Friday, January 23, 2015

FIRE Hybrid Model



Here is a rough framework for how I plan on funding my early retirement.




In December I posted my 2015 goals and two of them are to create a hybrid retirement strategy and another (exponentially more difficult) is to start using the HTML button and improve my blogging skills.

As you may have noticed, I have been working on both of these goals.

I must admit I have even impressed myself with this chart shown above. I successfully jumped back and forth between the Compose and HTML buttons. I then proceeded to make surgical-like adjustements to both widths and heights within the string of code.

Then I successful managed to insert a (br /)command so I can start typing below the spreadsheet.  As I typed this last sentenced I just realized that you don't want to be in the HTML mode as you type that break command or you will actually create a break. Duh.

Who says you can't teach an old dog new tricks?

Hell I may just start hanging out in the HTML during all my posts. It's kind of cool in there....NOT!!

Ok so maybe I won't be getting a job as a programmer at Google anytime soon, but slow and I mean REALLY slow and steady progress is fine with me.


Anyway here are some of the assumptions that I have made to reach FI at age 47.

  • First and most difficult is that I maintain a very high paying job during the next four years.
  • Raise my yearly dividend by $2500 a year for the next for years. (With a cleaner portfolio)
  • Accumulate $320,000 in savings outside my taxable portfolio. (This will be a MFer)
  • I assumed an average of 2.5% interest rate over time on my savings. If it is less, that OK too
  • Dividend growth rate of 3% (Conservative because I have bonds also)
  • Begin accessing 401k using equal installment payments (72-t) at age 50.
  • Delay social security until age 70 (if it still exists that is)
  • I have also a assumed a 2% increase in SS. It certainly could be more or less.
  • While I will only have 25 years in the work force I will have maxed the payroll tax contributions in half of those years so I feel comfortable at $1500/month at age 70.

Don't worry about the mule being blind, just load the wagon.

There are so many moving parts within this plan that it is most certainly will be altered a bit each year. In fact, I feel like Christopher Columbus when he first started his journey from Spain to America. Should he pack sandles and sun tan lotion or a heavy wool coat. I think that I have done a good job packing for all weather conditions with this model.

The one thing I do know is that I am heading west and if I have sunny weather and a nice strong breeze behind my sails that would be wonderful. If the waves are rocky and I have to use the oars during the entire trip, then fair enough. I am certainly no stranger to putting oars in the water and struggling against fierce opposition to reach my goals. Hell sometimes  a  few people have to be thrown overboard to lighten the vessel (I am referring to future expenses here, not real people).

Now that I have my FI voyage mapped out, I am excited and eager to continue on my journey.


Where are the life rafts on the cruise ship?


If you have ever been on a cruise ship, you know that there is an emergency training exercise which requires the passengers to head towards their designated life boats in the event of an emergency. When I get on the cruise ship I am all over this process. While my wife is trying to nap or worse find ways to spend money on things like massages, overpriced excursions, and on board souvenirs, etc. I am planning worst case scenarios knowing full well they won't ever happen. That's why she is probably napping? Oh well, what can I say....I am a pragmatist.

Hope for the best and plan for the worst is my motto.

Even the best laid plans don't always go according to plans. Like I mentioned above there are a lot of unknowns that can and most likely change things over the coming years. But then again, life is full of unknown pitfalls and opportunities and I will certainly embrace either as they present themselves to me.

The biggest potential problem would be a rapid job loss. This could result from dissatisfaction with my job performance, the company being sold, a dramatic change in economic conditions, etc. These are all real possibilites and would cause me to  quickly change course with my FI plans. Health conditions are certainly another factor. I could also simply choose to not continue with a 6 day a week, 10-12 hour daily schedule. In fact this is probably more likely than the first set of problems I mentioned.

Other jobs and side hustles could fill the void that would be created in the "Cash Withdrawal" column. There are a lot of opportunities to bridge the divide between income and expenses and I am not overly worried about this problem.


