Author Topic: Case Study - Feedback on expenses and potential retirement at 55  (Read 4041 times)

kiliscout

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Case Study - Feedback on expenses and potential retirement at 55
« on: February 09, 2021, 03:55:10 PM »
My current situation: retired military, current federal employee, late 40’s, no dependents besides an elderly dog; live in HCOL area.

My short term goals are to continue building my savings and potentially buy a holiday home (3 hours away) for approximately ~160k with my sister. We have discussed the purchase in-depth and have tried to work through potential obstacles/issues we could see happening. The plan would be to list it as a holiday rental and I/we would use it once or twice a month. Post retirement I’d split my time between the two residences as much as possible.

My mortgage is my largest concern at the moment. I’ve had roommates off and on over the last couple of years, and once COVID is less of an issue, I’ll likely rent out a room again in order to pay down the balance. My vehicle is new (2017), and won’t need to be replaced anytime soon. I have renovated most of my home (paid for in cash) so don’t foresee any major housing expenses in the near term. As an FYI, I have tracked my expenses for the last year, and intend to keep doing so in the future. I can break out some of the figures below if necessary!

Long term I’d love to retire at age 55 (in 7 years), but I wouldn’t be able to collection my pension until I reach minimum retirement age of 57. At age 55 I’ll have 30 years of federal time (including military + current federal time). I suppose I could hold out for an additional two years but I’ve lost the passion for my work and frankly am tired of staring at a computer screen for 9-hours a day. I’d be happy taking a part time job making enough money to cover some expenses, and either pulling money from investments or cash until my pension (approximately ~$35,000/year) kicks in. As a military retiree, my insurance costs are minimal; right now TRICARE costs me approximately ~300/year.

I don’t have any specific questions, just looking for general guidance on the figures below, and any feedback you might have!

2020 figures:

Gross salary: 176,597.00

Federal Pay: 149,364.00
Military Retirement: 27,233.00

Deductions: 94,409.00

Federal Taxes: 25,097.00 // 2,944.00 (28,041.00)
State Taxes: 6,853.00 // 1200.00 (8053.00)
TSP contribution: 19,500.00 (will add “catch-up” funds once I turn 50)
OASDI: 8,537.00
FERS retirement contribution: 6572.00
Medicare: 2,154.00
Military Deposit: 2,700.00
Life insurance: 594.00
Union: 402.00
Dental/Vision: 750.00
Allotment to cash savings/sinking funds/investments: 21,250.00

Net Pay: 78,724.00

ASSETS: 445,581 (w/o home equity) / 957,500 (incl. home equity)

Cash: 40,000.00
Taxable brokerage: 262,417.00
TSP: 143,140.00
E-Trade: 24,000.00
House: 512,000.00

LIABILITIES: 335,000.00

Mortgage: 319,000.00 (refinanced Jul 2020 for $323,000 @ 2.99% VA loan; Zillow value: 490,000)
Military Deposit (buyback military time towards federal retirement): 16,000 @ 2% (currently put $200/month towards debt)

2020 Expenses per month: (~63,000 per year)

Housing
Mortgage: 2000 (I pay approximately $175 extra per month; payment includes annual property tax of ~4k and insurance ~1k)
HOA: 381
Maintenance/improvement: $300 (includes $ for bathroom renovation; not typically this high)

Transportation
Gas, tolls, maintenance: 140
Insurance: 50

Utilities
Phone: 72
Electricity: 80
Internet: 73

Food
Groceries: 400
Dining out: 80

Dog
Dog food: 65
Dog sitter: 20
Vet: 400 (elderly dog had a couple surgeries this year; $ towards pet insurance)

Fitness: 160
Outfitting home gym because of COVID; swimming, running, biking, snowboarding. This is essentially my therapy!

Yearly expenses: 350
Includes: electronic replacement, extra taxes paid for 2019, pet insurance, Virginia personal property tax for vehicle, garden, Amazon Prime, YNAB, and health insurance

Clothing: 150
Major face punch here; I’m definitely limiting my purchases in 2021!)

Home decor: 100
Includes some bathroom renovation purchases

Entertainment: 170
Events, newspapers, subscriptions (TrainerRoad, Hulu, Netflix), movies, books

Gifts: 30
Personal: 150
Travel: 50

Thanks for your time and feedback!
« Last Edit: May 11, 2021, 04:38:31 PM by kiliscout »

dandarc

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Re: Case Study - Feedback on expenses and potential retirement at 55
« Reply #1 on: February 09, 2021, 04:14:01 PM »
If you're really spending $63K per year, seems likely your pensions would cover all that by the time you can collect, no? Plus you'd only be 7 years from social security, so even if there is a gap right at 55, you wouldn't have very long to cover it.

