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  • FI calculation


    Just getting started in the community and was hoping to get some clarification regarding estimating one's FI number. The basic calculation has yearly expense divided by withdrawal rate. So, for example, 100k yearly expense divided by 3% withdrawal rate gives $3,333,333.

    The issue is that this is in today's dollars. Have you guys been further factoring in inflation and if so how? Thank you in advance

  • #2
    Easiest is to inflate your spending out the number of years to desired FI date first, then divide by your planned withdrawal rate as above.

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    • #3
      Current dollar expense level and current dollar FI investment .
      Use a retirement planner is you wish to tweek rates of return, inflation and withdrawal strategies.
      Rule of thumb years out is an estimate.
      Precision will be due to chance.

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      • #4
        Make reasonable assumptions about risk adjusted returns net of taxes and inflation. You aren’t just investing until day one of your retirement, you should plan for thirty-plus years of retirement and then potentially more decades for your heirs.

        It’s not unreasonable to pick an asset allocation that’s stock heavy enough to keep up with taxes and inflation and still not touch corpus with a safe withdrawal rate of 3-4% per annum.

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        • #5
          assume inflation is 3%/yr

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          • #6
            If inflation did not exist we would all be 100% fixed income investors at retirement.

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            • #7
              Originally posted by JBME View Post
              assume inflation is 3%/yr
              Why? The more recent average in the last 30 years is closer to 2%, which is the Fed’s stated target.

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              • #8
                30 year breakeven inflation rate is 1.88%: https://fred.stlouisfed.org/series/T30YIEM

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                • #9
                  Seems like inflation on things you use proportionally more of as you age (healthcare) would need to be taken into effect too. At this point healthcare inflation is really my only RE financial concern.

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                  • #10
                    3% seems like a reasonable safe withdrawal rate.

                    For early retirement, 2-3% is probably what I would use, however more important than the SWR is the understanding that you need some agility and flexibility to deal with issues that can arise.

                    What type of issues?

                    1. sequence of returns risk (have some cash/bonds)

                    2. longevity risk (some like annuities, I am keeping a slightly more robust stock allocation for this reason)

                    3. unknown badness (pandemic was an example of an odd curve ball, this kind of thing is going to happen)

                    4. health care plan (expensive stuff and will only get worse with age) (if a side gig or part time work can pay for this = awesomeness. That is my "plan" ) a high deductible plan with a growing HSA seems like a good strategy but I imagine as an old critter much of my spending will go to healthcare.
                    Last edited by Tangler; 12-18-2020, 03:36 PM.

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                    • #11
                      Originally posted by ENT Doc View Post

                      Why? The more recent average in the last 30 years is closer to 2%, which is the Fed’s stated target.
                      honestly I'd go with anywhere from 2-3% if you want a range. I chose the upper range just to be conservative in my forecast for how much i'll need. I submit that it's probably a little high

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                      • #12
                        I too think it is smart to overestimate inflation when retirement planning

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                        • #13
                          Originally posted by gas728 View Post
                          Have you guys been further factoring in inflation and if so how? Thank you in advance
                          yes.
                          you just change your expected rate of return.

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                          • #14
                            Originally posted by JBME View Post

                            honestly I'd go with anywhere from 2-3% if you want a range. I chose the upper range just to be conservative in my forecast for how much i'll need. I submit that it's probably a little high
                            Fair enough. My conservatism affects my growth rate assumption and SWR.

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                            • #15
                              Take your current FI number in today's dollars, and just double it as soon as you can get there - you likely won't have to worry about inflation and tax rates. Make that your goal. If you're FI and we get a prolonged 50% recessionary market hit as in 2008 suddenly your only 0.5x FI (when that happens in early retirement it is called sequence of return risk, SORR, and by definition you don't have new income to buy low - to the contrary you have to sell investment assets low to support yourself, or return to work and probably decrease your standard of living). However if you're 2x FI a 50% loss would mean you're still FI and don't have to worry about working. Given that the Great Depression led to an 80+ percent hit, I have targeted and am at multiple fold FI, inflation and tax concerns a distant memory.

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