Case Study: Can I retire?

[FrugalSaver]

Net worth a little over $1.2M.

Much of my net worth is tied up in real estate and 401k. 40 years old.

I have about 30% equity in several rentals yielding about $2,000 per month after accounting for all expenses, mortgage, etc.

Also included is about $250,000 in cash and largely VTSAX (all taxable accounts).

401k is about $800,000. (I originally, erroneously stated "Yields about $15,000 / year in dividends and capital gains."
          Annual Yield of about $20,620 (not including CAPITAL GAINS which I'd expect this year but can't count on every yearbtw,
                    *if I assume the dividends received through 9 months (end of September) is linear through the end of the year, my total dividend yield WITHOUT "capital gains", for which there should be some this year for sure is


Expenses are about $4,000 per month.

Annual savings - $130,000 / year
          - of this amount, roughly $90k / year goes to cash or taxable investment accounts. The rest is 401k

Thoughts?

Certainly opportunities to reduce my expenses so if you'd say not yet, how much would I have tdo reduce expenses to to get to a "hell yes!  You can retire!"?

[PizzaSteve]

I would say yes, assuming your income sources can continue uninterrupted and you have no plans to increase expenses.

Caveat

* Do your expenses account for possible rising cost of health care or other possible life changes (e.g. elderly parent care, health issue, friend needing help)?  These costs can grow as you age or if HC reform passes (if US based)?

* How solid is the real estate income, regardless of economy (e.g. you are renting under market in a scarce capacity, limited development area, high demand situation, or are the houses easily competed with, likely to be less desireable as they age or have lower quality tenants  (e.g. a bankrupt tenant or squator could tie up property for a year or two, without ability to pay)?

* What are your backup plans, if the real estate or stash income are disrupted or expenses increase (e.g. a natural disaster like Houton hits rental income)? 

* Can you return to work to restock the account, if a market crash occurs?

[Hotstreak]

Looks fine to retire, but a lot of details are missing.  How much do you have outside your 401k/IRA and what's your plan to access that money?

[FrugalSaver]

Looks fine to retire, but a lot of details are missing.  How much do you have outside your 401k/IRA and what's your plan to access that money?

Good question.

About $250,000 in cash and largely VTSAX taxable accounts.   I'll add to the original post.

[retired?]

Yes, some details missing.  But, i do appreciate the brevity and format of you 'case study'.  Too often people write a treatise and in paragraphs that are ongoing.  When I see those, I don't even respond.

I'm considering submitting my own case study and would be happy to hear the base minimum info.  i.e. we don't need to hear how much one spends on wheat bread or saves via .............

[skip207]

What is your current savings rate?

If its taken you 20 years to get to this point then yeah, I would say you are OK to retire as another couple of years is probably not worth it.

If you are saving $50k a year might be worth doing a couple more years.

IMHO.

[marty998]

Looks fine to retire, but a lot of details are missing.  How much do you have outside your 401k/IRA and what's your plan to access that money?

Good question.

About $250,000 in cash and largely VTSAX taxable accounts.   I'll add to the original post.

So you can pretty much spend the next 6 years spending this money down before you even have to touch any money you make from Realestate.

Then you figure out how you support yourself for 12(?) years till you can access your 401k.

I'd say you're done.

[FrugalSaver]

What is your current savings rate?

If its taken you 20 years to get to this point then yeah, I would say you are OK to retire as another couple of years is probably not worth it.

If you are saving $50k a year might be worth doing a couple more years.

IMHO.

Good question I save about $130k per year counting all income sources, 401k match, bonus, rental income, etc (not counting mortgage pay down)

[BTDretire]

With that enormous* spending rate and a huge savings rate, I would work at least two more years. This would add $260k and 5.5 more years of spending and two more years of growth, (I hope!) Your close but I think a little tight.
Take advantage of that savings rate.

* Just kidding, I'm shooting for $50k to start.
Enormous by the standard MMM philosophy.

[JustGettingStarted1980]

Is the Mortgage paid off? If not, with a 130K/year savings rate, that might be able to be paid off in short order, thus decreasing your monthly expenses dramatically.

