Author Topic: How screwed are we for early retirement?  (Read 18806 times)

politenessman

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How screwed are we for early retirement?
« on: May 09, 2018, 01:39:57 PM »
Let me preface this by saying that I am very glad I found this place, and that I wish I had seen this when I was in my early 20s, because I have made a considerable number of mistakes, and now, late in life, I need to get all of this sorted out.
We have just recently moved to Colorado, for health, Quality of life and family reasons. We are still dealing with the vestiges of the move as we have only been here for 4 weeks.  We have not purchased our bicycles yet!
We both work from home, so we have zero commute, and we use the car once per week for groceries etc.

My wife and I want to retire early, but given our very late start and now lack of house (which may not be an issue - we like renting), I am throwing myself at the mercy of the forum for advice and face punches when needed. In terms of early retirement, I would like to be done by 62 rather than 67, or earlier if possible.

At this time I don't have a specific question, I just want to make sure I am not sabotaging myself.

Life Situation: Married filing jointly, No dependents, USA, CO
Ages: 52 (me) and 55 (DW)

Gross Salary/Wages:
   Me: $ 92K
   DW: $150k
   DW also gets an annual bonus ~$25k

Individual amounts of each Pre-tax deductions (I don't have the info in front of me but as best I can remember)

   My 401k:     (27%) - small employer match
   DW 401k:   (15%) - great employer match
   DW ins:      No idea but it covers me too

With the 401k deductions, we are both fully funding our 401ks including the allowed top up amounts, so the 401Ks are building by ~24K per year, for both of us. We plan to continue to do this for as long as we can.
There is no other income

Assets
Emergency Fund      $10,000  (0.01% interest)
DW 401k$200,000
me 401k$64,000
DW IRA$50,000
Me IRA$9,500
Total$333,500

Liabilities: small car loan at ~$15k Should be gone by September.


Joint Monthly expenses
Electric $     35
Gas $     35
Rent $ 1960   inc trash & water
Phones $   250      (3 lines inc data)
Car Ins $   100
Renter Ins $     10
Petrol $     30
Internet $     50
Groceries $  1000*
Amazon $     10
Netflix $     11
Entertainment $   100
$ 3591
*Groceries plus pet food/expenses, as we own a dog.


Individual expenses

Me: DW:
Spotify        $ 11          Spotify$   11
HBO $ 15Dropbox$   10
Britbox $   7iCloud $    3
Dotster $   7Boho Box $  25
Allowance $ 100Allowance $ 200
Storage $ 108Work Travel $ 800**
$ 248 $ 1049

Take home          = 6000+3480   = $9480
total expenditure    = 3591+248+1049   = $4888

Delta          = 9480-4888   = $4592

**A note about the travel.
Currently DW has to pay for her own work travel
It is one of the reasons she gets the big salary
We are working on resolving that issue.

What have we done so far to improve our situation?
  • Over the past year we have:
  • sold our house that was way too large for us
  • Moved to a new state (GA -> CO health benefits and closer to family)
  • Eliminated all student debt
  • Eliminated two car loans
  • Eliminated one car
In doing this we reduced our monthly expenses from $6k to $3600

Total debt eliminated ~$368,000
Monthly cash freed up ~$2,400

In addition, we have reduced my monthly costs:

Antivirus    $  9 - moved to a free service
Hosting    $ 14 - removed all hosting
Dotster    $ 13 - Let some URLs go
CBT Nuggets    $ 83 - moved this to a work expense
$119  - removed from my monthly expenses

What do we need to do next?
The next steps in getting our outgoings down are:
  • Resolve DWs work travel situation
  • Reduce Phone cost from $ 250
  • Reduce Car ins by moving to a higher deductible
  • Reduce Groceries plus pet food/expenses (from $1k)
  • Reduce the Storage costs from $108 to $55*
  • June/July/Aug/Sep to pay off car

*ideally I would like to get rid of the storage but we have a large collection of books, some family heirlooms and other stuff that does not fit in the apartment at the moment. This is in part because we both work from home and effectively have two offices.

So at this time it looks like after September we will have about 4500-4600 available to work with.
How am I doing and are we screwed?

Car Jack

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Re: How screwed are we for early retirement?
« Reply #1 on: May 09, 2018, 02:04:25 PM »
You already know that the storage is a problem.  Craigslist is your friend.  Although it's evil, eBay can get rid of things that are too unique to sell locally.  If you haven't used something in a year, it's useless and adding nothing good to your life.  Sell it.  Sorry.....I'm not a fan of keepsakes beyond what can fit in a shoe box.

Easy one next.  I have cricket and wifi makes data free.  I think we're up to.....I don't know.....either 3GB or 5GB each for data.  4 phones.  $100 total, all in.  No fees, extras or anything.  I have an iPhone (it was free from my former company) and wife and kids have something else.  I see zero reason to pay more than that.  This even gives you a spare phone.

Are you using reward cards for everything?  Slate is THE card for business and gives you 5% most places.  There are a bazillion other cards (I own most of them).  Same for airline miles, hotel points, restaurant points.  When I traveled for a living, I would plan specifically for points that I had a path to turn into cash.

With the money you guys have coming in, I'd think that beyond what you're saving, you'd be doing backdoor Roths every year......although you'd need to roll those IRAs into your 401k's to do it without a lot of mess.

Your emergency fund is scarily low.  It's also getting no return.  Redneck Bank will give you 1.75% up to $35k.  Ablebanking 1.7% with no limit.  In my opinion, you need at least $100k in emergency funds.  I have a lot of my eFund in US Savings bonds.  It does take a year to make them cashable, so you'd want to build slowly.

You are way behind on retirement savings, but you make a boatload of money in a low cost area.  You can catch up but you need to be serious about it.

Good luck.

Check2400

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Re: How screwed are we for early retirement?
« Reply #2 on: May 09, 2018, 02:11:26 PM »
So, to break it down to the relevant big picture views (rounding for ease)
                Month        Year
Expenses: $5000        $60,000/yr

Savings:   $4500        $54000
401k:       $4000        $48000  ( you say $24,000 "for both of us" but also say both fully funding, so I am assuming both = each)
Total per year:           $102,000
Invested Assets:         $325,000

So, 60K times 25 for 4% SWD = 1,500,000, or if you remove the roughly $10,000 in annual work travel expenses, your expenses are 50K, and your SWD = $125,000.
Savings + Current Assets @ 7% interest = $1,563,000 in 7 years, or $1,250,000 in roughly 5.5 years. 

Lets say you do 6 more years, because OMY (I really wish we could change this to 1MY, but neither here nor there) and you are sitting at $1,350,000.  Your Wife will be able to access 401k, and you'll be less than 2 years from doing the same.  Wife will be one year from early SS, and 4 years from Medicare.  I think you're close enough to count on SS too, which you should go and see your expected benefits on the IRS page for fun. 

