This topic has occupied the minds of Mr. and Mrs. PIE for the best part of a year. Lengthy conversations over dinner, kicking ideas around while on vacation, debating the various considerations when sitting on the first ski-lift of the day. Despite the importance of the topic and its worthiness for significant brain-power, it becomes exhausting at times and we always circle back to some of the same factors.
As you read through our analysis, it is important to know that Mr. and Mrs. PIE are quite the conservative pair. We like safety nets, we build contingency plans, we try to anticipate different situations that could unfold and we look for certainty. “Ha Ha, looking for certainty? Really?” you might scoff. And you’d be absolutely right. There is no certainty.
We can’t predict. We can prepare.
Here are the factors that ultimately rose to the top of the priority pile as we landed on our date of Tuesday, July 3, 2018. On this day, both Mr. and Mrs. PIE will call it a day with the corporate world. Why this specific date? Who wouldn’t want a first day of freedom to be July 4!!
Here are the key factors that have gone into our preparation. It is a mix of family, financial and philosophical considerations.
- The impact of the “date” on our children
- The strong desire to slow down the crazy nature of life as two working parents
- The realization of the slower, outdoor lifestyle we enjoy as a family
- The safety net of income we will benefit from starting in the summer of 2022 and beyond
- The combined assets that we will hold in our taxable and tax-advantaged accounts at the launch date
- Our comfort level with various scenarios we played with using “retirement” calculators
Impact of FI Date on our Children
Our eldest will be completing elementary school (age 11) in the summer of 2018. Since we’d be relocating to our mountain home in a different state, hence a new school for our kids, we recognized this would be a great time to minimize any other difficult transition if we chose a date further down the line or earlier. Raising children brings new priorities to every parent. The same considerations apply when thinking about FI date. Look out for an upcoming post this week from Mrs. PIE on the subject of how the needs of our children have shaped our plans and timeline.
Desire to Stop the Craziness
13 hours (at least) of combined commuting per week for Mr. and Mrs. PIE. That translates to 12,480 hours or 1.4 years of lost time between starting our working life in the US and the time we hit our FI date. Lost time is never found again. Added to that is the “madness” of balancing work-life with managing extra-curricular activities of kids interests and activities. Those readers with children and managing careers will know exactly what we are talking about. It’s time to call time on the crazy schedules, endless juggling and stress that ensues. It’s as simple as that.
The Outdoor Life that we Love
We have always enjoyed travel, hiking, skiing, kayaking and other outdoor pursuits. The purchase of a second home in the mountains nearly three years ago has allowed us to pursue most of those interests on a regular basis at weekends. The ability to do that has only whet our appetite for more. We get the weekend taste. We are hungry for more meals. And we can only stave off that hunger for so long.
Safety Net of Future Income and Division of Assets in Taxable vs Tax-deferred Accounts
There are two key considerations that have shaped our thinking.
Firstly, the division of assets within our investment portfolio.
In Figure 1 below I have captured the break-down on what our future portfolio will broadly look like at our FI date in terms of tax-deferred vs taxable accounts. A decent chunk of the taxable bucket will be from proceeds from the sale of our primary home. Of course the buckets ratio may change slightly depending on the overall performance of respective funds in each bucket over the next two years. We like how the balance of the buckets look and it should allow us to comfortably withdraw from our taxable account until we need to withdraw from our tax-deferred accounts.
Figure 1: Taxable vs Tax-Deferred Buckets in July 2018
Secondly, an income source (i.e. pension) that Mr. PIE has earned through his employer.
Mr. PIE is fortunate to have had an integrated career of >20 years so far in the pharmaceutical industry. To all intents and purposes, with one company, for the purposes of future benefits considerations. I won’t bore you with the details of acquisitions, spin-outs etc. that describes a few more subtle nuances. What this integrated service has resulted in is the benefit of employer contributions over that period on his behalf to a pension. Yes, a non-contributory pension. It’s a rare thing in these times, we are fortunate to have it and very grateful for the benefit it will bring as we enter the next phase of our lives. It will start providing income in 2022, four years post FI.
