolo »

it's not clear to me why FIRE requires a middle class standard of living. It seems people can set whatever goal they like for their spending if they have accumulated enough money to support that. Are you suggesting it is only considered "FIRE" if one retires immediately after reaching a point where "comfortable" retirement is supported?

Dividing the portfolio into two pieces (why only two?) just seems like adding unnecessary complexity. People only have one portfolio, regardless of what kind of mental gymnastics are done to pretend there are multiple separate portfolios.
Once in a while you get shown the light, in the strangest of places if you look at it right.
zuma
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Re: Checkpoints to determine retirement readiness

Post by zuma »

loukycpa wrote: Wed Jan 12, 2022 11:20 am
muffins14 wrote: Wed Jan 12, 2022 11:08 am "1) Secure and Provide – before you FIRE, you should own a home you would be happy living out your days in with no mortgage. You should be completely debt free. "

I think I disagree with that as well. Sure, it might be inflation hedge, but there are benefits to renting as well. I don't see ownership as a necessity to FIRE, and in some cases it might be a hinderance, since renting allows one to move to cheaper locations, too
I can see that point. Probably one of those things that seems very necessary to one style of living, while not necessary or even a disadvantage if living another kind of life (more nomadic).

If going this route though you better be sure about it. Thinking you can change your mind and decide you want to buy a home down the road doesn't align with the FIRE decision.
I don't understand this at all. Why couldn't someone retire early, rent for a while, and then later buy a home if they can afford it?
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loukycpa
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Re: Checkpoints to determine retirement readiness

Post by loukycpa »

zuma wrote: Wed Jan 12, 2022 12:20 pm
loukycpa wrote: Wed Jan 12, 2022 11:20 am
muffins14 wrote: Wed Jan 12, 2022 11:08 am "1) Secure and Provide – before you FIRE, you should own a home you would be happy living out your days in with no mortgage. You should be completely debt free. "

I think I disagree with that as well. Sure, it might be inflation hedge, but there are benefits to renting as well. I don't see ownership as a necessity to FIRE, and in some cases it might be a hinderance, since renting allows one to move to cheaper locations, too
I can see that point. Probably one of those things that seems very necessary to one style of living, while not necessary or even a disadvantage if living another kind of life (more nomadic).

If going this route though you better be sure about it. Thinking you can change your mind and decide you want to buy a home down the road doesn't align with the FIRE decision.
I don't understand this at all. Why couldn't someone retire early, rent for a while, and then later buy a home if they can afford it?
As someone who has never rented or considered doing so, admittedly I haven't given this much thought.

I suppose for someone who has this mindset, withdrawals from a chunk of the portfolio is supporting rent expense. If one changes mindset and decides to buy a house after FIRE, that same chunk of the portfolio will need to cover all the costs of homeownership (downpayment, mortgage or payoff, taxes, insurance, maintenance, etc.). If the numbers work they work, I don't disagree.

The point was if the numbers don't work, because as I think will often be the case the desirable home will require more outflow, no magical thinking. The money would not be there for the lifestyle increase for the dream home. Could be a source of regret. Hence the caution to be sure you have all the home you want (or you are sure you don't aspire to own a home).
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Re: Checkpoints to determine retirement readiness

Post by loukycpa »

marcopolo wrote: Wed Jan 12, 2022 12:03 pm it's not clear to me why FIRE requires a middle class standard of living. It seems people can set whatever goal they like for their spending if they have accumulated enough money to support that. Are you suggesting it is only considered "FIRE" if one retires immediately after reaching a point where "comfortable" retirement is supported?

Dividing the portfolio into two pieces (why only two?) just seems like adding unnecessary complexity. People only have one portfolio, regardless of what kind of mental gymnastics are done to pretend there are multiple separate portfolios.
Agree on middle class standard of living. It can be whatever standard one has funded. It won't be more than you have funded though once you FIRE. Which was the real point.

I understand this point. However, for most people, like it or not the cash flows required from the portfolio aren't going to be one even stream. They are front loaded until SS replaces a big chunk, more than 50% for the average retiree. You can manage your money as if this isn't the case if you want to I suppose, but that makes no sense to me.
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Re: Checkpoints to determine retirement readiness

Post by SnowBog »

marcopolo wrote: Wed Jan 12, 2022 12:03 pm Dividing the portfolio into two pieces (why only two?) just seems like adding unnecessary complexity. People only have one portfolio, regardless of what kind of mental gymnastics are done to pretend there are multiple separate portfolios.
I didn't take "dividing" as literally...

