zxspectrum48k wrote:Yes, it is a lot of capital. However, I'm assuming £60k living costs for two adults and two children for the next 15-20 years (plus £30-40k for school/uni fees) and then £60k for just the two adults. I read your blog, and it's not totally clear, but I think you are assuming around £20k+/annum for just yourself. I don't like SWRs (the modelling by academics of this is very weak, even Wade Pfau) but my SWR is effectively just 1.5%. In comparison yours is closer to 2.5%.
I think both of us are skeptical of the 4% rule (international SWRs are nowhere need 4%) but I'm more skeptical because I've spent quite a bit of my life understanding inflation baskets. The bifurcation in good/services inflation in the the typical G4 inflation basket is likely to result in most people needing to grow their wealth at CPI+2% just to stand still. Many FIRE types don't explicitly think about the liability side of the equation, and just focus on the returns on their assets . You only have to look at a bloggers crowing about their returns this year due to Sterling's fall but who don't reprice their forward liability curve. That's just intellectually weak. My case is particularly bad since school fees have risen 550% since 1990, while CPI has risen just 200%. So school fees are a liability rising at around CPI+3%. School fees will rise even faster with a weaker Sterling rate (foreigners will find UK schools cheaper). You have to model these liabilities, you can't just assume a blanket CPI flat rise.
One other point, is that obviously I'm making significant provision for my children (school fees, uni fees, house deposit/purchase, inheritance etc). I always feel that children are ignored in FIRE blogs. My view is that while my partner and I can attempt FIRE, I have no right to expect my children to see FIRE as a good idea. They may want to compete for high paid/high hour jobs, love consumerism etc etc. So I need to provide the maximum level of optionality so they can choose.
I give quite a lot away and so my anonymity remains important (at least for now). I therefore always stay away from the children discussion however what I will say is that I would be/am <delete as appropriate> happy for my children to be educated in non-private schools. I was and I turned out ok. It's also because I would happily personally provide further assistance/tutoring to help them further if gaps were appearing.
The reducing spending piece is one of the most important elements enabling FIRE (and I wrote extensively about it yesterday on the blog) as it not only increases your savings rate during the accumulation phase but it also reduces the actual wealth you'll need in FIRE. Apologies, if I have not come across clear previously. Let me try again:
- In TheRIT household I am responsible for all family running costs and my own discretionary spending. They are the numbers I declare. MrsRIT just covers off her discretionary spending. So a family holiday or the leccy bill I cover but a new lipstick she covers. Ie her spending is actually pretty small.
- In the last rolling twelve months (the accumulation phase) my total spending has been £26,800 however that needs some clarification:
-- We rent in a particularly expensive part of the country as that gives me the best opportunity to maximise savings (earnings-spending). If we net rent off (we'll buy in FIRE and yes I acknowledge I'll have home maintenance costs which I'll cover later) and also net work costs off (won't have those in FIRE) I'm down to £9,800 per annum.
-- This year we've also spent £3,100 of that £9,800 on the ground researching FIRE locations (specifically multiple visits to Herefordshire and Cyprus).
-- So we no longer spend very much...
In FIRE I am budgeting:
- If we go the Cyprus with a home purchase I am budgeting annual spending of EUR22,300. I use an exchange rate of 1.123 in my planning so that's £19,800 which is the £20k you reference. That includes expected home maintenance costs and car replacement costs. 31% of it is also purely discretionary spend (eating out, travel, etc) and we don't currently spend anywhere near that but I acknowledge we'll also have more time to spend.
- If we go the Herefordshire route I think we need a little more. Around £21,100.
So compared to the accumulation my FIRE budget allows us enough margin to live like royalty (in our opinion). This is because when I FIRE I want paid work to become 100% optional forever while also acknowledging that my spending profile may change as I could be FIRE'd for a lot of years. It is also (IMHO) important to add that all my modelling is based on historic worst case sequence of returns and even with one of these our life will be all we desire. If I just get an average sequence I am going to end up with so much wealth than I don't currently know what to do with it all. A position I'm pretty happy to be in.
I would be interested at the top level drivers that make you use CPI+2%. You mention private school fees but what are you seeing after that as I typically just use RPI in my modelling which has of course been higher than CPI for a long time (forever?)? In the spirit of transparency I've kept very accurate spending profiles for myself since 2013. Comparing 2013 to an annualised 2016 I've actually seen a nominal spend reduction of 10%. This may not however be so helpful to the discussion as over that time I've been learning how to increase quality of life while learning how to spend less and I acknowledge that at some time in the future my spend will minimise then start to be hit by inflation.