In Figure 2, I have plotted the portfolio withdrawal rate against three distinct phases in our FI life. You can see the tremendous impact that pension has on the withdrawal rate from our portfolio. As I have said above, we are a conservative pair and this safety net provides a great deal of comfort as we plan ahead. Social security in whatever form it comes will be added gravy. SS benefits won’t go away in my opinion but will look much different by 2034 to address the problem that is brewing related to the deficit. Note that I have not plotted the SS benefit ascribed to Mrs. PIE which will come 6 years after Mr. PIE and of similar magnitude to his SS benefit. That will reduce our portfolio withdrawal rate to zero. Again, if SS benefits end up being zero, nada (unlikely!), we will still have a withdrawal rate of 2.5% that we are comfortable with.
Figure 2: Portfolio Withdrawal Rate vs Age
Regarding the withdrawal rate, these numbers are by no means fixed. The key to any withdrawal strategy is to be able to react to market situations and adjust spend accordingly while keeping a very close eye on which asset allocation to draw from (stocks vs bonds). What is clear is from research on the Safe Withdrawal Rate (SWR) is that the first 10 years of any retirement / financial independence situation are absolutely critical. This relates to the Sequence of Returns, described by Wade Pfau and others. The bottom line from this analysis is that taking a major hit in the early years of FI in terms of portfolio depletion will likely not be recoverable. Although we fully understand the research that supports the 4% rule, there are many good arguments being put forward that this approach is outdated and could pose considerable risk to those banking on it during long periods of FIRE.
Our future expenses project for a healthy and comfortable lifestyle where we can travel, enjoy splurging occasionally on great restaurants and continue with hobbies such as skiing and other outdoor activities. We honestly have no idea whether we will wish to / need to look for additional side income sources – we’ll work that out along the way, it does not worry us much. We understand which aspects of our budget can be ratcheted back in a belt-tightening mode if portfolio returns are below an acceptable level, including a good understanding of how to reduce the initial 4% withdrawal during the first 4 years if necessary. Likewise, we understand which areas of our budget will never be compromised – healthcare, basic shelter/essential utilities and healthy food.
Comfort Level Based on Output of Retirement Calculator(s)
Retirement calculators have been covered extremely well by Darrow Kirkpatrick over at Can I Retire Yet. His thorough analysis boils down to a set of (mostly readily accessible) calculators that he has found workable and meet a set of criteria related to ease of use, fidelity, platform they run on and cost. He has subsequently updated and refined the list in a 2016 post. From the original 2014 post, we have found the Ultimate Retirement Calculator from The Financial Mentor to be an intuitive and flexible calculator. It is also free. Multiple data points such as current portfolio value, anticipated rate of return, inflation rate, longevity (of course a big guess), estimated expenses, one-time events (e.g. house sale), income events (e.g. pension, Social Security), changes to future expenses (e.g. rate of reduction of expenses with aging) can be inputted to the calculator. The output is tabular and computes savings/contributions needed to fully fund the plan. For those getting started, this is a calculator that you can play around with and see how different scenarios could impact your plan. We are just starting to look at the other calculators out there. Indeed, it is recommended that the early FI person / retiree should take advantage of multiple calculators and cross-reference the data output to build increased confidence around their specific plan.
With respect to our situation and input of data (including a conservative rate of return on our investments of 4-5%; rate of inflation at 3%; modest decrease in expenses as we age), the numbers reveal our portfolio not only lasting to age 100 but leaving a considerable estate to our children. That being said, we intend to look more closely at additional calculators and cross-check each output. There is more work to be done.
So, this is all fine and dandy. What would change this plan? To be honest, we can’t say. Life can throw all sorts of stuff at us with total disregard of timing and severity. Market collapses? Another major financial crisis? Stratospheric healthcare costs? We can’t control any of those so why worry about them?
We can’t prepare. We can adapt.
And that is precisely what we will do. Adapt, do more homework, modify and re-work the plan. For simplicity, here’s hoping that we don’t need to.
Oh, did I forget to mention this important point……..we are beyond excitement with our plan!!
What factors have come to the top of your priority list as you defined your FI date? What contingency plans are you putting in place? If you are at FI already, what would you have done differently as your FI date got closer?