Author Topic: Pending Early Retirement Sanity Check  (Read 12922 times)

SoCal

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Pending Early Retirement Sanity Check
« on: March 30, 2013, 10:24:06 AM »
Background: I have been a MMM mustache reader for about a year.  I have taken the plunge into ER, which will begin this summer.  I am late 30s, my partner is mid 40s, no kids.  We each make $250K/yr gross, $500K/yr total for us both.  Our combined spending needs are about $120K/yr.  We split everything 50/50, so during my ER will need $60K/yr for my share.  My partner will work another few years as he likes his job and he wants to build up his financial assets during these peak earning years.

Spending: While our $120K/yr spending may seem profligate to some, I am proud that we have cut our annual spending in half over the past three years by getting the big stuff right – moved from an expensive 4 bedroom house with mortgage to a far, far cheaper loft we bought with cash; went from a 2-car family to a 1-car family with me taking public transit; all travels using airline miles & hotel points; no vacation home.  While I know there are ample ways to further cut our spending, primarily in the area of entertainment (movies, NBA tickets, DirecTv, iphones, itunes, dining & drinking), we really hope to leave our spending as-is at $120K/yr, knowing we have this area as a safety margin for cutting if need be.

Assets:   Neither one of us have any debt.  The assets I list below are my assets – my partner’s assets will be about ˝ as much when he retires in several years.  My assets are:

$300K cash
$500K stock investments (split Vanguard Total Market, Target Retire 2040)
$500K retirement accounts ($400K 401(K) pre-tax S&P Index, $100K Roth IRA Vanguard Target Retire 2040)
$400K home equity (our primary residence)
_________________
$1.7M net worth

Safety Margins: I will likely work very lightly & remotely to help my old company, my partner may work longer than a few years as he likes his job, lots of room to reduce our spending without much pain, should inherit ~$1M in the next 20 years. 

Questions: May I ask your thoughts on the following questions?

1.  Based upon my assets of $1.7M, does the 4% safe withdrawal rate suggest safe spending of $68,000/yr?  Or, should I back-out home equity and base my calculation on $1.3M with $52,000/yr?
 
2.  Using http://www.ssa.gov/retire2/AnypiaApplet.html, having maxed my social security contributions for 1/2 of the 35 year window, my social security benefit at 67 will be $1,820/mo in 2013 dollars, which is 2/3 of the $2,679/mo it would be if I worked the full 35 years.  I like that leverage (2/3 the benefit for 1/2 the effort)!  I know all about the risks in this government program, but am I missing anything else?

3.  Given that I will soon be in ER, do you think I have the right mix of financial assets – ~59% US index stocks, ~23% real estate (my primary residence), ~18% cash?

4.  Finally, a general sanity check.  I'd really appreciate any criticism or tips, because I want to get this right from the start. 
« Last Edit: March 30, 2013, 02:10:44 PM by SoCal »

destron

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Re: Pending Early Retirement Sanity Check
« Reply #1 on: March 30, 2013, 11:01:08 AM »
Congratulations on your financial success and your desire for FI!

1. A couple things to keep in mind here. First, your primary residence cannot be included in your safe withdrawl rate. It is not generating income for you so you cannot withdraw money from your retirement accounts based on the assumption that it will. Second, the 4% safe withdrawl rate is based on a study that says you probably won't run out of money over the course of a 30 year retirement (http://en.wikipedia.org/wiki/Trinity_study). Since you are retiring early and need this money for much longer than 30 years, you should not withdraw even 4%.

I recommend you check out http://firecalc.com, plug in your numbers (and your husband's) and see what your situation looks like.

2. Can't comment as I am not in the SS program.

3. ER, by necessity, requires growth over a long period so a much higher level of stocks in your portfolio is, IMO, appropriate. Once again, I do not count my primary residence in my portfolio since it is not an investment for me. I have recently been playing around with my balances and have settled on a four fund portfolio which includes a total bond market, total US stock market, international stock market and REIT fund. You can play around with the numbers however you feel most comfortable. Check out the bogleheads forums: http://www.bogleheads.org/wiki/Lazy_Portfolios

4. My personal philosophy is one of less consumption. If I had your money, I would 'retire' today (and then keep working because I enjoy it, knowing that I do not have to go to work if I do not want to). You have an impressive amount of capital that certainly will allow you to retire comfortably. Please check out the firecalc, though. You can plug in numbers for expected income after retirement since you will be working part time, expected windfalls (and when you get them), and expected reductions in spending as you grow older. Firecalc will then run hundreds of scenarios for you and tell you how likely you are to fail based on historical data.

Apocalyptica602

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Re: Pending Early Retirement Sanity Check
« Reply #2 on: March 30, 2013, 11:23:02 AM »
Just popping in to say good job on all you've accomplished thus far!

And also that there's nothing inherently wrong with aiming for a "high" level of spending during your ER.

As long as you do your due diligence to make sure you have:

1) Enough growth / dividend / rent producing assets to cover that level of spending

2) Willingness to trim the (admittedly) high amount of fat from your budget during downturns.