But I took it to mean that you really have two stages to plan for.

An initial stage with more "near term" horizon where you are [likely] funding 100% of your expenses from your savings. Presumably a more conservative AA makes sense for these years.

The latter stage when pensions, social security, and eventually RMDs all kick in, which for the FIRE crowd is likely more "long term" (aka 10+ years away). A more aggressive AA makes sense, given the horizon as well as having other "safe" income streams at this point.

Whether these are just factored into the overall AA or treated as a separate buckets arguably doesn't matter. In other words, I'd agree there is no "requirement" to "divide" the portfolio..

But again I took the general point being to plan for both stages.

Depending on how much your pension and social security are, this can complicate the general SWR models. I don't have a 30+ horizon with a consistent need for funds. My projection is we'll need maybe 1% or so a year when we get to 70 (given how much we expect from pensions + social security). But what is "safe" for the first say 15 years? If we use something in the 3% range - as oft recommended for FIRE - we'll most likely be constrained to spend less than we could have during the early phase and have boatloads left when we get to the later phase.

This is one of the [many] reasons I like VPW, as longinvest's spreadsheet gives me an easy way to factor those in. It in effect is internally modeling the concept of a "bridge" portfolio to replace later pensions + social security. It's still a single portfolio in action, the VPW spreadsheet is doing all the hard work.
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Re: Checkpoints to determine retirement readiness

Post by marcopolo »

SnowBog wrote: Wed Jan 12, 2022 1:40 pm
marcopolo wrote: Wed Jan 12, 2022 12:03 pm Dividing the portfolio into two pieces (why only two?) just seems like adding unnecessary complexity. People only have one portfolio, regardless of what kind of mental gymnastics are done to pretend there are multiple separate portfolios.
I didn't take "dividing" as literally...

But I took it to mean that you really have two stages to plan for.

An initial stage with more "near term" horizon where you are [likely] funding 100% of your expenses from your savings. Presumably a more conservative AA makes sense for these years.

The latter stage when pensions, social security, and eventually RMDs all kick in, which for the FIRE crowd is likely more "long term" (aka 10+ years away). A more aggressive AA makes sense, given the horizon as well as having other "safe" income streams at this point.

Whether these are just factored into the overall AA or treated as a separate buckets arguably doesn't matter. In other words, I'd agree there is no "requirement" to "divide" the portfolio..

But again I took the general point being to plan for both stages.

Depending on how much your pension and social security are, this can complicate the general SWR models. I don't have a 30+ horizon with a consistent need for funds. My projection is we'll need maybe 1% or so a year when we get to 70 (given how much we expect from pensions + social security). But what is "safe" for the first say 15 years? If we use something in the 3% range - as oft recommended for FIRE - we'll most likely be constrained to spend less than we could have during the early phase and have boatloads left when we get to the later phase.

This is one of the [many] reasons I like VPW, as longinvest's spreadsheet gives me an easy way to factor those in. It in effect is internally modeling the concept of a "bridge" portfolio to replace later pensions + social security. It's still a single portfolio in action, the VPW spreadsheet is doing all the hard work.
The OP literally talks about two separate portfolio, one that keeps a 20-30% allocation to equities to serve as a BRIDGE, another GROWTH portfolio that is kept at 70-80% equities. This is just unnecessary complexity. What that equates to is something like a 60/40 portfolio, just use that. Yes, spending is uneven. Hasn't that been the case for most of one's life?

Do you actually use a SWR? I have never heard of anyone that does that.
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loukycpa
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Re: Checkpoints to determine retirement readiness

Post by loukycpa »

SnowBog wrote: Wed Jan 12, 2022 1:40 pm
marcopolo wrote: Wed Jan 12, 2022 12:03 pm Dividing the portfolio into two pieces (why only two?) just seems like adding unnecessary complexity. People only have one portfolio, regardless of what kind of mental gymnastics are done to pretend there are multiple separate portfolios.
I didn't take "dividing" as literally...

But I took it to mean that you really have two stages to plan for.

