Find Your Crossover Point to Financial Independence

[LuxLiving]

For those of you who know what your Crossover Point is (Your Money Or Your Life), congratulations. For the rest of us, here's where to find out!


http://www.whatsmycrossover.com/

[FrugalIII]

I'm a little confused by things like this. I have a pension that guarantees me a monthly income for the rest of my life. I am now 53. I also work full time now and plan on doing so for another 12 years. How is my pension calculated into something like this? It seems like the assumption is that I will be living on savings alone. Is there a way for me to figure this out?

[jIM_Ohio]

This is deceiving- just because you cross over does not mean you are financially independant. In my own terms, it means you have passed from accumumlating money to growing money (your deposits are little compared to even a small growth in portfolio).

Financially independant is if you have 25X expenses saved up in annuities, pensions or retirement accounts. 25X is based on the trinity study and is where the 4% withdraw rule comes from.

[LuxLiving]

Yes Jim, you may be correct in that perhaps it doesn't mean you are Financially Independent yet. Some people want to know WHEN they are going to hit the crossover point from just getting by to when they really start growing the money towards financial independence. I need to reread this section of the book.

Do tell us more about the trinity study. I will go google it after lunch!

FrugalIII, I don't have a good answer for you. This relates to the book Your Money or Your Life by Joe Dominquez & Vicki Robins/Robinson?? can't recall her last name exactly. You might want to check the book out from your local library. I'd be plugging in your known numbers in some of the other online calculators. Fidelity has a pretty decent one.

[jIM_Ohio]

Do tell us more about the trinity study. I will go google it after lunch!

Trinity study- often referred to by Scott Burns in some articles. Someone (forgot their name) did a Monte Carlo analysis (which uses past performance to determine/predict future returns and success rates of investment strategies) of various asset allocations.

My understanding was the study looked at portfolios like 100% equity, 80% equity-20% bonds, 60-40, 40-60, 20-80 and 0-100 type allocations, then back tested these (using Monte Carlo) using various withdraw percentages (2%, 3%, 4%, 5%, 6%, 7%...) to determine an optimal draw down portfolio.

The end conclusion was a 60-40 portfolio with a 4% withdraw rate (starting withdraw rate), increase 3% each year for inflation would last 30 years in around 95% of the 30 year periods tested.

Since then numerous calculators and web sites have come up with similar strategies which generally preach it's the 4% number which is the measure an investor shoots for to retire. Some calculators allow this to be higher because SS will kick in something once past age 67 or 68, and there are other techniques to make the portfolio last longer (do not draw down in a down year, or do not take inflation adjustment in a down year).

I have read similar studies since then which tweaked the 4% rule as well.

[Aleta]

Her name is Vicki Robins. I love that book and all of its charts. It gives you something to shoot for.

[aevans1206]

Well, I'll tell ya--I'll be kicking myself until I reach that crossover point. I've already wasted SIX years of great years of saving and will waste another two (or three) paying off debt. Grrrrrr......I have a pension too, but I'd rather not have to rely fully upon it. Know what I mean?

[Aleta]

Jim: How can't you draw down in a down year? If you have an IRA, you have to take out a certain amount according to the tables. You can wait until you are 70 1/2 to start drawing from it. I would always start with any cash accounts first receiving interest before going to the traditional IRA's.

Also, what did you mean by not taking an inflation adjustment in a down year?

[LuxLiving]

I don't think he was implying that you CAN'T draw in a down year, but that if you want your money to last a lifetime then it would be better for you to not draw at all in that year, or if you did, to draw a lesser amount. Most likely if you have other assets to pull from or can sell something or do something creatively frugal and get by w/just SS or something like a pension program or annuity, then that would be the best in a down market for the overall long-term 'last a lifetime' scenario.

Again, I think he was implying - If you didn't adjust up for inflation one year because the market was down, and just took the amount you took the year before in an effort to be sure your capital still has enough 'oompf' & volume to continue earning dividends, capital gains, interest, etc.

[bjl584]

Is there a general rule to follow when figuring out the 25X expenses rule? I was trying to figure this out for myself, and I realized that as I pay down my debts and eliminate expenses (mortgage, car payment, student loans, etc.), that this number is going to go down quite considerably.

[jIM_Ohio]

Jim: How can't you draw down in a down year? If you have an IRA, you have to take out a certain amount according to the tables. You can wait until you are 70 1/2 to start drawing from it. I would always start with any cash accounts first receiving interest before going to the traditional IRA's.

Also, what did you mean by not taking an inflation adjustment in a down year?

Aleta- most of my approaches are dealing with between ages of 53 and 70.5 (before RMDs kick in) and dealing with a Roth. Issue 1 is I hope to have most of IRA monies moved to Roth between now and age 70.5.

If a person has passed the point of no return (where bucket 3 does not exist), then they are drawing down principal and this strategy is much less effective.

Plan is a 3 bucket approach:
Bucket 1 is 9 years cash. This means when I retire, I want 9 years expenses in CDs or cash.
Bucket 2 is income generation. It needs to generate 1 years income each year from dividends, interest and growth.
Bucket 3 is growth. It's goal is to replenish bucket 2 with moderate success.

I would NOT take out of bucket 2 in a down year and I would not take out of bucket 3 in a down year.

I would NOT increase income from bucket 1 in a down year (inflation adjustment) either.

year 1- if portfolio generated income needed, 1 years cash moves to bucket 3
year 2- if portfolio generated income needed, 1 years cash moved to bucket 3
repeat as needed until I have only 3 years expenses in cash.

The goal is to either a) increase the shares in buckets 2 and 3 or at minimum maintain the shares in buckets 2 and 3 in a down year (do not sell and decrease shares). Decreasing shares increases probability of running out of money in retirement.

If market moved down (early in retirement) that is single biggest risk to this plan, so the plan accounts for that with an abnormally high starting cash allocation.

[jIM_Ohio]

Is there a general rule to follow when figuring out the 25X expenses rule? I was trying to figure this out for myself, and I realized that as I pay down my debts and eliminate expenses (mortgage, car payment, student loans, etc.), that this number is going to go down quite considerably.

To each their own.

Yes some expenses go down or disappear. Yes some expenses go up. Yes some new expenses appear. Yes some expenses go away, come back, then go away again.

Disappear/ Go down: mortgage
Disappear/ Go down: lunches for work
Disappear/ Go down: gas to work
Disappear/ Go down: clothes to work

Go Up: Health care
Go Up: Travel
Go Up: Golf/leisure activities (24 hours is a long day)

New expenses: Lawn maintainance (might be too old or frail to do physical labor)
New expenses: senior citizens club
New expenses: grand kids

appear/disappear: car (show me a car which lasts 30 years in retirement)
appear/disappear: new roof on house
appear/disappear: new HVAC for house
appear/disappear: new driveway for house

There are lots of expenses which occur one time every 10-20 years, and if you did not pay them before you retire, you will need to pay for them after you retire.