If it were me, provided I don't hate my job by that point, I'd accumulate a little longer. Just be careful not to get stuck in that 'Just one more year!' syndrome.

I'm very comfortable with risk when it comes to my asset classes, although risk averse when it comes to the minimum amount required to FIRE.

Zikoris

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Re: Pending Early Retirement Sanity Check
« Reply #3 on: March 30, 2013, 11:44:35 AM »
Wait - you have a fully paid for house, take public transit, pay for travels with points, and still manage to spend $120K/year? How is this possible? How are you possibly managing to spend this much? Are you literally taking buckets of money and setting them on fire every so often?

Another Reader

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Re: Pending Early Retirement Sanity Check
« Reply #4 on: March 30, 2013, 11:51:33 AM »
You are on the right track, but given your age, I would stick it out until I could withdraw less than 3 percent.  Inheritances are a nice windfall if they happen and Social Security is iffy at your age.  Neither should be a cornerstone of your retirement projections.  Your home is not part of the assets you will draw on.  It's helpful that you have $800k in total taxable accounts to draw on first and you have 5 years in cash, but an unfavorable sequence of returns early on could kill your plan.

At your age, I would want to have a portfolio that produced enough in income alone to provide the needed funds.  Dividends of a little less than three percent are achievable with a growth rate that should outpace inflation.  I have a lot of rentals for income as well, but the same result can be achieved with paper assets.

In your shoes, I would hang on for two to three years and squirrel away everything I could.

DocCyane

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Re: Pending Early Retirement Sanity Check
« Reply #5 on: March 30, 2013, 12:44:00 PM »
Wait - you have a fully paid for house, take public transit, pay for travels with points, and still manage to spend $120K/year? How is this possible? How are you possibly managing to spend this much? Are you literally taking buckets of money and setting them on fire every so often?

I was wondering the exact same thing...

Psychstache

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Re: Pending Early Retirement Sanity Check
« Reply #6 on: March 30, 2013, 01:05:42 PM »
She did mention expenses such as NBA games. I imagine that if you want to do things like get front row courtside season tickets to follow your team and similar interests, it would be pretty easy. Not judging (I would still be going to games if I still lived in my teams hometown) just saying it is pretty easy to do if you want.

SoCal

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Re: Pending Early Retirement Sanity Check
« Reply #7 on: March 30, 2013, 01:57:28 PM »
I am a he. 

Our expected retirement budget of $120K/yr (when we both retire):

$ 20K home (high HOA dues, utilities, insurance, property taxes, DirecTv, Phones)
$ 15K healthcare for 2
$  5K auto expenses (1 car family) & transit expenses
$ 20K travel (we want to travel a lot during retirement, perhaps 8 weeks/yr, even with points/miles the costs still add up)
$ 40K discretionary (food, drinks, entertainment, ~$50/day each)
$ 20K income taxes ($15K Federal and $5K CA, based upon $90K/yr taxable income)

_____
$120K

I have aimed high on some budget items to create a safety margin and to convince my partner that I am not planning a life of austerity for us.  Our current expenses are less in some areas ($5K healthcare, $10K travel), but probably about the same overall because we pay combined FED/CA/FICA/PROPERTY taxes of 40% effective (not marginal). 

and thank you all for the very helpful comments. 
« Last Edit: March 30, 2013, 02:13:38 PM by SoCal »

Ozstache

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Re: Pending Early Retirement Sanity Check
« Reply #8 on: March 30, 2013, 02:28:56 PM »
Sounds like you're on the right track to ER soon, but not just yet. As others have stated, your home should not be included in your SWR calculations and a more conservative 3% or less SWR should give you the longevity of your retirement that you need.

matchewed

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Re: Pending Early Retirement Sanity Check
« Reply #9 on: March 30, 2013, 06:41:34 PM »
Aaaaaaaaaand Face Punch -

Yes your spending is profligate. 50$ a day in discretionary spending is profligate. Do you burn the money pit after swimming in it each day? I'm surprised that you have been reading MMM for a year and not once did the thought occur to you that your lifestyle is extravagant; that maybe just maybe all the worry your partner has about living a life of austerity does not mean that a 30k a year life is austere.

That being said if you want to maintain 120k a year spending you will need assets of (not including your residence) 3mil for a rough 4% withdrawal rate or 4mil for 3 %.

Or you could retire tomorrow if you stop leading such a profligate lifestyle.




Another Reader

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Re: Pending Early Retirement Sanity Check
« Reply #10 on: March 30, 2013, 07:03:07 PM »
Actually, this makes an interesting case study.  The principles that allow the most frugal folks here to live on $12,000 a year also will allow these folks to have a $120,000 a year spending budget.  They just need to save the same breathtakingly high percentage of their high income to accomplish that goal.  Spending this amount of money may not be "sensible" to many here, but it's conscious spending on their part.  They will be able to be FIRE because of the choices they make now, the same as the rest of us.

happy

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Re: Pending Early Retirement Sanity Check
« Reply #11 on: March 30, 2013, 07:04:43 PM »
Same advice as everyone else more or less:

1. Don't count your home equity UNLESS at some point you think you would sell it and pay rent out of the 120k expenses.
2. 4% SWR for someone in their late 30s sounds a bit tight ( safer to do 3%) UNLESS you commit to working part-time to earn your 60k expenses or close to, each year. If you leave your very healthy 1.3MM untouched for 5-10 years  (or longer) by earning enough to cover expenses the numbers will improve.

