Using FIRECalc tool to determine FI status

One of the nice free tools that are available on the internet is the FIRECalc tool (see list to right). This tool allows you to put in a variety of data and variables, and try out different scenarios to see if you meet your goal, based on historical performance. The tool uses stock market history and your portfolio choices to try and predict how well you should do for a certain period of the future.

While not perfect (nothing is) it is a good first step towards exploring your goals and how close you are to FI. I will be discussing other tools in the future, but this is an excellent first start.

When you open the FIRECalc page, it provides a description of the model, what it does, how to navigate, etc. It is here where you start, putting in your annual spending, your portfolio value (401K, IRA, 403b, etc.), and the number of years you expect to be “retired.” The program will use this as a basis for determining your success.

The next tab is where you put in “other income” during retirement, above and beyond your retirement assets. Here is where you would put in your Social Security or pension benefits.

The next tab is the “not retired” tab, where you can put in how many additional years you intend to work before acting on your early retirement plan. It also provides a place to show the additional money you intend to invest during this time.

The spending models tab allows you to input the plan for inflation, how your spending power will go (i.e. adjusted for inflation, high expenses to start and less as you grow older, using a percentage of your portfolio, etc.) This lets you look at a variety of options on how you plan to spend, to see if you can achieve your goals.

The next tab is for your portfolio. Here you can use a consistent historical average, or provide your own asset allocation. Again, this allows you to look at the range of options and “play” with them to see how it would affect the result.

There is an optional tab for portfolio changes, lump sum additions to your portfolio (like inheritance, home sale, etc.)

The last tab shows a variety of investigation options you can get from the result, including changes to your allocation, delaying retirement, and spending levels. Just another set of options to play with to further analyze and refine your plan.

Once you are done entering all your information and options, just click on the “submit” button at the bottom to get the results. It will determine, based on the period it studies, how often your plan will succeed or fail, and will provide the lowest, highest, and average portfolio balances for you at the end.It should give you a “big picture” view of how your plan worked out. Now you can go “tweak” some of the entries to see how you might do.

Good luck, and I hope it provides you with some good news!

Mr. 39 Months

Investment update for Nov 1, 2018

I think this post is going to be similar to a lot of FIRE posts in early November. The stock market, bond market, and every other market in the US got crushed near the end of October, and almost everything went down. Ouch!

Retirement Accounts: Remember, my allocation for these is:

  • 30% Bond Index Fund
  • 17.5% S&P500 Index Fund
  • 17.5% International Index Fund
  • 17.5% Small Cap Index Fund
  • 17.5% REIT Index Fund

So for the month, I’m down about 5.5%, with the big losers being the S&P500, Small Cap and International . My Bonds and REITs were down , but not as much.

  • S&P500: -7%
  • Small Cap: -10%
  • International: -8%
  • Bonds: -1%
  • REITs: -2%

My 401K/Deferred account at work is down even more, -7.6%. This is primarily due to it not having a REIT option, so since it is heavier with stocks, it suffered more.

Dividend Income Account: Allocation:

  • 25% Dividend Stocks
  • 25% REITs
  • 50% Bond Index Funds

This account didn’t suffer as much. Part of that is its high weight in bonds & REITs (which didn’t suffer as much) and part of it is that the stock picks, especially Verizon, actually were up. Overall, its only down -2.8%

Value Investing Account: Allocation (remember I refocused this at the beginning of February):

  • 40% in individual value stocks I picked myself (2 each, 20% for each) – SBS and GILD
  • 20% USAA Market Index (my brokerage is USAA)
  • 40% in Vanguard Value Index fund

Gilead was down -11.7%, USAA was down 9.8%, and Vanguard value was down 5%. Surprisingly, Cia Saneamento (which has done terribly for the entire year) was up 25.8%! Very odd.

So what do you do after such a shellacking? I stay the course. For 2017, I had a tremendous year (the market was up 19%), so I got to reap the benefits of that. Now in 2018, with rising interest rates and the FANG stocks of the S&P getting hammered, it looks like its going to be a null year. You have to be willing to take the good with the bad.

