Recession planning and general advice for "retiring" in 5 years

[buddhapeace1]

I've started by laying out my financial goals and my questions for the hive mind to consider, and then provide a pretty full account our current financial picture. Thank you VERY MUCH for helping me think this through. I also have to believe that I'm not the only one thinking about the next inevitable (in my opinion) recession.

My financial goals:
1. Keep spending low so that I don't need gazillions of dollars when I retire to live the way I'm living now. I'm happy and have MORE than enough.
2. Support my son (now 21) to get through college. I will not be paying for any of my other kids to go to school. My ex will pay for my daughter, and my step kids are not on my payroll. :)
3. Work at my current job, which is wonderful but pretty demanding, for the next 5 years and SAVE SAVE SAVE (I should add that my work add an additional 10% of my salary to my 403b=$12,200 a year. It's unreal!)
4. At 55 go down to 50% work with my current employer. I'd actually like to have the option to quit all together, but will likely not do that. I'm a consultant and would be able to go to 50% while still holding on to all of my benefits. I enjoy my work, but want to do all of the other things I love doing more than I can now. Pottery, gardening, volunteering, playing music, etc. My husband is 10 years younger than me so he will be working for many more years--ha ha!

What's keeping me up at night/QUESTIONS:
1. From the super smarties out there, what do you see in my current investing that you think is good or not good? I enjoy managing our money and investments, but am just self-taught. What do you see or notice that gives you concern? How could I be doing better use my little soldiers to make even more little soldiers?

2. OHMYGODTHENEXTRECESSIONISCOMING! Do you agree? I'm old enough that I have seen the cycles many times before and I'm starting to get the "feeling". I've been doing some reading and it seems like there's a good chance we'll see a recession in 2020. In the past I've welcomed recessions because it was a great time to BUY! My retirement was so far out, I felt confident that whatever I lost could be earned back with patience and perseverance.

But now, I'm thinking that I can't really afford to lose 40% of my investments just a couple years before I cut back my work to 50% (or less). What do you think about this and what should I do? Again, my husband is only 41, so his investments are not a concern for me regarding the next recession. Does it make sense at some point later this year to move more of my 403b into bonds? Help!

Also, I have saved money for my son's college tuition in a 529 plan. I have moved it to very safe investments because he's actually in college now, but the money is still sitting there. I'm thinking I should work on moving all of that out of the 529 and into my high yield savings account to protect it. I'm going to spend it down in the next 2 years and can't afford to lose a big chunk of it. Am I being an alarmist? I tend to have a high risk tolerance, so it's weird and different to be feeling like I may need to move some things around before the recession hits.

Here are (almost) all the numbers

Life Situation: I am married (2nd time for both of us). I am 50 and he is 41. He has two kids (10 & 12), I have two kids (17 & 21), and in any given tax year at least 2 are claimed as dependents. I am paying for my 21 year old college tuition. We live in Tucson, AZ.

Gross Salary/Wages: ME: $128,000; HIM: $63,000

Pre-tax deductions:
We have both been maxing our 401ks each year (mine is actually a 403b because I work in the nonprofit sector), FSA is about $6,000, husband pays for health insurance pre-tax, mine is provided by my employer.

Rental Income:We have a guest house that we built a couple years ago and are renting it out on Airbnb when family/friends aren't staying. We are netting about $25,000 a year on this.

Gross Salary+Rental:    $216,000
- Pre-tax deductions:       $51,440
Adjusted Gross Income: $164,556

Current expenses:

Non-discretionary:
Mortgage (inc. escrow & insurance): Principal=$802; Interest=$863; Escrow=$438; TOTAL=$2103
Student loans: $460
Utilities (water, electric): $330
Fire service & waste management: $75
Car insurance: $143
TOTAL: $3111

Discretionary:
Cell phones (6 lines!!! 2 adults & 4 kids. Don't even get me started on whether a 10 year old needs a smart phone. They don't! But it's my husband's kids, so it's his decision.) $160
Internet: $65 (I am a consultant and do a lot of video conferencing and training so I need strong internet)
Food: $900 (groceries and eating out)
Home maintenance: $200
Gas: $200
Donations: $150
Support for college son: $500
Pet food and care (2 dogs and 2 cats): $80
TOTAL: $2255

