Author Topic: How do I assess my situation with so many unknowns?  (Read 3834 times)

Bookworm

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How do I assess my situation with so many unknowns?
« on: February 27, 2014, 03:08:33 PM »
I have been devouring the MMM site and the forums.  What a wonderful place!  I'm inspired by how well all you Mustachians are doing, but I must admit, I'm feeling a little overwhelmed. 

By comparison, we're old, spend too much, and, I think, are drastically behind in our attempts to accumulate retirement savings.  To be fair, our three biggest financial setbacks haven't resulted entirely from our own stupidity...one was a six-year custody battle (1991-1997) between my husband and his daughter's mother before we met, one was a failed business that we tried our damnedest to make succeed (2001-2002), and the last was the uninsured cost of the same daughter's care at a residential treatment facility (2006-2008, ~$100,000).  We also had some unfortunate real estate timing, but that probably WAS due to our own stupidity.

So, I'd really like to assess where we are right now.  I tried using the formula that arebelspy (clearly an individual whose intellect wildly exceeds my own) posted in another thread.  Even after running to my 19-year-old for math help, it made my eyes glaze over and my head hurt.

If we just had regular investment accounts like 401(k)s, funds with balances, and cash sitting in the bank, I would feel better about understanding where we stand, and/or could use "calculators".  Instead, we have:

* TSP and a 401(k), which we can access when my husband is 59 1/2.  This has an obvious balance...got it.

* Cash in the bank...got it.

* Two rental houses with mortgages and positive cash flow...how do I know how to value these?  Real estate values change wildly over time, and houses cost money to sell, so all the money wouldn't be ours if we liquidated.

* Our own house, which will be MUCH too big once all the kids leave the nest (youngest is 13), so we'll be selling and downsizing and keeping/investing the difference...same problem with quantifying what that means.  I have no idea what that difference will be when the time comes, or even when "the time" is.

* Military (reserve) retirement, which with his particular years of service, he can start collecting when he is 56.  The government gives us estimates of how much that payment will be, stated in today's dollars, but there is constantly some proposal in Congress to fiddle around with the cost of living increases or the payout start age, etc...I don't know how to incorporate that into our "total nest egg" figure, since it's a monthly amount, and one that can be changed at Congress's whim.

* VA disability payments...again, I know what they are right now, but not how they fit into the total "nest egg" calculation or how much the government will screw with them when budgets get squeezed.

* Soundness of the Social Security program aside, we won't reach eligibility at the same time, because my husband is 48 and I am 41.  In fact, I keep running into this issue with retirement calculators...they ask for age, and I don't know which one to put in.  He makes all the income, but obviously the money has to last through my old age as well, and I am younger.

So, how do I incorporate these things into an assessment?  Please be gentle with me...I know I'm a lousy mathematician.  In my defense, the other half of my brain is brilliant. :)
« Last Edit: February 27, 2014, 03:10:24 PM by Bookworm »

Thegoblinchief

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Re: How do I assess my situation with so many unknowns?
« Reply #1 on: February 27, 2014, 03:40:31 PM »
Before you count up your assets, you really have to know what your expenses are. Construct a budget based on anticipated spending in retirement (food, housing (rent/mortage+capital for repairs), medical, transportation (gas+capital for repair/replacement), travel, clothes, etc.).

This is your annual expense $. Your assets need to be 25x to retire safely. If you plan to have PT income, reduce the budget accordingly.

Until you have that number, it's kind of pointless to count your assets up. There's no context otherwise.

When it comes to assets, I wouldn't count the total value of the houses. If you KNOW you're going to sell yours, you can "count" the equity you won't spend on a new house. For the rentals, if you aren't keeping them, then count the equity. If you are keeping them, count the net cash flow against the annual budget number.

I wouldn't PLAN on the disability payments. Maybe use those as padding room.

soccerluvof4

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Re: How do I assess my situation with so many unknowns?
« Reply #2 on: February 27, 2014, 04:01:49 PM »
your not old and have plenty of time but there is alot more information needed for people to really help you.

House
Appraised value/real market Value                       Mortgage Balance/ rate % / Payment              Term of loan           Difference is your equity

I.E.  550k/ Based on comps in area 500k               300k / 3.5%   / IDk say 2100$                          30 year                     200k

But like thegloblinchief said I dont count either unless you take on low side.

You figure the Retals the same way for ownership part someone else can chime in on the renters part but comes down to I am sure yearly expenses/ Vs rent . 

All your assets are your savings, 401ks you mentioned etc... Subtract your debt and you have your networth.

But also as Thegoblinchief said you need to do a Budget of your monthly expenses as well.