How did you do in October?

 

Mr. 39 Months

Medical Costs in year 1 of early retirement

As we get closer to FIRE, one of the things Mrs. 39 Months and I (and so many others) get concerned about is paying for medical costs prior to hitting age 65. In the US, Medicare picks up at that age, and though there are still medical bills, Medicare does help pick up a lot of the slack.

The current plan is to retire early at age 56 for me, 58 for Mrs. 39 Months, so that means 7-9 years in which we will have to pay for our own medical. I’ve written before about how, after reading “The Power of Zero”, I want to try to minimize or eliminate taxes for us in the first 5-10 years. If we do that and they keep the ACA subsidies in place, we should be OK. The problem is that first year.

The plan is to retire early in July 2019. Doing that, I would have several issues pop up which would make us ineligible for Obamacare subsidies:

  • Six months of pay at my six-figure salary
  • A deferred investment account my company has, which will yield me roughly $204K, all of which I will receive on the first day after I leave, and all it taxable
  • The need to live for the remaining six months, and thus to draw money from somewhere.

So my initial plan to use Obamacare won’t work for year 1 of my early retirement. I could use the Cobra to get my work insurance (Cobra is a program where you can get health insurance for up to 18 months after you leave a job, provided you pay both your part and your company’s part). Currently I’m paying about $9,800/year for my Silver plan at work, so I’m expecting that to pick up my company’s contribution, that would at least be double that = $19,600/year ($1,633/mo.).

I’ve spoken about using HealthSherpa before, to assist in your searches for healthcare. When I go online there and type in my expected income for year 1, I get no subsidies. I went with a silver plan (the most popular) and a PPO (we like the flexibility there. The system is showing me an Amerihealth NJ plan for $1,569/month (ouch) with an expected annual cost for medium usage at around $21,577 (or $1,798/mo.). Double ouch! So for that first year, I’m going to need to add an extra $1K a month to my expected medical costs, because I will make way too much money to get ACA subsidies.

Something to plan for and make part of our budget. Thanks to the FI community, at least I am aware of this kind of stuff, and can prepare for it. Also, just because we hit FI doesn’t mean we stop working. It’s possible that I find another position in my company or at another, or Mrs. 39 Months keeps working and gets a job with benefits. Either way, we’ll work it out.

It pays to know what is going on, so thanks to all those who write about this stuff (see links to right). I hope all your plans work out!

 

Mr. 39 Months

Good post at retire by 40 on social security benefits for early retirees

The post gives you the math to determine your Soc Security benefits, and how retiring early will curtail them.

Most folks don’t know that the report from SSN assumes you will continue to work at your current salary till you hit your retirement age. Thus the number showing on the website for you is overstated if you retire early.

I found out that we’ll be taking about a 30% cut to our stated benefits if we decide to retire in the next year.

Interesting article in Kiplinger’s about the FIRE movement

Good article about the FIRE movement, with some examples. They’ve got most of it right, a few details off.

The examples they use is your typical high-income earning couple who made six figures in their early years. I wish we could see more examples of more normal people who do this in these sort of articles.

The article ends with  recommended steps, which folks in the FIRE movement can get behind:

To get on the road to Financial Independence, Retire Early, proponents recommend these nine steps:

1. Determine why you want to achieve FIRE, and envision what you will do once you get there. (This will keep you motivated.)

2. Calculate your net worth (total assets minus liabilities) to see where you stand.

3. Track every dollar spent so you know where your money goes.

4. Slash expenses. To reach a savings rate of 50% or more, you’ll need to cut major expenses, including housing and transportation.

5. Pay off high-cost debt, such as credit cards.

6. Build an emergency fund so you don’t resort to credit cards in a pinch.

7. Take advantage of tax-friendly accounts: 401(k)s, IRAs and a health savings account.

8. Use index funds to keep investing costs low.

9. Find a side hustle to bring in extra income and boost savings.

I’m just a “roady”….