So long as your lifestyle does not inflate dramatically, you should be fine.

But your numbers here indicate you might not really be spending 63K per year:

1. Your comprehensive deductions section does not add up to the total presented - where's the $3400 missing there?

2. You state net pay is $78,724. What happened to the other $15,000 to get to $63K annual spend?

You've already got "cash savings/sinking funds/investments" in your deductions section. Are you doing more of that? Is the missing $15K miscellaneous drain? Something else? That's about 25% of your stated spend - not exactly pocket change, so be sure you know where that is going.

On the mortgage - conventional wisdom is wrong. At 3%, you should hold on to that as long as you possible can. Stop sending extra. Even consider cash-out refinance (rates are still crazy low) and invest the proceeds.

Kierun

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Re: Case Study - Feedback on expenses and potential retirement at 55
« Reply #2 on: February 09, 2021, 04:34:39 PM »
No IRA?

jeroly

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Re: Case Study - Feedback on expenses and potential retirement at 55
« Reply #3 on: February 22, 2021, 05:21:00 AM »
When listing your assets you excluded the market value of your home, yet you list the mortgage as a liability.
Either include both in your asset/liability statement or exclude the mortgage.

If we add in the equity in your home, you have about $637k in net worth which yields about $25k/yr at a 4% WR.

Assuming that your expenses stay constant post-retirement, you 'need' $63k-27k=$36k/yr + taxes- let's assume an additional $7k/yr for taxes or $43k.

I'll assume that you'd get $20k /year from additional pensions and/or Social Securty at 65 - I'm not sure how it works for ex-military / federal employees.

So you're fully funded for your post-65 portion of retirement but need to bridge the gap from FIRE age to 67, or 12 years at ($43k-$25k=$18k) or around $200k. 

Given that you're under 50 and saving more than $40k/yr, you will save more than that without any consideration of investment returns at all, so things are looking copacetic assuming that you sell your house or extract the house equity in some fashion, and are able to keep your housing budget under its current level.

As far as buying a vacation home with your sister goes, well I wouldn't do it for a variety of reasons, not the least of which is the potential impact on your retirement plans. 

Dicey

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Re: Case Study - Feedback on expenses and potential retirement at 55
« Reply #4 on: February 22, 2021, 06:53:37 AM »
Buying that second home will delay your time to FIRE. Only you can decide if that's worth it. Another thing that might be missing from your budget is any kind of charitable giving.

reeshau

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Re: Case Study - Feedback on expenses and potential retirement at 55
« Reply #5 on: February 22, 2021, 07:22:38 AM »
It's a small amount, but it got me wondering: why the life insurance policy, with no dependents?  At this point in your life, it seems to serve no purpose.

crowinghen

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Re: Case Study - Feedback on expenses and potential retirement at 55
« Reply #6 on: February 23, 2021, 09:22:52 AM »
As far as buying a vacation home with your sister goes, well I wouldn't do it for a variety of reasons, not the least of which is the potential impact on your retirement plans.

Off topic comment I know, but I would also strongly not recommend this.
My sister and her husband went in halves on a beach house with her husbands brother, my husband and I coincidentally bought one of our own around the same time (2012). We just sold ours to get the cash to purchase a retirement home, taking advantage of the great market now. My sister would like to do that but the other partners do not want to sell. They split up the use of the house every other week, so my sister cannot even  use it as a true summer home, every other week they have to leave. So they are basically trapped until the brother wants to sell. FWIW

Best wishes

kiliscout

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Re: Case Study - Feedback on expenses and potential retirement at 55
« Reply #7 on: May 04, 2021, 08:25:29 AM »
If you're really spending $63K per year, seems likely your pensions would cover all that by the time you can collect, no? Plus you'd only be 7 years from social security, so even if there is a gap right at 55, you wouldn't have very long to cover it.

So long as your lifestyle does not inflate dramatically, you should be fine.

But your numbers here indicate you might not really be spending 63K per year:

1. Your comprehensive deductions section does not add up to the total presented - where's the $3400 missing there?

2. You state net pay is $78,724. What happened to the other $15,000 to get to $63K annual spend?

You've already got "cash savings/sinking funds/investments" in your deductions section. Are you doing more of that? Is the missing $15K miscellaneous drain? Something else? That's about 25% of your stated spend - not exactly pocket change, so be sure you know where that is going.

