Author Topic: Logistics of living off savings  (Read 5232 times)

bluetron

  • 5 O'Clock Shadow
  • *
  • Posts: 3
Logistics of living off savings
« on: September 05, 2013, 05:01:55 PM »
Hello-
I am hoping someone can help me or direct me to a thread that will be useful.
I am fairly new to this blog and forum, but MMM's ideas have really resonated with me, and it turns out I have been living a fairly Mustachian lifestyle even before I found this forum.
I am almost 40 and close to retiring, but live in San Francisco which is a pretty expensive city, and has high real estate values. I calculate that my family will need 50K a year to live on, and including our home equity, we have approximately 1.5 million saved. So far so good, right? The problem is that approximately 700K is in our home value and 450K is in retirement accounts. So we only have about 350K to really work with (in stock funds and Lending Club). So it seems that to retire and actually live off savings we would need to either sell the house and move someplace cheaper, or liquidate retirement funds early with a penalty. Am I missing something? Is there a way we could stay in our house and not touch retirement funds until 60?

beltim

  • Magnum Stache
  • ******
  • Posts: 2823
Re: Logistics of living off savings
« Reply #1 on: September 05, 2013, 05:13:34 PM »
It's going to be a tough road with so much equity tied up in your house.  Your liquid net worth is about $800k, so a $50k/year withdrawal would be a 6.25% withdrawal rate, substantially higher than most recommend.

The retirement accounts can be accessed early without penalty if you take 72(t) distributions basically, you have to commit to 5 years of withdrawals at a given rate.  That frees up the retirement funds for your use.  An online calculate suggests that you could withdraw $14-15k per year this way (I haven't checked that math).

So basically you'd need to come up with $35k per year until Social Security, which would be a 10% withdrawal rate on your taxable accounts.  I don't see that happening, or at least not while maintaining a comfortable margin of safety.


SnackDog

  • Handlebar Stache
  • *****
  • Posts: 1284
  • Location: Latin America
Re: Logistics of living off savings
« Reply #2 on: September 05, 2013, 05:32:20 PM »
Home equity doesn't go very far toward retirement unless you sell (and rent or move some place cheaper) or pay off the mortgage to lower expenses. If you need 50k/yr to live you could need as much as 25x that, depending on your age, health, etc to quit working.

bluetron

  • 5 O'Clock Shadow
  • *
  • Posts: 3
Re: Logistics of living off savings
« Reply #3 on: September 05, 2013, 06:01:31 PM »
Thanks so much beltim and SnackDog!
I did not know about the 72(t) distributions, so that's very helpful, but basically it's looking like the house will have to go.

DoubleDown

  • Handlebar Stache
  • *****
  • Posts: 1989
Re: Logistics of living off savings
« Reply #4 on: September 06, 2013, 09:26:30 AM »
Thanks so much beltim and SnackDog!
I did not know about the 72(t) distributions, so that's very helpful, but basically it's looking like the house will have to go.

You, sir, deserve two Internets! I applaud your flexibility, and congratulations on building up your healthy stash.

You might also search for "5 Year Roth Pipeline." It's another, more complicated way of accessing your 401k/IRA funds penalty-free before age 59.5, if the 72(t) distributions are not enough because of low interest/withdrawal rates. Basically you convert one year's worth of living expenses each year from a traditional IRA to a Roth IRA, then in 5 years you can access the principal penalty-free. You do this for each year, creating a "pipeline" of living expenses until you reach 59.5 or can start tapping into other retirement funds like pensions, SS, etc.

secondcor521

  • Handlebar Stache
  • *****
  • Posts: 2046
  • Age: 49
  • Location: Boise, Idaho
  • Big cattle, no hat.
    • Age of Eon - Overwatch player videos
Re: Logistics of living off savings
« Reply #5 on: September 06, 2013, 12:37:13 PM »
Unless things have changed recently, a 72(t) must continue for 5 years or until age 59.5, whichever is longer.  Since the OP is 40, that would mean a 72(t) would need to run about 20 years.

MrsPete

  • Magnum Stache
  • ******
  • Posts: 3519
Re: Logistics of living off savings
« Reply #6 on: September 06, 2013, 01:28:47 PM »
This is something my husband and I have been talking about lately.  We've focused on saving for years, and now we're approaching the point that it's time for all that effort to start paying off, but we're not 100% certain how the transition'll go.  Here are our thoughts at this point:

- We've picked out a date that makes sense for us to stop working at our full-time professional jobs (and we'll both stop at the same time). 
- At that point I'll be drawing a pension, so that'll be our grocery-and-electricity money. 
- We don't want to start dipping into our savings AT ALL for years, so we plan to each work part-time.  We've talked about various jobs, but all things that'll be entirely different from our current work, and definitely things that'll never require any take-home work.  We both do entirely too much at home now.  We definitely think working a little will make for an easier transition, and it'll allow us to keep the savings for later years, when we will be less able to work. 
- Our house is paid for.  We do not consider our house a part of our "net worth" because it's not spendable.  We do consider our current house the "down payment" on the retirement house we plan to build.

Happyback

  • 5 O'Clock Shadow
  • *
  • Posts: 21
  • Location: Oregon
Re: Logistics of living off savings
« Reply #7 on: September 14, 2013, 04:44:49 PM »
would a reverse mortgage on the house work?
Why or why not?

seattlecyclone

  • Magnum Stache
  • ******
  • Posts: 4729
  • Age: 34
  • Location: Seattle, WA
Re: Logistics of living off savings
« Reply #8 on: September 14, 2013, 05:01:49 PM »
Basically if you're targeting a 4% withdrawal rate, your savings (not including your house) need to be 25x your annual spending. Right now you only have $800,000. That can support a spending rate of $32k/year.

If you trade down to a house that is half as expensive, that adds an extra $350k to your stash. You can now support a budget of $42k/year. In a cheaper area that may well be enough to support a similar standard of living to what $50k/year buys in San Francisco.

Even in San Francisco, $50k sounds like a budget that could probably be trimmed a bit. Do you mind sharing what you spend all that money on? We might be able to come up with some creative solutions to reduce that some.

bluetron

  • 5 O'Clock Shadow
  • *
  • Posts: 3
Re: Logistics of living off savings
« Reply #9 on: September 17, 2013, 03:52:38 PM »
I am really amazed by this forum. It is so...civil. People are really thoughtful and helpful. So thanks again to everyone for their suggestions and ideas.
Seattlecycolone: You are absolutely right - the budget could definitely come down, and in this period of time before we actually retire we are working on bringing it down further.  I have been running some numbers with a cheaper house, and I think we could get by pretty easily on 36-40K a year if we put the equity from our current house into a cheaper place without a mortgage (and lower property tax).

Daleth

  • Handlebar Stache
  • *****
  • Posts: 1201
Re: Logistics of living off savings
« Reply #10 on: September 17, 2013, 08:09:29 PM »
Thanks so much beltim and SnackDog!
I did not know about the 72(t) distributions, so that's very helpful, but basically it's looking like the house will have to go.

Is there any part of it you could rent out? Or could you sell and use the money for a multi-unit? My sense is that duplexes (and triplexes or fourplexes, but not bigger than that*) are the way to go. That's how a friend of mine managed in the Bay Area--bought a large triplex, lived in a 3+ BR part (3BR plus finished attic "bedroom" used as office), rented the rest. In the Bay Area renting the rest could easily bring you the $36k-$42k/year you need to tide you over.


* Anything bigger than 4 units and you're no longer eligible for any type of normal home mortgage--you're in commercial real estate territory