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No. of Recommendations: 2
I've watched the debates on 2-3-5% wdr - but, call me naive - as DH and I are planning our retirement, we are planning on not touching our principal and living only on interest.

We estimate we'd like to have an annual income of $60/year. That requires us to have anywhere from $600,000 to $1.5m (preferably the higher in the event of very low returns).

Are we totally off in our thinking?

C.
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No. of Recommendations: 2
Yes. You are totally off. If you want $60K per year and want to live off pure interest and not let your principal deteriorate against inflation, you'll need to save up at least $3.4 million. I assumed an interest rate of 3%, inflation of 1%, and your (approximate federal) taxes below.

If you live in a state with no state income tax, your first $14K is tax free (personal exemptions and standard deduction). Your next $12K will be taxed at 10%. And your next $25K or so will be taxed at 15%. Your last $9K will be taxed at 28%. Therefore if you need $60K per year, you'll need your interest income to generate about $67K per year.

Somebody can give better numbers on the tax as I'm probably wrong about the 10% tax and the limits on the "cake layers" of taxation in the USA. But I'm close enough for government work.
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No. of Recommendations: 1
No. But heres a couple of things that we are thinking in our planning :

-we are estimating that to maintain our STANDARD of living that goes into calculating my annual budget, our cost of living goes up 4% annually. That means that in say 10 years, the 60K starting salary jumps to around 85K needed for that year (note, that only reflects an increase of around 3K/year in the cost of living, question is, how much does your cost of living increase NOW over last year).
if you aren't going to touch the principle, that means your 600K would have to grow to 700K which isn't all that unreasonable. Whats questionable is where to put the 600K to guarantee that it grows to meet your increasing budget needs as you syphon off the returns from the year before.

-our starting budget of (and its the same as yours 60K for the first year) reflects approx 40% over what we will need as a minimum baseline income. But the 40% pays for a few nice vacations, car payment IF we need to make one, etc. And if we don't spend it all, then its a "carry-over" to the next year, but as we fully plan on taking those nice vacations annually (calling them "field trips" for our homeschooling), not anticipating much "carry over".

-we are low balling our annual investment returns to 5%. If we get more in reality, we are ahead. But if we have a few years like the last few, they could eat up a chunk of principle. What this means tho is that we have to start with a lot more than the minimum if one was to plan on say 6% or 7% returns.

in your case, I would think the main concern is getting the returns on your assets. Think if you use 600K and expect 10% returns as a minimum, you would find yourself falling short of your needs, let alone having the ability to increase your w/ds annually as needed to maintain your standard of living.

recommendation, like you, we aren't too interested in the amount we can w/d per year. Its more important to be able to w/d what we need. And as you mentioned, its going to require a lot more than the minimum and would recommend you use a conservative "return" rate on what you do have in assets in your planning... Of course, it also depends on how long you intend to live only on the interest versus starting to syphon off the assets themselves. Good luck.
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No. of Recommendations: 12
I've watched the debates on 2-3-5% wdr - but, call me naive - as DH and I are planning our retirement, we are planning on not touching our principal and living only on interest.

We estimate we'd like to have an annual income of $60/year. That requires us to have anywhere from $600,000 to $1.5m (preferably the higher in the event of very low returns).

Are we totally off in our thinking?


I think you're naive, but I mean that in the kindest way. The big picture can get lost in the focus on pixels around here.<grin>

Your principal must continue to grow in retirement, because your expenses will continue to grow due to inflation. It will take more and more principal to get more and more interest to counteract inflation(all else being equal).

If inflation averages 3%/yr., then your expenses will grow by 3%/yr. and your principal must grow by 3%/yr. This growth must come from your interest, but if you spend all your interest each year, you will need some of your principal to counteract inflation which will decrease your pricipal and create a declining principal/interest spiral that results in portfolio failure (poverty before death).

The whole SWR debate is about whose quess is the optimum and there's no crystal ball to provide the level of clarity that some desire. Your SWR + PIR (personal inflation rate) is your RROR (required rate of return). Since all three of these are unknowable, you have to make guesses and assumptions. Failure to include your PIR is very dangerous. Failure to understand that these are averages and that they will undoubtedly fluctuate is also dangerous.

1HF


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No. of Recommendations: 0
orv - if you have things set up the way you say here, I'd say stop worrying.

arrete
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No. of Recommendations: 4
arette writes:
orv - if you have things set up the way you say here, I'd say stop worrying.

Budding FIRE candidates stress-out far too much about if they "can" or "can't". I know. I was one of them and I delayed my FIRE bliss for three unecessary years because of it.

My two FIRE mentors used to laugh at me the same way I now laugh at the same over-planning FIRE wannabes. Nike is right here. Just put your "tennies" on and "just do it".
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No. of Recommendations: 0
orv - if you have things set up the way you say here, I'd say stop worrying.

arrete



thanks. It is set up the way I portray it. Just keep reading/learning/listening to what others have to offer, looking for things I missed. Avoiding overconfidence in ones self is a great asset to have. But that said, avoiding being to confident generates what I call a "questioning attitude". Which is quite a bit different than "worrying"...
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No. of Recommendations: 10
otter states:
But that said, avoiding being to confident generates what I call a "questioning attitude". Which is quite a bit different than "worrying"...