On the mortgage - conventional wisdom is wrong. At 3%, you should hold on to that as long as you possible can. Stop sending extra. Even consider cash-out refinance (rates are still crazy low) and invest the proceeds.

Thanks for the reply! When I retire I'll only receive one pension. At the current time I receive a military pension, but because I'm "buying back my military time", once I fully retire from federal service, that military pension will go away, and I'll receive just one pension check from the government. The new pension will take into account the higher pay grade I've currently be earning and will be about ~$35k a year (compared to the $27k) I currently receive. (Hopefully this makes sense!). So won't quite meet my current annual spending unless I drastically reduce my expenses. Hence the reason I need to get rid of my mortgage! :) As for your questions:

1. I made a mistake in calculating my deductions - adjusted the numbers above. 

2. As for the $15k in expenses. I remodeled a bathroom and my finished basement in 2020, so I think that is where that money went. I pulled that money from accounts I automatically save to (and don't use for day-to-day expenses), so I didn't add them up as yearly expenses. I'll definitely take a look at my numbers again to be sure though!

Regarding my mortgage - I totally get your advice; I need to get over my desire to not carry any debt! I think I'm fairly aggressive in my investments, but doing a cash-out refinance would be a little too scary for me at this time! TPC

kiliscout

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Re: Case Study - Feedback on expenses and potential retirement at 55
« Reply #8 on: May 04, 2021, 08:28:30 AM »
No IRA?

Hi Kierun!

The TSP (Thrift Savings Plan) is my tax-deferred account that I max out every year; the government matches a portion of that every year.

kiliscout

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Re: Case Study - Feedback on expenses and potential retirement at 55
« Reply #9 on: May 04, 2021, 08:44:06 AM »
When listing your assets you excluded the market value of your home, yet you list the mortgage as a liability.
Either include both in your asset/liability statement or exclude the mortgage.

If we add in the equity in your home, you have about $637k in net worth which yields about $25k/yr at a 4% WR.

Assuming that your expenses stay constant post-retirement, you 'need' $63k-27k=$36k/yr + taxes- let's assume an additional $7k/yr for taxes or $43k.

I'll assume that you'd get $20k /year from additional pensions and/or Social Securty at 65 - I'm not sure how it works for ex-military / federal employees.

So you're fully funded for your post-65 portion of retirement but need to bridge the gap from FIRE age to 67, or 12 years at ($43k-$25k=$18k) or around $200k. 

Given that you're under 50 and saving more than $40k/yr, you will save more than that without any consideration of investment returns at all, so things are looking copacetic assuming that you sell your house or extract the house equity in some fashion, and are able to keep your housing budget under its current level.

As far as buying a vacation home with your sister goes, well I wouldn't do it for a variety of reasons, not the least of which is the potential impact on your retirement plans.

Thanks for the response and advice!

I've adjusted my figures and added in the value of my home to my overall assets.

Appreciate the math and words on my FIRE age to 67. I need to do some serious thinking about what I want/need when it comes to working and where I want to settle down. But knowing I need about $200k to tide me over (plus I intend to take a part-time job of some sort) makes it seem like even part-time FIRE is within reach.

For the time being I've shelved the idea of buying a 2nd home with my sister. The prices in the area I want to buy have gone up so we've decided to see where things look next year. And yes, I realize that would affect the above plans so that's another reason to reconsider the purchase!


kiliscout

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Re: Case Study - Feedback on expenses and potential retirement at 55
« Reply #10 on: May 04, 2021, 08:55:09 AM »
Thanks all for the advice!

Crowinghen - appreciate your input regarding buying property with a family member. It's definitely something I've seriously thought about and will consider further if we ever decide to buy jointly. As for now we are shelving the idea of buying a place together.

Reeshau - I should probably look into this; you are right, it's money I really don't need to spend. I'll add this to my to-do list!

Dicey - for now I've decided to hold off on a 2nd home purchase. I really need a way to get away from the HCOL living/working situation and get out in nature more. Being active (riding bikes, camping, kayaking, hiking) keeps me sane and having a mountain home (I.e., the 2nd home) was the potential answer to being able to do these things on a more regular basis. For now I'll settle with just throwing the dog, camping gear and bike in the Jeep and heading west (aka W. Virginia) for a weekend a month. :) And yes - I do need to get back into giving more. I did donate about ~1k this year. That's yet another area I forgot to add into my yearly expenses above...
« Last Edit: May 04, 2021, 10:25:50 AM by kiliscout »

Laura33

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Re: Case Study - Feedback on expenses and potential retirement at 55
« Reply #11 on: May 04, 2021, 02:23:43 PM »
Couple of thoughts:

First, while it is fair to count your home equity in your net worth, I would not count that toward the retirement funds you will be drawing 4% from, unless you intend to sell the house.  So really, in terms of retirement planning, you have about $465K invested, which will throw off about $18K as of today. 

