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Comment by JMTQp8lwXL | Hacker News Reader

$1M, or $40k annually. My rent is about half of my expenses, but I could downsize to a cheaper place and allocate the freed money for travel and leisure. I don't think I'll stop working once I reach $1M. I'd be more open to alternative work arrangements (e.g., temp contracting gigs) closer to $1.5M, to build in wiggle room. Some costs I haven't accounted for (currently subsidized by my employer), like health care, make me feel the "real" FI number is closer $2M as expenses will likely rise with age.

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I think that works as long as you have no spouse or kids. If you do, that number will be very hard to be independent.

I’ve had the same goal in mind, to get to a point where I can be more flexible with work arrangements. Maybe work part time or work from any location. I’m struggling with doing that though. I’ve already accumulated enough for me to do this, but my income is at its highest currently, and mentally it’s been a struggle to give that up. For the last couple of years it’s been, well let’s just save a bit more to be safe.

What investments or instruments do you plan to put the $1M in to yield $40k/yr? Stocks, bonds, dividends, properties...?

U.S. large cap (S&P 500), international stocks, some individual public companies (RSUs/ESPP), some bonds. I don't own any real estate.

Do you intend to sell your large cap holdings as they accrue in value every year? How do you rebalance your portfolio to account for under performers and handle cap gains?

Sorry for asking so many questions! This is super informative. Thanks! :)

I haven't fully considered this, as I haven't crossed that bridge. A naive approach would dictate holding a 100/0 stock/bonds portfolio, which would never necessitate rebalancing. To date, I've likely experienced some drift, but not meaningfully since my portfolio composition was 99/1. However, of the stock portion of my portfolio, I do plan to hold about one-third international; so I should rebalance annually. This can be done in tax-advantaged accounts, to avoid capital gains taxes. (A common FI strategy is to maximize contributions to tax-advantaged accounts, as I do). I handle capital gains, currently, by simply not selling taxable investments.

IIRC the Trinity study (where the 4% SWR comes from) was for portfolios with a decent chunk of bonds? And that it only claimed that SWR for a horizon of 30 years? As in, running to zero in 31 years was counted as a success.

Separately, not to rain on your parade, but I'd really be worried that 4% might not be feasible based on current market conditions - that study was based on a period when the US was rising into the role of world superpower, and most of the industrialized world had just been decimated.

That skepticism is valid. 3.5% might be the new 4%. Personally, I don't worry too much about returns because even though U.S. standing has declined, our returns have been incredible, mostly due to stock buybacks. Corporations have been the net purchasers, by a significant margin, in the past decade [0], somewhat driven by debt and specifically, low interest rates. Returns are increasingly untethered from actual performance. For these reasons, the U.S.' waning hegemony may not lower returns.

[0]: https://seekingalpha.com/article/4271159-corporations-bigges...

They way I do this (in the UK using ISA's and mostly Investment Trust based) is when an individual stock gets to big relative is to stop reinvesting dividends in that stock and reinvest that dividend in other's.

At the moment I just invest once a month combining last months savings with accrued dividends - which rebalances a little.

For example I have stopped reinvesting in Witan, Lowland and TR Property - in favor of smaller holdings - which at the moment looks like this.

BANKERS INV TRUST ORD GBP0.25

CQS NEW CITY HIGH ORD NPV

BT GROUP ORD GBP0.05

LAW DEBENTURE CORP ORD GBP0.05

JPMORGAN EMER MKTS ORD GBP0.25

POLAR CAP TECH TST GBP0.25

SCHRODER ORIENTAL ORD GBP0.01

CITY OF LONDON INV ORD GBP0.25

Will that cover health insurance & expenses? That stuff gets pricey fast.

I went to my state's health insurance site. It took me about 3 minutes to pull a quote. If my income was $40k/year, I could get a gold plan ($0 deductible) for $4,300/year in premiums (about $350/mo). Bronze plans had $3,200/year premiums but a $6,300 annual deductible. To keep costs predictable, I'd choose the gold plan.

If I chose to live fully off investments in early retirement, my taxable income would be lower since than $40k since I would be spending some from after-tax accounts (which doesn't count as income). The lower income could mean higher subsidies, and lower health care costs.

I see this all the time, trying to live off dividends or low returns off something like $1m or so. The thing is if you retire early in 30 years time you’ve spent all of your returns and now inflation has eroded your principal.

I don’t see why you wouldn’t just keep working in a low stress easy job, part time or something, and continue to build savings.

The withdrawal rate isn't a fixed $40k. It's $40k, adjusted for inflation, annually. Year 1 is $40k, Year 2 is $41.2k (assuming 3% inflation). Purchasing power stays constant over time.

Though I didn't specify the portfolio composition, most of my holding are US Large Cap, which are the 2nd best performing asset class below small cap: https://www.compoundvalue.com/wp-content/uploads/2013/10/IR_..., but both classes are significantly above the others (Bonds & T bills), so I'm not sure what's meant by low returns. If you mean sequence of returns risk, most people use a bond tent to mitigate the risk.

Taking out more than $40k/year erodes your principal though, I thought that was pertymcpert's point?

Like, if you've got $800k and can reliably earn 5%, as long as you're withdrawing only $40k you're good. But if you withdraw $41k one year, your principal is now only $799k. Next year if you need $42k, the return from your $799k is only $39,950, so your principal goes down to $796,950, etc.

From a quick spreadsheet, if inflation is 2% annually and you can get 5% on your principal, you deplete your $800k in ~32 years.

Doesn't seem too hard to fix with some supplemental income here and there?

Not taking a piss, could you share your spreadsheet?

https://docs.google.com/spreadsheets/d/1RTa0rnMdk8VSPpK7qgkl...

He is not trying to live off the dividend (as far as I understand), he is trying to live off the principal and the dividend. At the end of the day, if his expected life span is something like 85 years and he accounts for 110 years in savings he would be left with very little principal, but who cares at that point. It is true however that getting that right may be very tricky, because if you miscalculate you have no savings left.

Yeah I guess this is fine as long as you account for it. Starting with $800k, $40k expenses, 2% inflation and 5% return, retiring at 35 you end deplete your money at 67, but starting with $1M takes you to 83.

One thing to keep in mind is the cost of healthcare dramatically outpaces inflation, too. It's not ridiculous to think that healthcare premiums alone could eat up most of the principal. And this is assuming that taxes stay low & good health.

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