Case Study- Can I Really Retire by 40?

[bankofnewyork]

Hello All-

I am glad to have found this website and forum.  I'm new around here so please forgive me if I'm asking simple questions.  Fifteen years ago I read "The Overspent American" and a few books on investing and it greatly influenced my life.  However, after discovering MMM just a few weeks ago, I realize there was a lot more I could have done to save.  I don't feel too bad about it, since in my case I was a musician for most of my 20's and made virtually no money but have still managed to put away a decent nest egg.  I have just started making what I consider to be a great salary at $120K/ year.  My wife and I are both 36, and we just had our first baby.  We had both planned on working until 50 and then fully retiring.  By then, we'd have more than enough put away, plus a decent pension coming.  Now, however, we are starting to wonder about ways to possibly "semi-retire" in about 4-5 years.

Here is the current situation:
Savings
Combined 401Ks:  $275,000
Combined Roth IRAs: $157,000
Taxable Investments: $110,000
529 Plan for the little one: $5,800

Debt
$6,000 in low-interest student loan debt
Car is paid off

Income
I recently started making $120K
Wife made $80K until we had the baby, she is staying home right now.

Overall we're pretty happy with our financial situation, and we generally like our jobs, but we like each other more than work, and we do fantasize about having a lot more time at home together and to spend on hobbies of which I have many.  The main problem we have right now is that we live in an extremely expensive area for work and family reasons, so we own no real estate and our single biggest expense is rent which sets us back about $20K per year.  More on that later.

In the next year or two, I have an opportunity coming up at work which would allow us to live rent and utilities free for about 1.5 years, and also make an additional $50K in salary during that period.  So I think with some diligent savings, we could conservatively end up with the following picture by age 40:

Savings
Combined 401Ks:  $450,000
Combined Roth IRAs: $200,000
Taxable Investments: $250,000
529 Plan for the little one: ???

I am trying to figure out what kind of lifestyle this amount of money could support, and how exactly we would go about getting the money since most of it will be tied up in retirement accounts that have early withdrawal penalties.  I have just begun to learn about 72t withdrawals, and as far I understand it I could pull about $16K per year at age 40 from the 401K using that method.  Are there other ways I could withdraw more without a penalty?  I am also trying to determine which pots of money we would want to be withdrawing from at which times in order to be best positioned for taxes.  I should point out that I will be able to collect a pension starting at age 62 which will be worth about $18K per year (not to mention Social Security, which at 62 would be worth an estimated additional $13K per year for me, and probably a similar amount for the wife).

Another question I have relates to the 529 plan for the little one.  As you can see, it is rather modest for now, but a college education is a priority for us.  However, we are struggling with how much to put away each month.  I've seen estimates of everywhere from $250/month to $600/month, and I am wondering if there is any consensus around here.  Another thought is to just divert a large chunk from our taxable investment accounts to the 529 right now and just be done with it.  Although again, if we did that, how much would be enough?  Is college savings a legit reason to delay retirement until 50 or am I overthinking this one?

A final question involves real estate.  A big part of the reason MMM is able to keep his monthly expenses so low is they have a paid off house.  In our area, real estate is insanely expensive and we have stuck to renting for that reason.  The only way we would currently consider buying is to purchase a duplex or triplex and live in one unit while renting the others.  Still, this would require putting all of our taxable investments into a down payment which we are somewhat hesitant to do, especially if we could be looking to retire and move elsewhere in 4-5 years.  One question I am grappling with is, if I do quit my job at 40, and we moved to a less expensive area, should we take our $250k in taxable investments and purchase a home outright?  Or do we continue renting?  Or should we just put 20% down on property, perhaps a duplex, and just make the minimum payment every month?