FWIW, yes OPs expenses are high compared to the "MMM way" and so some face punching may be due:  however I am not joining the scrum since
1. He asked about ER planning, not how to reduce expenses
2.Sounds like  he has a partner who is a bit more spendy and still needing  to be indoctrinated to learn to spend less
3. He's managed to accumulate 1.7MM by late 30s...pretty damn impressive... plenty of earners on his income would have that much debt and not much else.

So, Socal to answer your number 4 question: general sanity check, criticisms: You are still spending much more than you need to. You can be just as happy spending less. But if you are reading this forum, you already know this.

matchewed

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Re: Pending Early Retirement Sanity Check
« Reply #12 on: March 30, 2013, 07:06:51 PM »
Actually, this makes an interesting case study.  The principles that allow the most frugal folks here to live on $12,000 a year also will allow these folks to have a $120,000 a year spending budget.  They just need to save the same breathtakingly high percentage of their high income to accomplish that goal.  Spending this amount of money may not be "sensible" to many here, but it's conscious spending on their part.  They will be able to be FIRE because of the choices they make now, the same as the rest of us.

I don't disagree with that. I do have to say that the concept of going below 120k annual expenses being akin to subjecting someone to austerity is laughable. I won't derail this further with accusations of the OP being a Spendy McSpendy Pants.

SoCal

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Re: Pending Early Retirement Sanity Check
« Reply #13 on: March 30, 2013, 09:29:16 PM »
I did not intend to be offensive in my charectizations of certain spending levels. My partner is absolutely wonderful and has come a long way in the less consumption direction.  One car for two people in LA it nutz to most our friends. Going from a ++1M huge single family home to a far, far less expensive loft is a huge decrease in consumption.  $120K/yr represents a well over 50% reduction in consumption in just a few years.  I am pretty proud of how far we have come.  Plus, as I said, there is ample fluff in our ER budget to painlessly cut back if needed.
« Last Edit: March 31, 2013, 01:23:08 PM by SoCal »

matchewed

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Re: Pending Early Retirement Sanity Check
« Reply #14 on: March 30, 2013, 09:37:44 PM »
I don't find it offensive and I take none, I hope you do not as well. This is the MMM forums though; it is a nearly daily occurrence to face punch someone and for much smaller reasons than a (crazy cray cray amount of) large number of expenses.

I'm glad that you have cut back by moving into a more reasonable home and getting rid of a car. Those are big moves to you and your partner you should be proud. I'm now poking fun at the language being used to describe sub 120k expenses as austerity. One of the concepts within this forum and the blog is to help people come to a realization that money does not buy happiness. The 50$ a day discretionary spending is not making you any more of a happy person; perhaps learning to cook awesome food as a way to have friends over and share more experiences with them rather than just pay cooks or going to restaurants.

That being said if you are consciously spending as AR is assuming then kudos. It's still way more money being spent than you need to live a fulfilling life but hey... it's your life. Just don't be surprised at the face punches in these parts.

destron

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Re: Pending Early Retirement Sanity Check
« Reply #15 on: March 30, 2013, 11:17:24 PM »
I did not intend to be offensive in my charectizations of certain spending levels. My partner is absolutely wonderful and has come a long way in the less consumption direction.  One car for two people in LA it nutz to most our friends. Going from a ++1M huge single family home to a far, far less expensive loft is a huge decrease in consumption.  $120K/yr represents a well over 50% reduction in consumption in just a few years.  I am pretty proud of how far we have come.  Plus, as a said, there is ample fluff in our ER budget to painlessly cut back if needed.

If you need to get rid of  you (presumably) Laker tickets next season for cheap for a much lower income MMM reader, PM me! I think I can find a good home ;).

Bigote

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Re: Pending Early Retirement Sanity Check
« Reply #16 on: March 31, 2013, 03:52:57 AM »
i made a similar adjustment in 2007.  We spent 240k after taxes that year, which is now down to 120k more or less.  it will drop again when we move to the burbs and no longer need a nanny and don't need to pay for preschool.

i agree with the other posters that your numbers don't add up yet. But you've clearly made great progress so congrats and keep up the good work.

Dee18

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Re: Pending Early Retirement Sanity Check
« Reply #17 on: March 31, 2013, 05:23:28 AM »
A key factor seems to be the $1M potential inheritance.  You may have a good sense of how likely that is and when it might occur.  I would calculate ER on Firecalc with and without that money.  If it is needed for your future do you have a backup plan if it doesn't materialize? Are you in a career that you could return to if you decided you needed more assets in the future?  Given your earning power at this point, I suspect the answer is yes.  Or, are you contemplating some other income producing after ER?  I must say I am getting a kick out of the thread of proselytizing for austerity that your post inspired....

prosaic

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Re: Pending Early Retirement Sanity Check
« Reply #18 on: March 31, 2013, 07:39:11 AM »
Our expenses come close to or cross over the 120K mark per year (family of 5, private school and day care, one child with significant special/medical needs), and we're becoming "min-max" people: spend the minimum on unimportant stuff so we can spend what we want on what's important to us.