Good luck. Sure you will get some great advice here. Other wise you can reach out to Areblespy if you like what he reads just by finding him on any link. Sure he would help you.     

nereo

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Re: How do I assess my situation with so many unknowns?
« Reply #3 on: February 27, 2014, 04:03:07 PM »
I have been devouring the MMM site and the forums.  What a wonderful place!  I'm inspired by how well all you Mustachians are doing, but I must admit, I'm feeling a little overwhelmed. 


* TSP and a 401(k), which we can access when my husband is 59 1/2.  This has an obvious balance...got it.

* Cash in the bank...got it.

* Two rental houses with mortgages and positive cash flow...how do I know how to value these?  Real estate values change wildly over time, and houses cost money to sell, so all the money wouldn't be ours if we liquidated.

* Our own house, which will be MUCH too big once all the kids leave the nest (youngest is 13), so we'll be selling and downsizing and keeping/investing the difference...same problem with quantifying what that means.  I have no idea what that difference will be when the time comes, or even when "the time" is.

* Military (reserve) retirement, which with his particular years of service, he can start collecting when he is 56.  The government gives us estimates of how much that payment will be, stated in today's dollars, but there is constantly some proposal in Congress to fiddle around with the cost of living increases or the payout start age, etc...I don't know how to incorporate that into our "total nest egg" figure, since it's a monthly amount, and one that can be changed at Congress's whim.

* VA disability payments...again, I know what they are right now, but not how they fit into the total "nest egg" calculation or how much the government will screw with them when budgets get squeezed.

* Soundness of the Social Security program aside, we won't reach eligibility at the same time, because my husband is 48 and I am 41.  In fact, I keep running into this issue with retirement calculators...they ask for age, and I don't know which one to put in.  He makes all the income, but obviously the money has to last through my old age as well, and I am younger.

So, how do I incorporate these things into an assessment?  Please be gentle with me...I know I'm a lousy mathematician.  In my defense, the other half of my brain is brilliant. :)

Salutations.  They say every journey begins with the first step.
Thegoblinchief is right about figuring out what your expenses are.  But to help you with a few of your questions...
For your rental and primary residence, a good first start is to know how much your mortgages are. 
For a first approximation take the amount of the original loan + down payment and subtract the balance.  For example, if you had a downpayment of $20,000 and a mortgage of $180,000, that would equal $200,000.  If your mortgage is now $120,000, you have 'paid off' $80,000 of the original purchase price, or 40%.
If the value of the house stayed completely flat, that would be your home equity (an unlikely scenerio).
To figure out home values, you really need to compare what similar places in the area *actually* sell at (list prices are frequently off by 10% or more).  If you see similar homes in similar areas sell for $225,000, that can be your 'target' for what your house is worth.
Extra credit; divide the % the home has increased (or decreased) in value by the number of years since you bought it and you'll have your annual appreciation (or depreciation).  It varies wildly but hopefully you are ≥+3%/year.
Another method is to take the appraisal value, but those are notoriously over-estimated for the purposes of insurance companies.

Understand that all of this is just a thought excercise until it comes time for you actually to sell.  If you're not selling your home for 5 more years it's fairly irrelevant what it's worth today.   The only point is to give you piece of mind about what your home is worth.

 Finally, for your mental exercise factor in closing costs.  A conservative rule of thumb is that you may spend 5% in closing costs (everything from a realtor's commission to fixing/repairing/staging things to get interested buyers).  This can be less if you are in a 'hot' market where there are competing offers.  Watching how quickly properties sell in your area is a good way to judge how 'hot' your market is.  Anything less than 3 months is good for people selling homes.  Longer than 6 months means you may need to fight to find the right buyer.

Bookworm

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Re: How do I assess my situation with so many unknowns?
« Reply #4 on: February 27, 2014, 04:33:11 PM »
Our house is worth about $320,000 and we owe $220,000.
One rental house is worth about $73,000 and we owe $27,000.  It rents for $800...PITI is $390.
The other house is worth about $166,000 and we owe $121,000.  It rents for $1350...PITI is $875.

There is some guesswork in the values on the first two, because both are in communities where every single home is custom-built, so the comps are goofy because, for instance, our next door neighbor's house is 13 years newer than ours.  The smaller of our rental houses is sandwiched between a home that's the same age and one that's 30 years newer and much larger than ours.

Our only other debt is $880 left from the cost of a surgery last year.  The interest rate is 0% and it will be paid off in August.