An initial stage with more "near term" horizon where you are [likely] funding 100% of your expenses from your savings. Presumably a more conservative AA makes sense for these years.

The latter stage when pensions, social security, and eventually RMDs all kick in, which for the FIRE crowd is likely more "long term" (aka 10+ years away). A more aggressive AA makes sense, given the horizon as well as having other "safe" income streams at this point.

Whether these are just factored into the overall AA or treated as a separate buckets arguably doesn't matter. In other words, I'd agree there is no "requirement" to "divide" the portfolio..

But again I took the general point being to plan for both stages.

Depending on how much your pension and social security are, this can complicate the general SWR models. I don't have a 30+ horizon with a consistent need for funds. My projection is we'll need maybe 1% or so a year when we get to 70 (given how much we expect from pensions + social security). But what is "safe" for the first say 15 years? If we use something in the 3% range - as oft recommended for FIRE - we'll most likely be constrained to spend less than we could have during the early phase and have boatloads left when we get to the later phase.

This is one of the [many] reasons I like VPW, as longinvest's spreadsheet gives me an easy way to factor those in. It in effect is internally modeling the concept of a "bridge" portfolio to replace later pensions + social security. It's still a single portfolio in action, the VPW spreadsheet is doing all the hard work.
Agree with all points.

I would add that planning for both stages does two important things I care about.

#1 - I know I can draw more money in the early years of retirement (stage 1) because I will need to draw less in stage 2.

#2 - It impacts asset allocation. I have more sequence risk than someone planning to retire without SS or pension, because I need more from the portfolio in stage 1 than in stage 2. Therefore I need more safe assets to manage this sequence risk.

Agree this is a separate portfolio only in the sense of spreadsheet or other tools you use to manage asset allocation and determine your draws from the portfolio. Again it informs asset allocation and the annual draw I take.
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loukycpa
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Re: Checkpoints to determine retirement readiness

Post by loukycpa »

marcopolo wrote: Wed Jan 12, 2022 1:49 pm
SnowBog wrote: Wed Jan 12, 2022 1:40 pm
marcopolo wrote: Wed Jan 12, 2022 12:03 pm Dividing the portfolio into two pieces (why only two?) just seems like adding unnecessary complexity. People only have one portfolio, regardless of what kind of mental gymnastics are done to pretend there are multiple separate portfolios.
I didn't take "dividing" as literally...

But I took it to mean that you really have two stages to plan for.

An initial stage with more "near term" horizon where you are [likely] funding 100% of your expenses from your savings. Presumably a more conservative AA makes sense for these years.

The latter stage when pensions, social security, and eventually RMDs all kick in, which for the FIRE crowd is likely more "long term" (aka 10+ years away). A more aggressive AA makes sense, given the horizon as well as having other "safe" income streams at this point.

Whether these are just factored into the overall AA or treated as a separate buckets arguably doesn't matter. In other words, I'd agree there is no "requirement" to "divide" the portfolio..

But again I took the general point being to plan for both stages.

Depending on how much your pension and social security are, this can complicate the general SWR models. I don't have a 30+ horizon with a consistent need for funds. My projection is we'll need maybe 1% or so a year when we get to 70 (given how much we expect from pensions + social security). But what is "safe" for the first say 15 years? If we use something in the 3% range - as oft recommended for FIRE - we'll most likely be constrained to spend less than we could have during the early phase and have boatloads left when we get to the later phase.

This is one of the [many] reasons I like VPW, as longinvest's spreadsheet gives me an easy way to factor those in. It in effect is internally modeling the concept of a "bridge" portfolio to replace later pensions + social security. It's still a single portfolio in action, the VPW spreadsheet is doing all the hard work.
The OP literally talks about two separate portfolio, one that keeps a 20-30% allocation to equities to serve as a BRIDGE, another GROWTH portfolio that is kept at 70-80% equities. This is just unnecessary complexity. What that equates to is something like a 60/40 portfolio, just use that. Yes, spending is uneven. Hasn't that been the case for most of one's life?

Do you actually use a SWR? I have never heard of anyone that does that.
My spending I suppose varies some from year to year. But it has never dropped 70% and then stayed down at that level permanently.