The face punches here seem, for the most part, to be focused on getting people to stop locking themselves into foolish thinking about money and not treating their debt as an emergency, and I appreciate that. In your case, though, I don't think face punches with regard to your spending habits need to be issued at all, but it will happen. :)

With no debt for you, it's just about making sure you have the savings in place for a safe SWR rate.

secondcor521

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Re: Pending Early Retirement Sanity Check
« Reply #19 on: March 31, 2013, 08:09:32 AM »
$ 20K income taxes ($15K Federal and $5K CA, based upon $90K/yr taxable income)

The tax numbers look right if you´re going to have $90K in taxable income.  Where is this taxable income coming from, though?  If it is dividends on your taxable investments, it seems high unless you´re investing in junk bonds or something.  If you´re going to work a little, then your nest egg doesn´t have to provide the full $120K of your budget, so you might be in a better position than you think.  For example, if you each earn $30K, that´s $60K, then $60K from a portfolio at 3% means you only need $2M.

Personally, I take my SS estimate and de-rate it by quite a bit for a safety factor.  I think I use like 25% of my estimated benefits.

You probably already know this, but if you´re willing to move to a colder climate (Portland, say), or to the midwest (Kansas City, for example), you could live the same life as you do now at probably half of the cost.


BPA

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Re: Pending Early Retirement Sanity Check
« Reply #20 on: March 31, 2013, 08:56:25 AM »
My two cents:  If you can afford it, I don't think it's so bad to budget for ER according to your desired lifestyle.  However, considering the MMM push back against consumerism, I did gape at the $50/day per person for discretionary spending. 

MooreBonds

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Re: Pending Early Retirement Sanity Check
« Reply #21 on: March 31, 2013, 09:37:24 AM »
Welcome to the forum! Congrats on slashing your spending by 50%! That's quite an accomplishment for anyone, even if you are still at a level that many in the forum can't comprehend (hey, if you and your SO really enjoy spending $50/day in various expenses, more power to you! It's just that many in the forum would opt for a sooner freedom date from working, rather than slaving away longer to afford higher average daily expenses...but if you love your job that much and love your daily spending, then have at it :) ).

However, there is a two-fold benefit from reducing your spending. Not only do you save more, but with a lower spending level, you can reach retirement sooner because you have a lower expense level to meet off of your investments. So think long and hard about if you really want/need such a high discretionary spending level, and how much you like working your jobs to fund it.

1.  Based upon my assets of $1.7M, does the 4% safe withdrawal rate suggest safe spending of $68,000/yr?  Or, should I back-out home equity and base my calculation on $1.3M with $52,000/yr?
As others have said, since you're looking to pull the plug in your late 30s/early 40s, I would assume having to fund 40+ years of retirement. You'll find some that would have no problem with 4% SWR...but myself and others would definitely encourage a more conservative assumption of a 3% withdrawal rate (personally, I'm shooting for ER @ in my early 40s and would assume a very conservative 2.75% SWR, but that's just me). The historical spending studies show that a 40+ year retirement has an historical SWR closer to 3%. Also, you show a big wad of cash - that's earning you zilch, so you should only look at your invested portfolio value, which are about $1MM.

2.  Using http://www.ssa.gov/retire2/AnypiaApplet.html, having maxed my social security contributions for 1/2 of the 35 year window, my social security benefit at 67 will be $1,820/mo in 2013 dollars, which is 2/3 of the $2,679/mo it would be if I worked the full 35 years.  I like that leverage (2/3 the benefit for 1/2 the effort)!  I know all about the risks in this government program, but am I missing anything else?

Good job on filling in your actual salary history to get an accurate SS estimate. However, my advice would be to remember that EVERYTHING tax-wise is subject to future change. For example: originally, just 50% of your SS benefits were taxed (since you pay income taxes on your SS withholding in your paycheck, and that's already taxed...but the 50% share your employer pays was never taxed by the gov't, so that's why just 50% of your SS benefits were originally taxed). But, in the 80s/90s (can't remember when), they decided to raise the % of SS benefits subject to taxation from 50% to up to 85% (depending on your income). So, effectively, you're double-taxed on up to 35% of your SS benefits.

This is a perfect example of why I advise everyone to have a diversity in your tax planning, with some money in ROTHs, some in traditional IRAs/401ks, and to discount SS. Not only could the gov't tax your ROTHs somehow, but higher taxes on your SS could definitely be in store if your income is high enough (they did it once before, there's nothing stopping them from doing it again). So, personally, I would take your SS estimate from your actual wage history and reduce it by about 30%-40% for a very conservative estimate. Plus, the SS estimate is based on the WAGE inflation index, not CPI....so between now and your Full Retirement Age, your SS benefit will only grow based on the wage index, which has lately lagged CPI by a good 1% + per year...over 30 years, this differential compounds to a big difference. AND, there's always the spectre looming of higher taxes on SS recipients that have higher (your) income levels. Either way, a 30%-40% discount to your projected SS benefit (in my opinion) is a good conservative estimate to factor in both means-testing SS benefits, as well as the differential between wage inflation VS CPI.


