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).