Living like a third world refugee is absolutely not in my FI plans


I will NOT retire eating Ramen noodles, canceling my cable, keeping the heater at 60 in the winter, living without AC in the summer, spending hours cutting coupons, playing board games at home for entertainment, wearing 30 year old suits, mending socks with holes in them, etc.....but I would without a doubt and with zero hesitation do exactly these things which I would HATE and much more dramatic things if necessary.....ALL HELL would have to break loose though.

Enough with the gloom and doom talk. FI is awesome concept, but living on $1500 a month for the next 40 years is not what I considering living the American Dream. It wasn't 20 years ago when I was 23 years old starting out in life, it isn't at 43, and it damn sure won't be when I am 63.

And yes I realize that working 60-70 hours a week is equally shitty and I will not continue down the fucked up path much longer. I just need to find a healthy balance between these two extremes

If I have offended anyone, it was not my intention. I do realize that we all have different wants and needs and that some of my career decisions seem without a doubt seem equally idiotic.

I just hate seeing potential wasted as it can result in regrets later on in life.


Isn't this a dividend FI blog???

As a side note, I truly would have liked to create a dividend only retirement plan, however I just don't have the time to build that large of a portfolio and I believe that it would be too inefficient for me.

Waiting another 10 years so I can have a $1,200,000 portfolio creating $40,000 a year sounds great in theory but is not practical in my view. I know I know....I may be forced to turn in my Dividend Communtiy Member badge. I really like it though.

Dividends will still be large part of my overall strategy, although I just don't see the benefit in having a 1.2 million dollar portfolio at 53, a 2.5 million dollar portolio at 63, and 5 million at age 73. This would be overkill in my opinion and a lot of the capital would end up unused or underused.

I also like the idea of my retirement airliner have four separate and independent engines rather than one engine that could malfunction or worse just stop. The cash withdrawal and 401k withdrawal components provide the shock absorbers that hopefully will allow me to sleep well each night.

Also the idea of having dividends, cash, and a small withdrawal program from my 401k seems to be a safe, balanced approach that will give me freedom sooner rather than later.

At this point I am open to all POSITVE FEEDBACK, suggestions, comments, questions, compliments, complaints, hostile discourse, and most importantly encouraging words.......and did I mention POSITIVE FEEDBACK?

MDP

CORRECTION

I just noticed that I show $10k a year taken out of my 401k after the age of 70. It will obviously be much higher than that as my current balance is $244k and the IRS requires a withdrawal per year based on life expectency. I obviously don't know what the balance will be 27 years from now or what the laws will be, but I should definitely increase that yearly number.

2nd CORRECTION

Thanks to a reader's comment I was informed that I cannot start withdrawing money from my 401k penalty free at age 50. Apparently age 50 is for IRAs and 401ks distributions have to begin at age 55. Why is there a difference between the two. I don't know and it seems pretty stupid to me. Anyway I have changed my 72t distributions to age 55 to reflect this change.  Hopefully I don't even need to use this additional income as age 55 as I hate dealing with anything related to additional tax confusion.

40 comments:

  1. Great post. The "living like a refugee" part was excellent. My plans are to retire in 19 years (at 55) with an income of at least $15,000 a month as I don't plan on changing my lifestyle (vacation twice a year, drive a big SUV, eat filet mignon and drink Brunellos and Amarones). Hell, with so much time on my hands, $1,500 a month is what I'll be spending on little blue pills.

    To each his own...

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    1. ADY,

      Damn a $150k income during retirement sounds really impressive. Most people never make that while working a full time job. Vacations, big SUVs, filets, blue pills....sounds like the only thing you are missing is a giant cigar and a couple of bikinis next to you by the pool!

      Good luck and keep up the inspiration!

      MDP

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    2. MDP,

      Sweet, we are targeting a similar FI time periods..I just wanted to clarify, is the $18K in "cash income" something that you will be earning from say part-time job, consulting, this site etc?