If I ignore that stage 2 is different, I will wake up in at age sixty something and it will dawn on me that 70% of my portfolio is no longer necessary. That doesn't seem like a plan at all to me. It seems like the lack of one.
marcopolo
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Joined: Sat Dec 03, 2016 10:22 am

Re: Checkpoints to determine retirement readiness

Post by marcopolo »

loukycpa wrote: Wed Jan 12, 2022 2:38 pm
marcopolo wrote: Wed Jan 12, 2022 1:49 pm
SnowBog wrote: Wed Jan 12, 2022 1:40 pm
marcopolo wrote: Wed Jan 12, 2022 12:03 pm Dividing the portfolio into two pieces (why only two?) just seems like adding unnecessary complexity. People only have one portfolio, regardless of what kind of mental gymnastics are done to pretend there are multiple separate portfolios.
I didn't take "dividing" as literally...

But I took it to mean that you really have two stages to plan for.

An initial stage with more "near term" horizon where you are [likely] funding 100% of your expenses from your savings. Presumably a more conservative AA makes sense for these years.

The latter stage when pensions, social security, and eventually RMDs all kick in, which for the FIRE crowd is likely more "long term" (aka 10+ years away). A more aggressive AA makes sense, given the horizon as well as having other "safe" income streams at this point.

Whether these are just factored into the overall AA or treated as a separate buckets arguably doesn't matter. In other words, I'd agree there is no "requirement" to "divide" the portfolio..

But again I took the general point being to plan for both stages.

Depending on how much your pension and social security are, this can complicate the general SWR models. I don't have a 30+ horizon with a consistent need for funds. My projection is we'll need maybe 1% or so a year when we get to 70 (given how much we expect from pensions + social security). But what is "safe" for the first say 15 years? If we use something in the 3% range - as oft recommended for FIRE - we'll most likely be constrained to spend less than we could have during the early phase and have boatloads left when we get to the later phase.

This is one of the [many] reasons I like VPW, as longinvest's spreadsheet gives me an easy way to factor those in. It in effect is internally modeling the concept of a "bridge" portfolio to replace later pensions + social security. It's still a single portfolio in action, the VPW spreadsheet is doing all the hard work.
The OP literally talks about two separate portfolio, one that keeps a 20-30% allocation to equities to serve as a BRIDGE, another GROWTH portfolio that is kept at 70-80% equities. This is just unnecessary complexity. What that equates to is something like a 60/40 portfolio, just use that. Yes, spending is uneven. Hasn't that been the case for most of one's life?

Do you actually use a SWR? I have never heard of anyone that does that.
My spending I suppose varies some from year to year. But it has never dropped 70% and then stayed down at that level permanently.

If I ignore that stage 2 is different, I will wake up in at age sixty something and it will dawn on me that 70% of my portfolio is no longer necessary. That doesn't seem like a plan at all to me. It seems like the lack of one.
There are plenty of approaches that incorporate various income and spending turning on and off at different times without having to create different portfolio. Take a look at something like amortization based approaches. There is a long thread on one specific implementation of such called ABW.
Once in a while you get shown the light, in the strangest of places if you look at it right.
sailaway
Posts: 4184
Joined: Fri May 12, 2017 1:11 pm

Re: Checkpoints to determine retirement readiness

Post by sailaway »

loukycpa wrote: Wed Jan 12, 2022 1:10 pm
zuma wrote: Wed Jan 12, 2022 12:20 pm
loukycpa wrote: Wed Jan 12, 2022 11:20 am
muffins14 wrote: Wed Jan 12, 2022 11:08 am "1) Secure and Provide – before you FIRE, you should own a home you would be happy living out your days in with no mortgage. You should be completely debt free. "

I think I disagree with that as well. Sure, it might be inflation hedge, but there are benefits to renting as well. I don't see ownership as a necessity to FIRE, and in some cases it might be a hinderance, since renting allows one to move to cheaper locations, too
I can see that point. Probably one of those things that seems very necessary to one style of living, while not necessary or even a disadvantage if living another kind of life (more nomadic).

If going this route though you better be sure about it. Thinking you can change your mind and decide you want to buy a home down the road doesn't align with the FIRE decision.
I don't understand this at all. Why couldn't someone retire early, rent for a while, and then later buy a home if they can afford it?
As someone who has never rented or considered doing so, admittedly I haven't given this much thought.