There are things you can do, like ensure you're getting deductions on taxes for travel costs, etc., and things you can choose not to do, like buy a house, that will nudge things around a little bit.  But just going from the numbers you're throwing around, you're under your stated goal.  A lot of people will come in here recommending lower groceries and no storage, but in the grand scheme of things, we're talking about months at worst of extended work for the hyper frugal cuts you would have to make (honestly your numbers already seem way low, only 100 for entertainment for two?). 

If travel is in your retirement plans, I would ensure you're baglogging as many points on work travel as possible.  I disagree that $100,000 is a relevant emergency fund number, but I would go ahead and start investing in taxable accounts to have accessible funds from the $4500 in excess you're earning. 

Aside from that, you're good if you can make it 5-6 years.  The most important thing for you, in my opinion, is to start investing the money now so you get used to saving, and then you can work on making your spending more efficient. 




nereo

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Re: How screwed are we for early retirement?
« Reply #3 on: May 09, 2018, 02:15:46 PM »
Nice case study

Overall I think you are doing very well, and your expenses are fairly reasonable.  My one overarching comment is that you might find it very useful and enlightening to carefully track where every dollar goes over the next several months. Often it reveals hidden 'leaks' that you had overlooked.

I'm going to assume that your rent (your largest expense) is reasonable for your area.
The three things that jump out at me is the cost of your phones, the storage charge, and the numerous subscription services which, while taken individually all seem reasonable but collectively get very expensive and have a lot of overlap (e.g. Amazon, Neftlix, HBO, Spotify, Britbox, iCloud, Dropbox etc.). 

Storage you might be able to address by doing a real purge.  Ask yourself what you have that you rarely use anymore, and whether its really worth $6,000 every 5 years to keep that storage compartment. Could you make space in your apartment, move what you truly can't replace and sell/give away everything else?

Consider paring down your subscription services. You probably shouldn't spend that much time watching TV anyway, and I suspect some of those (e.g. Britbox) is just for a few specialized shows.

Mobile phones can certainly be found cheaper; 3 lines with data should be closer to $100/mo, not $250.  Shop around.

Otherwise, keep up the good work. Now that a lot of your old debt is going you can really start saving to the tune of $70-90k/year (including your 401(k)s).  AT that pace you should be on target to retire in your early 60s, depending somewhat on what the markets do.

Homework:  Go to the SS website and determine what you and your wife's benefits might look like.  Given your high earnings I'm guessing you will bring in > $2500/mo at age 65, which could easily fund over half of your post-retirement expenses (which could be reduced). That means your target may be much closer to $600-700k instead of $1.2MM

PS - get a bike... they're fun to ride and completely change the way you interact with your neighborhood :-)

politenessman

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Re: How screwed are we for early retirement?
« Reply #4 on: May 09, 2018, 02:42:04 PM »
Easy one next.  I have cricket and wifi makes data free.  I think we're up to.....I don't know.....either 3GB or 5GB each for data.  4 phones.  $100 total, all in.  No fees, extras or anything.  I have an iPhone (it was free from my former company) and wife and kids have something else.  I see zero reason to pay more than that.  This even gives you a spare phone.

That's good info. I'd heard of Cricket but never really paid them any attention. I know DW is heavily invested in the Apple ecosystem, so what ever we do, she needs Apple. Looks like Cricket can support that, so i will be looking seriously at that.

Are you using reward cards for everything?  Slate is THE card for business and gives you 5% most places.  There are a bazillion other cards (I own most of them).  Same for airline miles, hotel points, restaurant points.  When I traveled for a living, I would plan specifically for points that I had a path to turn into cash.
Currently I am using Capital One and Amex (both paid off every month)
Maybe I can swap out the Capital One card and move to slate.

With the money you guys have coming in, I'd think that beyond what you're saving, you'd be doing backdoor Roths every year......although you'd need to roll those IRAs into your 401k's to do it without a lot of mess.
This is something I have no clue about. Guess I need to read up on backdoor Roth's although I was under the impression that with our joint income, we were not eligible to open a Roth IRA.

I would also love to roll my IRAs into my 401k but didn't know you could do that. Who should I talk to about that?

As for the emergency fund, you are right, it is low, and earning no interest. I would like to keep maybe $5k on hand and put the other 5K into a higher interest earning savings account and then throw another 5-10K in there to top the fund up.

Thanks, all this is food for thought.

kenner

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Re: How screwed are we for early retirement?
« Reply #5 on: May 09, 2018, 05:55:54 PM »

Are you using reward cards for everything?  Slate is THE card for business and gives you 5% most places.  There are a bazillion other cards (I own most of them).  Same for airline miles, hotel points, restaurant points.  When I traveled for a living, I would plan specifically for points that I had a path to turn into cash.
Currently I am using Capital One and Amex (both paid off every month)
Maybe I can swap out the Capital One card and move to slate.


Just FYI, but Slate is probably not the card you want here unless there's a non-Chase card called Slate that I haven't seen.  Chase Slate doesn't give 5% in various categories, that's the Ink Business Cash.  Slate just has 5% balance transfers which is useful if you're trying to lower interest rates, but it doesn't sound like you are.  There are a bunch of different recommendations for good credit cards out there...I like https://frequentmiler.boardingarea.com/best-credit-card-sign-up-offers/ but there's another thread about credit card recommendations in Ask A Mustacian

MDM

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Re: How screwed are we for early retirement?
« Reply #6 on: May 09, 2018, 10:26:54 PM »
At this time I don't have a specific question, I just want to make sure I am not sabotaging myself.
...
How am I doing and are we screwed?
Well done case study!

If the market is at all well behaved, it appears you could reach FI in ~5 years (based on a quick look using the case study spreadsheet).  Cut ~$600/month from your various non-work expenses, invest the $600, and time to FI drops to ~4 years.  Up to you whether that is worthwhile....

A couple of questions:
- No medical insurance?
- Why not put $6500/person/year into Roth IRAs?

politenessman

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Re: How screwed are we for early retirement?
« Reply #7 on: May 10, 2018, 06:35:38 AM »
Your grocery costs are insane for 2 people, even considering the dogs.  I spend $600-700/month with lots of splurges for 2 adults, 2 teens.

Spotify family plan is $16.49/month tax included for four people.
I'll look into spotify family plan, but we've both had our individual accounts for so long, I'm not sure how much effort is involved in moving over all our play lists etc.

As for the groceries, you are correct; it is very high. This is one of the things we are looking at bringing down, and I would like to see us running at about half of that.

If the market is at all well behaved, it appears you could reach FI in ~5 years (based on a quick look using the case study spreadsheet).  Cut ~$600/month from your various non-work expenses, invest the $600, and time to FI drops to ~4 years.  Up to you whether that is worthwhile....

A couple of questions:
- No medical insurance?
- Why not put $6500/person/year into Roth IRAs?

I'm not sure what the numbers are for insurance, but yes, it is there. It comes out of DW's paycheck and covers me as she has much better medical coverage than I can get.

