Case Study - Are we there yet? :-)

[curious]

Hi All,

Long time reader, first time poster. My wife and I have espoused lbym since we met and we've managed to get together a bit of a nest egg. We're now at the point where we think we could be close to actually stepping away completely and I'd love to get the opinions of other members of this forum as to whether or not we are mad to consider it :)

We're both still in our 30's, and we've been tracking our finances for quite a while. We live in Europe, so all figures will be in € rather than $, but it'll be broadstrokes anyway.

Spending

We spend on average €35k a year (ex. mortgage) but I'd allow for that upscaling to €40k a year. Ideally we would reduce it, but I like to build some fat into the calculations.

Net Worth/Assets

In total our net worth (ex. minor assets such as car,  jewelry, house contents etc) is around €900k or so.

That's made up of retirement accounts €320k, home equity €100k & non-retirement accounts €480k.

Debts/Liabilities

We owe about €75k on the mortgage (current rate is 1.15%) so that will either have to come out of the €480k or be paid off if we sell the house (house is worth €175k give or take)

Specific Question

While on the face of it we're in a great position, we're both nervous about the unknowns of the future. There's a long time (hopefully) between now and the end and we don't want to end up in financial trouble at a later part of our life. There is currently a couple of very well paid roles that we are fulfilling, but we're both sick of it and getting to the point where it's harder and harder to deliver well, because we feel that the rewards aren't justifying the sacrifice. Between us we earn around €200k pre-tax for each full year we continue to work.

The question is, if you were in our position, what would you do?

[matchewed]

I'm no expert in European Retirement specific assets. Are there methods for accessing them prior to traditional retirement age? How does that work? Have you researched historical returns for what you're invested in? What assumptions would you use for your SWR? What is your AA like? What are your inflation assumptions?

[curious]

I'm no expert in European Retirement specific assets. Are there methods for accessing them prior to traditional retirement age? How does that work? Have you researched historical returns for what you're invested in? What assumptions would you use for your SWR? What is your AA like? What are your inflation assumptions?

Thanks for the response.

We can access my portion of the retirement accounts (currently €180k) at any point from age 50 (I'm 37 now) In practice I can get up to 25% of value tax-free in a lump sum and then the rest will have to go into an approved minimum retirement fund until I'm 75. This means I can only withdraw gains every year rather than reduce the capital.

The plan would be to leave that pension as late as possible, 55 at a minimum but 60 ideally which may allow me to avoid the minimum retirement fund (it needs to cover €18k a year to avoid this) That would allow me to access the capital & gains on a draw down basis.

We will both be eligible for a government pension (if it still exists) however we will not qualify for the full amount, and we aren't eligible until we are 68. We've estimated that it would give us around €10k between us annually once we're eligible.

We are in the process of moving a lot of my investments around, with interest rates where they are right now we are doing well to get 5% after fees.
Our AA right now in our non-retirement accounts is split about 45% government bonds (paying 4.7% tax-free)
50% managed funds (which have a conservative split of 41% equities, 12.5% gov bonds, 9% corp bonds, 24% cash, 5% property & 8.5% other) (aiming to deliver 6.5% annually)
5% in single stocks and cash on hand

We're about to move about €75k of our retirement funds into a slightly riskier fund which is split across 20-25 publicly listed companies with a market cap of <€3bn and which aims to deliver >10% returns annually. As it's a longer term play, we're comfortable enough with some risk there.

When calculating SWR I've been completely ignoring the home equity and retirement accounts, which means that SWR is approaching 8%. However if I include retirement funds it drops to 4.5%**

For inflation to date I've been assuming that our returns will ourperform inflation by 2%...I'm not sure if that's too ambitious.



** I'm always unsure as to whether to use retirement accounts in this calculation or not. After all I can't access them until a predetermined point in time and while there will (hopefully) be some money there, it won't be much use if we have spent all of our non-retirement money 5-6 years earlier :)

[Exflyboy]

Well we all work on a safe withdrawal rate of 4%.. As you have a long projected retirement I would suggest you make that 3%.

So if you need 40k euros in todays money 40,000/0.03 = 1.3M Euros.

So I would say your not quite there yet if you want to be safe.

Frank

[curious]

Well we all work on a safe withdrawal rate of 4%.. As you have a long projected retirement I would suggest you make that 3%.

So if you need 40k euros in todays money 40,000/0.03 = 1.3M Euros.

So I would say your not quite there yet if you want to be safe.

Frank

Fair point.

