Snipping The Strings

[Matt]

Motivated by a thread here on Cutting the Cord I posted an update regarding 'life after Cable'. I have been without it for 18 months now. For some reason most people call it Cutting the Cord, and in my post I referenced that it may be because you are severing a dependency on a monthly outflow.



Reflecting further, I see the cord we called Cable as a string, and we are snipping away at them. Sure, cords, strings, whatever these semantic terms mean, but the point is that it is that there are many, and it is possible to unravel them and once isolated make educated decisions on them. Each one that we can remove from our budget puts us one step closer to F.I.R.E.

The goal is always to remove or reduce the costs that can be removed (without negatively impacting your lifestyle) and saving enough to offset those costs that cannot be removed.

The ones that spring to mind that I have removed or reduced to date are:

• Travel (zero)
• Mortgage (zero)
• Cable (zero)
• CellPhone (in process)

But when you dig deeper there are so many little things that make up the big picture, and each requires some sort of decision when time permits. It's these little decisions that make a massive difference, things like how much markup you would be prepared to pay for a bottle of wine, or an investment strategy.

A Full Lion Doesn't Hunt
An argument I make in the Pay Off your Mortgage Early thread is that a problem that can arise from cutting the strings is that it can make you complacent. If you don't have to make a mortgage payment each month, you don't have the same pressure to produce.

To avoid that, I think it is important to keep a firm eye on the overall strategy. You will get to a place where you have removed or reduced as much as you feel comfortable from your budget, but you will still need income to offset expenses, even the for the most frugal person. There are many ways to figure out how much is needed a common one is the Safe Withdrawal Rate (SWR) which recently has been set as 4%. The reason for that is the vogue with many personal finance 'boffs' to follow one another and appear like an expert.

The 4% rule came about from The Trinity Study which ran monte carlo simulations back in 1998 on retirement plans. Simplified, it is that if you withdraw 4% of your total savings per year it should last you throughout your retirement. The notion being that inflation adjusted investment income would top up your funds. I'm not sure that I agree with this notion of 4%, but I haven't pressure tested the numbers enough to know for sure, however I certainly would aim for a SWR of at least 4%.

How much more do I need?

Let's say I can survive on $40,000 in retirement, according to the 4% rule that would mean a nest egg of $1M. I have to say I would feel more comfortable about this $1M if I retired at 65 rather than 40..

The vastness of the amount required to retire early in relation to expenses is why I constantly talk about earning more, and why I tend to encourage people to find ways to reduce expenses only within their own parameters. I certainly enjoy some luxuries, but I make some decisions to not follow the pack either.

What strings have you cut to get you to retirement sooner?

 

[Kim @Savy.Traveler]

I am confused. Did you pay cash for your new place or are you renting? If renting, is it a temporary thing or are you refuting the home mortgage concept as some sort of forced savings for retirement?

 

[Matt]

I am confused. Did you pay cash for your new place or are you renting? If renting, is it a temporary thing or are you refuting the home mortgage concept as some sort of forced savings for retirement?

Cash.

 

[InstinctX]

Transportation / Gas: I generally have to fill up my car about every 2.5 or 3 weeks (since I have the ability to work from home); employer reimburses me for any travel related expenses if I need to go into one of their offices located 2.5 hours away from me -- disclaimer: since April, I am spending more on fill-up's with the need to trek out to WM's

Internet/TV/Landline Phone: 5% (since using Ink) - I pay my cell phone through WF CC because they offer phone protection

Car Insurance: saving 4.2% by paying with GC's bought by MS'ing (included the cost of activation fee for the GC)

Groceries: 5% with Old AmEx Blue / WF

 

[Andrew]

Things we have reduced or eliminated:

Travel (zero)

Cable (zero): Well zero in that in our area the cheapest cable service at a speed we need actually includes basic cable and HBO. This is quite useful in that HBO has the only television shows that I watch and a decent backlog of movies, which saves us from renting a movie each week, which we tend to do one night during the weekend)

Cellphone (would like to reduce) Currently in a family plan with my wife, mother, and myself. Wife and I pay $100 per month together for two iPhones with unlimited minutes. I know we can do better than this.

