Author Topic: Case Study: Am I fooling myself?  (Read 4545 times)

Threshkin

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Case Study: Am I fooling myself?
« on: January 21, 2014, 10:46:42 AM »
I am one of the new people who heard about this site from Market Watch.  Instead of being a hater, I was intrigued by how much the moustachian perspective mirrored my own thoughts.  "Traditional" financial advisers would have me keep working and saving for another 10 years or more.  After reading many of the articles here, I am wondering why!

Annual Income (Pre ER): Total $180K.  Breakdown: My Salary: 145K, Wife income ~25K (fluctuates, real estate), Rental Income 13.4K

Annual Income (Post ER): $15-20K (Mainly rental income if we keep the property plus opportunistic read estate or other income.)

Annual Current Expenses: 45K (actually closer to $35K but I like to plan conservatively). 
Fixed: 8.5K (Mainly utilities and property tax)
Variable: The big one here is about $8K per year in education expense that is mainly self enrichment.

Expected ER expenses: Expected to be about the same.  A new mostly fixed expense will be adding health care and phone, both currently mostly company paid (+$4K per year).  This should be offset by reduced expenses in other areas. Health care costs scare me a little.

Assets: Total $1600K 
Breakdown: Savings $1050K (mix of Roth IRA, Traditional IRA, Taxable Investment, Stock Options and Cash), Read Estate: $550K (Includes primary residence & rental property)
Liabilities: Essentially $0.  No mortgages or loans.  Credit cards paid month to month.

Specific Question(s): #1 - Why am I still working?  Prior to reading the moustachian advice here I was thinking I needed to get to at least $1.8 to $2M in savings, not counting real estate.  After reading this blog I wonder if I should just retire now.

#2 – When in the year is best to retire from a tax standpoint?  I was thinking about early in the year, either now or early next year.  I will take a tax hit when I cash out my options and want to minimize my income in the year I do this.  Note: I may need some time to help my wife grow a mustache.

#3 – What is the impact on Social Security if I retire early?  Right now I have more than 40 maxed out credits and should get about $30K/year at FRA.  But if I retire early and drop my income significantly, will this amount go down?  I hit FRA in about 10 years.

Thanks!

Edit: Added property tax expense.
« Last Edit: January 21, 2014, 10:58:29 AM by Threshkin »

okashira

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Re: Case Study: Am I fooling myself?
« Reply #1 on: January 21, 2014, 11:06:39 AM »
#2 - so retire now - so your taxable income is a low as possible for that option cash out.

I would already be retired if I was you.

Dr. Doom

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Re: Case Study: Am I fooling myself?
« Reply #2 on: January 21, 2014, 11:17:28 AM »
So first, yes, you can quit even with the extremely conservative 3% safe withdrawal rate.
You've reached the next phase of FI which is figuring out what you want to do next with your life.


Breakdown: Savings $1050K (mix of Roth IRA, Traditional IRA, Taxable Investment, Stock Options and Cash), Read Estate: $550K (Includes primary residence & rental property)


You'll also have to work at exactly how you want to arrange your assets in order to support your post-paycheck lifestyle.
I'd strongly recommend you read this post by the mad fientist which describes how to pull money out of your traditional IRA without paying taxes and prior to age 59 1/2 via Roth rollovers and laddering.  I found it to be incredibly useful myself.

http://www.madfientist.com/retire-even-earlier/

Good luck.



« Last Edit: January 21, 2014, 11:22:00 AM by Q_Train »

Cincy Stache

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Re: Case Study: Am I fooling myself?
« Reply #3 on: January 21, 2014, 11:23:12 AM »
WOW!  Congratulations on your pending retirement.  What a great feeling it must be to have watched a segment on MMM and realize you are positioned perfectly to retire and live w/ freedom.

Cheers!

SunshineGirl

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Re: Case Study: Am I fooling myself?
« Reply #4 on: January 21, 2014, 11:36:49 AM »
Maybe bank all your paychecks and live on your withdrawal rate as practice while you figure these things out - insurance costs, etc., and make some plans for how you'll spend your time the first year or so.

I'd also want to do any bigger projects while still employed or at least set that money aside.

Do you dislike your job?

If I can ask, what is this $8K annual educational expense?

I don't have an answer to your social security question, but I'm sure someone will. Folks on the Bogleheads forum are well-versed in this subject, so try that forum, too.

Catbert

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Re: Case Study: Am I fooling myself?
« Reply #5 on: January 21, 2014, 12:25:48 PM »
Yep, you can retire.  I suggest early next year.  If you and your wife are new to the idea of ER you need time to wrap your head around that.  As others have said practice living on your retirement income.

Next year work long enough to make maximum contributions to IRAs, 401ks, etc. even if that means devoting your entire pay checks.  Then cash out those stock options and enjoy.  Sometimes work places have specific events that can impact when to retire.  For example if large bonuses are given in March you probably don't want to retire in February.  Or if "excess" vacation time is lost January 1st but paid out if you retire before that then December 31st makes sense. 

seattlecyclone

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Re: Case Study: Am I fooling myself?
« Reply #6 on: January 21, 2014, 12:31:18 PM »
Specific Question(s): #1 - Why am I still working?  Prior to reading the moustachian advice here I was thinking I needed to get to at least $1.8 to $2M in savings, not counting real estate.  After reading this blog I wonder if I should just retire now.
Your savings will provide you with $42k/year (at a 4% withdrawal rate) and your rental property will provide an additional $15-20k. That's already higher than your expected retirement expenses, and we haven't even looked at Social Security yet! I see little reason you can't retire now. Nice work!

