Author Topic: Reader Case Study  (Read 4119 times)

8035

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Reader Case Study
« on: August 13, 2014, 01:31:41 PM »
Thank you for reading this question.  Apologies if the information is unclear or incomplete.

My question is regarding readiness for early retirement / changing in career path.  Am I fooling myself or am I in as good a position as I think I am in order to leave my job working for big oil and pursue other interests which would mean a large pay cut.  I love the outdoors and helping people, so I am interested in fire or police work, or possible a position with the state or national park system among other ideas.  Thoughts on what a reasonable level of income going forward given the information below?

Houston, Texas
40 years old
Married
Work in manufacturing for international oil company, 36 mile commute round trip
Wife teaches part time, 2.5 mile commute round trip
Two 10 yr old boys, plan for them to attend state university
401K/IRAs $620K
Big Oil Pension after 15 years service $2300/month @ 65
Wife’s teacher retirement system pension $1000-1500 depending on how many more years more she works
Taxable investments $230k
529s $90K
$80K equity in house
Expenses $5800/month
   Moving to cheaper cell phone plan in November when contract expires
   Working on getting rid of cable TV subscription
   Very simple tastes in terms of material things but do want to have the money to travel and take our kids places
Only debt is mortgage $75K (3.875%); home has been remodeled so only small renovations and maintenance remain
Drive older vehicles that are paid for and in good shape – drawback is they are a Tahoe and Honda Odyssey minivan
Total current compensation (salary+bonus+employer 401K contribution+pension+wife’s salary) = ~$185-190K

Thanks again
« Last Edit: August 13, 2014, 01:35:36 PM by 8035 »

marblejane

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Re: Reader Case Study
« Reply #1 on: August 13, 2014, 02:03:13 PM »
The short answer is probably, but I think we'll need some additional info to help you answer this question. Specifically, we would need to start with:

1. How much of your income is the wife's salary? How long do both of you want to keep working?
2. Your expenses are $5,800/mo, or $69,600 per year. Do you expect to continue that level of spending for the time being? To answer this question, would probably need to see how your expenses break down (for example, if you are ditching a long commute for this new job, you might have reduced gas costs. Or maybe you move to a smaller place when kids move out).

Just for an example, let's assume that you are done savings for kids' college, & both plan to work to 65. Since you are getting $3k/mo in pensions beginning at age 65, you need $2,800/mo or $33,600 per year from your retirement accounts. A 4% SWR on the current combined balances of your 401k/IRAs/taxable accounts is $34,000. If you won't be touching these accounts for another 25 years, then yes, you are set, all you need is to bring in enough income to cover annual expenses (right now, $69,600 per year after taxes, or let's say roughly $87,000 gross salary).

Another way to look at it is that your current SWR is $34,000 (this is 4% of the $620k in the 401ks/IRAs and the $230k in taxable accounts). If you want to start drawing down that amount, then you just need $35,600 after tax in earned income to supplement your investments.

A lot is going to depend on your risk tolerance (how much margin of error you want in your projections) and how your expenses may increase/decrease over time. Is that helpful?

Thegoblinchief

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Re: Reader Case Study
« Reply #2 on: August 13, 2014, 04:08:50 PM »
Your expenses are awfully high. Without further breakdown it's hard to comment or offer advice.

8035

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Re: Reader Case Study
« Reply #3 on: August 14, 2014, 11:02:50 AM »
My wife makes $25K as a part time school teacher.  I would like us to see us fully or partially retired between 50 and 55.

I think that is a reasonable level of spending, but we could definitely cut back in some areas - cable TV, cell phone bill, me finding a job that eliminates my commute.  Here is some further detail regarding our expenses.