You can "question yourself" into the old folks home <grin>. Say you're 40 and expect to live until 90. That means you have 18,262.5 days left of life. Each passing day represents a larger percentage of your life starting at 0.0055%. How many of those "days" do you want to spend reducing your 1% probability of failure by 50%.

I don't know about the rest of you, but IMHO, there is a reverse "time-value" of life in operation here. This means that each youthful day (today) is worth more than each "old-age" day (tommorrow).
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No. of Recommendations: 0
"time-value" of life ... This means that each youthful day (today) is worth more than each "old-age" day (tommorrow).

This is a great phrase and a great concept. I know we've skirted around the issue before, but I don't think it's ever been stated so succinctly. CC should appreciate that.

arrete
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No. of Recommendations: 0
I tend to look at it the other way. My goal is to retire early. A lot of others are stuck working until they are 65/67 or whatever their retirment age will be. I view the day that I fully retire before the age of 65 as a major success. I don't look at the extra year or two as "lost opportunities" as I consider myself extremely fortunate to be able to even consider retiring early.

I also tend to look at a glass half full of water as "half full". In otherwords, tend to be grateful for what I do have, not what I miss. In this case, what I am "missing" in your words is just part of the road I travel to what I will have when I reach my goals...
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No. of Recommendations: 6
I don't know about the rest of you, but IMHO, there is a reverse "time-value" of life in operation here. This means that each youthful day (today) is worth more than each "old-age" day (tommorrow).

I have to wholeheartedly agree with this. As you age, your world shrinks. This is inevitable. My grandmother is 94 and has alzheimers. Her world is down to three rooms and a twice/wk bus ride to the senior center to play with the other adult kids. Her pace is approximately 15'/minute.

When I had a career, my world was my office, my car (in DC traffic), my house and occasional trips to places I usually didn't care much for. I can't say I was much better off than my grandmother. My pace was faster, but not necessarily more enjoyable. ER changed that.

1HF
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No. of Recommendations: 0
"time-value" of life ... This means that each youthful day (today) is worth more than each "old-age" day (tommorrow).

if I was considering retiring at the age of 25 versus the age of 50 I would agree with you. But when one talks a couple of years difference, yes there is some drop off, but if one stays active during those years and takes care of one self, bet you could still catch up with the "floss covered" youngsters that you "mentioned" (course the question that you are raising, are you in good enough shape to do something about it once you catch up with them).

course, if the extra years paid off financially, you could "recover" your strength over a nice dinner and an evening drive in your Porsche'....

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No. of Recommendations: 2
I don't know about the rest of you, but IMHO, there is a reverse "time-value" of life in operation here. This means that each youthful day (today) is worth more than each "old-age" day (tommorrow).

This is such a great statement that I'm going to nominate it as one of the "Classic FIRE Posts".

It's also one of those occasions where I totally agree with our Costa Rican agitator. ;-)

Nice job, galeno

bill2975
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No. of Recommendations: 7
The whole concept of having a "job" that you go to, to earn money to live, is a relatively new conept in Human Evolution. It is only recently that humans have given up the nomadic hunter-gatherer existence, to tie themselves down to a "job." We've seem to lost some of our freedom in our transition to an industrial society. I'm not sure that it's all good. Our fear of death has driven us to lose a lot of the joy of living. We are afraid to take chances, to set our eyes on to the next mountain to see what's over there. There comes a point in our existence when we need to say, "hey, I'm not getting any younger, I'm going to dive in, take the plunge, and see if I can do this!" We can discuss the SWR over and over ad nauseum, but if our fear keeps us from a fun filled exciting life, then is security and safety really worth it? For those of us who are U.S. citizens the worst that can happen is that we run out of money in old age, when we're too old for adventure, and we have to live on Social Security. That is what the vast majority of Baby Boomers are going to be doing anyway. What difference if we have to join them when our bodies are spent and we are close to the end anyway? At least we'll have our memories of all the good times we had in our early retirement. - Art
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No. of Recommendations: 13
...our fear keeps us from a fun filled exciting life, then is security and safety really worth it?

Well, Abraham Mazlow says that safety and security are higher up the Heirarchy of Human Needs than "fun." Here's another take (not mine) on fun from Happiness is a Serious Problem by Dennis Prager.

Fun Versus Happiness

Fun is most definitely important to a happy life, but unless understood and used properly, it actually reduces happiness.

One reason is that fun shares a number of characteristics with drugs. Motivated by the belief that fun (and its partner, excitement) will bring happiness, many men and women become fun addicts, people who pursue fun with ever increasing amounts of energy, money, and time, and sometimes at great cost to personal lives and family.

Fun shares an additional trait with drugs—the next dose must be as strong or stronger than the previous one. For many people, fun is not satisfying in moderate doses; the “kick” is insufficient. And for those who associate fun with happiness, seeking fun in moderation is as absurd as seeking happiness in moderation.