Mortgage/Rent: This is such a huge portion of our monthly expenditures. This is definitely a lifestyle choice as we choose to live in the city (and one in which housing costs are very high. Not NYC high but right near it). I mostly work from home but my wife has only a ten- minute walk to work. We really crave the urban environment and can not see ourselves leaving the city right now. Buying is something we have thought about but we are at a point in our lives where we have no idea if new employment opportunities might take us away in six months to a year.

All other expenditures have budgets set that we are very good about staying under.

 

[pstlb]

I fit in to your $40k per year in retirement. I can meet all my expenses and still have $800-$1000 in discretionary spend per month. However, we had to work at it to reduce our expenses to pay off mortgage, put kids through college, new cars, etc. BUT it is very difficult to shift to the mindset of now spending money! After years of budgeting, I now no longer need to but habits are hard to break. I can afford to do some traveling but am hell bent on MS to cover those expenses. My SO thinks I'm nuts to constantly be ordering AGC, BBs, Serve, Buxx, AFT, GB and taking advantage of every opportunity that comes up. Only advice I have to those you are in their working years: there is a delicate balance of saving/budgeting and enjoying the here and now. You must plan for the future but live in the present. Make those memories now, go on that once in a lifetime trip, who knows what the future will hold.

 

[Badassity]

It's amazing how easy it is to live without some recurring expenses once you've tried it. Things you thought were necessary suddenly become distractions that you're happy without.

We haven't had cable/digital TV for over a decade. One month the bill came for our satellite package and we realized we hadn't watched anything since I last paid it. That was a pretty easy one to get rid of. Somehow we ended up with Netflix. Three kids is my excuse. I'm taking the easy road on potential mutiny.

Sometimes I could use call display I guess, but basic phone without all the extras is pretty cheap.

One big thing about telecommunications packages is you can request a rate reduction. It never hurts to ask. We pay $52 per month for 140G Fibe 6 (maybe 12 now - tech challenged) internet plus phone taxes in with Bell. The regular rate on that is over a hundred bucks. The only down side is I have to call them back once a year to complain about a price increase and talk to the Retention Department. A big sigh and a lot of perceived pain at the time, but a sweet hourly salary in savings.

I sometimes think how much time I'd save personally without internet. Some days I lose hours in a forum, a great new blog, or crazy minutiae research. Then I lament that there are not enough hours in a day. But I'm pretty unlikely to cut that cord.

Lots don't matter to me. Cell phones for instance. Though I'm getting to a point where it makes sense for the kids to have them. Easier to track them down and meet up with them. That snowballs because I'd need one too.

 

[Badassity]

I like playing around with these formulas for recurring costs:

• to calculate a weekly expense compounded over ten years, multiply the price by 752
• for a monthly expense, multiply by 173

It's from my favourite PF blog... (I have no affiliation). The two bullets above are cut from http://www.mrmoneymustache.com/2011/04/15/getting-started-3-eliminate-short-termitis-the-bankruptcy-disease/

Seeing how much a recurring expense costs over time is pretty shocking at first.

 

[Annie H.]

Great thread. I'd like to caution folks NOT to use the 4% rule without really studying and understanding it. The original study-1988 (when stock market returns were more robust than they've been in the subsequent years) came up with 4% but in recent years with the performance of the market many have lowered that rate to 3%. The original authors updated their study in 2009 and so I find the phrase, "which recently has been set as 4%" slightly misleading although I'm sure it was unintentional.

It is important to note, and also often missed (you can't just stick your $1MM in the bank and expect the 4% rule to work), the study specifies an investment asset allocation of 50% equity/50% fixed income and many older investors in the decumulation/withdrawal stage are not comfortable with such a high equity % although such a ratio can work well for folks who retire early and have the option of going back to work if things don't work out.