I suppose for someone who has this mindset, withdrawals from a chunk of the portfolio is supporting rent expense. If one changes mindset and decides to buy a house after FIRE, that same chunk of the portfolio will need to cover all the costs of homeownership (downpayment, mortgage or payoff, taxes, insurance, maintenance, etc.). If the numbers work they work, I don't disagree.

The point was if the numbers don't work, because as I think will often be the case the desirable home will require more outflow, no magical thinking. The money would not be there for the lifestyle increase for the dream home. Could be a source of regret. Hence the caution to be sure you have all the home you want (or you are sure you don't aspire to own a home).
If you never considered renting, you probably never ran the numbers. But here you have multiple people telling you that this isn't how it works. There are a number of ways in which moving between renting and owning can be advantageous, even for similar homes in the same neighborhood. On top of that, geo arbitrage is a very real thing. So maybe it makes sense to pay $3k in rent while living in a HCOL, but that same person later decides to move back closer to family and now it makes sense to buy, with their overall portfolio withdrawal actually decreasing.
SnowBog
Posts: 2615
Joined: Fri Dec 21, 2018 11:21 pm

Re: Checkpoints to determine retirement readiness

Post by SnowBog »

marcopolo wrote: Wed Jan 12, 2022 1:49 pm The OP literally talks about two separate portfolio, one that keeps a 20-30% allocation to equities to serve as a BRIDGE, another GROWTH portfolio that is kept at 70-80% equities. This is just unnecessary complexity. What that equates to is something like a 60/40 portfolio, just use that.
Again, I didn't read it as literally as you. But I can understand why you took it literally, and I (and I think OP) agree it shouldn't be literally two portfolios. (Nothing against doing so if that easier for people, but no requirement to do so...)

I took it instead as thinking through how to determine ones AA. As you note, the end result can be a blended one. In fact, our AA is 60/40 for similar reasons.
marcopolo wrote: Wed Jan 12, 2022 1:49 pm Yes, spending is uneven. Hasn't that been the case for most of one's life?
Largely, no... Our spending is fairly predictable, with some minor variations.

In retirement we'll likely have higher spending variations, primarily due to healthcare and going through various stages of private/ACA coverage for family, for 2, for 1 + Medicare, for 2 on Medicare, and eventually for just 1 again.

But I think the more relevant part was "income" not expenses. Here while my income has been anything but consistent or predictable, it has always covered our expenses - so the variation was how much "extra" we could save in a given year - which isn't really a problem.

In retirement, especially "early" retirement years, we'll basically go from $0 income to nearly all expenses (all essential and then some) covered by delayed pensions/social security.

When I first started my planning/modeling, I effectively did break things into two portfolios/plans - given the significant differences in income and thus needs from the portfolio.

I extended my own model into more of a "cash flow" that allows my to model in different incomes and expenses, each with their own start/end dates. The result was basically "did the plan work" by seeing if we ran out of money anywhere along the way.

I eventually found VPW. I'm not a huge fan of the "accumulation" side (I think of required savings in terms of "expenses", not how VPW handles it in terms of "income", but I figured out how to use an adjusted "income" amount to approximate or expected expenses and now it works for us). But the "withdrawal" side makes a ton of sense to us, especially for the reasons stated here with different income sources coming in at different times.
marcopolo wrote: Wed Jan 12, 2022 1:49 pm Do you actually use a SWR? I have never heard of anyone that does that.
I still use SWR as a "rule of thumb" to just track where things are at in a simple model. For example, I really like the Your Money or Your Life's idea of a "wall chart" where you plot out expenses each month vs. a SWR (say 4%) of your portfolio. Over the few years I've done so, it's been encouraging to see those lines converging.

But I don't plan to use SWR for actual retirement... (But I know many others who pay in here and give the impression that's exactly what they plan on doing.)
SnowBog
Posts: 2615
Joined: Fri Dec 21, 2018 11:21 pm

Re: Checkpoints to determine retirement readiness

Post by SnowBog »

sailaway wrote: Wed Jan 12, 2022 3:16 pm
loukycpa wrote: Wed Jan 12, 2022 1:10 pm
zuma wrote: Wed Jan 12, 2022 12:20 pm
loukycpa wrote: Wed Jan 12, 2022 11:20 am
muffins14 wrote: Wed Jan 12, 2022 11:08 am "1) Secure and Provide – before you FIRE, you should own a home you would be happy living out your days in with no mortgage. You should be completely debt free. "

I think I disagree with that as well. Sure, it might be inflation hedge, but there are benefits to renting as well. I don't see ownership as a necessity to FIRE, and in some cases it might be a hinderance, since renting allows one to move to cheaper locations, too
I can see that point. Probably one of those things that seems very necessary to one style of living, while not necessary or even a disadvantage if living another kind of life (more nomadic).