Miscellaneous (travel, larger home improvement projects or repairs, gifts, etc.): $400

TOTAL SPENDING AVERAGE/MONTH: $5766

Assets: 
Me:
403b w/OneAmerica:$375,500 (currently allocating 100% to State Street Equity 500 index fund, hold 58% in this and 42% in American Funds American Balanced R3) Maxing out this year at $25,000
Roth w/Ameritrade: $46,500 (Invesco QQQ trust) Maxing out this year at $7,000
Trad IRA w/ Ameritrade: $11,500 (Invesco QQQ trust)
529 college savings plan for oldest son: $21,000
High yield savings account: $9,000

Husband:
401k w/Fidelity: $87,500 (current allocations: 15% Legal & General Future World Developed Climate Change CIT Class A; 25% Dodge & Cox Income Fund; 60% Vanguard Institutional 500 Index Trust) Maxing out this year at $18,000
Roth w/Fidelity: $1,200 (Fideility 500 Index Fund) Maxing this out this year at $6,000.
Stock granted by employer: $11,500 (Starbucks)

Joint:
Lending Club: $7,000
Other savings: $5,000
Home value: $510,000
Cars: they're old and we'll drive them into the ground, so not including
TOTAL: $1,006,950

Liabilities:
Mortgage:
Currently owe $258,700
20 year-fixed @ 3.99%
15.75 years remaining if we pay minimum
$2,103 a month payment

School loans:
Me: $9,634 @ 3.125%
Monthly payment $265 with 24 more months

Husband:
$5,760 @ 5%
Monthly payment $195, not sure how many months to pay off because I don't have access to this account

No credit card or car loans--we don't believe in this kind of debt
We have a HELOC for emergencies, but have never used and have 0 balance

[A Fella from Stella]

You are doing a fantastic job.

Forget about the recession. You have the cushion to lean back on in both real cash and your education. Plus, even if things fall, you might keep your job with no disruptions, so where's the recession?

Your son's education will do him very well.

[buddhapeace1]

You are doing a fantastic job.

Forget about the recession. You have the cushion to lean back on in both real cash and your education. Plus, even if things fall, you might keep your job with no disruptions, so where's the recession?

Your son's education will do him very well.

Thanks, Fella! It's reassuring to hear your opinion.

[Body Surfer]

We enjoy spending time in Tucson. Out of curiosity how much did it cost you to build the guest house? Does having vacationers (Airbnb) cause stress for the you and the family?

[buddhapeace1]

We enjoy spending time in Tucson. Out of curiosity how much did it cost you to build the guest house? Does having vacationers (Airbnb) cause stress for the you and the family?

We spent $75,000 to build our 600 sq foot guest house, doing quite a bit of the work ourselves (they did the build and we did all the finishing: plumbing, electrical, cabinets, paint, floors, tile, etc.) It is a really lovely space! Here's a link to it: https://www.airbnb.com/rooms/22771905?s=67&shared_item_type=1&virality_entry_point=1&sharer_id=16258536
It will probably be lived in by mother in the future, but for now we rent it out in order to pay ourselves back for the cost. Doing the Airbnb thing has actually been a really positive experience. I don't find it stressful. It is really quite private and away from family traffic, and we have met great people. We pay our older kids to clean it so we don't worry much about that and they learn how to work and earn a little extra money...win-win! We're getting close to paying ourselves back for the construction, and then we can decide what we want to do with all of that extra income (there are a lot of options)!

[Body Surfer]

very nice. Thanks for sharing the info

[FIRE 20/20]

2. OHMYGODTHENEXTRECESSIONISCOMING! Do you agree? I'm old enough that I have seen the cycles many times before and I'm starting to get the "feeling". I've been doing some reading and it seems like there's a good chance we'll see a recession in 2020. In the past I've welcomed recessions because it was a great time to BUY! My retirement was so far out, I felt confident that whatever I lost could be earned back with patience and perseverance.