I'm looking into the Roth thing but for the life of me cannot see the advantage given the tax bracket we are in now.
« Last Edit: May 10, 2018, 06:38:37 AM by politenessman »

mbl

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Re: How screwed are we for early retirement?
« Reply #8 on: May 10, 2018, 06:36:48 AM »
At this time I don't have a specific question, I just want to make sure I am not sabotaging myself.
...
How am I doing and are we screwed?

A couple of questions:
- No medical insurance?
- Why not put $6500/person/year into Roth IRAs?

At their income level they don't qualify for the full amount if any at all.

MDM

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Re: How screwed are we for early retirement?
« Reply #9 on: May 10, 2018, 06:39:21 AM »
At this time I don't have a specific question, I just want to make sure I am not sabotaging myself.
...
How am I doing and are we screwed?

A couple of questions:
- No medical insurance?
- Why not put $6500/person/year into Roth IRAs?

At their income level they don't qualify for the full amount if any at all.
They do qualify, via the Backdoor Roth IRA - might be a problem for the $50K tIRA, but worth considering for the $9.5K tIRA.
« Last Edit: May 10, 2018, 06:40:59 AM by MDM »

politenessman

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Re: How screwed are we for early retirement?
« Reply #10 on: May 10, 2018, 06:39:41 AM »
At this time I don't have a specific question, I just want to make sure I am not sabotaging myself.
...
How am I doing and are we screwed?

A couple of questions:
- No medical insurance?
- Why not put $6500/person/year into Roth IRAs?

At their income level they don't qualify for the full amount if any at all.
I do have an old IRA with about 8-9k in it that I could back door, but again, is it worth it?

MDM

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Re: How screwed are we for early retirement?
« Reply #11 on: May 10, 2018, 06:42:39 AM »
I do have an old IRA with about 8-9k in it that I could back door, but again, is it worth it?
Will your 401k plans accept rollovers of your tIRAs?

If so, yes it would be worth it.

politenessman

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Re: How screwed are we for early retirement?
« Reply #12 on: May 10, 2018, 06:57:14 AM »
I do have an old IRA with about 8-9k in it that I could back door, but again, is it worth it?
Will your 401k plans accept rollovers of your tIRAs?

If so, yes it would be worth it.
I will find out. That IRA is doing a grand total of nothing for me at the moment, so I do need to do something with it.

freya

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Re: How screwed are we for early retirement?
« Reply #13 on: May 10, 2018, 07:40:14 AM »
I'm in the same age range and going through many of the same moves you should be considering...

I think your budget is pretty tight given your high rent.  I'm assuming that the $1000 in groceries covers incidentals and household items?  That stuff can add up and I don't see a budget line for it anywhere else.

ABSOLUTELY you should do annual back-door Roth IRA contributions and yes you can open a Roth IRA account.  Roll your existing IRA into either a solo 401K or one of your employer accounts, then open a traditional IRA and save up $$ until you have enough to make the non-deductible contribution.  Be aware that Roth conversions can't be withdrawn for 5 years.

Also, at the rent you're paying, you should definitely look into buying.  If you decide to go this route, open an online savings account and throw your savings in there - don't try to invest it.  Otherwise, I agree that you need to fatten up the emergency fund before investing in taxable.


politenessman

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Re: How screwed are we for early retirement?
« Reply #14 on: May 10, 2018, 08:07:43 AM »
I'm in the same age range and going through many of the same moves you should be considering...

I think your budget is pretty tight given your high rent.  I'm assuming that the $1000 in groceries covers incidentals and household items?  That stuff can add up and I don't see a budget line for it anywhere else.

ABSOLUTELY you should do annual back-door Roth IRA contributions and yes you can open a Roth IRA account.  Roll your existing IRA into either a solo 401K or one of your employer accounts, then open a traditional IRA and save up $$ until you have enough to make the non-deductible contribution.  Be aware that Roth conversions can't be withdrawn for 5 years.

Also, at the rent you're paying, you should definitely look into buying.  If you decide to go this route, open an online savings account and throw your savings in there - don't try to invest it.  Otherwise, I agree that you need to fatten up the emergency fund before investing in taxable.
The $1000 in groceries is an allowance that covers some incidentals and household items although being renters, those don't occur that often. I believe we can likely cut that in half once we get a rhythm going.

I still don't see the advantage in a Roth IRA. With our earnings, the tax bracket we are in is too high to make a Roth worthwhile, but I am open to it if someone can show me the math.

DW and I have made the decision not to buy simply because we believe the money we would invest in property would be better invested and get us to retirement faster if we invested in mutual funds etc. Additionally, we are really enjoying not owning a house right now :)

MDM

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Re: How screwed are we for early retirement?
« Reply #15 on: May 10, 2018, 08:12:21 AM »
I still don't see the advantage in a Roth IRA. With our earnings, the tax bracket we are in is too high to make a Roth worthwhile, but I am open to it if someone can show me the math.
Why do you think "the tax bracket we are in is too high to make a Roth worthwhile"?

E.g., do you prefer paying tax on your taxable account interest, dividends, and capital gains, vs. paying no tax for those in a Roth account?

Note that in your situation a deductible traditional IRA is not available, so the pertinent comparison is between Roth and taxable.

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Re: How screwed are we for early retirement?
« Reply #16 on: May 10, 2018, 08:32:49 AM »
I do have an old IRA with about 8-9k in it that I could back door, but again, is it worth it?

Is 30, 40, 50 years of tax-free growth worth it?  x $6500/yr, x 2 people, for as long as you continue to earn income?  And paying no taxes at all on all that growth when you sell?  IDK -- keep that up for a decade or two, and pretty soon you're talking about real money.

IF you can roll the existing IRAs into your current 401(k)s, it's a no-brainer.

politenessman

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Re: How screwed are we for early retirement?
« Reply #17 on: May 10, 2018, 09:01:34 AM »
I do have an old IRA with about 8-9k in it that I could back door, but again, is it worth it?

Is 30, 40, 50 years of tax-free growth worth it?  x $6500/yr, x 2 people, for as long as you continue to earn income?  And paying no taxes at all on all that growth when you sell?  IDK -- keep that up for a decade or two, and pretty soon you're talking about real money.

IF you can roll the existing IRAs into your current 401(k)s, it's a no-brainer.

OK I see what you are saying. I ran this from https://www.bankrate.com/calculators/retirement/roth-ira-plan-calculator.aspx and I can see that the Roth gives slightly better performance than traditional savings and of course I am paying the same tax no matter where I put the money.



... and I guess the payout is tax free, where as the traditional (taxable) savings is of course taxed. OK now I see why that works.
I'll take a deeper look into how to back door a Roth from the IRA I have now.