If going this route though you better be sure about it. Thinking you can change your mind and decide you want to buy a home down the road doesn't align with the FIRE decision.
I don't understand this at all. Why couldn't someone retire early, rent for a while, and then later buy a home if they can afford it?
As someone who has never rented or considered doing so, admittedly I haven't given this much thought.

I suppose for someone who has this mindset, withdrawals from a chunk of the portfolio is supporting rent expense. If one changes mindset and decides to buy a house after FIRE, that same chunk of the portfolio will need to cover all the costs of homeownership (downpayment, mortgage or payoff, taxes, insurance, maintenance, etc.). If the numbers work they work, I don't disagree.

The point was if the numbers don't work, because as I think will often be the case the desirable home will require more outflow, no magical thinking. The money would not be there for the lifestyle increase for the dream home. Could be a source of regret. Hence the caution to be sure you have all the home you want (or you are sure you don't aspire to own a home).
If you never considered renting, you probably never ran the numbers. But here you have multiple people telling you that this isn't how it works. There are a number of ways in which moving between renting and owning can be advantageous, even for similar homes in the same neighborhood. On top of that, geo arbitrage is a very real thing. So maybe it makes sense to pay $3k in rent while living in a HCOL, but that same person later decides to move back closer to family and now it makes sense to buy, with their overall portfolio withdrawal actually decreasing.
OP, you may want to check out articles like this and some of them linked from it. https://jlcollinsnh.com/2013/05/29/why- ... nvestment/

While I happen to own a home, and enjoy the "peace of mind" it brings me, these types of articles helped me understand that its not necessarily as "financially sound" as I had previously assumed it was.
Topic Author
loukycpa
Posts: 228
Joined: Wed Aug 05, 2020 9:52 am

Re: Checkpoints to determine retirement readiness

Post by loukycpa »

SnowBog wrote: Wed Jan 12, 2022 3:28 pm
sailaway wrote: Wed Jan 12, 2022 3:16 pm
loukycpa wrote: Wed Jan 12, 2022 1:10 pm
zuma wrote: Wed Jan 12, 2022 12:20 pm
loukycpa wrote: Wed Jan 12, 2022 11:20 am

I can see that point. Probably one of those things that seems very necessary to one style of living, while not necessary or even a disadvantage if living another kind of life (more nomadic).

If going this route though you better be sure about it. Thinking you can change your mind and decide you want to buy a home down the road doesn't align with the FIRE decision.
I don't understand this at all. Why couldn't someone retire early, rent for a while, and then later buy a home if they can afford it?
As someone who has never rented or considered doing so, admittedly I haven't given this much thought.

I suppose for someone who has this mindset, withdrawals from a chunk of the portfolio is supporting rent expense. If one changes mindset and decides to buy a house after FIRE, that same chunk of the portfolio will need to cover all the costs of homeownership (downpayment, mortgage or payoff, taxes, insurance, maintenance, etc.). If the numbers work they work, I don't disagree.

The point was if the numbers don't work, because as I think will often be the case the desirable home will require more outflow, no magical thinking. The money would not be there for the lifestyle increase for the dream home. Could be a source of regret. Hence the caution to be sure you have all the home you want (or you are sure you don't aspire to own a home).
If you never considered renting, you probably never ran the numbers. But here you have multiple people telling you that this isn't how it works. There are a number of ways in which moving between renting and owning can be advantageous, even for similar homes in the same neighborhood. On top of that, geo arbitrage is a very real thing. So maybe it makes sense to pay $3k in rent while living in a HCOL, but that same person later decides to move back closer to family and now it makes sense to buy, with their overall portfolio withdrawal actually decreasing.
OP, you may want to check out articles like this and some of them linked from it. https://jlcollinsnh.com/2013/05/29/why- ... nvestment/