3.  Given that I will soon be in ER, do you think I have the right mix of financial assets – ~59% US index stocks, ~23% real estate (my primary residence), ~18% cash?

If your portfolio was high enough, 18% cash is ok. HOWEVER, that assumes that your stock portfolio has enough growth. You have about $1MM invested, which is not large enough to offer enough growth to keep spinning off capital gains/dividends to fund a $60k annual withdrawal. Personally, I have about 34% in international equities, and would recommend some more exposure in your portfolio there. Also, don't count your primary residence in your portfolio, neither as an investment nor as exposure to an investment class (unless you will be selling it in 10-20 years and moving to a cheaper place).

Assets:   Neither one of us have any debt.  The assets I list below are my assets – my partner’s assets will be about ˝ as much when he retires in several years. 

This worries me a bit - you need to boost your portfolio by a healthy amount to generate $60k/year in withdrawals. If he will also need $60k/year in withdrawals, he'll need a portfolio that's also larger than yours is right now - and if you project that his portolio will only be half of your CURRENT portfolio when he retires, there's no way I would recommend you can safely assume you can withdrawal $120k from it for the rest of your lives.

Sure, you could both happen to retire at a sweet spot of rising investments and make it work out...but the odds of that are very difficult to predict, and you won't know if you retired at the right time until 10 years after, when your portfolio is either sitting pretty, or reduced by 30%-40% of it's original value, and you're both stuck looking for jobs after being out of work for 10 years!

Safety Margins: I will likely work very lightly & remotely to help my old company, my partner may work longer than a few years as he likes his job, lots of room to reduce our spending without much pain, should inherit ~$1M in the next 20 years. 

Even if your expected inheritance was in just 5 years, a lot can happen in 5 years with the other person's health and final years of living expenses. And with it being possibly 20 years out, you can't reasonably expect to receive this inheritance (UNLESS it's a $1MM life insurance policy that's guaranteed paid-up, and you're 'guaranteed' to receive the policy value....in which case, you can plan on receiving that money)
« Last Edit: March 31, 2013, 09:40:09 AM by MooreBonds »

SoCal

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Re: Pending Early Retirement Sanity Check
« Reply #22 on: March 31, 2013, 01:00:05 PM »
Wow.  I am incredibly grateful for all the time spent by so many of you in providing thoughtful responses.  It is comforting, even if a bit of a reality check that our ER might not be quite as flush as I described in my original post.  Please allow me to comment & query a bit further:

1.  Housing: I realize that our primary residence is not an investment, but I am struggling to understand why I should not include it when thinking about the assets that will fund our retirement.  Given our urban, new, transit-friendly, massive-public-investment home location, I am very comfortable in planning that our home value will rise at least in line with 3% inflation.  That's better than any banking product, government bond, or non-junk corporate bond.  If we rented instead, and I suddenly now had an extra $400K to be invested, I have no idea where I'd put the money - don't really want more than 60% net worth in equities, no way bonds in the next 5 years, not interested in foreign investments as I believe the USD in strengthening generally, I'm not disposed to being a landlord & the rents aren't worth the investment here (~$2500/mo rent for a $500K home).  Is there a flaw in my logic?

2.  Discretionary: Our $50/day each discretionary budget includes all food (home & out), drinks, entertainment, clothes, movies, theater.  I think we would probably cut back on our housing & travel before happy hours & Clippers games.   

3.  Additional Income and 4% Withdrawals: Our occupations very likely will allow us to very, very lightly work for at least 5 years (before we are dinosaurs) bringing in $30K/ea.  Based upon the advice, the consensus seems to be that this would be prudent if we keep our spending at $120K/yr.  My thought is to just see how it goes - keep business connections warm, cut back 4% withdrawals to 3% max during down markets, make up to the difference with just a bit of contract work or reductions in spending (travel).  Is it reasonable to think of the 4% safe withdrawal rate this way?

4.  Safety Margins: I only mentioned inheritance as a safety margin.  I thought safety margins meant that if things go bad, there are some likely-though-not-certain backstops before going broke.  A very likely but not 100% certain inheritance.  Discounting an expected social security benefit of $1800/mo each at 67 (in 2013 dollars) by a quarter to $1300/mo ea is still $30K/yr total for the 2 of us at 67.  Starting with a high ER budget is an inherent safety margin.  The ability to sell our home & spend less on housing still in southern California.  Or, absolute worst-case-scenario, leave California (teary at the thought, at least this is anonymous).