Thinks about it,

JGS

[FrugalSaver]

Is the Mortgage paid off? If not, with a 130K/year savings rate, that might be able to be paid off in short order, thus decreasing your monthly expenses dramatically.

Thinks about it,

JGS

I have several rental mortgages which aren't paid off. They are mostly 30% paid off. One is 50%

[FrugalSaver]

With that enormous* spending rate and a huge savings rate, I would work at least two more years. This would add $260k and 5.5 more years of spending and two more years of growth, (I hope!) Your close but I think a little tight.
Take advantage of that savings rate.

* Just kidding, I'm shooting for $50k to start.
Enormous by the standard MMM philosophy.

Ha. I agree. I could spend less. Not all the $130k is cash. Only about $90k

[skip207]

At that kind of savings rate, at that age, unless you *really* want to stop work I would look to continue.
If you were 60 or even 55 I would say go for it.  But at 40 that's a long gap to fill.
If you can get closer to $500k in the savings account I think you are golden.  2 years and FIRE.

[skip207]

With that enormous* spending rate and a huge savings rate, I would work at least two more years. This would add $260k and 5.5 more years of spending and two more years of growth, (I hope!) Your close but I think a little tight.
Take advantage of that savings rate.

* Just kidding, I'm shooting for $50k to start.
Enormous by the standard MMM philosophy.

Ha. I agree. I could spend less. Not all the $130k is cash. Only about $90k

Even at 90k I would continue.  Each year you work is going to give you 2 years of fire.  Add a bit on for returns and you are at 5 extra years.
That's a long time to figure out how to bridge that gap between savings running out and being able to access your 401k. (not sure on your laws).

The other thing it does is gives you a bit of wiggle room should the market shat itself.

[hucktard]

I think you are right on the edge of retire/keep working at your savings and spending rates. If you are really able to save $130K/year, I would probably work for one to three more years so that you have plenty of money. Or...reduce your spending and retire now. Or...quit now but get a side gig/job that you enjoy. You have choices for sure.

[RobFIRE]

In short, your spending seems too high.

In longer, seems to me with that large 401K as soon as you hit the retirement age (57 or 59.5 or something in US?) you will have plenty. In the interim you have $4k a month in expenses yet only $2k a month net rental income plus $250k cash. If you spend that $250k at $2k a month you might run it down after 12 to 15 years or something, a bit short of retirement age, and the FIRE calculations tend to assume living off the interest not the principle itself. So you either need to cut expenses to $3k (then the $250k could cover $1k a month at 5% withdrawal, bearing in mind you have so much 401K with 10+ years still to grow), or find part time work to cover the difference. Or, of that level of spending is what you want/prefer, work another couple of years to have enough cash to be more or less covering it from investment+rental income.

[FrugalSaver]

Thanks for the thoughts everyone. Keep me coming. Valuable insight!

[EnjoyIt]

FrugalSaver,
Techincally, you can retire today.
You get $2k/month from real estate and you need another $2k/month
You have $800k in a 401k.  You can start withdrawing the money today penalty free following the SEPP guidelines.  Basically using this calculator you can find out how much the IRS will allow you to withdraw every year

http://www.bankrate.com/calculators/retirement/72-t-distribution-calculator.aspx

When I ran the calculator using $800k at age 40 you can easily withdraw $2k/month till 59 1/2 and after that you are free to do whatever you want.  BTW I'm sure you know but $800k at 4% is 2,667/month.  So basically between you rental income and your 401k you will have $4667/month to spend. And that doesn't even include your $250k taxable account.

Based on these figures you can retire right now. But, I have a little bit of a concern though regarding your rental income. How reliable and consistent is this income for the next 20-30 years? Take into consideration that you will be relying on that income for 20-30 years or possibly opt to sell between now and then.  What would happen if a few big employers in your area close and/or move to another state and you find your apartments with significant vacancies?  Will you be able to cover the mortgages or will you be forced to sell during a down market or foreclose on those properties?  I know nothing about your real estate empire so only you can judge the risks.

