Author Topic: 2nd set of eyes (or 3rd, or 4th...)  (Read 977 times)

sebvad

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2nd set of eyes (or 3rd, or 4th...)
« on: September 24, 2018, 07:32:00 PM »
Topic Title: Looking to retire early, always helpful to have a second (3rd, 4th..) set of eyes on the data to see if im thinking straight or not 8-)

Life Situation: Married filing jointly, im 46, DW is 44 (and plans to work forever). One child in college (full ride scholarship). US citizen living in US.

Gross Salary/Wages: $168k for me, $88k for DW. Total HH gross = $256k/yr.

Individual amounts of each Pre-tax deductions $18.5k for me, $8k for DWs 403Bb

Other Ordinary Income: None.

Qualified Dividends & Long Term Capital Gains: None.

Rental Income, Actual Expenses, and Depreciation: No rental properties. Annual expenses are averaging between $60-70k for the past few years.

Current expenses: No real estate expenses except for taxes (approx $7k annually). Total annual expenses are between $60-70k, which do include monies i spend for reimbursable work expenses - approximately $10k. Should i stop working, wed anticipate our total annual expenses to be in the $60k area, w/o changing our lifestyle at all. Up until this point we've been hammering away at mortgage (paying 6x the monthly payment each month towards principle until it hit zero).

Assets:
Home - $500k - no payment, we own it.
Total retirement funds - $1,040,000
Own 3 vehicles outright
Short term reserves (banks) - $140k cash

Liabilities: None.

Specific Question(s):
For our planning purposes, DW plans to continue to work at her job for at least the next 20 years, with a current annual salary of $88k, of which $8k goes towards her 403b. We are debt free. Our goal is to have a very high level of confidence that wed generate $100k/year for 30 years, starting drawdown at 65. Our retirement funding will come from:

- Standard retirement funds (401k/403b) - by my math - at a valuation of $1,040,000 today - if i work for another 12 months and we continue to contribute at the rate we have been, assuming a 5% annual return, its value should be about $1,125,000 in 12 months. If i stop working at that point, and DW continues funding at 8% of her salary for the next 20 years, assuming a 5% return annual, that should grow to approx $3.3mm USD - giving us $132k/year to live off of at a 4% withdrawal rate. Our 10 year historical average return rate is 11.4%. Using a 25x multiple of our spend - wed seem to need ~$1.5mm USD at time of retirement to maintain our standard of living. At a $100k spend level (increasing our standard of living in retirement), wed need $2.5mm USD balance in 401k. If it grows to north of $3mm USD - that feels like were in pretty good shape?
- Social Security estimates place us (jointly) receiving ~$50k/year if we start taking at 67. Lets be cautious and say its $40k - if we add that to our retirement funds - that takes the annual pretax annual retirement funds to $172k/year ($132k+$40k)
- Pension - Ill get about $18k/year pension starting at 65. Adding that to the above - that brings us to $190k/year.
- House - we could, of course - sell our house (currently valued at $500k). Not working that into the above figures just because i dont think we need to.

If i were to stop working 40hours 12 months from today - our annual expenses are ~$60k/year, and weve got 20 years before we pull from retirement accounts, DWs salary should be able to cover our annual expenses until retirement, and weve got a healthy cash buffer if we find that there are years where it doesnt. Her employment will provide our health care should i stop working. DW is a tenured professor - which basically means she has to kill someone to lose her job, and even then it better be one heckuva brutal murder. High confidence in her job stability, and in her own words 'she wants to work forever' (or at least until 'conventional' retirement age).

Net/Net - to me - the above all seems to be pointing to me feeling comfortable with walking away from corporate america in 12 months. Id love it if the wisdom of the crowds here would be willing to take a look at the above and see if youre seeing something that Im not.

Thanks in advance folks!

lhamo

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Re: 2nd set of eyes (or 3rd, or 4th...)
« Reply #1 on: September 24, 2018, 08:14:12 PM »
I'd say you can walk now!

MDM

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Re: 2nd set of eyes (or 3rd, or 4th...)
« Reply #2 on: September 24, 2018, 09:48:22 PM »
What is your expected taxable income when DW retires if she switches to Roth 403b now?  If that is still more than $88K/yr, switching to Roth is likely best.  You can reevaluate ~annually as investments returns, etc., change.