MDM

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Re: How screwed are we for early retirement?
« Reply #18 on: May 10, 2018, 10:19:29 AM »
I ran this from https://www.bankrate.com/calculators/retirement/roth-ira-plan-calculator.aspx....
On the one hand that calculator makes Roth look better than a fair comparison does.  That's because it assumes each year's 7% return in the taxable account pays 28% tax on that 7%.  This would be accurate for a savings account earning 7% interest, but not for a stock fund.  A stock paying 2% dividends and having 5% growth annually, with 15% tax on both the dividends and long term capital gains, would end up with $91,177 instead of $86, 037.

On the other hand, nothing says you have to withdraw everything in 10 years.  Continue to put more into the Roth each year, either from contributions or traditional to Roth conversions, and the gap between Roth and taxable only gets larger.

Laura33

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Re: How screwed are we for early retirement?
« Reply #19 on: May 10, 2018, 10:38:17 AM »
A stock paying 2% dividends and having 5% growth annually, with 15% tax on both the dividends and long term capital gains, would end up with $91,177 instead of $86, 037.

Right.  But then if you need to use the money, you also have to pay capital gains on growth above your basis (unless your income at the time is so low that you are at the 0% CG rates, presuming those are still around then).

politenessman

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Re: How screwed are we for early retirement?
« Reply #20 on: May 10, 2018, 10:40:39 AM »
So essentially we are quibbling about $5k over 10 years, at which point I plan to retire anyway.
Is that a fair assessment?

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Re: How screwed are we for early retirement?
« Reply #21 on: May 10, 2018, 11:01:21 AM »
*ideally I would like to get rid of the storage but we have a large collection of books, some family heirlooms and other stuff that does not fit in the apartment at the moment. This is in part because we both work from home and effectively have two offices.

If you really have family heirlooms, do you not have family that can enjoy them? Its not a heirloom if no one wants it in their house.

I too have a lot of books, I built a bookcase to store them. I also have storage in unique spots; I built extra shelves in closets, storage under beds, shelves along the top corners of rooms etc. Can you think outside the box and downsize a lot and keep the rest in your apartment? You have two home offices, a living room, a bedroom, a kitchen and more; surely some of that space could be rearranged.

The first step is to get rid of all the extra stuff. Eventually you will be buying a house; are you going to buy a bigger house just to store stuff or a smaller house so you can FIRE sooner? Its not just the storage unit costs today, if you are planing on storing it in the future in your new house, you're already planning on buying a larger accomodation than you currently have. Are you unhappy with your current place? So unhappy that you want to work longer? Thats the choice, longer work career or smaller house. Brutal honesty is required, the facepunches are meant to help you, all I get is the satisfaction of hopefully helping someone.

Keep up the good work, I'm impressed with everything you have already accomplished.

politenessman

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Re: How screwed are we for early retirement?
« Reply #22 on: May 10, 2018, 11:31:18 AM »
*ideally I would like to get rid of the storage but we have a large collection of books, some family heirlooms and other stuff that does not fit in the apartment at the moment. This is in part because we both work from home and effectively have two offices.

If you really have family heirlooms, do you not have family that can enjoy them? Its not a heirloom if no one wants it in their house.

I too have a lot of books, I built a bookcase to store them. I also have storage in unique spots; I built extra shelves in closets, storage under beds, shelves along the top corners of rooms etc. Can you think outside the box and downsize a lot and keep the rest in your apartment? You have two home offices, a living room, a bedroom, a kitchen and more; surely some of that space could be rearranged.

The first step is to get rid of all the extra stuff. Eventually you will be buying a house; are you going to buy a bigger house just to store stuff or a smaller house so you can FIRE sooner? Its not just the storage unit costs today, if you are planing on storing it in the future in your new house, you're already planning on buying a larger accomodation than you currently have. Are you unhappy with your current place? So unhappy that you want to work longer? Thats the choice, longer work career or smaller house. Brutal honesty is required, the facepunches are meant to help you, all I get is the satisfaction of hopefully helping someone.

Keep up the good work, I'm impressed with everything you have already accomplished.
You make some good points, thank you. We got a storage unit when we moved (~4 weeks ago) as we have downsized from 4000 square feet, to an apartment of 1000 square feet. The storage is temporary as we work through the last few things that we have and some stuff will be eliminated and some will find its way into the apartment.

When we initially planned the move, we were looking at buying a house in a year or so of about 1200-1800 square feet, and once that happened, the storage would not be required. I think at this time we are leaning towards staying in rental property for a while (for a number of reasons and not all of them finance related) so there is now more of an urgency in getting rid of the storage.

I'm actually very good at making space where there is none, so I am pretty sure I can soak up all I need to into the apartment, it is just going to take some time, given everything else that is going on.

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Re: How screwed are we for early retirement?
« Reply #23 on: May 10, 2018, 11:49:37 AM »
So essentially we are quibbling about $5k over 10 years, at which point I plan to retire anyway.
Is that a fair assessment?

Not quite.  As Laura33 said earlier (and I had a post that disappeared somehow) - another major advantage is that you won't pay LTCG taxes on the money when you take it out.  That could save you 15% (or even 20%, depending on your bracket)  compared to taking out a similar amount from either a taxable or 401(k) account.  To put numbers to it, suppose your money doubles in the next decade.  In a Roth if you take out $10k you pay $0 on that disbursement.  If you take out $10k you could pay 15% on the portion of that money which is considered 'gains' (here $5k, but that's assuming you have 0% gains now).  So your tax bill would be $750 higher on that $10k.

You can leverage Roth dollars to take out just enough from your taxable/401k accounts to keep your taxable burden very low each year.

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Re: How screwed are we for early retirement?
« Reply #24 on: May 10, 2018, 01:09:24 PM »
A stock paying 2% dividends and having 5% growth annually, with 15% tax on both the dividends and long term capital gains, would end up with $91,177 instead of $86, 037.

Right.  But then if you need to use the money, you also have to pay capital gains on growth above your basis (unless your income at the time is so low that you are at the 0% CG rates, presuming those are still around then).
The phrase "end up" means that capital gain taxes have been paid at the end when the money was all withdrawn for use.  See rows 127-145 on the 'Misc. calcs' tab of the case study spreadsheet.

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Re: How screwed are we for early retirement?
« Reply #25 on: May 10, 2018, 01:14:56 PM »
So essentially we are quibbling about $5k over 10 years, at which point I plan to retire anyway.
Is that a fair assessment?
Yes.  It might take you 5-10 hours total over those 10 years to make the Roth contributions (with most of that coming in rolling your IRA into your 401k, if allowed), so the "hourly wage" for that work is...?

politenessman

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Re: How screwed are we for early retirement?
« Reply #26 on: May 10, 2018, 01:30:42 PM »
It might take you 5-10 hours total over those 10 years to make the Roth contributions (with most of that coming in rolling your IRA into your 401k, if allowed)
You'll have to excuse me, I am an engineer who is just starting to get to grips with all of this, but I don't understand what this means?  If I convert my IRA to a Roth, and I am putting $6500 a year into it, what am I rolling into my 401k?