If we could could cut our housing costs to near-zero like MMM, we would probably only need about 30K/year to live a very comfortable life.  As such, I am trying to figure out how to squeeze maximum value out of the money we'll have saved up by age 40.  My wife has a professional skill set that would allow her to easily make some part time income, and I would probably do little things here and there to make money as well.  So it's not as if we would need to live entirely off our savings.  Up until now, we had always just assumed we'd be retiring "early" at age 50, so we haven't given much thought to actual mechanics of how we would start living off the money we had saved.  So now, given that we are looking at retiring in a 4-5 year time horizon, I am trying to get a starting point for thinking about these kind of questions, as well as hear ideas from the community about how best to build upon what we have started and make sound decisions going forward.

Thanks all and I look forward to hearing your responses!

BNY

[waltworks]

As you seem to be aware, your problem is housing costs (this is my problem too, but I'm not willing to move, so I'm just growing used to the fact that I won't be FI for an extra 5 years). Living in your current (NYC? SF?) location, you are not going to be able to make it work in the timeframe you are talking about, especially if you want to pay for college and/or if you decide you want another kid.

It sounds like you're already mentally ok with moving, though, so your job is now to figure out where you'd like to live, what it'll cost, and whether you want to work part-time or at a lower paying gig to have some safety margin and be able to pay for college. The rent vs buy decision can be entirely financial, or you can talk it over with your family and decide whether there are non-financial reasons to sway you one way or another.

So! Time to travel! It's not hard when you have a small baby, actually. What sports/activities/climate/culture do you like? Make a list of suitable places, and go visit them and check out housing and schools (and jobs that you'd enjoy doing).  If you find a place you love that's cheap, your decision gets much easier. If you don't, well, maybe you want to work a little longer.

-W

[Westoftown]

I think you can.  Here are a couple of things to consider.  First, don't assume your income goes to zero after retiring.  You will be very young and I'm sure you can find a way to produce some income, while keeping it fun.  Think of MMM - his income has only gone up since FIRE.  Now we can't all have a multi-million hit blog but we can all do something.  Also, ease into it.  Develop your business, consulting, rental property, or whatever business you might like before you FIRE.  That way - you aren't starting from zero when you quit.

Thats where I am now - trying to develop something part time so that I can ease into it full time.

[mozar]

Yes, you could retire at 40. You project to have 900k x .04 = 36k a year including housing. I think 250k is a good budget for housing. In a lot of places in the US it's cheaper to buy than to rent, so it depends where you want to live. If you paid 250k cash for a house you would have 650k left which would be 26k a year after housing. I think you could live on that.

My guess is that you would want to have some cash or taxed investments to hold you over for the five years you are waiting for a Roth ladder to mature. Oh wait you have a Roth. My understanding is that it doesn't really matter where you draw from as long as you don't go over replacement. So draw from taxable, then Roth, then 401k (which you will be converting to a Roth so you can withdraw after 5 years.

As far as saving for college, remember that you have 18 years of compounding. Also decide if you want to pay whole or part, public or private. A private school now is 200k for four years. You could put that aside before you retire and let it compound. Personally, I think that's ridiculous. I would focus on getting your kid the skills needed to win scholarships. Harvard admits 10% blacks and hispanics, 10% athletics scholarships and 10% legacy. 50% of Harvard applications are from Asian people. If you are Asian, you have to have a SAT average of 140 points higher than everyone else to get in. The kid needs perfect grades and leadership in their extracurricular activities. Travel is helpful too so they get perspective.

[Catbert]

Don't buy a house since you hope to move from your current city if you can FIRE in 5 years or so.  The transaction costs could eat up any profit you might get.  Instead take that opportunity to live rent free from 1.5 years and save what you would pay in rent.  Even after you retire and move to a lower COL area, rent for at least a year to ensure you like the area and specific neighborhood. 

72t elections don't usually work well for someone retiring in their early 40s because the % of tIRA you can access is pretty small.  (Works fine if you are mid-50s with only a few years until you can access at 59.5.)  However, you can always access your contributions to Roth IRAs.  You can convert from 401k/IRAs using a 5 year Roth pipeline.  Don't start that until your income and tax rate has dropped in retirement.