      I see you have some fixed income from one high-yield bond fund and from a equity/bond fund (unless I am missing something else). I think your HY fund is a little risky, since you have a high yield but there is a possibility of default, which reduces the income base.. Wouldn't you be better off in equities that pay dividends? The taxes will be lower, and I view the risks as being somewhat similar in nature ( quality dividend stocks vs risky HY bonds - when int raters are low people pay high yields for risky borrowers). And what I really hate is that you are paying such high annual fees for those funds - 0.60% - 0.70% is a lot.

      Other than that, I like how you have broken out your goals by year. I agree that you will likely have to update them over time, but I think it is nice that you are very conservative. When you are as conservative as you in goals, it is quite possible that most surprises will be on the positive side ( as long as the underlying base of assets is of good quality).

      Good luck in your dividend investing journey!

      Dividend Growth Investor

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    3. DGI,

      Yeah the mutual funds are something that I am planning to continue selling off. I wanted to make sure my stock portfolio was diversified before I dumped the funds. Also I hate the idea of selling anything that would result in a taxable event. You are right though about the expenses over time and I will probably slowly reduce the funds over a couple of years.

      MDP

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    4. DGI,

      Also the cash portion will not require a job. That most likely will be a withdrawal program consisting of cash, SPY, and BND.

      MDP

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    5. Average Dividend Yield,

      I like your style. I have the same thoughts exactly. I want to go out in style if possible.

      Keep cranking,

      Robert the DividendDreamer

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  2. Great post and love you showing the excel sheet on your plan. I totally agree about not living like a refugee. You can't look back 10-20 years down the road and regret that you miss important experiences because you didn't spend the extra money.

    Having said that, if you can reduce your expenses slightly to cut out some of the more luxury items, you may be able to achieve FI much easier.

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    Replies
    1. Tawcan,

      Thanks buddy! Yeah I don't want to reach the finish line and then die. I want to blow through the finish line and keep accelerating through FI. That is when I plan on really enjoying life to its fullest!

      I appreciate the continued support!

      MDP

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  3. Couple of impressions right off the bat MDP - first off, wowsers on the $320k of cash. That is a ton of cash, and I'm not sure it is really the best use of your money. Perhaps some sort of investment other than a <1% savings account? I have a post going live soon on 1500 days that details a strategy that might make sense for that money.

    Secondly, the live in a manner that you desire is awesome. No one should be expected to live up to the same standard that anyone else does. We are each reaching for freedom, but freedom is absolutely different for all of us.

    Thank you for laying this out, pretty cool. I've done some personal projecting, just not as in-depth as this. Have a great weekend!

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    Replies
    1. W2R,

      Thanks for the feedback. Right now my cash balance is very low so I need to work on getting it built up first. You are certainly right about cash being a bad investment. As I start hitting a sizable amount, I'm sure that I will be watching the monthly interest payments and will start cringing.

      I take the approach that eventually 3-4% interest rates will return and that will make it more palatable. Maybe I will put half in an index fund and the other half in bonds and just withdraw from it yearly. We'll see.

      MDP

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    2. We've talked about P2P lending before, but once you're able to access that, it might be a good fit. Be on the lookout for a post I wrote going live next month on 1500 Days... talks about this very concept.

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    3. W2R, I look forward to reading about it!

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  4. FIRE at 47 is great!!!!!!

    Raise my yearly dividend by $2500 a year for the next for years - that would be very impressive...

    Accumulate $320,000 in savings outside my taxable portfolio - that is a bundle!

    Dividend growth rate of 3% - I like that call.

    Keep up the great work.

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    Replies
    1. Mark,

      Thanks. I have some big goals and I will do my damnedest to reach them. If I fall short, then it is on to plan B.

      MDP

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  5. MDP,

    I find it interesting that you're aiming to not only meet your monthly bill requirements but go above them as well. I am cut from the same cloth. On one hand I want to drop the day job like an anchor in a storm. On the other I like to eat more expensive healthy food, run the a/c, give my kids nice Christmas gifts rather than socks, etc. There's a nice balance and I hope to achieve it.