Income (excluding rentals) is currently about $100,000/year between salary and the disability payments, which are sizable since the VA has rated my husband 90% disabled.  But we're spending about $5000/month.  Groceries and household items (two adults and 3 teenagers) alone have been running about $750!  DH's commute is absolutely insane, but 1) he has a pretty efficient car, 2) he's doing everything he can to get a job closer to home, and 3) it beats the heck out of both unemployment and the job he left for this one, which was 2,500 miles from home, because that's all he could find.  At least we're living in the same house again.

Gerard

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Re: How do I assess my situation with so many unknowns?
« Reply #5 on: February 27, 2014, 05:49:07 PM »
Let me come at this a little differently. The point of calculating the value of your productive assets is to get a rough idea of what they'll produce at a 4% return. But if you're not selling those rental homes, you already know what they produce: the rent minus all the related expenses. So if you're just trying to get a rough-and-ready sense of how close you are to FIRE, or how safe you'll be, maybe you should just calculate your expected overall annual expenses in retirement, subtract the annual net income from your rental properties, and make sure your other assets are about 25 times the remaining expenses.

Bookworm

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Re: How do I assess my situation with so many unknowns?
« Reply #6 on: February 27, 2014, 10:58:46 PM »
Gerard, that really helps!

MDM

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Re: How do I assess my situation with so many unknowns?
« Reply #7 on: February 28, 2014, 10:20:42 AM »
All good advice above.

As for "age" (e.g. regarding Soc Sec payments): worry more about "the years in which the cash flows occur" and less about "how old you and your spouse are" during those years.  You can go to the Soc Sec website http://www.ssa.gov/estimator/ to get estimates depending on the year you want to start taking benefits.  Then plug those estimates (or some fraction, say 50% if you want to be conservative about SS's future) into the retirement calculator.  The whole "when do I start taking SS?" is a topic unto itself - for starters you could try the year your husband turns 68.

Another thought: use one of the personal finance software packages (Quicken/Money/Mint/YNAB/etc.) to collect all your asset, income and expense information.  You can check the internet, e.g. http://thesimplemoneyblog.com/2013/quicken-or-mint/ for comparisons on these.  Using these packages forces/helps you to understand the overall picture better, and then you can let the computer do the math for you....

Nords

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Re: How do I assess my situation with so many unknowns?
« Reply #8 on: March 01, 2014, 05:40:42 PM »
* Military (reserve) retirement, which with his particular years of service, he can start collecting when he is 56.  The government gives us estimates of how much that payment will be, stated in today's dollars, but there is constantly some proposal in Congress to fiddle around with the cost of living increases or the payout start age, etc...I don't know how to incorporate that into our "total nest egg" figure, since it's a monthly amount, and one that can be changed at Congress's whim.
I hear you.  The top posts & questions on my blog are about Reserve/Guard retirement.  It's almost as if nobody is showing these people how it works...

I can't attempt to quantify political risk, but I can cite a track record.  In every case where Congress has attempted to change the entitlements (or the benefits), it's been grandfathered.  In some cases the legislation was written that way (REDUX), in others it took a repeal of earlier legislation (the recent COLA cuts), and in some it took a side trip to the Supreme Court (Tricare For Life).  I think you can safely ignore political risk in your spouse's Reserve pension.

Having said that, you might want to check that start date.  I haven't kept up with every change to the 2008 NDAA which started the earlier Reserve retirements, but I was under the impression that it was no earlier than age 58.  If you have something that says age 56 then please let me know, because I occasionally get the question from other Reserve/Guard members and I'd like to tell them where to look.  If you don't have verification at hand then I can start digging through the 2008 NDAA and Title 10 U.S. Code again to see whether my memory is any good.

The simplest estimate for a Reserve pension is to use today's dollars for your spouse's current rank at its maximum longevity.  (When the Reserve pension starts, the assumption is that the retiree was on active duty for the full time between "retired awaiting pay" and the start of the pension.  That's why the calculation uses the maximum longevity of the pay charts.)  The accompanying assumption is that the military pay tables will attempt to keep up with the Employer Cost Index, which will be approximately the same as the CPI.  Bold assumptions, I know, and probably not very accurate, but better than anything else I've seen.  If the pension start date is a decade away then this estimate will probably be within 5%.  If the pension start is two decades away then the estimate is probably within 15%.

The rest of the pension details are at this post:  http://the-military-guide.com/2012/02/27/calculating-a-reserve-retirement/

I can tell you that regardless of the start date of the pension (age 56 or age 58), Tricare will not start until age 60.  That question's been asked & answered several times, and Congress only messed with the pension start date.  Your military healthcare option before age 60 is Tricare Reserve Retired or whatever is available from an employer, through the healthcare exchanges, or possibly the VA.  Then at age 60 you'll pick up Tricare, and at age 65 (along with Medicare) it's Tricare For Life.