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No. of Recommendations: 14
A lot of people are having trouble coming up with a figure that says what they'll need to be financially independent. It just so happens that I cleaned off my desk today, and buried under a pile of mail was a newsletter that has an article on estimating your retirement income.

First, set up a little table that shows your current expenses. Then, try to predict how those expenses will change when you FIRE. After that, you'll use a multiplier (which I'll get to in a bit) to figure the inflation adjusted annual income you'll need.

Current Projected Annual
Annual Annual x multi- = Income
Areas Expense Expense plier Needed
----- --------- --------- ------ --------
Housing $xxxxx $xxxxx
Food $xxxxx $xxxxx
Clothing $xxxxx $xxxxx
-----
Healthcare $xxxxx $xxxxx
Taxes $xxxxx $xxxxx
Insurance $xxxxx $xxxxx
-----
Transportation $xxxxx $xxxxx
Vacation/Travel $xxxxx $xxxxx
Charitable Cont. $xxxxx $xxxxx
Other $xxxxx $xxxxx
----- ---------
TOTAL PROJECTED ANNUAL EXPENSE: $XXXXXX x x.x% = $XXXXXX

You can make your table much more complex than I did, but this should cover the basics. Certain costs may increase or decrease when you stop working - for instance, your housing costs may go down because your mortgage is paid off, or your healthcare costs may go up because you're no longer covered under an employer's plan. Take these changes into account when coming up with your "Projected Annual Expense" (in today's dollars).

Next, you'll need to figure a "inflation factor multiplier." Conveniently, the newsletter has done this for us:

Years Anticipated Inflation Rate
to FIRE 3% 4% 5% 6%
------- ----- ----- ----- -----
5 years 1.2 1.2 1.3 1.3
10 1.3 1.5 1.6 1.8
20 1.8 2.2 2.6 3.2
30 2.6 3.2 4.3 5.7

The tough part here is picking which inflation factor to use, because inflation rates aren't steady and aren't necessarily easy to predict. So just pick one. :)

Then, take your "Total Projected Annual Expense" from the first table, multiply it by the "Inflation Factor" you picked from the second table, and you will have your "Estimated FIRE Annual Income."

Total Projected Inflation Estimated FIRE
Annual Expense x Factor = Annual Income Needed

Where is this income going to come from? Any number of places, many of which we've already been discussing. The following is a list of some, but by no means all, possibilities:

* Asset Income (dividends, interest, rents)
* Pensions and Retirement Plans
* Earnings (Wages)
* Social Security
* Other (Residuals, Licenses, Other Types of Benefits)

So the next difficult task is to figure out what percentage of your "Total Projected Annual Expense" each type of income will provide. This figure will probably vary over time as well. For instance, if you retire early, it'll be some time before retirement benefits like Social Security kick in, so maybe during those years you'll still want a small wage coming in - perhaps from a hobby.

I'll leave it to you to figure out the rest. Hopefully I've gotten those of you who have no direction headed the right way.

SS
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No. of Recommendations: 5
You can make your table much more complex than I did, but this should cover the basics.

The best, complete list I have found to really start thinking about retirement budgeting is found here:

http://www.efmoody.com/planning/budget.html

It is an extremely exhaustive list, but it gets you thinking about a lot of things.

-Agg97
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To get a good handle on the cost to maintain your current standard of living, Just take your net income, subtract from that anything that you save. What remains is by definition the cost of maintaining your current lifestyle. It's a good starting point for making adjustments for any changes you anticipate in retirement.

Regards,
FMO
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To get a good handle on the cost to maintain your current standard of living, Just take your net income, subtract from that anything that you save. What remains is by definition the cost of maintaining your current lifestyle. It's a good starting point for making adjustments for any changes you anticipate in retirement.


Yes, that's a simplified way... then I've heard multiply that times 25 to get the total amount you'd need to be FI.
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chooey98 writes:

Yes, that's a simplified way... then I've heard multiply that times 25 to get the total amount you'd need to be FI.

Yes, if you buy into the approach that you should remain invested heavily in equities and take a 4% withdrawal rate. I reject this proposition as essentially unworkable for most folks. I also believe you can safely withdraw a much larger percentage of your portfolio if part of that portfolio contains good income-producing real estate in addition to other investments.

For those living entirely off their assets, a portfolio composed of primarily the S&P 500 and U.S. bonds is suicidal in my opinion. It is not diversified (being 100% in large cap U.S. stocks and bonds, whose price movements are highly correlated) and the volatility will have you wetting your pants and making moves which are not in your best interests. This approach also requires you to sell your seed corn due to current high valuations and low yields. Any approach dependent on the liquidation of principle is dangerous IMO.

Regards,
FMO
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FMO:For those living entirely off their assets, a portfolio composed of primarily the S&P 500 and U.S. bonds is suicidal in my opinion. It is not diversified (being 100% in large cap U.S. stocks and bonds, whose price movements are highly correlated) and the volatility will have you wetting your pants and making moves which are not in your best interests. This approach also requires you to sell your seed corn due to current high valuations and low yields. Any approach dependent on the liquidation of principle is dangerous IMO.

I think you are painting stocks with the same broad strokes that are so irritating when they are applied to real estate (which is more often the case on TMF). Any investment, improperly managed, can turn into a nightmare.

st
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SloanT writes:

Any investment, improperly managed, can turn into a nightmare.

I agree entirely. All I did was state an opinion that a strategy which relies on a high allocation to only large cap stocks and accompanied by only U.S. bonds does not provide much diversification and will likely lead to a level of volatility which will be unsettling and detrimental to the average investors attempting to live solely off there investments. I don't think I said large cap stocks or U.S. bonds are bad did I? After all, I own them both. I am not alone in my opinions regarding their proper management however. Gillette Edmunds, Author of "How to Retire Early and Live Well" advise putting no more than one-third of your retirement in U.S. stocks" He doesn't think stocks are bad either, but he does believe in diversification into several noncorrelated asset classes.

Regards,
FMO





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