5.  Taxes: I just took a swag that if we are spending $120K/yr in ER, then $30K will be from savings and $90K will be from dividends/interest/capital gain/work.  $90K taxable income (for 2) requires about $15K Federal and $5K California tax.  For those living 100% off (non-rental) investments, what percentage of the your withdrawl is taxable income vs. already-taxed savings?

I hope I was responsive to all questions and above posts.  Again, thank you for the free advice!
« Last Edit: March 31, 2013, 01:29:10 PM by SoCal »

matchewed

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Re: Pending Early Retirement Sanity Check
« Reply #23 on: March 31, 2013, 01:21:31 PM »
1. The concept behind not using your primary residence when calculating your assets for FIRE is that you always need somewhere to live. With this you will always be paying something to have a house even if you don't have a mortgage such as rent if you're a renter, property tax, insurance, and maintenance if you're a homeowner. If you did you did sell the house to rent or live in a smaller house you would need to calculate out the mortgage or rent into your expenses during FIRE.

2. I've had my say. :)

3. It is reasonable to think of 4% as more likely if it is propped up with things like part-time work or other income streams. But take a peak at the Investors Alley, you'll see many discussions about the viability of the 4% rule.

4. Safety Margin - Remember you have 50-60 years to cover if you FIRE today. Some people will make sure their plan is their Safety Margin. It all depends on how risky you are. And be careful of believing that starting with a budget of high expenses means you can just cut back whenever you want. It is very easy to get used to a lifestyle and believe that anything less is austere.

MooreBonds

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Re: Pending Early Retirement Sanity Check
« Reply #24 on: March 31, 2013, 01:29:22 PM »
1.  Housing: I realize that our primary residence is not an investment, but I am struggling to understand why I should not include it when thinking about the assets that will fund our retirement. 

Well, let me put it to you this way: say your home/condo is paid off and is worth $10,000,000 (and somehow you have the same property taxes, insurance, etc.). Does that suddenly change your portfolio spending plans? If you aren't going to sell your place and buy a cheaper place to free-up that equity, your home value means nothing (unless it's part of your plan to do a reverse mortgage down the road)....if it were worth just $100 or worth $10,000,000, it's irrelevant, because you're not using that housing value to buy your food/pay your utilities.

It's true that if you sold and rented, and invested that $400k you still have living expenses...but with your condo/home, you still have similar expenses (property taxes, association dues, perhaps more utilities, perhaps more insurance, etc.)...so your living expenses will still be mostly absorbed by that $400k that is invested.

3.  Additional Income and 4% Withdrawals: Our occupations very likely will allow us to very, very lightly work for at least 5 years (before we are dinosaurs) bringing in $30K/ea.  Based upon the advice, the consensus seems to be that this would be prudent if we keep our spending at $120K/yr.  My thought is to just see how it goes - keep business connections warm, cut back 4% withdrawals to 3% max during down markets, make up to the difference with just a bit of contract work or reductions in spending (travel, discretionary).  Is it reasonable to think of the 4% safe withdrawal rate this way?

If both of your occupations would truly allow a relatively easy time of finding part-time work, and you want to pursue that, then it's certainly a viable option...but just make sure that it is a likely scenario. Many people merely assume that they can cut to part-time status at the same pay rate without any trouble...but some/many employers and industries don't necessarily have openings for some part-time careers. And as I mentioned before, I lean towards the conservative assumptions side of the aisle - personally, I'd rather work 2-3 extra years full-time (assuming my job isn't truly toxic) and then not worry about possibly having to find contract work down the road (which may or may not be available on the terms that I need them to be), instead of a scenario where it's maybe a 30%-50% chance I  might have to look for work in 5/10/20 years down the road (and then only have it be sparsely available).

Again, some industries might have opportunities for your skill set as a contract/part-time worker down the road...others, not so much. Some have invincible optimism and sleep well bushwhacking into the unknown with a questionable chance of success, while others prefer a more likely outcome.

One other thing: picture yourself in the future, with a possibly dropping portfolio. Would the two of you handle the stress of it, and the prospect of having to once again enter the workforce, or of not knowing how much longer your portfolios would stay down before recovering? Maybe you have nerves of steel. Just remember that the possible agony or worry of a 2-3 year bear or dead market is 2-3 years long - it's not just a 1 week situation where your stomach might be doing flips and tied up in knots with possible worry.


4.  Safety Margins: I only mentioned inheritance as a safety margin.  I thought safety margins meant that if things go bad, there are some likely-though-not-certain backstops before going broke.  A very likely but not 100% certain inheritance.  Discounting an expected social security benefit of $1800/mo each at 67 (in 2013 dollars) by a quarter to $1300/mo ea.  The ability to sell our home & move somewhere much cheaper.

LOL...well, I guess it depends on what you define as "safety margin". :) To me, a safety margin/ace in the hole is something you can count on as an almost fail-safe backstop, or a 'worst case scenario'.

For example, to me, getting a true Social Security estimate, then whacking it in half by 50% to account for future means testing and inflation growth is a 'safety margin', because it's a worst-case that I KNOW I can reliably count on. However, saying that my parents have an estate currently worth $1MM which I might inherit in 20 years is not a safety net, because that's not the 'realistic worst-case scenario' that could happen.

