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Author: SoftSimp Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 5068  
Subject: Funding future needs Date: 8/8/2003 9:36 AM
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OK, I took some time with my budget this morning and projected it into retirement. Assuming my house and the one rental property (I hope to have more than one by then, but I'm not counting unhatched chickens) are paid off, we will need about $35,000 in today's dollars. I figured this using a much more detailed version of the first chart in my "Estimating Future Needs" post (http://boards.fool.com/Message.asp?mid=19429269).

We'd like to retire in about 20 years - I'll be 57 and DH will be 62. If I figure inflation to be about 5%, then the multiplier from the "Estimating Future Needs" post would be 2.6. So we'll need about ($35,000 x 2.6 = 91,000) $91,000/year in 20 years.

Our rental property, if I remove the outstanding debt (which will be paid off) currently brings in about $9,000 annually, after expenses. Since I'm multiplying my future expenses by 2.6, I'm going to go ahead and multiply this current income by 2.6 to come up with a future figure: $23,400 annually. I'll call it $23,000. So I can count on an income from our rental property of about $23,000/year.

That means I'm going to need to come up with ($91,000 - $23,000 = $68,000) $68,000/year from somewhere.

On DH's most recent Social Security statement, they said that if he stops working today he'll be entitled to $921/month at 62. Since he plans on continuing to work, I'm going to estimate that at $1,000/month (as you can see, I'm very conservative - but I am hoping that SS will still be around in 20 years). So there's another $12,000/year in income.

So, taking SS into account, we're going to need ($91,000 - $23,000 - $12,000 = $56,000) $56,000/year from somewhere.

If I figure the typical stock/bond investment combo to yield about 8% annually, and figure inflation to remain at 5%, then I need to figure out how much needs to be invested in order to generate $56,000 at a 3% rate of return (8% - 5% = 3%).

If I don't want to dip into my principal (and I don't), I'll need ($56,000 / .03 = $1,866,667) $1,866,667 to generate $56,000 in investment income per year. So it looks like yesterday's estimate of $500,000 - $600,000 was a bit off.

At our current savings rate, we can't get there. At our current earnings rate, we can't increase our savings rate. So, are we up a creek without a paddle? NOOOO! I refuse to have to work any longer than absolutely necessary. Which means I'll just have to be smarter. ;)

Let's take another look at that rental property. All by itself, it's generating ($23,000 / $91,000 = 25%) 25% of the income we need to retire in the style we want. So, if we had 3 more just like it, we wouldn't need anything invested in the stock market! Now, that particular property happens to be a cash cow (mortgage is $400/mo, rents are $1,150/mo). We paid $68,500 for it in 1999. We found a motivated seller and I did a very good job of negotiating. I don't think it's realistic to believe that all the properties we buy will do as well, so I'll be happy if they just pay for themselves over time, so that when we're ready to retire we can have them all paid off.

I think it's more realistic to expect a rental property to generate about 15% of what we'll need, which would be roughly $5,250 in today's dollars. So if the one property is generating 25%, in order to make up the other 75% we'll need 5 more properties.

If I figure on them costing roughly $90,000-100,000 each, then in order to put 20% down on each, I'll need to save up about $100,000. This is in the realm of possibility for us, whereas saving up $1,866,667 is not. So this is what I'm going to try to do in order to fund our retirement in 20 years. And doing this will also mean that if SS disappears between now and then, we'll still be OK.

Then anything that we manage to sock away into the stock market is just gravy. :) And there's the chance that I'll continue to work a little bit, too. I'm currently a database consultant and work our of my home. I don't see any reason I couldn't continue that after FIRE, on a smaller scale. Plus the tax benefits are phenomenal.

I hope my illustration helped some of you look at funding your FIRE creatively. It doesn't have to be XX dollars in the market earning XX return for XX years - it just has to be something you're comfortable with.

I was pretty conservative in my calculations, figuring a pretty high inflation rate (5%) and a pretty low investment return rate (8%), but I figured it's better to over-estimate what we'll need than to under estimate. If you believe these figures will be different, then you'll come up with very different results.

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