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Re: How screwed are we for early retirement?
« Reply #27 on: May 10, 2018, 01:36:44 PM »
You make some good points, thank you. We got a storage unit when we moved (~4 weeks ago) as we have downsized from 4000 square feet, to an apartment of 1000 square feet. The storage is temporary as we work through the last few things that we have and some stuff will be eliminated and some will find its way into the apartment.
That changes my opinion dramatically, 4 weeks is a pretty short time frame. 4000 sf to 1000 is equally impressive. My house is 920 sf, however I imagine a person who lived in a tiny home would be appalled by all my stuff, its all relative.

The main part is to keep a healthy and happy focus, which it appear you have. In hindsight, you didn't need a post about it, you needed a congrats for continuing the progress you're making.

You may want to start a journal to keep yourself accountable. You may find it beneficial and fun, journals are only for yourself and others to applaud your efforts. You seem to be well in control, but most of us need the occasional bit of motivation and thats how journals help. When I reread my own posts, I often see it a different way a year later (and sometimes wonder what I was thinking back then), hopefully you keep at this for years to come.

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Re: How screwed are we for early retirement?
« Reply #28 on: May 10, 2018, 01:55:48 PM »
It might take you 5-10 hours total over those 10 years to make the Roth contributions (with most of that coming in rolling your IRA into your 401k, if allowed)
You'll have to excuse me, I am an engineer who is just starting to get to grips with all of this, but I don't understand what this means?  If I convert my IRA to a Roth, and I am putting $6500 a year into it, what am I rolling into my 401k?
See this post - you were going to check on this possibility? ;)

Presuming your marginal rate now is higher than it will be after retirement, you would prefer not to convert pre-tax traditional to Roth now.  Instead, roll the pre-tax IRA over to your 401k plan.  With no pre-tax IRA balance, the path is clear for Roth contributions via the backdoor method.

politenessman

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Re: How screwed are we for early retirement?
« Reply #29 on: May 10, 2018, 02:04:55 PM »
The main part is to keep a healthy and happy focus, which it appear you have.
We try. Both myself and DW are excited about happiness through financial independence. There are so many things we want to do and places we want to go, and work does seem to get in the way!
It is also nice to be able to throw some numbers together and have actual targets for retirement instead of this nebulous thing sometime in the (now near) future.
I don't journal, I don't have the patience for it, but she does. All this is getting written down!

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Re: How screwed are we for early retirement?
« Reply #30 on: May 10, 2018, 02:06:37 PM »
It might take you 5-10 hours total over those 10 years to make the Roth contributions (with most of that coming in rolling your IRA into your 401k, if allowed)
You'll have to excuse me, I am an engineer who is just starting to get to grips with all of this, but I don't understand what this means?  If I convert my IRA to a Roth, and I am putting $6500 a year into it, what am I rolling into my 401k?
See this post - you were going to check on this possibility? ;)

Presuming your marginal rate now is higher than it will be after retirement, you would prefer not to convert pre-tax traditional to Roth now.  Instead, roll the pre-tax IRA over to your 401k plan.  With no pre-tax IRA balance, the path is clear for Roth contributions via the backdoor method.

OK Now I understand,.
I am indeed looking into it - the company I work for uses Fidelity and so far I've not found anything about rolling my IRA into the 401k, but once my work day is done, I will be doing more digging.

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Re: How screwed are we for early retirement?
« Reply #31 on: May 10, 2018, 08:26:47 PM »
@MDM -- oops, missed that.  Thanks for clarifying.  So I assume that the original chart also takes that into account, since there is a line-item for taxes.

@politenessman:  It's not just 10 years; remember, you may be retiring in 10 years, but you won't be spending all your money then.  If you save that Roth money for another, say, two decades, even if you don't add any more funds to it, what's the delta then?

Personally, also I like having some money in a Roth because it will free me up to do more sophisticated tax planning as time goes on.  For example, with the $24K standard deduction, you can have up to $24K in income (withdrawals from your 401(k)/traditional IRA count) without paying any federal tax; if you will be close to that but might go over, why not take a little out of the Roth that year (which doesn't count as income) to avoid paying any federal taxes?  In addition, you also have a long-term capital gains rate of 0% if your total income (including CGs) is below @$77K (MFJ, as of now, I think).  But if you have a year in which you exceed that threshold, then from what I understand, ALL of your CGs are taxed at 15% or @23.8% (depending on your marginal tax bracket).  So maybe one year you need to sell a chunk of your assets, because you need a new roof or a car or to pay a medical bill.  If you take the money from your 401(k), that generates "income" that puts you over the threshold; if you take it from selling regular stocks in a taxable account, that generates CGs that put you over.  But if you pull it from the Roth, there are no tax implications -- and so your taxable income stays below that @$77K threshold, and so you avoid the need to pay any tax at all on any of your CGs that year.  And that might be worth a lot more than $10K, you know?

MDM

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Re: How screwed are we for early retirement?
« Reply #32 on: May 10, 2018, 09:59:13 PM »
@MDM -- oops, missed that.  Thanks for clarifying.  So I assume that the original chart also takes that into account, since there is a line-item for taxes.
The calculations behind the chart treat the investment as a bank savings account earning 7%/yr interest, so ordinary income tax rates apply to the annual interest and there are no capital gains at all.

The chart comes from an advertising site, and at least they are upfront about the purpose of the site:
Quote
Bankrate.com is an independent, advertising-supported publisher and comparison service. Bankrate is compensated in exchange for featured placement of sponsored products and services, or your clicking on links posted on this website. This compensation may impact how, where and in what order products appear. Bankrate.com does not include all companies or all available products.

fuzzy math

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Re: How screwed are we for early retirement?
« Reply #33 on: May 11, 2018, 07:58:53 AM »
Were your former salaries similar to what you're making now? Have you checked out your Social security benefits on their website?

I may be reaching here (as I'm not an accountant and am still pretty confused about the new tax laws), but I believe work costs are no longer tax deductible. Your DW might be better off asking for a lower salary and all work costs reimbursed. Companies can still deduct that stuff. It would make it cheaper for the company (deductions, plus they'd pay less in payroll taxes etc) and for your family you'd pay less in income tax with lower salaries. I would make this your highest priority.

Your books may not fare so well in storage. You also can't access them to read or enjoy in storage. Please consider (once you're settled) donating them. I bet 95% of what you own is either able to be found at goodwill or the library. Do you even go back and read the same books over again?


politenessman

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Re: How screwed are we for early retirement?
« Reply #34 on: May 11, 2018, 08:17:00 AM »
Were your former salaries similar to what you're making now? Have you checked out your Social security benefits on their website?
No, its taken us a while to get where we are, especially DW. She has put a lot of effort into her career and it has paid off for her.
We have looked as the SS web site and we both have the same figures:
Retire at:
67            $2397
70            $3095
62            $1562

Quote
I may be reaching here (as I'm not an accountant and am still pretty confused about the new tax laws), but I believe work costs are no longer tax deductible. Your DW might be better off asking for a lower salary and all work costs reimbursed. Companies can still deduct that stuff. It would make it cheaper for the company (deductions, plus they'd pay less in payroll taxes etc) and for your family you'd pay less in income tax with lower salaries. I would make this your highest priority.
Actually we are working on getting the travel as a business expense without lowering the salary. No sense in giving money away!

