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A Safe Withdrawal Rate

Gotta be real here.  Never retired early before.  We are kind of figuring this stuff out through trial and error as we go.  Luckily we aren’t the first so there are quite a lot of lessons learned out there already for us to draw from.

2018 will be the year it all gets very real for us. The numbers are already starting to tell us that we should be thinking end game. We anticipate the once complex decision tree will become simpler and simpler as the year draws to a close. 

Our plan is to FIRE with 2.3 million in net worth (2.2 million invested with 100K in savings).  We have over 2.1 million right now.  If the stock market goes flat we are done in 12 months.  If one or both of us get laid off this year, the typical severance packages offered by our companies will bridge most of the gap we need.  This means the jobs we have right now will be the last “traditional” jobs we will have if we choose that route.

Currently we are at what is most likely the W2 earnings peak of our lives. 

Exiting too early and not having enough to sustain us is the risk that has worried us the most.  The field that we both work in changes too rapidly for us to be able to return 10 years down the road (or even 5).  We will be dinosaurs in just a couple years and it would be very difficult to return at our current compensation level.  Working one more year at this level would be worth working several years later in terms of net worth growth.  This line of thinking has led us to the action of “sacrificing” our twenties and most of our thirties for the ridiculous sum of money we have banked.

So how do we minimize the probability of ever having to go back into the cube farms (not by choice)? 

It’s all built around our safe withdrawal rate assumption.  Within the early retirement community many point to a safe withdrawal rate of 4% (25x annual expenses) being the target.  Most calculators out there will estimate a 4% rate having a success rate of over 80%, which is really good.  We on the other hand want a success rate approaching 100%.  In order to do that you need to be at or below 3%.  Doing this however, significantly increases the amount that you will need to save.

We are technically at a level of assets that would support a 2.6% withdrawal rate for $55,000 annual spending (as shown by the green highlighted columns above).  Our goal has always been 2.5% so we are a little short… but almost there.  I ran our numbers through 3 simulation tools for different withdrawal rates.  As I expected, our 2.5% is still ultra conservative relative to the calculators.  Vanguard, I suspect is a little too conservative with 100% success not occurring until the withdrawal rate plummets to 1%.  It’s also worth noting how much investment assets need to grow to support lower withdrawal rates.

Retirement also isn’t all about finances either.  We both have been on long term projects at work that we wanted to see through to the end before leaving (fulfillment & legacy milestones also play a part in the timing).

Speaking of legacy, at the end of this life we do want to leave a sizeable amount of money to an organization that makes this world a better place for as many people as possible.  If we were completely focused on optimizing in order to minimize years worked and maximizing years retired, we would die the day our investment account reaches zero. Instead, we would prefer to continue to see our assets grow through retirement and select causes that matter the most to us.

In an uncertain world, how could we ensure that outcome?  Short answer is… that we can’t.  Aliens could attack, robots become our overlords or some environmental disaster occurs. 

In those scenarios, what is in your bank account doesn’t really matter anyway (in the long run anyway).  So we’re focusing on the positive; that humanity will continue to strive to solve more problems than it creates.  New companies will be created, new industries and new breakthroughs that make life better.  Spreading our risk across hundreds of companies helps us invest in civilization in total which spreads our risk around and allows us to benefit financially from the “next big thing”.  These indexes also payback their shareholders in the form of dividends.  Our 2.5% withdrawal target was originally based on what we would expect to receive from dividends from the two indexes we have been investing in.

Markets have done amazing since we created this target and calculated our $2.2 million investment target.  Dividends however, have not grown in proportion to share prices which makes it harder for us to go with the dividend only plan.

As you can see, we would only expect 2.22% in dividends from our investment assets with our two-thirds S&P and one-third international split.  If we were okay with a 2.2% withdrawal rate then we would need to save an additional $300k over our $2.2 million goal to compensate.

I was hoping to be 100% living off of dividends without having to sell a share.  It’s possible that with the corporate tax rate lowering from 35% to 21% that companies will buy back shares and raise their dividends.  This likely scenario could raise our rate from 2.22 to something higher (unless share prices continue to climb out of proportion to this).

The other option we have is to modify our asset mix to include higher yielding ETFs.  For example:

By adding another index we can still achieve 2.5% dividends that match our 2.5% withdrawal rate.  So we do have some options before touching principal or we can wait to FIRE and save more.  Of course we could also suck it up and draw off of principal (sell shares) to make up the difference.

The details will firm up as we approach the main event (our FIRE date).

Have you already FIREd? What withdrawal rate are you using? If you haven’t, what is your target rate? We would love to hear your thoughts.

 

 

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