One of the tenets of FI is to have time to do what you really enjoy. One of Mrs. 39 Months hobbies that she has picked up in the last couple of years is playing the dulcimer – a folk instrument with roots in 19th century Appalachia. It’s kind of funny, because Mrs. 39 Months is 100% Italian America (all 4 grandparents from Italy). Still, she really enjoys the instrument. Her father actually helped make one for her from a kit when she was 18 (she still has it) and she continued to have some interest over the years. Lately, though it has become quite a passion.

Part of having any sort of hobby like this is the potential to travel to various shows, with vendors, classes and a network of friends and “fellow travelers.” It also provides her with the opportunity to spend money, and the running gag in the community is, when someone asks “how many dulcimers do you have” to answer back “I still need one more.” Currently Mrs. 39 Months has 3, and may be interested in picking up “just one more.”

Going to the shows offers me the chance to travel, and to spend time with Mrs. 39 Months. When I went through various exercises to go through goals and objectives for the year, determining what makes me happy and what takes energy away, one of the things I wanted to do more of in 2018 is to travel and be with Mrs. 39 Months. So this weekend, we are up in Milford, CT at the Nutmeg Dulcimer conference.

For me, I act as Mrs. 39 Months “roady” for her dulcimer events. The official definition of a roady is “a person employed by a touring band of musicians to set up and maintain equipment.” I don’t think Mrs. 39 Months would let me touch her dulcimers, but I do the driving, help with the packing/unpacking, and generally provide the moral support. For this, I get the companionship of being with my spouse and enjoying the conversation.

She has taken various classes and is looking to buy a music book or two – but hasn’t found a 4th dulcimer that really needs to be purchased. She says she’s learned a few more things and expanded her skills – which is what it is all about.

I would urge those of you with friends and family to take the time to enjoy the comradery and life with them as you journey towards or enjoy FI. After all, it’s the journey which is the thing, not the final destination!

 

Mr. 39 Months

 

When was the day you decided FI was the way?

In my work life, I have to attend major team meetings 2-3 times a year. This are typically 2 day events where we  go over our key objectives for the year, and look at our existing staffing (their professional goals, current level of work, and potential for growth/promotion). It’s actually a very good experience, and I have to give my boss credit for caring to develop and promote those under him. In addition, the key objectives for each team member are not job-based, but are additional goals to help “drive” the team forward and change the organization for the better.

Unfortunately for me, I am looking to reduce my responsibilities and/or early retire in less than 21 months. So when we discuss my own professional development, and potential promotions/opportunities to improve the organization, I have to hedge my conversations and downplay future contributions. Part of my FI plan includes some bonuses that would be due to me, especially in March 2019. While it wouldn’t be a back breaker to not receive the full bonus, I do believe if my contributions were good in 2018, I deserve to get the bonus.

I’ve talked before about the feeling that in some cases technology has passed me by. This was also evident in the meeting, as I was surrounded by many folks somewhat younger than me, with more technical prowess, and burning to move up the career ladder. I did not have that “burning desire” and questioned whether learning new technology and new skills (some of which I questioned if they were truly valuable) was really something I wanted to do.

It was during this event that it hit me again why I wanted to achieve FI. I wanted the freedom to be able to choose how I contribute to the organization, not to be forced into a career path or job that was ill suited for my skills or interests. Since I am pretty much there (yep, I still have “1 more year syndrome”) I have decided that in April of next year – right after bonus – I am going to approach my boss with the request to downshift pay & responsibility.

We will see how that goes over. I think I have a pretty good skill that is in short supply in my organization, so I might be able to step back from a management role and continue to be paid. I guess we will see in 6 months.

Wish me luck, just like I wish all of you luck on your journey to FI!

 

Mr. 39 Months

Drawdown Strategy Analysis – using “Power of Zero” – V2 using lessons from the book

My last post, I covered the traditional way to withdraw upon reaching retirement (all your taxable, then all your tax deferred, and finally, all your tax-free spending. In the end, I was left with $1.1M in my Roth IRA.

