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Subject:  Re: A visual tool Date:  9/4/2003  11:20 AM
Author:  GusSmed Number:  668 of 5069

can you clarify how this would work?

The short answer is update your FIRE and total net worth figures once a month, and compare the two as a percentage. If the net worth percentage has advanced a full percentage point or more compared to your remaining links, tear up the links.

Getting those figures is a matter of record keeping. I always know my net worth, because I have record for everything in Quicken. I include my estimated home equity in this figure by tracking my house's current estimated market value in Quicken, as well as the remaining balance on my mortgage.

Presumably you keep a budget. You absolutely need one if you want a firm FIRE figure, because you need to know how much you want in retirement. I'd include a reasonable monthly recreation budget in this, since you don't want to be just scraping by. I would not include rent or mortgage.

For example, for me this figure is $40,000 / year, which includes $12,000 / year in recreation, and things like property taxes.

Now you need to include taxes. This is moderately complex, since it's a sliding scale, and your income is going to include capital gains and dividends, which aren't taxed like normal income. I currently estimate my tax burden will be about 20%, excluding property tax. My actual tax burden is about 30% right now, but that's all normal income, and my household income is about double what I'll need in retirement.

For me, then, I'm estimating my pre-tax desired income to be $40,000 / (100% - 20%) = $50,000 / year. At 4% withdrawal, that's $1.25M. At 5%, it's $1M. Personally, I'm going with a 5% rate, which is aggressive, because I believe I will be able to adjust my spending and re-balance my bond vs. stock income a bit more intelligently than the RE spreadsheet shows.

To this, I add the cost of a house. I didn't include rent or mortgage in my earlier numbers because I intended to add that cost here. I'm allowing $300K for this figure, because I figure that's the maximum cost to build to suit in a market more reasonable that the Boston suburbs. Build to suit isn't my first choice, but it does put a cap on what I expect to pay. Hence my total target figure is $1.3M at present.

I walked through this stuff because you can combine two steps by multiplying your current annual budget by x20 / 80% = 25 (for 5%) or x25 / 80% = 31.25 (for 4%). If you keep reasonable track of what you're actually spending, you can update your FIRE figure quickly by doing something like this:

FIRE = Last 12 month's spending x 30 + House Cost.

It's worthwhile to update housing prices about once a year, since they do change. One way to do it is to use or something similar to take a gander at asking prices for houses you'd like in the area you'll retire. If you think you'll retire in your present house - which I don't - you needn't bother, you can just use your mortgage.

- Gus

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