Ask Big Ern: A Safe Withdrawal Rate Case Study for “Mr. Corporate Refugee”

Welcome! It’s time for another Safe Withdrawal Rate case study! Please click here for the other seven installments. Today’s volunteer is “Mr. Corporate Refugee,” not his real name, obviously. But as the name suggests he is ready to pull the plug on the corporate grind. He and his wife did everything right to prepare for early retirement. Pay off the mortgage on their house (as recommended by yours truly) and accumulate a nice nest egg close to seven figures. The only problem: they reside in a high-cost-of-living area in California and more than half of their net worth is tied up in their primary residence. Even a portfolio as large as $1 million will likely not be sufficient to cover expenses in your current location. What to do now? I’ll propose two routes to early retirement. Move to a cheaper location, a “secret” low-income-tax paradise – more on that below, and be able to retire now. Or work for only four more years and retire in the current location. Let’s go through the math…

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See that house over there? It’s an investment!

Few topics in personal finance and in the early retirement community stir up emotions as nicely as the pros and cons of homeownership. Some folks in the FIRE community are renters and swear by it and others are very happy homeowners and/or real estate investors. Neither side is wrong. Those with more nomadic lifestyles probably prefer renting and the those with kids in school and strong ties to the local community are apparently happy homeowners. Normally, the two sides just coexist peacefully but discussions normally get heated and sparks fly when one side accuses the other of doing something wrong. If I had to distill the arguments of the two sides into bumper stickers it would be:

  • Homeowners: Renting is just throwing away money!
  • Renters: A house is not an investment at all. Or it’s a terrible investment!

But of course, both claims are just that: bumper stickers. And both claims are demonstrably false and/or crude generalizations! Let’s look more into the math of the rent vs. own tradeoff…Read More »

Ask Big Ern: A Safe Withdrawal Rate Case Study for “Ms. Almost FI”

Welcome to a new installment of our “Ask Big Ern” series with case studies on safe withdrawal calculations. This is already the seventh part, see here for the other parts of the series! Today’s volunteer is Ms. Almost FI and that’s not her real name, of course. She’s planning to retire early in 2019 and this causes a lot of anxiety: Does she have enough money? When should she take her pensions? What about long-term care insurance? All very valid questions, all impossible to answer without a careful customized analysis!Read More »

The Shockingly Simple/Complicated/Random Math Behind Saving For Early Retirement

One of my favorite Mr. Money Mustache articles is the “Shockingly Simple Math” post. It details how frugality is able to slash the time it takes to reach Financial Independence (FI). That’s because for every additional dollar we save we reduce the time to FI in two ways: 1) we grow the portfolio faster when we save more and 2) we reduce the savings target in retirement by consuming less.

That got me thinking: Is the math really that simple? How sensitive is the savings horizon to different rates of returns? What happens if we use historical returns instead of one specific expected return assumption? How important is the asset allocation (stock vs. bond weights) on the path to early retirement? How much does the equity valuation regime (e.g. the initial CAPE ratio when starting to save) matter?

So, in typical Big ERN fashion, I take an ostensibly simple problem and make it more complicated!

Let’s get the computer warmed up and start calculating…

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