Second, your projected retirement expenses are not $63K, because over the next 50 years, you are still going to need to replace your vehicle, fix things that break on your house, and do all those other things you have a sinking fund for.  I'm not entirely sure from your numbers exactly how much is going to sinking fund/home improvements, but you need to add that amount on to the $63K to estimate your real future expenses.

So if you want to retire at 55, you've still got some work to do -- you have probably about $80K in expenses, and investments/pension that will currently cover about half of that.  The good news is that your pension will continue to increase, that you are saving a lot, and you will have the over-50 catch-up added to that soon.  And the even better news is that you still have 7-8 years to save up and let the power of compounding work for you -- your existing investments will probably double on their own in a decade. 

But what this suggests is that you really need to prioritize your investments now, and worry about paying off the house later.  Your house is going to be worth whatever it will be worth when you're 55 whether you have 1% equity or 100% equity -- and again, it really doesn't matter unless you sell.  OTOH, the value of your investment accounts at 55 will vary depending on how much you invest between now and then.  So even if you want to have a paid-off house by the time you FIRE, you're still better off if you invest the money first, and then if you really want to, pay off the house when you retire (taking tax considerations into account, of course).  That also provides you the most flexibility, because if the shit hits the fan between now and then, you have liquid assets you can draw on and just delay FIRE if necessary, whereas if your money is locked up in the house, you can't really access it to live on in a crash, and you're still at risk of losing your entire investment until you hit that 100% equity point.

kiliscout

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Re: Case Study - Feedback on expenses and potential retirement at 55
« Reply #12 on: May 11, 2021, 04:32:54 PM »
Couple of thoughts:

First, while it is fair to count your home equity in your net worth, I would not count that toward the retirement funds you will be drawing 4% from, unless you intend to sell the house.  So really, in terms of retirement planning, you have about $465K invested, which will throw off about $18K as of today.  I agree with you here. I'm going to keep it listed as my net worth, but with the knowledge that it doesn't count towards my retirement plan.

Second, your projected retirement expenses are not $63K, because over the next 50 years, you are still going to need to replace your vehicle, fix things that break on your house, and do all those other things you have a sinking fund for.  I'm not entirely sure from your numbers exactly how much is going to sinking fund/home improvements, but you need to add that amount on to the $63K to estimate your real future expenses. I have approximately $500 a month going towards sinking funds; and do know that those will be "re-occurring expenses" in the future. The $63k I've listed below is my current expenses; I plan to adjust them as time goes by and I get closer to retirement. I've recently done a lot of improvements to my home so I hope it'll be many, many years before I want (or need) to do more! :)

So if you want to retire at 55, you've still got some work to do -- you have probably about $80K in expenses, and investments/pension that will currently cover about half of that.  The good news is that your pension will continue to increase, that you are saving a lot, and you will have the over-50 catch-up added to that soon.  And the even better news is that you still have 7-8 years to save up and let the power of compounding work for you -- your existing investments will probably double on their own in a decade. 

But what this suggests is that you really need to prioritize your investments now, and worry about paying off the house later.  Your house is going to be worth whatever it will be worth when you're 55 whether you have 1% equity or 100% equity -- and again, it really doesn't matter unless you sell.  OTOH, the value of your investment accounts at 55 will vary depending on how much you invest between now and then.  So even if you want to have a paid-off house by the time you FIRE, you're still better off if you invest the money first, and then if you really want to, pay off the house when you retire (taking tax considerations into account, of course).  That also provides you the most flexibility, because if the shit hits the fan between now and then, you have liquid assets you can draw on and just delay FIRE if necessary, whereas if your money is locked up in the house, you can't really access it to live on in a crash, and you're still at risk of losing your entire investment until you hit that 100% equity point. Today I opened a new mutual fund that I'm going to funnel money towards for a future mortgage payoff (or maybe not; we'll see!), and I've adjusted my mortgage payment so that I'm not sending extra money to it.

Thanks for all your advice!

zolotiyeruki

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Re: Case Study - Feedback on expenses and potential retirement at 55
« Reply #13 on: May 13, 2021, 09:36:50 AM »
I'll take an opportunity to pick apart your spending, since it doesn't look like anyone else has.  After all, reducing your spending both increases the money you can put toward retirement, and reduces the amount you'll need to save up.