    Best,
    DWC

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    Replies
    1. DWC,

      Yes reaching the bare minimum is like shooting for a C in school. It gets you to the next grade, but the same problems continue to exist. I want plenty of room between my income and bare necessities. Ideally my basic expenses will be roughly half of my FI income.

      MDP

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  6. Amen to not living like a refugee!! I plan on using dividends mostly to supplement my income in my 20s, 30s, and 40s so i can afford nicer things. 5k to 10k a month in dividends is what my goal is when I retire. Good luck to you!

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    1. DFD,

      $5-10k in monthly dividends is a huge goal. Good luck with it! Living like a refugee would in a word SUCK. It sounds like you have the right idea to build your dividend income up to a reasonable level.

      MDP

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  7. Loved the comment on not planning on living like a refugee. Kudos to you for putting up a bold plan and sharing it with the rest of us. I also like the analogy of looking at your FIRE running on four engines rather than one or two. I know you have already mentioned that you'd like to delay the SSI to age 70 if its still there by then...but if it isnt there...how will it affect the finances? You should try and run different scenarios of losing some part of the income for which you have no control.

    Again, looks like a fantastic plan and I wish you the best in achieving it.

    cheers
    R2R

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    1. R2R,

      The plan is bold but achievable. If there isn't SS, then I doubt I will feel much of an impact. I will have been living of savings and retirement for over 20 years and the dividend income will be very solid by that time. I also will have the underlying asset base to draw from if I eventually need to.

      I have run many firecalc simulations, and assuming my expenses remain under control, I will survive every market scenario with my current plan.

      MDP

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  8. Solid goals. You're well on your way. I'm with you on spending. I sometimes feel bad about what I deem a normal spending level compared to many in the FI community.

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    1. Adam,

      I sometimes feel a bit wasteful as well. I have spent a few years living with a Depression Era mindset and while it was tolerable, it felt very restrictive. My parents live this way and they have plenty of money. I don't begrudge them for their choice as it seems to make them happy.

      MDP

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  9. Nice post DividendPipeline. I like the fact that you plan on having separate income streams down the line. Keep on grinding and you'll end up just fine with your mentality.

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    1. DD,

      Thanks and I will certainly grind away, for a few more years at least. I may be FI in four years, but will probably keep some side hustles going just to keep my skills fresh! :-)

      MDP

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  10. Thanks for sharing - always interesting to see how others plan to fund ER.

    I think as a shock absorber I'd prefer to have the cash cover 100% of expenses in the first 5 years rather than some lower % stretched out over 20 years- then (assuming a 'normal' market year) collect your dividends, bond interest, any withdrawal/sold shares and stick that in a 5 yr CD and just keep rolling the 'already paid for' window a year ahead. It seems pretty reasonable to worry about some mix of stocks/bonds under performing cash over 5 years, but not really over 20.

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    1. pacer45,

      First of all thanks for your input. The withdrawal component is the hardest part for me. I know that my 401k withdrawal will be using a 65/35 stock bond mix and pulling a set amount per year. The dividend component is self explanatory as I will use just the income and let the portfolio grow.

      Do I want the third leg of my FI model to be stock heavy? I don't think so. Maybe a 50/50 stock bond mix is the best way to go.

      I do like the idea of 5 years of expenses covered by cash to allow for a market recovery in the event of a 73-74, 00-02, or 07-09 bear market event.

      MDP

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  11. This was an epic post, MDP. I'm so happy that you did some soul searching and came up with this solid achievable plan. I love the idea of a little more comfort when finally throwing in the towel and I want that too. This was great inspiration for me to start thinking a little more long term now that I'm finally gaining some assets. Oh...and I can totally relate to your html struggles, I can do the very basics, but even that seems to take days of playing around. Thank you for sharing and I'll be cheering you on through it all :)

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    1. Ryan,

      You are kicking ass! Keep doing what you are doing. Your story is inspiring and I can't wait to see how this year turns out for you!