However if we went down to €30k instead of up to €40 then we only need €900k to be at slightly over 3%. €5k a year is less than €100 a week...I think I could make that sacrifice :)

[nereo]

Well we all work on a safe withdrawal rate of 4%.. As you have a long projected retirement I would suggest you make that 3%.

So if you need 40k euros in todays money 40,000/0.03 = 1.3M Euros.

So I would say your not quite there yet if you want to be safe.
Frank

Fair point.

However if we went down to €30k instead of up to €40 then we only need €900k to be at slightly over 3%. €5k a year is less than €100 a week...I think I could make that sacrifice :)

The problem with this assumption is that you are including the value of your home as part of your net worth.  Unless you plan on selling the home or using it as a rental property, you can't include that in your SWR calculations.  From a ball-park estimate, I'd agree with Frank and say you're not there quite yet, at least not with the spending levels you are envisioning.

On a different track - what about you and your SO switching to part-time work?  You could let your investments compound while working just enough to earn 40k/year.  At least in the US that kind of income can be made with two people working as part-time teachers.

[curious]

Well we all work on a safe withdrawal rate of 4%.. As you have a long projected retirement I would suggest you make that 3%.

So if you need 40k euros in todays money 40,000/0.03 = 1.3M Euros.

So I would say your not quite there yet if you want to be safe.
Frank

Fair point.

However if we went down to €30k instead of up to €40 then we only need €900k to be at slightly over 3%. €5k a year is less than €100 a week...I think I could make that sacrifice :)

The problem with this assumption is that you are including the value of your home as part of your net worth.  Unless you plan on selling the home or using it as a rental property, you can't include that in your SWR calculations.  From a ball-park estimate, I'd agree with Frank and say you're not there quite yet, at least not with the spending levels you are envisioning.

On a different track - what about you and your SO switching to part-time work?  You could let your investments compound while working just enough to earn 40k/year.  At least in the US that kind of income can be made with two people working as part-time teachers.

Well one of the ideas we had been bouncing around was exactly that. Sell the house, move somewhere cheaper and use the money from the sale to provide an investment return that would cover rent and some of our living expenses. Feels a bit final though :)

I think both yourself & Frank are right, we are pushing it a bit in terms of "retiring" however I do think your suggestion has merit. In truth we have already talked that over between ourselves, we were considering more of a 6 month on, 18 month off scenario though. Certainly one that needs to be looked at it more detail one way or the other.

[nereo]

On a different track - what about you and your SO switching to part-time work?  You could let your investments compound while working just enough to earn 40k/year.  At least in the US that kind of income can be made with two people working as part-time teachers.

Well one of the ideas we had been bouncing around was exactly that. Sell the house, move somewhere cheaper and use the money from the sale to provide an investment return that would cover rent and some of our living expenses. Feels a bit final though :)

I think both yourself & Frank are right, we are pushing it a bit in terms of "retiring" however I do think your suggestion has merit. In truth we have already talked that over between ourselves, we were considering more of a 6 month on, 18 month off scenario though. Certainly one that needs to be looked at it more detail one way or the other.
[/quote]
Well if you are considering selling/renting your home I'd say you are very close, depending on whether you actually spend 35k (875,000) or 40k (1M). 
I know Frank and I differ on this point, but i have no problem using a 4% SWR, especially for young, educated, able-bodied people.  Odds are it will never be depleted even if you don't make any course corrections.  Just keep in mind that if you decide to retire you should be willing to a) reduce your spending and/or b) pick up part-time work if your portfolio falls below its original, real-adjusted value.
But if you maximize the chance that you'll never have to work again under any market condition, then do what Frank suggests and keep saving until you hit a 3% SWR.  Both strategies will almost certainly work - they just have different tradeoffs.

[Exflyboy]

I think the important message here is that we are all comfortable with different levels of risk.

I have a friend making well into 6 figures who has $2.6M.. which would generate over $100k a year.. Him and his family live on about $40k. Hates his job, he is 53 and wouldn't dream that he has enough to safely retire..:)

For me I had about $1.3M when I finally pulled the plug at 52.. but I was pretty nervous about it.. and that includes the fact my wife still works at $30k and I get $15k rent with a roughly $30k expenditure.

So yes I am pretty risk adverse and 4% SWR has proven to be workable...

Frank

[nereo]

I think the important message here is that we are all comfortable with different levels of risk.

On this I agree with you completely.  I just like to share my own comfort with risk, since it may help the OP (and others) decide which they'd rather do - have an almost bulletproof starting portfolio, or have a higher starting SWR, knowing there's a chance (historically a <50% chance) that some extra income might be needed during a couple years of a lengthy retirement.
Equally valid approaches - to each their own.