To me, you have to discount that by the likelihood of it happening. If the person leaving you the money currently has $10,000,000 in their portfolio, then it's pretty damn likely they will have at least $1MM to leave you, that's one thing...but if the person has an estate worth $1.5MM (including house) and still has up to 20 years of living, I would definitely discount that to the point of an inheritance not being worth $1MM after applying the chance that they will spend more from a variety of reasons (they are 100% CDs and have to spend down more of their portfolio, they have high health care expenses, they marry someone that they end up leaving their money to, etc.).

Overall, it definitely sounds like both of you are on the same page and have some good ideas. It just depends on what one/both of you are willing to do for supplementing the portfolio withdrawals, and what your tolerances are with portfolio fluctuations...and fine tuning what kind of budgets you would have once semi/fully retired, and what you would need to earn to make up the shortfalls (with realistic estimates of taxes, etc.)

Also, is your equity portion of your portfolio adequately diversified? Or is it all in a few high-expense ratio, undiversified mutual funds? The 4% SWR assumes essentially no investment fees or expense ratios, so that's another factor to keep in mind when considering the various academic studies of 30 year retirements (or longer).


happy

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Re: Pending Early Retirement Sanity Check
« Reply #25 on: March 31, 2013, 06:10:37 PM »
1. House.
Your house is only an asset if you are prepared to "realise" that asset and sell it to use the proceeds. If you have an expensive house it works as a margin of safety. Don't forget if you sell and repurchase, thats more money lost in costs. "Rich Dad Poor Dad", not my most recommended finance book, FWIW, explains that your house is a liability not an asset.

3. Additional income and 4% SWR
You need to run some math on your proposition of earning 30k each for 5 years and see where it gets you..
currently ignoring your partner:
You have 1.3MM and plan to live on 60k ... 4.6%
If you make 30K and withdraw 30k.............2.3% (much safer), but only whilst you generate 30k.
If you make 60k and withdraw 0 in 5 years at 5% (conservative but accounts for inflation) you will have 1.669375..lets say 1.67MM....now you have 3.6% SWR. If you work for 10 years @60k you now have 2.143411or 2.8% SWR.

I'm not smart enough to easily figure out what happens if you earn 30k and withdraw 30k for 5 or 10 years, but it won't be as good!

If it were me,  I would need to earn the 60k for between 5-10 years to feel safe.

This is all assuming your partner will carry the financial burden equally.

I sense some urgent determination in your posts to retire soon even though most posters have said wait just a little longer. (might have got this wrong since its the "internets"). If you cut expenses from 60 to 50k you get a SWR 3.8% and if you go to 40k 3.0%. (still thats 80k for two people) ie you could do it straight away very safely.





galaxie

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Re: Pending Early Retirement Sanity Check
« Reply #26 on: April 01, 2013, 07:06:04 AM »
Your house doesn't count as an asset because you can't withdraw part of it.  You can really only sell it or not sell it - and if you sell it, you have to pay for somewhere else to live.

(Sure you could do a HELOC or something, but then you'd have to make payments on it, which would drive your monthly expenses up and not really help the bottom line much.)

kythuen

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Re: Pending Early Retirement Sanity Check
« Reply #27 on: April 01, 2013, 08:48:39 AM »
Just a side-note, regarding the 1MM inheritance. If that inheritance is coming to you, how certain is it that it would be left instead to your partner, if you were to die before the the person leaving it to you dies?  Or if it's being left to your partner, vice-versa? 

You're in your thirties, your partner is in his/her forties - can you be 100% certain you'll stay together until one of you dies?  If you divorce/split up, how much of that inheritance can the non-inheritor count on seeing?

I'm not saying you should plan to be hit by a bus or breaking up, but if it were me, I wouldn't count on my partner's inheritance as a safety margin until half of it was in my bank account.

velocistar237

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Re: Pending Early Retirement Sanity Check
« Reply #28 on: April 01, 2013, 10:47:37 AM »
1.  Housing: I realize that our primary residence is not an investment, but I am struggling to understand why I should not include it when thinking about the assets that will fund our retirement.

When comparing retirement assets to retirement expenses, you just have to be consistent. If you count your home value as part of your retirement assets, then you also have to count the opportunity cost of not having that money invested. It's easier to exclude both the home value and the lost investment income (which, by the way, is how people treat most of their possessions).

As an example, consider the following comparison between owning and renting where the two happen to be financially equivalent. On one side is a $200K house with $4K/year associated expenses, and on the other is a $900/month rent with $100/month associated expenses. With a 4% real return (accounts for inflation, which can then be ignored), these require the same assets: $200K+$4K/0.04 = ($900+$100)*12/0.04 = $300K.

If you rented, it would be obvious that you would count $300K in your retirement assets and $12K/year in your expenses. If you owned instead, would it make sense to count the full $300K in your assets, but only count $4K/year in your expenses, with $8K/year left over for other expenses? No, because we've already established that the ownership scenario is financially equivalent to a scenario with $12K/year expenses. That leaves two choices: list the entire $300K as retirement assets and list $4K/year housing expenses and $8K/year opportunity cost, or book keep the $200K separately, leaving $100K of assets to cover $4K/year of housing-related expenses. Most people do the latter.