What I would do:
I would consider my 401k and taxable account as my total nest egg and make sure that I can survive on that withdrawing 4% while having a 50% vacancy rate for a few years.  I believe you may be there right now.  If not I would consider working a few more months to a year. The other option as mentioned above is to work part time or consider doing something as a transition to fire.

Me personally, I don't like the idea of retiring on a tight 4% budget.  I would want a little wiggle room because I expect my spending to increase faster than inflation over the next 30 years where social security would set in.  I am positive that as I age my healthcare costs will go up and I will find some tasks that I used to do myself will require outsourcing. My plan is to retire spending slightly less than 4% to allow for likely growth to make up for future increase in expenses with eventually social security kicking in and helping out at 70. 

[FrugalSaver]

FrugalSaver,
Techincally, you can retire today.
You get $2k/month from real estate and you need another $2k/month
You have $800k in a 401k.  You can start withdrawing the money today penalty free following the SEPP guidelines.  Basically using this calculator you can find out how much the IRS will allow you to withdraw every year

http://www.bankrate.com/calculators/retirement/72-t-distribution-calculator.aspx

When I ran the calculator using $800k at age 40 you can easily withdraw $2k/month till 59 1/2 and after that you are free to do whatever you want.  BTW I'm sure you know but $800k at 4% is 2,667/month.  So basically between you rental income and your 401k you will have $4667/month to spend. And that doesn't even include your $250k taxable account.

Based on these figures you can retire right now. But, I have a little bit of a concern though regarding your rental income. How reliable and consistent is this income for the next 20-30 years? Take into consideration that you will be relying on that income for 20-30 years or possibly opt to sell between now and then.  What would happen if a few big employers in your area close and/or move to another state and you find your apartments with significant vacancies?  Will you be able to cover the mortgages or will you be forced to sell during a down market or foreclose on those properties?  I know nothing about your real estate empire so only you can judge the risks.

What I would do:
I would consider my 401k and taxable account as my total nest egg and make sure that I can survive on that withdrawing 4% while having a 50% vacancy rate for a few years.  I believe you may be there right now.  If not I would consider working a few more months to a year. The other option as mentioned above is to work part time or consider doing something as a transition to fire.

Me personally, I don't like the idea of retiring on a tight 4% budget.  I would want a little wiggle room because I expect my spending to increase faster than inflation over the next 30 years where social security would set in.  I am positive that as I age my healthcare costs will go up and I will find some tasks that I used to do myself will require outsourcing. My plan is to retire spending slightly less than 4% to allow for likely growth to make up for future increase in expenses with eventually social security kicking in and helping out at 70.

Thank you for the thoughts. Yeah I don't want to get into 1 more year syndrome. I'd feel better with another $400-500k but not sure the time tradeoff is worth it. How will I feel when 45 compared to now?  Would I regret all those 630 mornings and not traveling?  Is 45 still young enough? 

I do t plan to pull the tip chord tomorrow but trying g to more formalize when I think I would he comfortable doing that.

[EnjoyIt]

FrugalSaver,
Techincally, you can retire today.
You get $2k/month from real estate and you need another $2k/month
You have $800k in a 401k.  You can start withdrawing the money today penalty free following the SEPP guidelines.  Basically using this calculator you can find out how much the IRS will allow you to withdraw every year

http://www.bankrate.com/calculators/retirement/72-t-distribution-calculator.aspx

When I ran the calculator using $800k at age 40 you can easily withdraw $2k/month till 59 1/2 and after that you are free to do whatever you want.  BTW I'm sure you know but $800k at 4% is 2,667/month.  So basically between you rental income and your 401k you will have $4667/month to spend. And that doesn't even include your $250k taxable account.

Based on these figures you can retire right now. But, I have a little bit of a concern though regarding your rental income. How reliable and consistent is this income for the next 20-30 years? Take into consideration that you will be relying on that income for 20-30 years or possibly opt to sell between now and then.  What would happen if a few big employers in your area close and/or move to another state and you find your apartments with significant vacancies?  Will you be able to cover the mortgages or will you be forced to sell during a down market or foreclose on those properties?  I know nothing about your real estate empire so only you can judge the risks.