I also did the analysis with a withdrawal rate of $84,000/year (of which 8,500 if Fed/State taxes). This works out to $75,500 if I manage to avoid any taxes whatever – based on the guidelines of “the power of zero”. In addition, if I keep my income around $24K (the exemption for married) my medical subsidies will reduce my medical costs by an estimated $7.166/year. So I’m going to assume a withdrawal rate of 68,500 to keep the same lifestyle as my previous withdrawal – again provided I can keep my revenue at $24K for the year.

In order to make this work, I would need to use money in my investment account over the next two years to shift $200,000 from my Tax-Deferred bucket, into my Tax-free bucket (using my investment account to pay the taxes. If I do this, at my FIRE date (21 months from now) I should have the following assets:

  1. Taxable bucket: $302,358 (including $156,689 in deferred that I will have just paid the taxes on)
  2. Tax-Deferred: $518,578
  3. Tax-Free: $505,627

So, unless being spent, the items listed will grow at 5.24%.

  • Year 2020 (6 months): Pulling $42K out of Tax-Deferred account (Pop’s IRA). Taxable, but I just got hit with a lot of taxes for my Deferred.
  • Year 2021-2024: Withdraw minimum from Pop’s IRA (a little over $4K) and enough from Mrs. 39 months IRA to hit the $24K (allowance for IRS with no taxes) and remainder from Taxable bucket. This allows us to pay $0 in tax and minimal for insurance, due to subsidies
  • Year 2025-2026: Mrs. 39 Months starts collecting Soc. Security, which alters some stuff. Continue to pull minimum distribution from Pop’s IRA (starting to climb to $5K and $6K), finished depleting our taxable bucket, while reducing money from our tax-deferred bucket to keep total under the $32K minimum for tax-free. Will need to start pulling some from our Tax-Free Roth to make up for lower Tax-Deferred money
  • Year 2027-2028: Mrs. 39 Months goes on Medicare. Assuming medical costs increase about $4500. Continue to take minimum from Tax-Deferred to keep Soc Security under $32K point where we’d have to pay taxes on it. Still Tax free 8 years after retirement.
  •  Year 2029-2031: Mr. 39 Months goes on Medicare. Assume medical costs climb to our final number, so our withdrawal has to be $75,500/year (adjusted for inflation). Still able to pay no taxes by withdrawing minimums from Tax-Deferred and supplementing with Tax-free Roth.
  • Year 2032: Mr. 39 Months begins taking Soc. Security at age 67. However, I’m going to assume that, due to issues with Soc. Security, I am going to assume that I am only going to get half of what I will get (i.e. 50% cut in benefits), so that works out to $16,908/year. So, each year roughly $30K in Soc. Additional funds out of Tax-Deferred and Tax-Free, but I’m going to be past the “don’t pay taxes on Soc Sec – now taxed at 50% of them. Assume income requirements go up to $77K
  • Year 2033-On. RMDs and Social Security force me into higher tax brackets, meaning I’m set at $78500. Mix of Tax-Deferred and Tax-Free withdrawals keep me in good shape.
  • Year 2062: I hit 97 and Mrs. 39 Months hits 99. We have roughly $924K in Roth IRA, and $192K in Tax-Deferred IRA, for a total of $1.16M.

This is more than we had under scenario 1.  This also doesn’t touch our “emergency fund” or house money – which I think of as our backup money in case of major disaster. If this tells me anything, it’s that I should look to shift more than $200k from our Tax-Deferred money, so that we can possibly keep our taxes lower once we start taking our Social Security.

Again, issues with this are that it shows that I could have taken out more and “lived a little more” in my years. In addition, I kept the $9K in medical spending stable, which might not really be accurate.  However, I ended up not paying much in taxes over much of the early part of the retirement.

I think the next step here is to do this study, assuming no social security, and see where that hits.

Other blogs on this top

 

Mr. 39 Months