You might also consider
- DW increasing he contribution to the full $18.5K/yr
- doing trad->Roth conversions at the 12% marginal rate (possibly even into the 22% bracket if you have excess cash available to pay the conversion tax).

reeshau

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Re: 2nd set of eyes (or 3rd, or 4th...)
« Reply #3 on: September 25, 2018, 03:55:34 AM »
Several points:

At a $100k spend level (increasing our standard of living in retirement)
$100k in 20 years has a present value of $55k, at 3% inflation.  So, it's actually a little lower standard of living you are shooting for.  Of course, you have a number of factors making this super-conservative, but the effect of inflation can often be lost on FI case studies, because people are usually talking about shorter timeframes to get started.

- Social Security estimates place us (jointly) receiving ~$50k/year if we start taking at 67. Lets be cautious and say its $40k - if we add that to our retirement funds - that takes the annual pretax annual retirement funds to $172k/year ($132k+$40k)
- Pension - Ill get about $18k/year pension starting at 65. Adding that to the above - that brings us to $190k/year.
I agree with @MDM about looking at Roth.  At this income level, you will have a very high tax bracket, particularly if your state taxes pensions.  At this high an income, SS will also get taxed.  You could manage your taxes better getting more post-tax now.

If i were to stop working 40hours 12 months from today - our annual expenses are ~$60k/year, and weve got 20 years before we pull from retirement accounts, DWs salary should be able to cover our annual expenses until retirement, and weve got a healthy cash buffer if we find that there are years where it doesnt.
So, you could quit *now*, just on *this*.  You have a pension coming and significant savings that will grow.  I would say you are OK, if you only had a decent / padded emergency fund to deal with the fact that you will become a one income family.  Everything beyond that is gravy.

babybug

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Re: 2nd set of eyes (or 3rd, or 4th...)
« Reply #4 on: September 25, 2018, 05:36:33 AM »

If you're still depending on her income for the 20 years, isn't that just dropping to a single income household?

Or will you specifically live off your retirement savings for your portion of expenses? If so maybe do separate calculations?

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sebvad

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Re: 2nd set of eyes (or 3rd, or 4th...)
« Reply #5 on: September 25, 2018, 07:00:21 AM »
So it's interesting - i posted the same question over at the FireCalc forums (literally a cut/paste of the below), and their perspective is a little (lot?) less optimistic.  Still very valuable, in that I don't want to be overly optimistic - but it is interesting that there's such a difference of opinion in, essentially, the same community of folks 8-)

Lots of great things to consider above:
- Inflation adjusting is absolutely something i didn't factor in.  Great point!
- Roth conversion is something i need to read more up on.  We've got some funds in a roth, but we haven't been eligible for years, and i've not given it much thought.  This is something i need to better understand for sure.
- Future taxable income in a single income scenario?  Hm.  If her gross is $88k, and the new tax laws have an exemption for what - $24k (ish)?  and we knock off $2k for charitable giving and are still receiving a tax break due to real estate taxes - i'd think our taxable income in that scenario would be closer to $60k (swagging it)
- Babybug - you're right, it'd be a single income scenario for 20 years, and then leveraging 'official' retirement funds to fund the post 65 years.  Sorry for the imprecision in the terminology.  Through my eyes, i'd essentially be retiring in that i'm no longer going to work daily for income (although honestly in a year i'm going to get bored and will likely take on something, albeit for far less income at far less stress)

Really appreciate the extra set of eyes you guys provide - thanks!

lhamo

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Re: 2nd set of eyes (or 3rd, or 4th...)
« Reply #6 on: September 25, 2018, 07:30:31 AM »
I think you have misunderstood how tax deductions work -- you can either take the standard deduction OR you can itemize (which would allow you to deduct more for charitable giving/property taxes, etc. IF those amounts exceed the standard deduction.

Under the current system you also get a child tax credit for every kid under age 17 -- that counts for quite a bit.

Definitely look at a Roth conversion strategy once you drop to one income.  MDM's Case Study spreadsheet can help you figure it out, or there is a useful spreadsheet here:

https://www.bogleheads.org/forum/viewtopic.php?t=97352

I used the latter to figure out how to minimize the tax hit on conversions over the next 20 years (I turn 50 in a few weeks) -- took a lot of tweaking but came up with a system that would keep our taxes mostly in the 10% bracket (with a TINY bit in 12%) and save us over 600k in total federal tax by getting most retirement funds moved into Roths by the time I'm 70.

sebvad

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Re: 2nd set of eyes (or 3rd, or 4th...)
« Reply #7 on: September 25, 2018, 07:56:22 AM »
I'm quite certain i don't have a firm grasp on tax law, especially since it's recently changed 8-)  Will def look at the link you'd shared. Thanks mate.