Case study: early retirement and cash flow modeling

[m_m]

New here.  Been interested in saving and investing for years but was just referred to this site and have been reading some here.  I'm hoping to get some feedback or advice.

I'm 32, wife is 30, and we have a 1 year old.  We plan to have 1 more kid.

Income:
Me 93k
Wife 45k (part time)
I contribute 10% of my salary to my 401k and my wife contributes 9%. 

Just got a new job so last year we were at 74k and 45k incomes.  The year before that we were both at about 70k before my wife went part time.

I don't have a fully detailed spending breakdown.  We've only recently started trying to measure expenses more accurately.  These are the major monthly components:
Mortgage: 1200 (incl tax & insurance)
Phones: 70
Cable/Internet: 100
Daycare: 480
Auto insurance: 125
Food varies a bit.  I don't have the number but we are flexible there - most meals are made at home.
Gas I'm guessing 220ish.

We don't carry any debt on credit cards.


401k
Me: 99k
Wife: 45k

Investment account
Stocks: 30k
ETFs (index funds): 50k
Mutual Funds: 180k
Money Market (savings): 20k
Total recent yearly contributions to this investment account have been 35k, 39k, 24k, and 18.4k so far this year

Bank
Checking account: 5k

House
Principal balance: 150k
Est. value: 275k
30 yr 4.75%


So the total looks like:
Income: 138k
Savings/cash: 429k
Equity (est.): 125k


I have two questions. 

Does it seem like we're on a path where I can retire early?  Other than moving up into a bit larger home one day, I don't plan to increase my standard of living.  I drive an 11 year old Honda, for instance, and would plan to stay at 20k or so if I ever  bought another car.  I've seen the rule of thumb estimations for retiring early (25x expenses) but am trying to put a little more detail into it so I can adjust certain parts of my plan, which leads to my next question.

Can I make a decent cash flow estimation?
I've made a spreadsheet which is supposed to measure cash flow over the years.  My process is:
Column A: beginning balance
B: return on investment - I can adjust the percentage but usually use 4.5% (hopefully) conservatively
C: contribution - I set this to 30k and add 2.5% per year to account for salary increases
D: end balance, equal to beginning balance of next period

At retirement, contributions will turn negative.  To calculate the amount, I estimate total expenses today (gross income - taxes - savings) and grow this amount by 3% per year for inflation.  I know there are parts that aren't handled to a fine level of detail - for instance, health insurance costs will change in retirement, I'm not accounting for paying off a house at some point, etc.  How do I also account for taxes when I'm pulling out of savings?  I'm trying to keep it a high level estimation but not sure how accurate I can account for taxes that way.  If I need X of expenses per year in the future, then I will actually need to deduct X plus an amount for taxes - but I'm not sure how to calculate what the tax amount would be. 

What else am I missing in this projection?  I'm trying to get to something that is still fairly simple but easy enough to change contributions in certain years to account for college expenses or my wife taking time off from work for the kids and things like that.

[MDM]

I'm hoping to get some feedback or advice.
...
I contribute 10% of my salary to my 401k and my wife contributes 9%. 

Why not contribute $18K each?

I don't have a fully detailed spending breakdown.  We've only recently started trying to measure expenses more accurately.  These are the major monthly components:
Mortgage: 1200 (incl tax & insurance)

Good idea to use Quicken or Mint or whatever to track all spending.  It's ok to have a "miscellaneous" amount - for some low single digit percent of your total spending.
For mortgage, you should separate the P&I (that goes away when the mortgage is paid) from the T&I (that continue even after the mortgage is paid).

401k
Me: 99k
Wife: 45k

Investment account
Stocks: 30k
ETFs (index funds): 50k
Mutual Funds: 180k
Money Market (savings): 20k
Total recent yearly contributions to this investment account have been 35k, 39k, 24k, and 18.4k so far this year

Good - you are already saving.

Does it seem like we're on a path where I can retire early?  Other than moving up into a bit larger home one day, I don't plan to increase my standard of living.  I drive an 11 year old Honda, for instance, and would plan to stay at 20k or so if I ever  bought another car.  I've seen the rule of thumb estimations for retiring early (25x expenses) but am trying to put a little more detail into it so I can adjust certain parts of my plan, which leads to my next question.