Also note that the Trinity Study used Monte Carlo simulations--they are called Monte Carlo for a reason! For in depth discussion of the Trinity Study, SWR and other investment strategies preparing for early retirement the Bogleheads forum is an excellent resource--in fact it's a great resource over all.

http://www.bogleheads.org and the Wiki there is more up to date and helpful than the Wikipedia in the OPs post:
http://www.bogleheads.org/wiki/Trinity_study_update

I can recommend a couple books that might be helpful with regard to early retirement that also discuss SWR and other "formulas' for early retirement:

Work Less, Live More: The Way to Semi-Retirement (this is an older, 2007, but still very relevant book)
http://tinyurl.com/lzqr5mj and

Your Money or Your Life
http://www.amazon.com/Your-Money-Life-Transforming-Relationship/dp/0143115766

There are many ways to figure out how much is needed a common one is the Safe Withdrawal Rate (SWR) which recently has been set as 4%. The reason for that is the vogue with many personal finance 'boffs' to follow one another and appear like an expert.

The 4% rule came about from The Trinity Study which ran monte carlo simulations back in 1998 on retirement plans. Simplified, it is that if you withdraw 4% of your total savings per year it should last you throughout your retirement. The notion being that inflation adjusted investment income would top up your funds. I'm not sure that I agree with this notion of 4%, but I haven't pressure tested the numbers enough to know for sure, however I certainly would aim for a SWR of at least 4%.

How much more do I need?

Let's say I can survive on $40,000 in retirement, according to the 4% rule that would mean a nest egg of $1M. I have to say I would feel more comfortable about this $1M if I retired at 65 rather than 40..

 

[Matt]

I used the phrase recently set in reference to bloggers who are making it the norm, then went on to show the study is from 1998- note the study did look back beyond just that one year, but I still don't fully trust it just because I haven't run my own numbers.

 

[Annie H.]

I used the phrase recently set in reference to bloggers who are making it the norm, then went on to show the study is from 1998- note the study did look back beyond just that one year, but I still don't fully trust it just because I haven't run my own numbers.

Yes, the study did look back beyond 1998, perhaps I didn't make that clear. I was trying to point out that the study authors updated their results in 2009 and so the data now includes 11 additional years of "look back" information and that's partially where recommendations by many have started to move from 4% to 3%. Many other good methods out there and it's an extremely complex topic. I highlight the point I'm trying to make with the quote below:

"Before concluding, a few key assumptions for these studies must be understood. First, they are based on historical data from the U.S., and so the applicability of these success probabilities depends on future stock and bond returns behaving with the same patterns as we have seen historically. Second, because these studies rely on long periods of historical data, they tend to only include stocks and traditional bonds. Retirees may wish to consider including TIPS in their retirement portfolios, as well as international assets, real estate, and other alternative assets. Third, though it is beyond the scope of this discussion to be considered further, retirees may wish to investigate whether they can benefit from purchasing nominal and/or inflation-adjusted annuities with a part of their retirement wealth."

If you want to go further here's a very involved discussion of the updated report:

http://www.bogleheads.org/forum/viewtopic.php?p=1010376#p1010376

Another great resource is ESP planner developed by Boston University economist, Laurence Kotlikoff, "ESPlanner eliminates the guess work from financial planning. Its patented algorithms do lifetime budgeting, calculating how much to spend, save, and insure each year to maintain your family's living standard." Kotlikoff uses an approach which involves "smoothing" which tries to take into account variations in investment returns and lifestyle changes during retirement. It's worth a look for anyone trying to plan retirement--whether early or late. Kotlikoff is also a somewhat prolific writer and contributor to public discourse.
http://www.esplanner.com/

(gotta brush up on my embed link skills) below: "The Trouble With Retirement Calculators
http://www.huffingtonpost.com/laurence-j-kotlikoff/the-trouble-with-mark-mil_b_559532.html

Finally do NOT overlook the many nuances of how and when to collect social security. This generally does not come into play until one-- or one partner--reaches 62 (unless there has been an early death) but to gain maximum benefits one MUST study up and develop a strategy.. Delaying SS to age 70 --especially if one is able to do a married couple strategy and only one delays--is like buying an annuity for free and one can gain thousands of dollars over remaining life.