While I happen to own a home, and enjoy the "peace of mind" it brings me, these types of articles helped me understand that its not necessarily as "financially sound" as I had previously assumed it was.
I've never seen my home as a good investment, and generally not even an investment at all. It's a money pit no question about it. Obtaining and now maintaining have been a drag on my path to retirement. I could certainly reduce my spend and increase my portfolio if I sold it and rented a townhouse or something. It is a luxury good I can now afford and I am glad that I can. :happy

Don't see this as inconsistent with my general point, which is that if you want to own and enjoy this luxury good, fund it before you FIRE. Otherwise you can't count on being able to afford it.
muffins14
Posts: 1222
Joined: Wed Oct 26, 2016 4:14 am
Location: New York

Re: Checkpoints to determine retirement readiness

Post by muffins14 »

loukycpa wrote: Wed Jan 12, 2022 11:20 am
muffins14 wrote: Wed Jan 12, 2022 11:08 am "1) Secure and Provide – before you FIRE, you should own a home you would be happy living out your days in with no mortgage. You should be completely debt free. "

I think I disagree with that as well. Sure, it might be inflation hedge, but there are benefits to renting as well. I don't see ownership as a necessity to FIRE, and in some cases it might be a hinderance, since renting allows one to move to cheaper locations, too
I can see that point. Probably one of those things that seems very necessary to one style of living, while not necessary or even a disadvantage if living another kind of life (more nomadic).

If going this route though you better be sure about it. Thinking you can change your mind and decide you want to buy a home down the road doesn't align with the FIRE decision.
Why can’t you change your mind though? Presumably you have a portfolio of size X, if X is enough to fund your expenses plus the mortgage, you are still financially independent
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SnowBog
Posts: 2615
Joined: Fri Dec 21, 2018 11:21 pm

Re: Checkpoints to determine retirement readiness

Post by SnowBog »

loukycpa wrote: Wed Jan 12, 2022 6:21 pm
SnowBog wrote: Wed Jan 12, 2022 3:28 pm
sailaway wrote: Wed Jan 12, 2022 3:16 pm
loukycpa wrote: Wed Jan 12, 2022 1:10 pm
zuma wrote: Wed Jan 12, 2022 12:20 pm
I don't understand this at all. Why couldn't someone retire early, rent for a while, and then later buy a home if they can afford it?
As someone who has never rented or considered doing so, admittedly I haven't given this much thought.

I suppose for someone who has this mindset, withdrawals from a chunk of the portfolio is supporting rent expense. If one changes mindset and decides to buy a house after FIRE, that same chunk of the portfolio will need to cover all the costs of homeownership (downpayment, mortgage or payoff, taxes, insurance, maintenance, etc.). If the numbers work they work, I don't disagree.

The point was if the numbers don't work, because as I think will often be the case the desirable home will require more outflow, no magical thinking. The money would not be there for the lifestyle increase for the dream home. Could be a source of regret. Hence the caution to be sure you have all the home you want (or you are sure you don't aspire to own a home).
If you never considered renting, you probably never ran the numbers. But here you have multiple people telling you that this isn't how it works. There are a number of ways in which moving between renting and owning can be advantageous, even for similar homes in the same neighborhood. On top of that, geo arbitrage is a very real thing. So maybe it makes sense to pay $3k in rent while living in a HCOL, but that same person later decides to move back closer to family and now it makes sense to buy, with their overall portfolio withdrawal actually decreasing.
OP, you may want to check out articles like this and some of them linked from it. https://jlcollinsnh.com/2013/05/29/why- ... nvestment/

While I happen to own a home, and enjoy the "peace of mind" it brings me, these types of articles helped me understand that its not necessarily as "financially sound" as I had previously assumed it was.
I've never seen my home as a good investment, and generally not even an investment at all. It's a money pit no question about it. Obtaining and now maintaining have been a drag on my path to retirement. I could certainly reduce my spend and increase my portfolio if I sold it and rented a townhouse or something. It is a luxury good I can now afford and I am glad that I can. :happy

Don't see this as inconsistent with my general point, which is that if you want to own and enjoy this luxury good, fund it before you FIRE. Otherwise you can't count on being able to afford it.
Ultimately, money is fungible.

As sailaway pointed out, if someone's paying $3k/month to rent in a HCOL area, if they found a place they could purchase (perhaps by moving to a different location) for less than $3k/month (inclusive of payment, insurance, taxes, and if included in their rent utilities) they'd actually come out ahead.