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#2 When in the year is best to retire from a tax standpoint?  I was thinking about early in the year, either now or early next year.  I will take a tax hit when I cash out my options and want to minimize my income in the year I do this.  Note: I may need some time to help my wife grow a mustache.
I think early in the year is a good plan if you have a bunch of vested, unexercised stock options. If these options are considered "incentive stock options" by the IRS, you may want to look into the different tax treatment between "cashing them out" immediately versus exercising the options, holding on to the stock for a year or two, and then selling the shares. The calculations can be complicated and highly dependent on your personal situation, but in general there can be some tax benefit to holding for a while, especially if you don't expect your retirement to cause the stock to go down significantly. :-)

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#3 What is the impact on Social Security if I retire early?  Right now I have more than 40 maxed out credits and should get about $30K/year at FRA.  But if I retire early and drop my income significantly, will this amount go down?  I hit FRA in about 10 years.
If you log on to the Social Security web site and put in your personal information, they'll give you an estimate of your benefits based on the assumption that you'll keep working and earning the same salary as last year, every year from now until the date you start collecting benefits. But that doesn't take early retirement into account! Take a look at this brochure for the real story. How it works is they look at every individual year you worked, scale your wages from each year up to account for inflation, take the top 35 years, and plug that into a formula that converts your lifetime wages into a monthly benefit.

The good thing for an early retiree is that it's a highly progressive formula: the first $816 in average monthly inflation-adjusted wages over your lifetime gets replaced at a 90% rate during retirement, the next $4,101 gets replaced at a 32% rate, and anything above that gets replaced at a 15% rate. So if you retire early, your Social Security benefits will be less than if you keep working and earning the same salary between now and your FRA, but at this point you probably won't see a huge difference because you've already earned enough to max out that 90% space. You get diminishing returns after that. This is especially true if you have already earned wages in at least 35 calendar years: your wages this year will replace a year in your teens or twenties when making the calculation, so you basically just get credit for the difference in earnings between those two years.

Threshkin

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Re: Case Study: Am I fooling myself?
« Reply #7 on: January 21, 2014, 01:07:27 PM »
SunshineGirl - The Educational expenses are for my wife.  She is in a master's program for Student Affairs in Higher Education.  All her life she was either told what to study or unable to study because of family responsibilities or income insecurity.  When we got together she finally had the stability to do what she wanted which was to study what she wanted.  Even if she decides to stop, I may go back to school myself, again to study what I want because I want to learn, not because I need it for a job.

I like my job in general but also like the idea of not being tied to it.  For many years i have lived according to two philosophies.
  • "If you don't like what you are doing.  Do something else!" I have no patience for people who say they hate their job but who are not doing anything to change it.
  • "Like what you do." In every job there are good and bad parts.  Focus on what you like, not what you don't like.

We did several big projects last year.  Paid off the mortgage, major medical, etc.

Threshkin

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Re: Case Study: Am I fooling myself?
« Reply #8 on: January 21, 2014, 01:27:33 PM »
seattlecyclone - #3 - Thank you very much for your information on SS and for the link!  It will take some work to plug all this into a spreadsheet but it looks like exactly what I needed.  Some of my early income years were very small so I was worried about this.  From your feedback it looks like I may have been overly worried.  But when it comes to money, I prefer to be very conservative.

#2 - The options are all classified as NSO.  The vested amount is about $185K.  Unvested is only about $20K at current share price value.  Vesting happens around the first of July.
« Last Edit: January 21, 2014, 01:47:06 PM by Threshkin »

Threshkin

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Re: Case Study: Am I fooling myself?
« Reply #9 on: January 21, 2014, 02:01:53 PM »
mary w - 401k has been maxed out since it first became available.  That was a no brainer, even back when it hurt real bad to lose that income.  Bonuses happen at random times, and have been nonexistent for the last few years.  My options are a consideration but there is only about $20K unvested right now so I would not leave much on the table.  They vest around the beginning of July. My bigger concern is the tax hit because I will need to cash them out all at once which will create a bug tax hit that I do not want to add on top of our wage income.

Rollover IRAs and 401ks are about 60% of my retirement portfolio split about 80% Traditional and 20% Roth.  I have been putting 100% into Roth for the last few years because I got worried about the eventual required minimum distribution.  I also wanted to diversify my cash pools.  I am just now learning about the tax-free conversion strategy.

Exflyboy

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Re: Case Study: Am I fooling myself?
« Reply #10 on: January 21, 2014, 03:25:58 PM »
 am in a close;y similar situation to you.. I retired a week ago..:)

 Lets see.. I have about $1250k plus the paid off house. Plus rent of $15k after expenses.

4% of $1250 gives me 50k per year.. plus the rent.. thats $65k... Its just the Wife (who is still working).. Seems plenty to me.

Frank