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Cross posting to here as well - crazy to buy a $5M house?
45 yo M 10M liquid, 13M NW. going back and forth about a massive upgrade. Spend is 350k/year, combined salary 1.2M. Expect equity payout of 5-8 million in 2028 but who knows. Debating between current comfortable life and doing something big well before we become empty nesters.
How much does the $5m add to your cash burn in terms of increased property tax, insurance, utilities and maintenance. In my area, $5m house is at least $110k in property taxes.
What does that do to your SWR? Doesn’t look like your liquid NW can easily absorb that.
Are you trying to retire early? In which case I would wait for the actual payout before buying. Your 350k/year spend will go up with a home upgrade. Assuming your liquid NW will drop to 8M and the 13M current NW includes home equity that you plan to use towards the new house, you are going to be what people call “house poor” and unable to support your spend with your liquid NW.
Your current spend and NW puts you in fire territory and you could retire if you choose to. This sub is about early retirement so people will assume that is what you are trying to accomplish. If you believe the lifestyle upgrade is worth giving up financial independence, that is a personal choice.
Perhaps not in style with this subreddit, but why not. If that makes you happy. If you don’t do it, will you think back in 10 years “if only..”? Can always sell it again.. worst case you lose some money on it, it would still be a relatively small % to your NW
I’m hoping this sub uses a more reasoned barometer than a Sheryl Crow song.
It seems the standard formula for fatFIRE is between 3-4percent of your assets with some assets in equities and others in fixed income. Given the rally in equities and rise in PE multiples this could give a false sense of wealth. You aren’t earning more rather the market is just pushing earnings to the left.
Would a better formula be that your share of earnings from equity holdings + interest income > than 1.2*required expenses? Where the 1.2 is your margin of safety.
While the 4% rule is not the only viable model for FIRE, it has several advantages
Simplicity - which is critical for any mass adoption.
Academic scrutiny - In the Trinity study and multiple since that have tested it over multiple time frames.
Diversification is critical as sector rotation over time is normal.
A stricter model could certainly work. Or for greater simplicity, you could just stay at the 3% end of the SWR draw.
It is important to realize that in many simulations of the 4% rule, folks end up with significantly more than their starting balance which means that even if you start within the range at the peak of the market, you’ll be fine. You can test this out with peak dotcom bubble or right before the GFC.
I was thinking of all the people who’ve hit their number because of the insane market over the last 12 years. This can’t persist forever (eg: a lot of wealth created on the back of AI hype - which might revert back to pre-ChatGPT valuations).
Sometimes when there are signals of a potential market crash, I take a look at this subreddit, and see that exactly nobody is panicing. Not even one post. And then it’s back to the “time in market” philosophy and just wait.
It’s not about a selloff or time in the market. It’s about accounting. A lot of wealth has been created as the markets price optimism into the future. If you are budgeting for increases in stock prices to live off that’s speculative. If you are budgeting increases or stability in earnings that is investment - comparable to a bond.
I have about 26mm in spy’s and 26mm book value in a business. The PE of the spx is about 30, so my share of the earnings of the spx is about 800k. My business will probably do 2mm in fcf next year. So my earnings next year are 2.8mm. If the spx rallies because earnings go up, great. If it sells off and earnings stay the same then that is ok.
What I am trying to say is that maybe we shouldn’t look at our wealth as the market determined present value of all future earnings and basing our ability to live on that continuing to grow. Instead base it on our share of current earnings. Sometimes those current earnings are expensive and sometimes they are cheap. But that’s the long term cash flow you can count on.
You are probably right. Coincidentally those earnings somewhat align with 3-4% swr though, heh. Either way, up or down, all will be fine. Can always spend just be a bit less..
The FIRE model is based on backtested data that covers periods of exuberance and large crashes over decades. If you want to come up with your own model, I am looking forward to your paper that shows why the trinity study or one of its variants fails and your arbitrarily conservative model succeeds.
Like another poster said, if you are concerned about valuations, pick a more conservative SWR, but to claim that you know that the market is permanently overvalued, will crash and not behave like it has historically over long periods should be supported by evidence and not feelings. If we see that level of destruction of wealth without recovery, regular retirees have a lot more to worry about than fatfirees.
I didn't say the market is permanently overvalued or that it will crash.
I'm saying that maybe there is way a to look at the equity portion of ones portfolio that stabilizes the withdrawal rate that doesn't require some assumption about an asset price that's based on vibes.
Earnings are stable. Prices are not. Most of our wealth has grown in excess of the earnings of the companies we invested in. The $ amount to fatFIRE relative to the market is lower than ever before. That shouldn't be. Should it?
Whether true market value of an equity is based on earnings is a tale as old as the market itself. Just because you call it a different name (“vibes”) doesn’t change that. I don’t see the need to come up with a different way of thinking where the existing model is sufficient. You seem to fall prey to the common thinking that this time it is different because you call it “vibes” instead of exuberance or any other name.
Unless you seem to care about the value of your portfolio for bragging rights, just use a SWR that has been known to withstand periods of exuberance.
I don't know if what we are seeing is exuberance or not. I do know that the valuation of the SPX is pricing in earnings growth. So earnings have to grow to justify the price. In the meantime, my networth has gone up substantially as a result of that earnings growth being priced in.
That is what I'm thinking about.
Bragging rights would be to take the nominal value of the SPX - it feels a lot better when i think that I own 26MM of SPY's vs I am entitled 800k of earnings.
I feel like you are arguing for the sake of arguing. If you want to claim that your model of calculating your FIRE number is superior because of your personal opinion of market value due to AI, I am looking forward to your paper that compares against the more traditional model with backtested data.