Quote
Your books may not fare so well in storage. You also can't access them to read or enjoy in storage. Please consider (once you're settled) donating them. I bet 95% of what you own is either able to be found at goodwill or the library. Do you even go back and read the same books over again?
See one of the posts above. We just moved here and downsized from 4000 square feet to 1000 square feet. The storage is essentially overflow for some of our residual stuff (including the books) that we intend on moving into the apartment once we have room and place for it all. Some of the stuff will likely be given away or CL'd.

freya

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Re: How screwed are we for early retirement?
« Reply #35 on: May 11, 2018, 08:20:34 AM »
OP, the Roth IRA contributions are IN ADDITION to your 401K contributions and NOT for Roth-converting your trad IRA, in case that wasn't clear.  There are many good reasons for you to open a Roth IRA now, and there is zero downside except the minimal amount of time spent doing it.   Would you not spend a couple hours to save even just $1000 on taxes?  That's like a $500/hr side gig, and the easiest money you'll ever get.  You'll want this later anyway, for doing Roth IRA conversions from your nice fat 401Ks in retirement to fill up your 0% and 10% tax brackets - another rocking deal.  There are rules about needing to have a Roth IRA open for at least 5 years before withdrawing, so you really want to be opening it asap.

Another option we haven't talked about:  an HSA.  Calculate the cost difference between a high deductible plan and a standard medical plan, if you have both options available.  It's likely you'll find that the added cost of a HDHP with its higher deductible & lower premiums is less than the tax savings from making HSA contributions - and you may not incur the entire deductible cost.   This is another big potential slug of cash that you shouldn't leave on the table.  Note however that if you do go with an HSA you will want a larger emergency fund to cover the deductible.

Yet another tax dodge:  since you and DW are now working from home, can you arrange for at least one of you to become an independent contractor?  The tax treatment of this is infinitely better:  1) all work-related expenses are deducted including home office, 2) you only pay income tax on 80% of net income, and 3) you get to open a solo 401K which allows you to tax defer 20% of income in addition to the $24,500 401K contribution limit, up to a $53,000 overall limit.  The income you get from your employer will need to increase, since you'll be saving them fringe benefits & payroll taxes plus having to pay self-employment tax.  You'll have to check about health insurance options though.

politenessman

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Re: How screwed are we for early retirement?
« Reply #36 on: May 11, 2018, 08:36:05 AM »
OP, the Roth IRA contributions are IN ADDITION to your 401K contributions and NOT for Roth-converting your trad IRA, in case that wasn't clear.  There are many good reasons for you to open a Roth IRA now, and there is zero downside except the minimal amount of time spent doing it.
I need to check and see if we are eligible for a Roth, as our MAGI may put us over the limit for opening a Roth. If that is the case, I will need to open a traditional 401k and then convert it to a Roth.

Quote
You'll want this later anyway, for doing Roth IRA conversions from your nice fat 401Ks in retirement to fill up your 0% and 10% tax brackets -
ok this is new to me. Do what now? Can you explain this - like I am a 5 year old.
(seriously, I have an engineering background but money math confuses the fuck out of me. I have no clue about any of this stuff which is why, late in life, I am just getting to grips with this.)

Quote
Another option we haven't talked about:  an HSA.
I have no real clue about health ins. so I need to dig into this and try to understand it. So far, its all greek to me so it will take some time, reading and work to get an understanding of how this works for us.

Quote
Yet another tax dodge:  since you and DW are now working from home, can you arrange for at least one of you to become an independent contractor?
No, neither employer will go for this, we know, we asked.

freya

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Re: How screwed are we for early retirement?
« Reply #37 on: May 11, 2018, 09:04:33 AM »
OP, the Roth IRA contributions are IN ADDITION to your 401K contributions and NOT for Roth-converting your trad IRA, in case that wasn't clear.  There are many good reasons for you to open a Roth IRA now, and there is zero downside except the minimal amount of time spent doing it.
I need to check and see if we are eligible for a Roth, as our MAGI may put us over the limit for opening a Roth. If that is the case, I will need to open a traditional 401k and then convert it to a Roth.

Quote
You'll want this later anyway, for doing Roth IRA conversions from your nice fat 401Ks in retirement to fill up your 0% and 10% tax brackets -
ok this is new to me. Do what now? Can you explain this - like I am a 5 year old.
(seriously, I have an engineering background but money math confuses the fuck out of me. I have no clue about any of this stuff which is why, late in life, I am just getting to grips with this.)

Compared to the storage issue, this is very large potatoes and it's worth putting in the work to gain expertise here.  First, regarding the Roth account:  you are not barred from opening an account.  You can't make direct contributions, is all.  Please do read up on the back-door Roth dodge, as it's important to do it correctly or you could end up with a big tax bill.  You maybe should consider consulting a tax attorney on this and various other issues, if you're not comfortable handling it yourself.

After you retire, you will no longer have the employer wage income.  This will leave you with income from two broad categories:  1) interest, unqualified dividends, and wages from side jobs, and 2) interest and dividends.  If you make less that $90K, income in category 2 is tax free - so you only have to pay income tax on category 1.  Let's say category 1 is limited to $5,000 per year.  Since you have a $24,000 deductible before you have to pay even $1 of tax, you could bring in another $19,000 of income without paying any income tax.  You do that by withdrawing $19,000 from your 401K.  However, let's say you don't need this money right away and just want to keep it stashed away - and, you can't simply withdraw it without penalties since you're not at age 59.5 yet.  So you convert it to the Roth IRA.

This means that you didn't pay any tax on this $19,000 when you put it into the 401K.  Once it's safely in the Roth, you will never pay a dime in taxes on it.  Then means you got this money tax free.  Wow!  Since even a 10% tax rate is a bargain and you'll have a lot of money in tax deferred accounts that you'll want to get at, you should do this up to the top of the 10% tax bracket.  Still very minimal taxes.

Be aware that there are rules about using Roths - please do read up on it.  The main ones to know about:
- You can withdraw from a Roth at any time if you are at least 59.5 years old.
- If you retire at age 55 or older you can withdraw from a Roth without penalty, but ONLY one that's been open for at least 5 years.
- If you are younger than 55 or separated from your job before age 55 and are not yet age 59.5, you can only withdraw Roth contributions (not gains) that have been sitting in the account for at least 5 years.