What I would do:
I would consider my 401k and taxable account as my total nest egg and make sure that I can survive on that withdrawing 4% while having a 50% vacancy rate for a few years.  I believe you may be there right now.  If not I would consider working a few more months to a year. The other option as mentioned above is to work part time or consider doing something as a transition to fire.

Me personally, I don't like the idea of retiring on a tight 4% budget.  I would want a little wiggle room because I expect my spending to increase faster than inflation over the next 30 years where social security would set in.  I am positive that as I age my healthcare costs will go up and I will find some tasks that I used to do myself will require outsourcing. My plan is to retire spending slightly less than 4% to allow for likely growth to make up for future increase in expenses with eventually social security kicking in and helping out at 70.

Thank you for the thoughts. Yeah I don't want to get into 1 more year syndrome. I'd feel better with another $400-500k but not sure the time tradeoff is worth it. How will I feel when 45 compared to now?  Would I regret all those 630 mornings and not traveling?  Is 45 still young enough? 

I do t plan to pull the tip chord tomorrow but trying g to more formalize when I think I would he comfortable doing that.

I think you are either there already or pretty damn close.  Working till 45 would probably be overkill. While one more year would definitely put you into the secure category by making your investments at about $1.2 Million which should easily fund $4k/month without even touching your real estate.  Adding in real estate income will put you over the top and allow for some lifestyle creep as well as cover any potential risks.

BTW, 45 is still young enough, but it sounds like you are fed up with work. Since it is already October stick it out till the end of this year realizing that you are technically financially independent and don't have to spend another minute in that place. For some people knowing they can quite at any time rejuvenates their interest at work.  After January re-evaluate your position and see where you stand.  Maybe working for a few more months to make that years spending and maximize your 401k.  Who knows it may be possible that your employer values you and willing to keep you on part time till they find a replacement which may be a good alternative to FIRE right away.

[skip207]

5 more years is overkill.

You have 2 choices IMHO.

1.Go now, take the gamble that you are a little on the thin side for your expenses but only a fairly small chance of failure, however lifestyle adjustments would need to me made to ensure you did not fail in that case.

2. Work another 2 years max.  Take that risk of failure down to basically zero.  Retire at a still very good age of 42 (that's the age I plan to FIRE too) and sit back and relax with no money worries at all.

Of course 1 could work out as well but there is a little more risk.

TBH with you, if I was in your situation and could access the 401k (sounds like you can) I think I would split the difference and do 1 more year.  Use this next year to get your ducks in a row.

[rob in cal]

  Shouldn't the 401k with 800k be expected to yield more than 15000 per year ?  Adjusting the rate of return expectation upward would change the whole debate.

[gluskap]

By MMM's calculation your annual expenses are $4k x 12 months = $48k.  Using the 4% rule multiply that by 25 to get the nest egg you need.  Which is $1.2 million which is your net assets.  So yes I think you can retire.  Of course the 4% rule is not 100% safe although pretty darn close to it.  The slight chance of failure would be if you had a market crash right after retiring.  But in that case you could reduce your spending perhaps and tap into your rental income too.  So I think you're pretty good.  Although if you want to be extra safe you could fall into OMY syndrome and pad the nest egg a bit more especially as your savings rate is so high.  Retiring early at 41 is still really early by most people's standards.

[FrugalSaver]

  Shouldn't the 401k with 800k be expected to yield more than 15000 per year ?  Adjusting the rate of return expectation upward would change the whole debate.

The $800k yielding about $15,000 is just dividend returns. Is that what you meant?  It's probably more than that but I haven't added it up to the dollar so far this year.

[Hotstreak]

  Shouldn't the 401k with 800k be expected to yield more than 15000 per year ?  Adjusting the rate of return expectation upward would change the whole debate.

It's in the OP but it is irrelevant to the discussion since OP should have a well balanced portfolio and rely on the 4% withdrawal rate or similar.  So yeah it doesn't make any sense, but it's also irrelevant.




ETA:

  Shouldn't the 401k with 800k be expected to yield more than 15000 per year ?  Adjusting the rate of return expectation upward would change the whole debate.

The $800k yielding about $15,000 is just dividend returns. Is that what you meant?  It's probably more than that but I haven't added it up to the dollar so far this year.

