Hi RIP friends, you won’t believe this: a short post by Mr RIP!
Yeah sure RIP, when you start like this it always ends up with thousands and thousands of words…
No, trust me! I don’t have time anymore for anything, I’m a father now and I’m supposed to be sleeping while babyRIP sleeps, correct?
Well, she’s an angel! She sleeps all the time and so I have some unexpected free time, awesome! What’s the best way to
waste spend it? Blogging of course!
Ok, let’s see… Btw, playing with fire? What do you mean?
A-ha! So the catchy and clickbait-ish title caught you! SEOs, am I doing good? Am I learning?? 🙂
Ok, seriously, of course when I mention the world FIRE I mean that thing: Financial Independence and Early Retirement. I always mean that. When flames are burning I can’t call the firemen anymore. I imagine them playing with the pole while discussing safe withdrawal rates. I believe that the FIRE department is an hedge fund. When someone says that a new rockband is “on fire” I imagine them…
RIP, you said “seriously”… And this post is heading toward thousands words… I’m quitting, kthxbye!
No, wait… ok, you’re right, let’s get back on track.
I’m playing with FIRE.
In April 2018, a month ago, I started a process of re-evaluating of our life goals, FIRE goals and low level investment details. I documented the bottom-up investment refactoring in a recent post.
Now it’s time to face the hard questions and make tough decisions: when, where, how and so on.
Life is changing fast, passion for what I do at work is diminishing exponentially month over month, the current arbitrary target FU Money is getting closer each month, family is growing, passions are flourishing and my body is rapidly changing (ageing?). Call it midlife crisis, close-to-FI impatience or whatever you want.
Anyway, I’m not making any big decision here today, not answering any profound question. I don’t have a clear mind now. I plan to make big plans this summer, when I’ll take 10 weeks of (paid) paternity leave from work, i.e. more than 2 months off! It won’t be a “true sabbatical” with a toddler around, but it’s still a 10 weeks break. We’ll find for sure some time as a family to draw pictures of our ideal next life.
So what’s this post about?
It’s about playing with numbers!
Today it’s Friday May 11th 2018, so far the month looks awesome from a financial perspective. What follows is a screenshot of my personal Net Worth document, not the shared one.
Thanks to an amazing Mr Market and the USD skyrocketing we crossed several round numbers: 800k EUR, 950k CHF and 950k USD. We’re few “good months” close to become millionaire in CHF and USD! Maybe that will happen during my paternity leave this summer or even before. It may also be that the market suddenly drops 50% and we’re back into dark ages of wealth.
What about live FIRE metrics? Let’s take a look 🙂
A good month (so far), a nice jump in FI% and a 5 months cut in FI date (both the ideal/Italy and real/Switzerland). Supercool!
Let’s focus on the Italian FI metrics for now. The inputs of these metrics are the desired Withdrawal Rate and the monthly (yearly) target allowance.
The numbers I’m using since last revision are: 3.5% SWR and 3500 EUR target monthly allowance (42k EUR yearly).
They’re kind of arbitrary though.
3.5% is a very safe SWR. According to Big ERN 3.25% is the absolute safe SWR for a 60 years horizon with capital preservation that would have been successful for each cohort in the past. Btw, am I the only one who gets a
boner shiver down the spine when I read “cohort” on ERN blog?
I picked a super safe SWR because (1) generic fear, (2) we’re in high CAPE world, (3) effects of fees, taxes on profits and tracking errors can be modeled as a SWR spread. Assuming all these effects sum up to 0.5%, aiming to a net 3.5% means relying on a 4% actual SWR.
I used to be even more conservative just a year ago. Original SWR when I started the blog was 3.33%. One of the hottest topics these days on the Financial Independence community is the actual drawdown strategy. My next post will be a very long one about the SWR spectrum and I’ll position ourselves better on that scale.
But let’s just play a little bit: what if we get rid of some of our fears and raised the SWR to 4%? What would change? Let’s take a look:
What the hell! Trading some confidence for money reduced the FIRE date by a full year!
The FU Money would be cut by 150k EUR. Current yearly allowance would increase to 32k to reflect the increased optimism/confidence in our strategy.
What about expected expenses? 3500 EUR is really arbitrary. I have no idea. I was living a very cheap life back in Italy, until 2012. I had no responsibility for other family members, but I know I could be living on 500 EUR/Month in my fully paid Milan flat.
Of course I would never ask my family to go extremely cheap, but nonetheless I have no idea about how much would make for a comfortable (according to our low standard) life in Italy. When I launched the blog I was aiming to 33333 EUR per year, or 2777 EUR per month. If you wonder why I picked that number: 33333 *30 (SWR 3.33%) = 1 Million.
Which number makes more sense? Allowance should include actual planned expenses and bureaucracy overhead. One of my future posts will be about “early retirement in Italy”, i.e. the bureaucracy and tax implications of living off of investments in Italy. I know profits are taxed 26%, capital gain is taxed 26% too and maybe there are other issues I don’t know yet.
Anyway, 3500 EUR is more than almost any of my friends makes per month. What if I relax my fears and accept a monthly allowance of 3000 EUR instead of 3500?
Wow, the impact of reducing monthly allowance by 500 EUR is even bigger than increasing the SWR to 4%! Ok, it’s not a surprise: 3500–>3000 is 7:6 ratio while 3.5%–>4% is 7:8 ratio. The former is more impactful than the latter in this linear model.
Reducing allowance to 3k per month would immediately lower the current WR (in case we call it FI today) to 4.46% and according to cfiresim we’d have a 72% probability of success if we retired today!
That’s incredible! Well, it actually isn’t. It’s just math 🙂
But wait, what if we both increase SWR to 4% and decrease target monthly allowance to 3k EUR?
Whaaaaat?? We’d be 90% done and probably FI by the end of this year!
It’s impressive is the enormous impact of these apparently small changes in the strategy! Ok they’re not so small, 500 EUR/mo less is not a joke. But it’s a 80% cut on waiting time!
The FU Number will be 900k EUR, still roughly 1.1 Million USD. It’s borderline leanFIRE for someone.
And please, remember that these numbers assume that we won’t earn a penny for the rest of our lives.
On the Swiss side we don’t have much to play with. I know our current spending regime, and I know I can’t cut much. Actually, expenses are probably going up over time with a child in Switzerland.
Even if we play it extremely well and cut our expenses by say 15%, there are other implications for early retiree in Switzerland like mandatory Pension Pillar 1 contributions and capital gain tax once investments become our main income stream.
That’s why I can’t play much with yearly target allowance for the Swiss FI metrics. It’s actually way too optimistic to claim we could keep it at current level.
We can only play with the SWR so let’s try to increase it to 4%:
Yeah, that’s the best we can do. It’s still a 10 months cut from current Swiss Fire Date, but I’m pretty sure it’s an overly optimistic scenario.
So RIP, are you retiring at the end of the year?
A-ha, I knew you were still around! 🙂
No, it doesn’t mean anything for now. I’m just playing with FIRE!