      MDP

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  12. Thanks for sharing such an in depth post of your retirement plan! You're absolutely right about not living like a refugee. Why would you work so hard for years just to live so cheaply?

    As other's have mentioned, I think it might be best to cut down the 320k cash to something smaller. That would allow you to invest more to continue growing your net worth, while still being conservative and holding a cash buffer.

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    1. free2retire30,

      I may look at a 50/50 stock bond split for everything over say 100k. Thanks for the suggestion. My plan is definitely a work in progress and I appreciate any and all advice.

      MDP

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  13. Just wondering, how much do you make per year now? I am married wife does not work for medical reasons and 35. I make almost 90k per year and invest 2500 a month, 1500 401k, and 500 into each of our roths. Comes out to 18k 401k and 11000 between two roths. I feel like it will be forever before we can even dream about retirement.

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    1. Anonymous,

      I make about $200k right now, but during the first 15 years of my career I averaged about $65k. While it seems like I am making good progress now, the real results have come from the first 15 years of relentless saving (primarily in my 401k and mortgage reduction).

      Considering the fact that you are "pulling the wagon" all by yourself I think you are making outstanding progress. I would advise you to keep building your career and saving aggressively. Even without the recently spike in income for me, my net worth increases more per month now than it did per year a decade ago. Again the real work was done when I first started the process many years ago.

      MDP

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  14. You can't start 72T until you are 55.

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    1. Anonymous,

      I think you may be confusing accessing your 401k penalty free if you leave your employer at age 55, I am referring to using the IRS provision in which you have to take substantially equal periodic payments (SEPP) under the 72t provision. If I start taking these payments at 50 then I have to continue until I reach 59 1/2. Also if I were to use the 72-t provision within 5 years of 59 1/2 then I would have to take out the installments until the 5 years elapsed.

      As an additional note I used an estimation of what I think they might be. Many things including which life expectancy method and obviously my 401k balance at the time will ultimately determine how much I withdraw each year.

      This is how my CPA explained the rule to me. If anyone can expand upon it further, it would be greatly appreciated.

      MDP

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    2. Your CPA is a tool. IRA is age 50, 401K is age 55.

      The following additional exceptions apply only to distributions from a qualified retirement plan other than an IRA:
      1.Distributions made to you after you separated from service with your employer if the separation occurred in or after the year you reached age 55.
      http://www.irs.gov/taxtopics/tc558.html

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    3. From IRS Publication 575.
      Additional exceptions for qualified retirement plans. The tax does not apply to distributions that are: From a qualified retirement plan (other than an IRA) after your separation from service in or after the year you reached age 55 (age 50 for qualified public safety employees).

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    4. Anonymous,

      I will definitely research things further and possibly find a new CPA. If I leave my employer at age 47 could I convert my 401k to an IRA and then use the 72t provision? Is there a certain amount of time I would have to wait?

      Thanks,

      MDP

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    5. Anonymous,

      I just gave myself a throbbing headache at the IRS website and I think you are correct. Anyt withdrawals before 55 is a no-go unless I want to deal with a penalty. That still could be an option although not the best one.

      MDP

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  15. MDP,

    I am with you all the way with not living like a refugee. I have been saving and planning for 28 years. I want to live the high life if at all possible. Even if I do not end up that way, it is my dream.
    You are doing quite well, so you should be enjoying the fruits of your labor very soon.

    Keep cranking,

    Robert the DividendDreamer

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    1. Robert,

      I want to live the high life as well, but after a brutal 20 years in sales with virtual no 2 day weekends (I did have a day off during the week most years) I am ready for some me time. What could be a huge problem for me is leaving a $200k a year job. That is borderline insane. Luckily I have a few years to figure things out.

      MDP

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