Your post says $15k dividends and capital gains, which would be the total yield of the account including market gains.

[FrugalSaver]

  Shouldn't the 401k with 800k be expected to yield more than 15000 per year ?  Adjusting the rate of return expectation upward would change the whole debate.

It's in the OP but it is irrelevant to the discussion since OP should have a well balanced portfolio and rely on the 4% withdrawal rate or similar.  So yeah it doesn't make any sense, but it's also irrelevant.




ETA:

  Shouldn't the 401k with 800k be expected to yield more than 15000 per year ?  Adjusting the rate of return expectation upward would change the whole debate.

The $800k yielding about $15,000 is just dividend returns. Is that what you meant?  It's probably more than that but I haven't added it up to the dollar so far this year.

Your post says $15k dividends and capital gains, which would be the total yield of the account including market gains.

We're probably talking the same thing, but by "capital gains" I'm referring to the amounts paid in December that get distributed.

Not, for example, the 15% or so the market is up this year. In that case, $800k in VTSAX would be up $120,000 + dividends + capital gains.

I'm not all VTSAX with the $800,000 but just using that for illustrative purposes

[Hotstreak]

FrugalSaver you have $1.05Mil in liquid investments and $24k in rental income, to cover a $48k annual spend.  Your rentals are able to cover 50% of your expenses, and with the 4% rule your other investments are able to cover 87.5% of your expenses.  Obviously if you retire today you have enough cash flow to cover 66k annual spend, which is quite a nice cushion.


Lots of people are giving appreciation to your short write up but it is doing you a dis service.  People cannot give good advice without all the facts, which have trickled in throughout this thread.  If you had given a full accounting up front you would have very few people recommending you continue working, since the math clearly indicates you could have retired several hundreds of thousands of dollars ago (almost half a million dollars ago!).

[Hotstreak]

We're probably talking the same thing, but by "capital gains" I'm referring to the amounts paid in December that get distributed.

Capital Gains is a very specific accounting term, you are referring to something else.  If you mean the amount your employer puts in, or you put in, those are contributions.  If you mean that you are withdrawing money from your 401k and putting it in your checking account, that is a Distribution (there are actually several kinds of distributions.  I would recommend reading around a bit and nailing down a specific budget before going forward further, since it seems that you have not been taught or exposed yourself to all of the basics yet.

[FrugalSaver]

FrugalSaver you have $1.05Mil in liquid investments and $24k in rental income, to cover a $48k annual spend.  Your rentals are able to cover 50% of your expenses, and with the 4% rule your other investments are able to cover 87.5% of your expenses.  Obviously if you retire today you have enough cash flow to cover 66k annual spend, which is quite a nice cushion.


Lots of people are giving appreciation to your short write up but it is doing you a dis service.  People cannot give good advice without all the facts, which have trickled in throughout this thread.  If you had given a full accounting up front you would have very few people recommending you continue working, since the math clearly indicates you could have retired several hundreds of thousands of dollars ago (almost half a million dollars ago!).

Thank you for the thoughts.  I'm happy to answer any clarifying questions and have and continue to update the original post as good thoughts have come in and I've identified other info that would be helpful to those willing to take the time to share their opinion (either for the future, current or already FIREd plan).

btw, I just ran the numbers on dividends yielded so far this year and, if I assume the dividends received through 9 months is linear through the end of the year, my total dividend yield WITHOUT "capital gains", for which there should be some this year for sure is

$20,620.

Now, all that is tied up in my 401k so that poses the challenge of how to access those funds, which has been discussed in other threads with 72(t) and IRA options, etc.

I'll update the OP to reflect this.

[FrugalSaver]

FrugalSaver you have $1.05Mil in liquid investments and $24k in rental income, to cover a $48k annual spend.  Your rentals are able to cover 50% of your expenses, and with the 4% rule your other investments are able to cover 87.5% of your expenses.  Obviously if you retire today you have enough cash flow to cover 66k annual spend, which is quite a nice cushion.


Lots of people are giving appreciation to your short write up but it is doing you a dis service.  People cannot give good advice without all the facts, which have trickled in throughout this thread.  If you had given a full accounting up front you would have very few people recommending you continue working, since the math clearly indicates you could have retired several hundreds of thousands of dollars ago (almost half a million dollars ago!).