Happy reading!

fuzzy math

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Re: How screwed are we for early retirement?
« Reply #38 on: May 11, 2018, 09:14:28 AM »
Were your former salaries similar to what you're making now? Have you checked out your Social security benefits on their website?
No, its taken us a while to get where we are, especially DW. She has put a lot of effort into her career and it has paid off for her.
We have looked as the SS web site and we both have the same figures:
Retire at:
67            $2397
70            $3095
62            $1562

Quote
I may be reaching here (as I'm not an accountant and am still pretty confused about the new tax laws), but I believe work costs are no longer tax deductible. Your DW might be better off asking for a lower salary and all work costs reimbursed. Companies can still deduct that stuff. It would make it cheaper for the company (deductions, plus they'd pay less in payroll taxes etc) and for your family you'd pay less in income tax with lower salaries. I would make this your highest priority.
Actually we are working on getting the travel as a business expense without lowering the salary. No sense in giving money away!

Quote
Your books may not fare so well in storage. You also can't access them to read or enjoy in storage. Please consider (once you're settled) donating them. I bet 95% of what you own is either able to be found at goodwill or the library. Do you even go back and read the same books over again?
See one of the posts above. We just moved here and downsized from 4000 square feet to 1000 square feet. The storage is essentially overflow for some of our residual stuff (including the books) that we intend on moving into the apartment once we have room and place for it all. Some of the stuff will likely be given away or CL'd.

I agree you'd be best off getting them covered at current salary but you'd be second best off with a lower salary if that fails.

I did see your post about downsizing. I wasn't trying to have you move all your stuff into your apt to save money, I was urging you to challenge the notion that you need a ton of books in your home. E books are another easy way to read the materials you want to read. I do think you've done a lot and deserve recognition for that!

Novik

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Re: How screwed are we for early retirement?
« Reply #39 on: May 11, 2018, 09:28:56 AM »
There's going to be a lot of math in this post, but OP please read because the ending is GOOD.

Assuming you will spend 60k a year in retirement (same as now, but maybe shifted costs from groceries and work travel to health insurance and fun travel), if you took SS for 2400$/month at 67, each, that's effectively your 60k right there. You could retire today if you had enough savings to take you the next 12-15 years.

You don't. So let's say instead that you want to take SS at 70 for your wife, and 67 for you, totaling approx 5500$/month = 66k/year. You need savings to get you from the year you retire to then. Let's call how many more years you work "A".
  • Amount needed to get from 'now+A' to SS = 60*(15-A)
  • Invested assets at 'now+A' = 325 + 102*A       (using numbers from Check2400's summary - substitute as needed)
  • Solve for A:  (15-A)*60 = 325+102*A   ->   A = (15*60 - 325) / (60 + 102)     ->    A = 3.5

That's right - you could retire in 3.5 years, live by drawing down your stash while waiting for SS to kick in, and then live off SS. (You would likely have stash left over because this math only accounts for investment returns matching inflation - so it works even investing conservatively).

Even if you want some stash leftover or don't fully trust SS, an extra six months of work or some slightly reduced spending take care of that.  If you crack down on the spending, fix the work travel, etc you could maybe do it in less than 3 years.

tl;dr  America SS is amazing, you can retire in 3 years if you take advantage of your ability to save 102k per year.

politenessman

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Re: How screwed are we for early retirement?
« Reply #40 on: May 11, 2018, 09:43:43 AM »
I did see your post about downsizing. I wasn't trying to have you move all your stuff into your apt to save money, I was urging you to challenge the notion that you need a ton of books in your home. E books are another easy way to read the materials you want to read. I do think you've done a lot and deserve recognition for that!
We went from ~25 boxes of books down to 9.
Only one of those is mine, the other 8 belong to DW.
Mine are mostly reference and a couple that have sentimental value.
We did this by donating and replacing with kindle and other eDocuments (pdf etc).
Its a work in progress!
... and in fact I have a larger library now that I use ebooks than I ever had with paper books. Ebooks are my friend!

Laura33

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Re: How screwed are we for early retirement?
« Reply #41 on: May 11, 2018, 10:03:37 AM »
There's going to be a lot of math in this post, but OP please read because the ending is GOOD.

Assuming you will spend 60k a year in retirement (same as now, but maybe shifted costs from groceries and work travel to health insurance and fun travel), if you took SS for 2400$/month at 67, each, that's effectively your 60k right there. You could retire today if you had enough savings to take you the next 12-15 years.

You don't. So let's say instead that you want to take SS at 70 for your wife, and 67 for you, totaling approx 5500$/month = 66k/year. You need savings to get you from the year you retire to then. Let's call how many more years you work "A".
  • Amount needed to get from 'now+A' to SS = 60*(15-A)
  • Invested assets at 'now+A' = 325 + 102*A       (using numbers from Check2400's summary - substitute as needed)
  • Solve for A:  (15-A)*60 = 325+102*A   ->   A = (15*60 - 325) / (60 + 102)     ->    A = 3.5

That's right - you could retire in 3.5 years, live by drawing down your stash while waiting for SS to kick in, and then live off SS. (You would likely have stash left over because this math only accounts for investment returns matching inflation - so it works even investing conservatively).

Even if you want some stash leftover or don't fully trust SS, an extra six months of work or some slightly reduced spending take care of that.  If you crack down on the spending, fix the work travel, etc you could maybe do it in less than 3 years.

tl;dr  America SS is amazing, you can retire in 3 years if you take advantage of your ability to save 102k per year.

Except:  SS stops when you die.  So you also want to have a little extra money left by the time you claim SS to cover expenses between the time that the first one of you dies and the second goes, when you will be down to the one remaining SS income.  OTOH, that usually doesn't need to be a huge figure, because it will very likely have plenty of years to grow before you are in that situation.

Novik

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Re: How screwed are we for early retirement?
« Reply #42 on: May 11, 2018, 10:46:41 AM »
Except:  SS stops when you die.  So you also want to have a little extra money left by the time you claim SS to cover expenses between the time that the first one of you dies and the second goes, when you will be down to the one remaining SS income.  OTOH, that usually doesn't need to be a huge figure, because it will very likely have plenty of years to grow before you are in that situation.

True! So let's say they both delay to 70 to receive 3100$ each (37k/year/person). When both collecting, that's 74k (!!). With only one SS there's a 23k gap to 60k spending.

Now your ages are 52 and 55. So in 18 and 15 years you can claim SS. In 15 years if you had 575k it would generate 23k/year forever to bridge the gap between single SS and spending. This requires setting aside 210k invested now to grow to 575.

Then you just need the same math but subtracting 210k from the 325k you're starting with:
Solve for A:  (15-A)*60 = 115 +102*A   ->   A = (15*60 - 115) / (60 + 102)     ->    A = 4.85    (4 years 10 months)


But realistically, a single person household would have reduced expenses for travel/food/allowance/insurance. Let's say 400$ on food, 200$ on allowance, 100$ on misc. and round to 8k/year. This reduces the initial money that needs to be set aside down 140k, to produce 25*15k = 375k in 15 years.