The above comparison assumes that the house value keeps pace with inflation. If the house does appreciate faster than inflation, then that skews the comparison a little bit, but not a lot. Historically, houses have kept pace with inflation, and often the exceptions come with matching renovation expenses. If you assume that your home value will increase, then that's the opposite of a safety margin. The odds that your home value will generate a return anywhere near the level of a typical investment portfolio is pretty small, even ignoring liquidity issues.

SoCal

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Re: Pending Early Retirement Sanity Check
« Reply #29 on: April 01, 2013, 02:51:11 PM »
Very helpful.  Thank you all.

yolfer

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Re: Pending Early Retirement Sanity Check
« Reply #30 on: April 02, 2013, 03:59:53 PM »
Regarding housing, perhaps this MMM article might help clear up the confusion?

http://www.mrmoneymustache.com/2012/01/30/your-money-can-work-harder-than-you-can/

Especially the paragraph with the asterisks and its related footnote.

lagniappe

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Re: Pending Early Retirement Sanity Check
« Reply #31 on: April 02, 2013, 09:47:50 PM »


Assets:   Neither one of us have any debt.  The assets I list below are my assets – my partner’s assets will be about ˝ as much when he retires in several years.  My assets are:

$300K cash
$500K stock investments (split Vanguard Total Market, Target Retire 2040)
$500K retirement accounts ($400K 401(K) pre-tax S&P Index, $100K Roth IRA Vanguard Target Retire 2040)
$400K home equity (our primary residence)
_________________
$1.7M net worth

Safety Margins: I will likely work very lightly & remotely to help my old company, my partner may work longer than a few years as he likes his job, lots of room to reduce our spending without much pain, should inherit ~$1M in the next 20 years. 

Questions: May I ask your thoughts on the following questions?

1.  Based upon my assets of $1.7M, does the 4% safe withdrawal rate suggest safe spending of $68,000/yr?  Or, should I back-out home equity and base my calculation on $1.3M with $52,000/yr?
 
2.  Using http://www.ssa.gov/retire2/AnypiaApplet.html, having maxed my social security contributions for 1/2 of the 35 year window, my social security benefit at 67 will be $1,820/mo in 2013 dollars, which is 2/3 of the $2,679/mo it would be if I worked the full 35 years.  I like that leverage (2/3 the benefit for 1/2 the effort)!  I know all about the risks in this government program, but am I missing anything else?

3.  Given that I will soon be in ER, do you think I have the right mix of financial assets – ~59% US index stocks, ~23% real estate (my primary residence), ~18% cash?

4.  Finally, a general sanity check.  I'd really appreciate any criticism or tips, because I want to get this right from the start.

1.  With $1.3 Million in investable assets from you, and an assumed 0.6 from your partner (other posts have addressed why for SWR purposes your equity in your residence is not included), you will have about $1.9 million combined.  From that, you want to spend $120K.  That's a 6.3% withdrawal rate.  I retired 10 years older than you are now, and would use nothing greater than a 2.5-3% rate for a 45-50 year retirement.


2.  On Social Security, people have been saying for years that it will implode, and it has changed, but it is still there.  Give it a healthy haircut, if it makes you feel more confident, but I don't think you are missing anything.  I personally think of it as a safety net, but want my plan to succeed without it.

3.  Your asset allocation  (real estate is not a financial asset) is actually quite different from what you show.  Don't forget that Target Date 2040 is at least 10% bonds, and is both US and International stocks.  The bond allocation will increase over time.  Use Morningstar or Vanguards website to truly understand what your current asset allocation is.  Only you can determine if your asset allocation is right for you, but how will you react if you are no longer working and your portfolio declines 40-50%.  That will happen, probably more than once a decade, with your current allocation.  I am a fan of the basic couch potato/ margarita portfolios because they are simple, have decent returns but less volatility than an all stock portfolio, and I am more likely to stick it out in a down market. I am about 1/3 each US stock, international stock and bonds. Once you decide on your desired asset allocation, you can figure out how to deploy all of that cash.  A few books that I found helpful in helping me think through my allocation were Work Less Live More by Bob Clyatt, The Investors Manifesto by Bill Bernstein, and The New Coffeehouse Investor by Bill Schultheis.

4.  Final Thoughts.  A). It doesn't seem that you are ready yet to stop working.  Financially, I would want at least twice the assets you and your partner have.  B). I would also recommend that you really think about how your relationship might change if you stop working and your partner continues to toil away every day.  A recently divorced friend reminded me recently that early retirement and divorce are not two things you see frequently in the same person, so plan for both.  C). It is very hard to go back to making your level of salary once you've been out of the game for a few years, so it may be worthwhile to work a few more years now.  D). Please don't count on the inheritance - I know many people whose hoped for inheritances went to either late life medical expenses or to dishonest folks taking advantage of elderly people.