 

[Annie H.]

• CellPhone (in process)

Please report back on that. Any strategies on reducing the cost of ISP/internet access? If there's one company in the entire US I'd like to take advantage of it's Comcast. In fact there's long running online thread, "Comcast Must Die."

 

[Haley]

The only ISP strategy I've been able to come up with has been vetoed by my husband.
The idea I floated was to switch back and forth between providers (about yearly, depending on offers and termination options) and between named account holders to try to get new customer offers (in short, a churn).
We have exactly two providers to our address, and only one is reliable, which is why the idea got vetoed.

 

[Annie H.]

The only ISP strategy I've been able to come up with has been vetoed by my husband.
The idea I floated was to switch back and forth between providers (about yearly, depending on offers and termination options) and between named account holders to try to get new customer offers (in short, a churn).
We have exactly two providers to our address, and only one is reliable, which is why the idea got vetoed.

I've tried the churn and run into a lot of difficulties. I've also done lots of appeals to recon department and in the past only slightly successful especially when I lived where Comcast absolutely dominated. Comcast kept saying their only offers were triple play and that's a hassle. We moved and AT&T started sending me two or more offers a week. First $100 GC, then $200 and when they got up to $500 I decided to call Comcast. Ironically--as I thought I was a pretty good negotiator in the past--I absorbed some of the info used here for AF credit and called using the tactic of *long* time customer and all the other offers available to me-- of course having that helps a lot (Dish, Direct TV, Uverse, etc.). If you want to go hard you have to be prepared to actually cancel and I wasn't but I was able to get a $30 month reduction plus a tier upgrade and free HBO. Most successful I've ever been in 15 years of negotiating.

 

[DarcyMae]

My "cord cut" has been refraining from upgrading my smartphone. My employer requires me to carry a phone and pays me a monthly stipend for it. For the first two years that my phone was under contract, the stipend covered all but $16 of the monthly bill. Now, with the phone off contract, I actually make $25 or so each month since the monthly fee went down post-contract but the stipend is the same regardless.

It's been hard to not trade my 2012 phone in for the latest-and-greatest model but so far I'm holding firm!

 

[PedroNY]

Why 4% depletion rate? Wouldn't you want to leave some legacy? Donate 95% away like W. Buffet? Set up you kids, just enough that they have to work (and stay hungry) but be set? I only ask that, as mos of 4% rule assumes you need to draw down that much in your retirement and you hope that you don't outlive it. What if you are making way more in your retirement, and your net worth is growing, and you are still living comfortably? Just a thought, I'd like my net worth to grow, always grow, regardless of my income being generated through work or investments...

Matt, I like your point about the lion, and staying hungry and making sure not to become complacent. That's the key!

Cheers,

PedroNY

 

[Annie H.]

Why 4% depletion rate? Wouldn't you want to leave some legacy? Donate 95% away like W. Buffet? Set up you kids, just enough that they have to work (and stay hungry) but be set? I only ask that, as mos of 4% rule assumes you need to draw down that much in your retirement and you hope that you don't outlive it. What if you are making way more in your retirement, and your net worth is growing, and you are still living comfortably? Just a thought, I'd like my net worth to grow, always grow, regardless of my income being generated through work or investments...

PedroNY

I have no kids so no need to leave a "legacy"-- if there's some left, nice for my partner, siblings. 4% rule (now 3%) does NOT mean you HAVE to spend 3% per year only that if you spend more, you're probably going to be in trouble. As far as growing net worth there's always the question-- how much is enough? I'd love to be able to put everything in 6% CDs for the rest of my life and not worry about the stock market. But I don't know what "enough" is. I take my nest egg $xxxxxx and divide it by the number of years I expect to live. If that doesn't give me enough to withdraw each year to supplement my meager SS I simply decide I'm not going to live 10 or 20 or however many more years I'm playing with at the time.