Solve for A:  (15-A)*60 = 185 +102*A   ->   A = (15*60 - 185) / (60 + 102)     ->    A = 4.4    (4 years 5 months)


Then we should also account for growth on the remaining 185k (approx 55k in 4 years) and growth on the invested savings over those 4-5 years until retirement (ballpark 45k in 4 years):

Rough math accounting for those facts:  A = (15*60 - 115 - 55 - 45) / (60 + 102) = 4.2 years  (4 years 2 months)


I don't have a good way to account for saving the extra 14k while you have 2 SS incomes, so this plan does leave you with a extra money from that, and you'll also have the principle from the 375. This plan also doesn't account for taxes (hopefully low).

But tl;dr - 3.5 years was ambitious, but 4-5 years is a very solid plan and you could go lower if you dropped your spending.


(Hope all this math isn't annoying anyone - it's just fun to work out FIRE scenarios on real numbers... my own are so amorphous to make anything but "spend little, save lots" silly at this point).

MDM

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Re: How screwed are we for early retirement?
« Reply #43 on: May 11, 2018, 10:55:22 AM »
After you retire, you will no longer have the employer wage income.  This will leave you with income from two broad categories:  1) interest, unqualified dividends, and wages from side jobs, and 2) interest and dividends.  If you make less that $90K, income in category 2 is tax free - so you only have to pay income tax on category 1.
Probably "...and 2) long term capital gains and qualified dividends" is what was meant, as that would be correct.

politenessman

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Re: How screwed are we for early retirement?
« Reply #44 on: May 11, 2018, 11:08:02 AM »
Some good math there!
You can cut slice this a dozen different ways but this is good food for thought.

Ben Kurtz

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Re: How screwed are we for early retirement?
« Reply #45 on: May 11, 2018, 11:20:45 AM »
The bolded text is incorrect.  Roth contributions can be withdrawn at any age/at any time, penalty and tax free.

https://www.rothira.com/roth-ira-withdrawal-rules

To slice the salami a little thinner, you can indeed withdraw regular Roth IRA contributions any time tax and penalty free at any time. And by "regular Roth IRA contributions" I mean when you pull out your checkbook and send a check to Vanguard with your Roth IRA account number in the memo line.

But Roth IRA "contributions" that arrive by way of a conversion from a deductible tIRA or deductible 401k are subject to a 5 year seasoning rule. And since the OP said their family might be MAGI'd out of regular Roth IRA contributions, this is the more salient point.

I would imagine the rule for backdoor Roth IRA contributions must be similar to regular Roth IRA contributions, given that you can withdraw principal/basis directly from a non-deductible tIRA without tax consequences anyway, so there is nothing for the 5 year seasoning rule to protect. But I don't remember the actual text of the rule off-hand.

MDM

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Re: How screwed are we for early retirement?
« Reply #46 on: May 11, 2018, 11:40:00 AM »
I would imagine the rule for backdoor Roth IRA contributions must be similar to regular Roth IRA contributions.
Yes, similar but not identical. 

When looking at withdrawals from Roth IRAs,
  • The law assumes direct Roth contributions are withdrawn first and no tax or penalty applies to them.
  • Next in the withdrawal order are the pre-tax dollars from tIRAs that were converted to Roth (and thus taxed at the time of conversion).  No "tax" on those when coming out of the Roth, but a 10% "penalty" if withdrawn less than 5 tax years after conversion.
  • Then we get to post-tax dollars from tIRAs that were converted to Roth, aka the "backdoor Roth".  No tax or penalty applies to them.

See
http://retirementlc.com/wp-content/uploads/2017/07/2017-07-06-Roth-IRA-Distribution-Ordering-Rules.pdf
http://fairmark.com/forum/read.php?2,54159,85510#msg-85510
for more.

Check2400

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Re: How screwed are we for early retirement?
« Reply #47 on: May 11, 2018, 12:27:59 PM »
@politenessman ,

You've opened up a Pandora's Box on Roth/mega/etc.  While @Laura33 is right that it is likely more than 'just' 10K in growth tax savings, I am going to give you permission to acknowledge that it is 'only' 10k. 

The reason I, anonymous internet person you don't know, give you permission to minimize those very real savings is because you originally asked if the forums thought you could be done by 62 instead of 67, and you've been given quite a bit of information on optimized savings, instead of a simple analysis of your savings as is.  I posted my opinion, and Novik broke it out a bit more, but the consensus is that 62 would be too long, and you should be done no later than 58.  6 years!!

So, congratulations!  You came for a case study and I think that the emphasis on such nominal optimization shows that you are in a great great spot for the vast vast bulk of your goal. 

Things we know:
1) storage is a diminishing expense as a very understandable crutch while moving to a new location and resettling your life
2) Travel costs are a mutually beneficial shift of salary to lower expenses and payroll
3) housing isn't in the short term plans

The question now is, how do you plan on implementing the savings for the next six years?  Do you have a Vanguard funds picked out?  What is your risk personality, especially so close to retirement and ten years into a bull run in the markets for stock/bond allocation?  Is your level of spending at a sustainable amount on a go forward basis? 

To put it another way, as a semi involved forum poster, I dislike when the forest is lost for the trees.  You're in a great spot, but only if you take the steps to implement.  It seems like you may be getting analysis paralysis with the backdoor IRA decisions, and I don't want that to happen at the expense of getting money into taxable accounts now. 

So, what do you think your next steps should be?


politenessman

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Re: How screwed are we for early retirement?
« Reply #48 on: May 11, 2018, 01:25:40 PM »
A most excellent set of questions.
My next steps are:

Roll my old IRA into my 401k - I have started that process
Once the car is paid off (September) start putting 4-5k into some sort of savings
I don't have funds picked out yet but I am starting to do research (based in great part on what I read in this forum)
I'm ok with some risk in my savings, as I have a relatively low risk 401k.

Quote
analysis paralysis
Sometimes you just have to make a decision on an incomplete data set and go with it. I'm ok with that.

freya

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Re: How screwed are we for early retirement?
« Reply #49 on: May 12, 2018, 08:29:15 AM »
Just to be clear and then leave the Roth issue alone...backdoor Roth contributions are technically conversions, so they can't be withdrawn for 5 years.  The reason for going hog wild on the Roth IRA deal is that I perceived that the OP is already running a tight ship as far as expenses go, and that, the best route to increasing savings is to reduce taxes and protect the investments that will soon be appearing.

How about this for next steps:

1) Look into whether you could benefit from opening an HSA, by researching costs & premiums for your current health plan vs and high deductible plan.  Generally, the HSA is the better deal if you're high income.

2) Open a high-yield online savings account - here's a list to start researching:  https://www.nerdwallet.com/blog/banking/best-high-yield-online-savings-accounts/.

Move the $10K in savings there, and you'll throw new savings there as well.  Grow this account to 1 year expenses for your emergency fund, then you can start thinking about investments.