But now, I'm thinking that I can't really afford to lose 40% of my investments just a couple years before I cut back my work to 50% (or less). What do you think about this and what should I do? Again, my husband is only 41, so his investments are not a concern for me regarding the next recession. Does it make sense at some point later this year to move more of my 403b into bonds? Help!

Others can address other parts of your post much better than I can, but I do have a comment on this.  First, a few links.  Hopefully these are of no use to you because you've already read them, but based on what you wrote above they might be worth a re-read:

https://www.mrmoneymustache.com/2017/06/20/next-recession/
https://jlcollinsnh.com/2012/04/15/stocks-part-1-theres-a-major-market-crash-coming-and-dr-lo-cant-save-you/
https://jlcollinsnh.com/2012/04/29/stocks-part-iv-the-big-ugly-event/

The bottom line from all of these is this - yes, another recession is coming.  If you adjust your asset allocation based on 'starting to get the "feeling"', you're going to do yourself far more harm than good.  I recommend creating an Investment Policy Statement (IPS).  An IPS is designed exactly to help investors make a decision *before* the SHTF so that when it does and you start to panic you have rules in place to protect you from yourself.  See the thread linked to below for some starting points on an IPS.  The important things to remember are that your IPS can be as long or short as you want it to be and can say whatever you want it to say.  Mine is just a few bullet points, but it tells me what to do (and what not to do!) in a few key situations.  But as you create it you need to think about how you will react to various situations *before they happen*.  Your IPS is just for you (and maybe your partner) so it can say things like - "If the market falls more than 20%, I know I'll be freaking out and will want to do something.  I've done the research and decided that my asset allocation is appropriate so I will maintain it no matter how far it falls."  The point is that if you accept that a crash is definitely coming but no one knows when, and you create an asset allocation you're happy with, then you can write out the rules NOW (before the panic-inducing crash) that you'll need to follow when (not if) it happens.  Having all this in place will help you deal with it with equanimity, which will mean you don't make the mistake of buying high and selling low. 

https://forum.mrmoneymustache.com/investor-alley/who-has-a-written-investment-policy-statement/

[buddhapeace1]

2. OHMYGODTHENEXTRECESSIONISCOMING! Do you agree? I'm old enough that I have seen the cycles many times before and I'm starting to get the "feeling". I've been doing some reading and it seems like there's a good chance we'll see a recession in 2020. In the past I've welcomed recessions because it was a great time to BUY! My retirement was so far out, I felt confident that whatever I lost could be earned back with patience and perseverance.

But now, I'm thinking that I can't really afford to lose 40% of my investments just a couple years before I cut back my work to 50% (or less). What do you think about this and what should I do? Again, my husband is only 41, so his investments are not a concern for me regarding the next recession. Does it make sense at some point later this year to move more of my 403b into bonds? Help!

Others can address other parts of your post much better than I can, but I do have a comment on this.  First, a few links.  Hopefully these are of no use to you because you've already read them, but based on what you wrote above they might be worth a re-read:

https://www.mrmoneymustache.com/2017/06/20/next-recession/
https://jlcollinsnh.com/2012/04/15/stocks-part-1-theres-a-major-market-crash-coming-and-dr-lo-cant-save-you/
https://jlcollinsnh.com/2012/04/29/stocks-part-iv-the-big-ugly-event/

The bottom line from all of these is this - yes, another recession is coming.  If you adjust your asset allocation based on 'starting to get the "feeling"', you're going to do yourself far more harm than good.  I recommend creating an Investment Policy Statement (IPS).  An IPS is designed exactly to help investors make a decision *before* the SHTF so that when it does and you start to panic you have rules in place to protect you from yourself.  See the thread linked to below for some starting points on an IPS.  The important things to remember are that your IPS can be as long or short as you want it to be and can say whatever you want it to say.  Mine is just a few bullet points, but it tells me what to do (and what not to do!) in a few key situations.  But as you create it you need to think about how you will react to various situations *before they happen*.  Your IPS is just for you (and maybe your partner) so it can say things like - "If the market falls more than 20%, I know I'll be freaking out and will want to do something.  I've done the research and decided that my asset allocation is appropriate so I will maintain it no matter how far it falls."  The point is that if you accept that a crash is definitely coming but no one knows when, and you create an asset allocation you're happy with, then you can write out the rules NOW (before the panic-inducing crash) that you'll need to follow when (not if) it happens.  Having all this in place will help you deal with it with equanimity, which will mean you don't make the mistake of buying high and selling low. 