The problem of needing to raise the excitement threshold for fun is a real one. Think of how much fun you had the first time you kissed—merely kissed—a boyfriend or girlfriend. Sometime thereafter kissing ceased to provide enough fun, and heavy petting began. Then its ability to provide enough pleasure wore off, too, and intercourse ensued. Then, for those who pursue fun rather than happiness, in time that too loses much of its ability to provide fun and excitement, and more potent pleasures are needed. Examples might include seeking sex with other partners either through infidelity, which usually reduces happiness, or by remaining single and having many partners, a lifestyle associated more with loneliness than with happiness.

In this regard, I sometimes think that Hollywood stars have an almost God-given role to play in our world. The richest, most beautiful, and most famous people, who do indeed have constant access to the most fun—the best parties, the most sex with glamorous partners, the most expensive cars, the most luxurious homes, the most exotic vacations, and the most opportunities to engage in and get to attend the best sports and theatrical events—repeatedly remind us that these things simply do not lead to happiness. As noted earlier, in memoir after memoir they reveal to us the sad lives behind all the fun. We should feel greatly indebted to every Hollywood star who has written about his or her alcoholism, lost children, depressed life, profound loneliness and various addictions. If we could learn from others' lives—a trait that may best define wisdom—we would be very grateful to those people for providing such credible testimony that fun doesn't lead to happiness.

But because most people do not learn from others' lives, they continue to believe that the next fun-provider will do what the preceding fun-providers have not been able to do—make them happy.

In addition to having drug-like qualities, there is another, equally powerful way in which fun can actually decrease happiness. If we identify having fun with happiness, we will identify the opposite of fun—pain—with unhappiness. However, because no happiness is possible without pain, the attempt always to avoid it by having fun as much as possible makes happiness impossible.
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No. of Recommendations: 1
One reason is that fun shares a number of characteristics with drugs. Motivated by the belief that fun (and its partner, excitement) will bring happiness, many men and women become fun addicts, people who pursue fun with ever increasing amounts of energy, money, and time, and sometimes at great cost to personal lives and family.

Fun shares an additional trait with drugs—the next dose must be as strong or stronger than the previous one. For many people, fun is not satisfying in moderate doses; the “kick” is insufficient. And for those who associate fun with happiness, seeking fun in moderation is as absurd as seeking happiness in moderation.


This is great stuff. Think of this the next time you meet a "party animal" and you will experience sympathy or loathing or anything but envy for the party lifestyle.

I went through a mercifully brief party phase in my life and quickly got bored with people who think life should be one big party. This even goes beyond that to cover the adrenaline junkies who participate in extreme sports. My most extreme experience was skydiving, but that was tame compared to the guaranteed bone cruncher sports like skateboarding off buildings onto handrails. Imho, fun is darwinistic. A certain amount enhances the quality of life and more than that leads to unhappiness.

1HF

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No. of Recommendations: 3
My most extreme experience was skydiving, but that was tame compared to the guaranteed bone cruncher sports like skateboarding off buildings onto handrails.

More like testicle-crunching. I recently saw one of those "Funniest Home Videos"--several scenes of young men (at least they started out that way) doing just what you describe--skateboarding off buildings onto handrails. Scene after scene of boys gripping their groins in what must be indescribable pain; then getting up (eventually) to do it all over again. I think you're onto something with your Darwinism theory.
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No. of Recommendations: 0
I've watched the debates on 2-3-5% wdr - but, call me naive - as DH and I are planning our retirement, we are planning on not touching our principal and living only on interest.

We estimate we'd like to have an annual income of $60/year. That requires us to have anywhere from $600,000 to $1.5m (preferably the higher in the event of very low returns).

Are we totally off in our thinking?


Ummm.... probably. At least on the amount you need to invest.

The kicker is inflation.

You are going to be hard-pressed to invest $1.5M in a manner that spins off $60K (inflation-adjusted) in interest/dividends AND grows enough to cover inflation. (And is in safe investments, not junk bonds and story stocks.) On average, let alone every single year so that you never have to touch the underlying assets at all.

The stocks of the S&P500 index (used in the SWR study) don't pay much in dividends. Most of the increase in value there is capital gains. On that plan, you'd be selling some of the stock most years.

If you don't account for inflation, you can probably invest $1.5M to safely yield $60K. This year. And next year. And twenty years from now, you will still get your $60K - and hope it's enough to pay the rent for the year, on your one-room apartment with kitchen privileges.
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No. of Recommendations: 0
More like testicle-crunching. I recently saw one of those "Funniest Home Videos"--several scenes of young men (at least they started out that way) doing just what you describe--skateboarding off buildings onto handrails. Scene after scene of boys gripping their groins in what must be indescribable pain; then getting up (eventually) to do it all over again. I think you're onto something with your Darwinism theory.

You know, the Darwin Awards committee are explicit in their NON-requirement that the qualifiers actually die... seems to me that this might do the job.
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No. of Recommendations: 1
1.5 million in MO would give you $93000 a year before taxes,but i doubt you'd be able to sleep at night.

2828
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