Can I make a decent cash flow estimation?
I've made a spreadsheet which is supposed to measure cash flow over the years.  My process is:
Column A: beginning balance
B: return on investment - I can adjust the percentage but usually use 4.5% (hopefully) conservatively
C: contribution - I set this to 30k and add 2.5% per year to account for salary increases
D: end balance, equal to beginning balance of next period

At retirement, contributions will turn negative.  To calculate the amount, I estimate total expenses today (gross income - taxes - savings) and grow this amount by 3% per year for inflation.  I know there are parts that aren't handled to a fine level of detail - for instance, health insurance costs will change in retirement, I'm not accounting for paying off a house at some point, etc.  How do I also account for taxes when I'm pulling out of savings?  I'm trying to keep it a high level estimation but not sure how accurate I can account for taxes that way.  If I need X of expenses per year in the future, then I will actually need to deduct X plus an amount for taxes - but I'm not sure how to calculate what the tax amount would be. 

What else am I missing in this projection?  I'm trying to get to something that is still fairly simple but easy enough to change contributions in certain years to account for college expenses or my wife taking time off from work for the kids and things like that.

For a quick estimation, use
Time in years to FI = Ln((S + i*E/WR) / (S + i*A)) / Ln(1 + i)

A = Asset amount currently invested in funds you will draw upon in retirement.
E = Total (including taxes) annual expenses in retirement
i =  Return on invested retirement funds.
S = Annual amount invested in funds you will draw upon in retirement.
WR = Withdrawal Rate planned for retirement, using Trinity Study definitions.

For more detailed estimates, try Quicken's Lifetime Planner or www.cfiresim.com.

If you want to borrow some spreadsheet tax calculations, check http://forum.mrmoneymustache.com/ask-a-mustachian/how-to-write-a-%27case-study%27-topic/msg274228/#msg274228.

[m_m]

Thanks.  I will look into the calculation you posted as well as the tax spreadsheet.

On the 401k, I've not liked the choices available with the companies I previously worked for - high ERs.  I suppose the pre-tax contribution would likely outweigh that but I've never gotten that detailed into the numbers.  I have always contributed more than the matching % but not up to the limit - the extra then went into our own investment account instead.  At my new employer, they have a stock market and bond market index fund through Vanguard.  I set mine to 85/15 into those so I suppose I would feel better maxing out the contribution with those choices.

[young canadian]

Hey m_m!

Joined the forum just to reply! I noticed an inconsistency in your growth assumptions (I think). You assume 4.5% investment returns, which I assume is real growth and not nominal growth, as generally, it is my understanding that individuals on this site use ~7% nominal growth, then assume 2-3% inflation, which gives an average real investment return of ~4-5%. The only reason this matters is because you then gross-up your total expenses by 3% per year for inflation, which would overestimate your expenses relative to your portfolio growth. I generally use real returns in financial models so that I can interpret them in today's dollars. Good luck!

Can I make a decent cash flow estimation?
I've made a spreadsheet which is supposed to measure cash flow over the years.  My process is:
Column A: beginning balance
B: return on investment - I can adjust the percentage but usually use 4.5% (hopefully) conservatively
C: contribution - I set this to 30k and add 2.5% per year to account for salary increases
D: end balance, equal to beginning balance of next period

At retirement, contributions will turn negative.  To calculate the amount, I estimate total expenses today (gross income - taxes - savings) and grow this amount by 3% per year for inflation.  I know there are parts that aren't handled to a fine level of detail - for instance, health insurance costs will change in retirement, I'm not accounting for paying off a house at some point, etc.  How do I also account for taxes when I'm pulling out of savings?  I'm trying to keep it a high level estimation but not sure how accurate I can account for taxes that way.  If I need X of expenses per year in the future, then I will actually need to deduct X plus an amount for taxes - but I'm not sure how to calculate what the tax amount would be. 

What else am I missing in this projection?  I'm trying to get to something that is still fairly simple but easy enough to change contributions in certain years to account for college expenses or my wife taking time off from work for the kids and things like that.

[m_m]

That's a good point to consider.

However, it's 4.5% nominal the way I'm modeling it - using 7% would make a big difference but I'm hesitant to bank on more.

It does make me realize, though, that I'm assuming my contribution will start at 30k and grow equal to my salary growth - in other words, showing that I will contribute more each year despite rising expenses from inflation.  That may be too optimistic.  I can either take out the salary increase and assume it's wiped out by inflation or add income and expenses to the model and apply raises and inflation to them correctly.

The choice of 4.5% is just a conservative figure.  My portfolio's annual rate is a lot more so far but I'm expecting it to average lower over time.  4.5% is used for a "worst-case" scenario.  Even assuming 4.5% worries me.  I just tell myself if it comes crashing down then pretty much everybody else is in the same situation.

[ZiziPB]

I don't know much about cash flow modeling so I won't comment on that but I would strongly suggest you consider maxing your 401k, especially if you have access to low cost index funds (which it sounds like you have).  There is nothing that will beat the tax benefits both upfront and continued tax-free growth.  With your income and expenses it makes absolute sense to max it.