--How much longer do you expect your elderly dog to live?  Do you expect to get another after he/she dies?
--Your entertainment budget is pretty high.  That's a lot of subscriptions.  How much do you use each of them?
--Your phone and internet bills are crazy high.  You might want to consider RedPocket or Airvoice as an alternative cell phone carrier, and shop around for your home internet connection.
--$381/mo on an HOA?  Holy smokes, man, that expense by itself means you need an extra $114,300 (381*12*25) to retire!  I realize you can't cut this without moving, but as you make your plans for retirement, you'll want to consider your location.
--You've recognized your overspending on clothing.  That's good.  Have you reduced that?
--$400/mo for one person's groceries seems like a lot.  Back when we only had a couple kids, we fed our whole family on that much.

If you have no dog in retirement (save $485), cut your entertainment in half ($85), cut your groceries, phone, and internet in half ($275), cut your clothing down by $100, don't overpay your mortgage ($175), and live in a place with no HOA ($381), you'd reduce your spending by $1500/mo, or a whopping $18,000 per year.  To me, these are (or should be) easy and fairly painless changes to make.

Take that $18k out of your $63k, and you're down to a $45k annual spend.  Subtract out the $35k paid by your pension, and you only need to cover $10k/year of expenses from your own retirement savings.  With a 4% WR, you'd need only $250k of savings, and you already have nearly double that.

That $18k/year of savings would also take place in the 22% tax bracket.  With taxes added back in, you'd need $23k/year to cover that spending.

charis

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Re: Case Study - Feedback on expenses and potential retirement at 55
« Reply #14 on: May 13, 2021, 09:53:29 AM »
No IRA?

Hi Kierun!

The TSP (Thrift Savings Plan) is my tax-deferred account that I max out every year; the government matches a portion of that every year.

I don't understand your response here. It appears that you have enough income to fund an IRA as well and that it would be beneficial.  Your tsp balance is pretty low for the number of years you have in.

kiliscout

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Re: Case Study - Feedback on expenses and potential retirement at 55
« Reply #15 on: May 15, 2021, 01:46:26 PM »
No IRA?

Hi Kierun!

The TSP (Thrift Savings Plan) is my tax-deferred account that I max out every year; the government matches a portion of that every year.

I don't understand your response here. It appears that you have enough income to fund an IRA as well and that it would be beneficial.  Your tsp balance is pretty low for the number of years you have in.

I'm the confused one here! Apparently I do have an IRA that I set up years ago, but for some reason I thought I couldn't fund it anymore because of my current income amount. I'll do some reading/research and make changes if I'm able to. My TSP balance is low because I've only been a government employee for 5 years. I was military beforehand, and the small TSP $$ I had then (TSP's were only available the last couple years of my military career) was rolled over into one of my brokerage accounts - or maybe it was my IRA, I don't remember!

charis

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Re: Case Study - Feedback on expenses and potential retirement at 55
« Reply #16 on: May 15, 2021, 04:06:56 PM »
Gotcha, I think I was confused because someone asked about an IRA and you responded by describing your TSP.

MustacheAndaHalf

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Re: Case Study - Feedback on expenses and potential retirement at 55
« Reply #17 on: May 16, 2021, 01:19:51 AM »
Wow, I just discovered TSP funds have higher expense ratios than Vanguard.
https://www.tsp.gov/funds-individual/

Their S&P 500 fund (C fund) has a 0.051% expense ratio, and their international developed markets fund (I fund) has a 0.055% expense ratio.  Both of which are quite good, but I thought they used to be even better.

Vanguard S&P 500 has a 0.030% expense ratio, and Vanguard Developed Markets a 0.05% expense ratio.  Since the gap is larger for the C fund vs S&P 500 at Vanguard, you might want to emphasize international in your TSP.

There's a secondary benefit as well: international stocks tend to have much higher dividends than U.S. stocks - much larger than the foreign tax credit benefits.  So putting more U.S. stocks in taxable is probably better, tax wise.

kiliscout

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Re: Case Study - Feedback on expenses and potential retirement at 55
« Reply #18 on: May 17, 2021, 06:02:21 PM »
Gotcha, I think I was confused because someone asked about an IRA and you responded by describing your TSP.

I did some reading up on IRA's, and unfortunately (depending on how you look at it!) I make too much to  contribute to an IRA. According to what I read, if you make above $139k you're not eligible to contribute. My salary + military retirement puts me just over that limit.