The rental income is also not on bedrock so it could go up or down but i also don't have significant equity in each of the property (many have 30% with only one having 50% and none having > 50%).

[FrugalSaver]

We're probably talking the same thing, but by "capital gains" I'm referring to the amounts paid in December that get distributed.

Capital Gains is a very specific accounting term, you are referring to something else.  If you mean the amount your employer puts in, or you put in, those are contributions.  If you mean that you are withdrawing money from your 401k and putting it in your checking account, that is a Distribution (there are actually several kinds of distributions.  I would recommend reading around a bit and nailing down a specific budget before going forward further, since it seems that you have not been taught or exposed yourself to all of the basics yet.

I believe I'm using the term Capital Gains correctly in the amounts mutual funds pay to the mutual fund holders at the end of the year when sales of stock within the fund have occurred at a price greater than it was purchased.  Similar to a dividend, but as an added bonus that comes in December for the funds that I own.

[jlcnuke]

You have $1,050,000 liquid money. You spend $48,000/year. Using just that information, and assuming you live for another 45 years, you have a 66.7% chance of retiring now successfully per FIRECalc.

That doesn't include rental income OR social security however.  When I put in $12,000/year in rental income (I'm cutting your number in half to be very conservative), then you have a 96.1% chance of success historically per FIRECalc. That still doesn't include SS either.

As such, assuming you're not too dumb to adjust spending in the event of significant economic problems in the future, I'd say you're good-to-go now. The big caveat to that is obviously the stability of your rentals and how much they "could" impact your spending in the event of long-term vacancies. You'll have to decide what you think the likelihood of that is. If you consider it a realistic problem, then I'd plan for what to do in such a situation and adjust your retirement plan to accommodate a scenario like that.

Personally, I'd want enough money so that I could have a withdrawal rate that gives me a 95%+ chance of success historically INCLUDING assuming I had zero rental income if I was going to be VERY conservative in planning.

[Laura33]

I just want to clarify one thing:  the 4% rule is based on a portfolio of stocks and bonds.  It does not include (i) cash/savings accounts, or (ii) rental property.

So the way I would do the math is apply the 4% rule to your 401(k) ($800K = $32K), and then add in your rental income, minus an offset for vacancies and periodic expenses (so maybe $1500/mo? = $18K).  That seems to exceed your annual spend, though not by much.  If that were all you had, it would likely be tight.  However, that ignores that you also have (i) $250K in cash, and (ii) significant equity in the rental properties (though we don't know what that is).  All of that provides an awesome safety net should your expenses be higher or your income lower than you anticipated.

IOW, I think you can FIRE now, with a reasonable margin of safety.  Plus you still have SS as longevity insurance if you run short in 25 years or so.  Obviously, you don't have to quit immediately -- it makes sense to take 6 mos. or a year or whatever to get your ducks all in a row.  But you sure don't need to wait multiple years.

[FrugalSaver]

I just want to clarify one thing:  the 4% rule is based on a portfolio of stocks and bonds.  It does not include (i) cash/savings accounts, or (ii) rental property.

So the way I would do the math is apply the 4% rule to your 401(k) ($800K = $32K), and then add in your rental income, minus an offset for vacancies and periodic expenses (so maybe $1500/mo? = $18K).  That seems to exceed your annual spend, though not by much.  If that were all you had, it would likely be tight.  However, that ignores that you also have (i) $250K in cash, and (ii) significant equity in the rental properties (though we don't know what that is).  All of that provides an awesome safety net should your expenses be higher or your income lower than you anticipated.

IOW, I think you can FIRE now, with a reasonable margin of safety.  Plus you still have SS as longevity insurance if you run short in 25 years or so.  Obviously, you don't have to quit immediately -- it makes sense to take 6 mos. or a year or whatever to get your ducks all in a row.  But you sure don't need to wait multiple years.

To be clear, on my equity in the homes, all are at least 25% with one being at 50%. I'd say as a total portfolio of equity to outstanding mortgage, it's 30% equity.