https://forum.mrmoneymustache.com/investor-alley/who-has-a-written-investment-policy-statement/

This is incredibly helpful, Fire 20/20! I hadn't hear of an IPS before, but it makes perfect sense and will help set my mind at ease. Thank you!

[EngineerOurFI]

@buddhapeace1

Clarification questions:
I guess I'm kind of missing something digging into the numbers.  Sure I'm new here, but just taking a stab at looking through the numbers.

So you're saving $56,000/year = $25k/yr in your 401k + $7k/yr in your IRA + $18k/yr hubby 401k + $6k/year Hubby IRA

Sure, there's some extra matching on top of that.

Your income is currently $216k gross.  I'm a little confused where the $51,440 in pre-tax deductions comes from, seems like this should be higher since you're putting $43k per year in 401ks (doesn't look like they are Roth 401ks?) and also you have the $24.4k standard deduction plus I assume some other things are pre-tax such as husband's health insurance and FSA that you stated is $6k/year?.  Am I missing something on the math?  Did you just start maxing out 401ks and maybe you're referencing your AGI from last year without taking this into account?

Regardless, you're showing us that you have $164k or so after the pre-tax deductions that I'm assuming include your yearly $43k in 401k contributions between you and husband and your spending is only $69k per year.  Where's the other $95k of post-deduction income going after the $69k/year expenses if it's not being spent?  I don't see a large taxable investment account and it doesn't look like you're throwing that extra cash at mortgage or student loans or 529 - so what's going on with the rest of the income not included in the $69k per year spend?

I guess another way to put the above -- I would think your after-tax and after-401k/IRA contribution monthly income is quite a bit higher than your expenses (which is awesome!), but I'm not really seeing where that money goes in terms of paying down debt or taxable account?

This is a pretty important question to figure out since it drastically affects how much additional $ you can save prior to retirement.

Also, does it not make sense on your medical insurance plan options to switch to a high deductible plan and start maxing out HSA contributions as a savings vehicle?  It's the only truly triple-tax free (no taxes going in, no taxes on growth, and no taxes coming out) investment vehicle out there if you use it correctly.

Feedback based on current assets:

Assuming you want to stay in the current house (this is a question, of course) and both student loans are paid off and let's just assume that you feel obligated to provide for one-half of the household expenses during your retirement while your husband is still working.  I'm thinking about things this way since you're talking about husband and wife retiring at much different timeframes due to age differences, so I would think the goal is for your saved assets side of the equation to keep paying half of the household bills therefore justifying your ability to retire? 

That means your household expenses = $5,766 - $460 in paid off loans = $5,306/mo or $63,672 per year.  Your half of the expenses to be covered by your retirement savings would be $31,836.  Using 4% SWR, you'd want $795,900 in assets for just "your" side of the equation.  Unless you think your expenses will drop quite a bit after you retire, of course.

I think your side of the equation currently has $442,500 in assets (I'm ignoring 529).  So you have a shortfall of $353k.  With your savings rate (depending on answers to above questions and including the match you mentioned), I think you can get there pretty quickly.  I'm guessing this current savings rate is pretty new?

As far as your concerns about your retirement plans in the face of a potential recession, I'd recommend looking at Big Ern's Ultimate SWR Guide as it goes through a lot of scenarios with detailed math that can give you comfort about your selected SWR for your situation, comfort level, and views on Social Security, etc.

https://earlyretirementnow.com/2016/12/21/the-ultimate-guide-to-safe-withdrawal-rates-part-3-equity-valuation/