How to calculate assets for Financial Independence, Retire Early (FIRE)

twister_teddy

Apologies if this is not the correct forum for FIRE discussions. 
I am learning about FIRE and confused about calculating the net worth. I understand that total net worth should include real estate (residential and investment property) however these are not liquid assets.
So when it comes to 4% safe withdrawal rule of RE (retire early), how can one withdraw the growth easily if the assets are in the form of real estate. 
Does "RE" part of FIRE requires the assets to be converted in liquid assets such as stocks, savings, cash etc.

Sailtheworld

The 4% needs to come from liquid investments that are in addition to owning a house. i.e. a pension fund or cash savings.

Obviously a big pot is needed to cover 25x your annual outgoings but it would need to be even bigger if you had to cover rent as well.

kangoora

Total net worth should include real estate, however, it is only partially relevant to FIRE (imo). Owning a property free and clear reduces your outgoings as you no longer need to pay rent/mortgage so is a fairly important milestone in any fire planning. Where it is more relevant to fire is if you have in your plans to downsize to free up capital at some point because some of that real estate capital will then, at some point, be part of your disposable net worth/assets.

I would not include real estate you are living in as part of any fire assets, you can't sell 20% of a house to fund retirement. Strictly speaking I suppose you can, as part of an equity release scheme but I certainly wouldn't consider planning on using equity release as part of a fire strategy, however I would consider downsizing as part of a strategy. I guess equity release is vaguely possible to be used as part of a retirement strategy if you have no dependents or wishes to leave anyone any cash when you peg it.

MaxiRobriguez

I think owning a home is irrelevant for most FIRE folk.

The idea is that once your investments cover your outgoings then you're free to retire. Unless you're renting out a room then your home shouldn't count because it's not generating income. 

I find it far easier when looking at prospective retirement dates to only use my ISA and Pension totals. I will probably have a mortgage post retirement but that debt may get eaten by inflation, and even if it doesn't, provided I'm covered with the other two then it doesn't matter. 

barnstar2077

As someone who wants to retire early but lives quite frugally, I have thought that I could shave an extra year or two off of my working life by simply borrowing a bit more on my mortgage.  Which could then be paid off with the lump sum from my pension (Although that certainly would not be my first choice!)  But as the others have said, unless you could downsize to free up money then the property that you live in shouldn't really be a factor in your calculations.

twister_teddy

What about the scenario when you're retiring to a different country and you don't want to buy a house there. 
Why can't you sell or rent your current residential in UK before retiring abroad. 
What about the investment properties which are bringing in a certain yield every year. 
I don't understand why all the FIRE net worth need to be in liquid assets. The yield on the real estate is comparable to the income from the invested stocks.
Indeed I am factoring in the rental costs abroad in my burn rate.

jim1999

Option 1: Calculate for all assets and base your expenses on a figure that includes rent
Option 2: Ignore housing, base expenses on figure excluding rent

dont_look_now

Certainly you should factor in the expected changes in circumstances after you retire. E.g. if you'll sell your current home, count the estimated proceeds as capital. And equally, if you'll be renting after retirement, the rent you expect to be paying counts as part of your expenditure (when figuring out how much capital you need for it to be 25X your expected expenditure).

(However, if you have enough to FIRE in some low-cost-of-living country, but wouldn't actually want to spend the rest of your life there, then you're not really ready to FIRE.)

Investment properties (i.e. ones you will let, instead of live in) should be counted in some way as capital. You could just apply the 4% rule to your net equity in the property. But you would probably also make specific projections about what cash you expect each property to generate, after costs, taxes, vacancies, contingencies, etc.

Eco_Miser

twister_teddy said:

What about the scenario when you're retiring to a different country and you don't want to buy a house there. 
Why can't you sell or rent your current residential in UK before retiring abroad. 
What about the investment properties which are bringing in a certain yield every year. 
I don't understand why all the FIRE net worth need to be in liquid assets. The yield on the real estate is comparable to the income from the invested stocks.
Indeed I am factoring in the rental costs abroad in my burn rate.

You can do what you like, but if your investment properties aren't bringing in at least 4% after all expenses you're going to have problems with them at some stage.

NB. The '4% rule' is based on somewhat out of date US figures and a 30 year retirement. Longer retirements and UK investments both suggest a lower percentage, perhaps only 2%

twister_teddy

Eco_Miser said:

twister_teddy said:

What about the scenario when you're retiring to a different country and you don't want to buy a house there. 
Why can't you sell or rent your current residential in UK before retiring abroad. 
What about the investment properties which are bringing in a certain yield every year. 
I don't understand why all the FIRE net worth need to be in liquid assets. The yield on the real estate is comparable to the income from the invested stocks.
Indeed I am factoring in the rental costs abroad in my burn rate.

You can do what you like, but if your investment properties aren't bringing in at least 4% after all expenses you're going to have problems with them at some stage.

NB. The '4% rule' is based on somewhat out of date US figures and a 30 year retirement. Longer retirements and UK investments both suggest a lower percentage, perhaps only 2%

That's kind of the problem that I am having, most of the FIRE related content I find is focused for US.  Is there a good source, calculators focused around UK laws and market dynamics. 
Most of the shares I've invested are global funds, so I understand that average growth needs to be over 4% (which it is) and similar historical figures are for the real estate in UK.
I don't quite understand why you would say that its a 30 year retirement, mathematically as long as the growth is over 4% average, the capital should never decrease and only increase. Am I missing something technically ?

coachman12

Eco_Miser said:

twister_teddy said:

What about the scenario when you're retiring to a different country and you don't want to buy a house there. 
Why can't you sell or rent your current residential in UK before retiring abroad. 
What about the investment properties which are bringing in a certain yield every year. 
I don't understand why all the FIRE net worth need to be in liquid assets. The yield on the real estate is comparable to the income from the invested stocks.
Indeed I am factoring in the rental costs abroad in my burn rate.

You can do what you like, but if your investment properties aren't bringing in at least 4% after all expenses you're going to have problems with them at some stage.

NB. The '4% rule' is based on somewhat out of date US figures and a 30 year retirement. Longer retirements and UK investments both suggest a lower percentage, perhaps only 2%

I agree with both Eco and twister. I believe that the 4% figure is no longer accurate, if indeed it ever was. I also agree with the warnings about investment properties causing "problems at some stage."
When I used to hold real estate assets, mainly office complexes, I found them too much trouble and too adversely affected by tax payments and various other costs. That is when I offloaded them which allowed me to concentrate on a much larger than previous shares' investment portfolio, in addition to the existing stocks of gold and objets d'art. 
I have never regretted that decision and now look at the stats which show that shares have risen by 50% more than real estate over the past 10 years ( and far more over longer periods). From the FIRE viewpoint, I would back the yield on the income from invested stocks as against real estate income.