If they could afford $3k for rent indefinitely, they can definitely afford to spend $3k (probably even more) to buy a place (since at some point it will be paid off).

They may have challenges getting a mortgage without a job (some lenders will do so based on their assets).

But as many of us are offering, it's most definitely not a "requirement" to purchase a house before FIRE or retirement in general. It's arguably a good recommendation to have your home paid off prior, but again not a requirement. The numbers either work or they don't - that simple...
Topic Author
loukycpa
Posts: 228
Joined: Wed Aug 05, 2020 9:52 am

Re: Checkpoints to determine retirement readiness

Post by loukycpa »

SnowBog wrote: Wed Jan 12, 2022 8:31 pm
loukycpa wrote: Wed Jan 12, 2022 6:21 pm
SnowBog wrote: Wed Jan 12, 2022 3:28 pm
sailaway wrote: Wed Jan 12, 2022 3:16 pm
loukycpa wrote: Wed Jan 12, 2022 1:10 pm

As someone who has never rented or considered doing so, admittedly I haven't given this much thought.

I suppose for someone who has this mindset, withdrawals from a chunk of the portfolio is supporting rent expense. If one changes mindset and decides to buy a house after FIRE, that same chunk of the portfolio will need to cover all the costs of homeownership (downpayment, mortgage or payoff, taxes, insurance, maintenance, etc.). If the numbers work they work, I don't disagree.

The point was if the numbers don't work, because as I think will often be the case the desirable home will require more outflow, no magical thinking. The money would not be there for the lifestyle increase for the dream home. Could be a source of regret. Hence the caution to be sure you have all the home you want (or you are sure you don't aspire to own a home).
If you never considered renting, you probably never ran the numbers. But here you have multiple people telling you that this isn't how it works. There are a number of ways in which moving between renting and owning can be advantageous, even for similar homes in the same neighborhood. On top of that, geo arbitrage is a very real thing. So maybe it makes sense to pay $3k in rent while living in a HCOL, but that same person later decides to move back closer to family and now it makes sense to buy, with their overall portfolio withdrawal actually decreasing.
OP, you may want to check out articles like this and some of them linked from it. https://jlcollinsnh.com/2013/05/29/why- ... nvestment/

While I happen to own a home, and enjoy the "peace of mind" it brings me, these types of articles helped me understand that its not necessarily as "financially sound" as I had previously assumed it was.
I've never seen my home as a good investment, and generally not even an investment at all. It's a money pit no question about it. Obtaining and now maintaining have been a drag on my path to retirement. I could certainly reduce my spend and increase my portfolio if I sold it and rented a townhouse or something. It is a luxury good I can now afford and I am glad that I can. :happy

Don't see this as inconsistent with my general point, which is that if you want to own and enjoy this luxury good, fund it before you FIRE. Otherwise you can't count on being able to afford it.
Ultimately, money is fungible.

They may have challenges getting a mortgage without a job (some lenders will do so based on their assets).

But as many of us are offering, it's most definitely not a "requirement" to purchase a house before FIRE or retirement in general. It's arguably a good recommendation to have your home paid off prior, but again not a requirement. The numbers either work or they don't - that simple...
Agreed.

Thanks all for good comments. I went back and edited on several different points made.
SnowBog
Posts: 2615
Joined: Fri Dec 21, 2018 11:21 pm

Re: Checkpoints to determine retirement readiness

Post by SnowBog »

For ease of those finding this thread... You may want to move your revised version to the top.

You can note that it's changed a bit based on comments, so people don't question why some of the posts say what they do...

But I think if far better to keep the updated version of your original idea in the first post. (or alternatively link to the post with the current version - don't make people read through a bunch of posts to find it)
Topic Author
loukycpa
Posts: 228
Joined: Wed Aug 05, 2020 9:52 am

Re: Checkpoints to determine retirement readiness

Post by loukycpa »

SnowBog wrote: Fri Jan 14, 2022 1:11 pm For ease of those finding this thread... You may want to move your revised version to the top.

You can note that it's changed a bit based on comments, so people don't question why some of the posts say what they do...

But I think if far better to keep the updated version of your original idea in the first post. (or alternatively link to the post with the current version - don't make people read through a bunch of posts to find it)
good idea done
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