Snipping the strings:

Page Plus, a Verizon reseller, apparently has 4G LTE access in the works in "the not too distant future." Resellers of PP are not allowed to release the date. If you are interested-- in PP or other carriers, watch the forums:
http://www.howardforums.com/content.php
http://www.kittyforums.net/

 

[Annie H.]

Two great articles on the 4% withdrawal rate and Monte Carlo Simulations:

Can Retirees still use a 4% withdrawal rate?
The Power and Limitations of Monte Carlo Simulations

 

[HariOm]

What about land line? Is it really necessary? I just cancelled the voicemail and long distance service on our land line, with the thought that we'd just keep the land line only for the occasional fax or in case of emergency. Then realized that without long distance service we're not going to be sending many outgoing faxes, which can be done by smartphone anyway. So what, if any, is the rationale for maintaining a land line today? (BTW it's AT&T land line. We've lived entirely without TV since last century, so no need of cable or fiber optic.)

 

[loves2fly]

Mortgage: zero (no rent either)
Landline: using Magic Jack, paid until 2019 @ $15.xx/year
Cellphone: grandfathered plan from Alltel, now with Verizon unlimited web browsing, 600 shared minutes with My circle plan included, no text (we use free heywire for txting)
Cable/Internet: Internet only with Cox communications @ $59.xx monthly

 

[HariOm]

Regarding land line question about, NYT published a helpful summary: http://www.nytimes.com/2014/01/18/your-money/weighing-the-need-for-a-landline-in-a-cellphone-world.html. I still lean toward cutting this cord.

 

[Matt]

Regarding land line question about, NYT published a helpful summary: http://www.nytimes.com/2014/01/18/your-money/weighing-the-need-for-a-landline-in-a-cellphone-world.html. I still lean toward cutting this cord.

I've not had a landline since... Well ever. We had one at my parents house, but since moving out I've never used one.

Might be a consideration if you have an elderly person/poor coverage for emergency services etc.

 

[InstinctX]

I have a landline because I work from home most of the time....and it's part of Verizon's triple play bundle (which saves money). The call quality is 1000x better..it's very obvious when I'm on conference calls & someone who's speaking is using a cell phone. Other benefit is faxing (though I'm sure there are alternatives).. I use the fax for faxing in my travel & expenses for work My company used to reimburse me for landline but stopped because they provide a smartphone.

Plus I have it for emergency purposes -- in particular when there's storm outages. However, you need to have a old-school type of phone that doesn't require power (which are fairly cheap, under $20) LOL

 

[Matt]

I have a landline because I work from home most of the time....and it's part of Verizon's triple play bundle (which saves money). The call quality is 1000x better..it's very obvious when I'm on conference calls & someone who's speaking is using a cell phone. Other benefit is faxing (though I'm sure there are alternatives).. I use the fax for faxing in my travel & expenses for work My company used to reimburse me for landline but stopped because they provide a smartphone.

Plus I have it for emergency purposes -- in particular when there's storm outages. However, you need to have a old-school type of phone that doesn't require power (which are fairly cheap, under $20) LOL

Indeed, it is one reason I hesitate to personally get the Republic Wireless phone, wifey has it and it works well, but sometimes the quality doesn't sound 'professional' enough for me, I will have to test it under the new wifi to confirm, else perhaps a landline for that purpose is necessary.

 

[Dangjr213]

What about land line? Is it really necessary? I just cancelled the voicemail and long distance service on our land line, with the thought that we'd just keep the land line only for the occasional fax or in case of emergency. Then realized that without long distance service we're not going to be sending many outgoing faxes, which can be done by smartphone anyway. So what, if any, is the rationale for maintaining a land line today? (BTW it's AT&T land line. We've lived entirely without TV since last century, so no need of cable or fiber optic.)

I had to keep a landline until the contract on my home alarms system was up. Now moved to one that works off broadband and ditched the home phone