   Average
Mortgage   365.14
Homeowners Ins   171.42
Flood Ins   53.5
HOA   19.25
Auto Ins,   138.63
Property Taxes   318.31
State Farm Life   53.08
Discover   4247.7525
Electricity   173.6658333
Comcast   221.3558333
Verizon   165.9475
Toll   63.33333333
Water   107.7541667
Gas   41.72
M-Card   143.7641667

8035

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Re: Reader Case Study
« Reply #4 on: August 14, 2014, 11:07:58 AM »
Here is summary in thousands from 2013 credit card expenses which we pay off each month

merchandise - $22
Services - $10
Gas - $4.6
Supermarket - $3.6
Restaurant - $3
Travel / Entertainment - $2.3
Auto - $2
Education - $2
Home Improvement $1.3
Government $1.3
Medical - $1.3
Warehouse club - $1.1
Department store $0.5

dandarc

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Re: Reader Case Study
« Reply #5 on: August 14, 2014, 11:28:41 AM »
So you're spending 70K, your portfolio should 'safely' provide 34K, your wife makes 25k, so those add up to 59K.  You have to make at least 11k from whatever you cut back to.  That is a bare minimum and would keep you both working until the pensions and/or SS kicks in, unless the portfolio grows beyond inflation.

Think you can find something acceptable in the 40-50k after tax range?  Because then you'd be a lot safer - not drawing much at all from the investments f you can make that much.

To support 70K in spending indefinitely, you'll need 1.75 Million invested at a 4% safe withdrawal rate.  If you can figure a way so you don't touch the current investments for the next 10 years, and you can get a 5% real return, you'd be projected to have 1.4 Million in today's dollars- not quite enough to support this spend rate by itself, but then you'd only be about 15 years from the pension kicking in, so you'd be fine.

So - retire today to not working at all, you're definitely not ready.  Cut the income back to something closer to average for full-time work, and you'll probably be just fine.  Actually start drawing on your retirement funds significantly and it starts to get pretty murky.  I personally wouldn't do it right now, if the job I could get today + wife's income would not at least cover our current spending.  Put 50-100K more away each year for just a few more years, and cut the spending back a little and you'll be on much firmer ground.

shotgunwilly

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Re: Reader Case Study
« Reply #6 on: August 14, 2014, 11:30:07 AM »
You spend $22,000 a year on "merchandise?"

bo_knows

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Re: Reader Case Study
« Reply #7 on: August 14, 2014, 11:40:18 AM »
I don't do this often, but you laid the numbers out pretty well.

Assumptions made:

- Live till you're 90
- $940k total invested funds (401k/IRA, 529, taxable) invested roughly 75% stocks / 25% bonds (feel free to change)
- $27600/yr inflation-adjusted pension from big oil starting in 2039
- $10000/yr inflation-adjusted pension from teaching starting in 2039
- No SS.
- Roughly $20k/yr in college expenses
- $69600/yr expenses (I'll err on the high side for the calculation)
- Absolutely no savings between now and age 50 (meaning you take a lower job, and coast to retirement)
- Retire at 50.

Result:  71% historical success rate. Not terrible, but not safe. http://www.cfiresim.com/input.php?id=29409

Same scenario, but cut your expenses by 15%... 85% historical success rate. Better.  http://www.cfiresim.com/input.php?id=62573

Same scenario, cut your expenses by 15% AND save $2750/mo until retirement (total in all accounts): 100% historical success rate. Yay! http://www.cfiresim.com/input.php?id=80903

So, depending on the income/savings hit, and how you can change your expenses, you're certainly in a good place.


8035

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Re: Reader Case Study
« Reply #8 on: August 14, 2014, 11:47:59 AM »
Thank you very much for those comments.

The second breakdown on credit card spending was from a credit card 'spend analyzer' so I am suspicious of the numbers.  We cook our own food, clean our own house, mow our own grass, etc.  But we have spent some money on remodeling our early 90s home and did purchase an above ground pool and deck so have had some big expenses.  But no, we are not spending much of anything on clothes, gadgets, or junks.

I could cut several hundred dollars per month if I were to work from home and reduce cable and cell phone expenses.

I feel like my retirement ($620K in today's dollars plus pensions and SS) will leave us in great shape come 59.5 years of age.  The 401K has 20 years to grow, and I will continue to save for retirement to some degree until I stop working.  I agree that it would be wise to work for a few more years at high salary and build up our taxable investments and then maybe a few years down the road withdraw from that as needed while continuing to work but at a reduced income.

If I were to leave my current job and move to something else, my wife would go back to work full time teaching where she would make $50-55K, and I would be aiming to bring in $60-70K, so yes we would be hoping to bring in north of $100K.

Gone Fishing

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Re: Reader Case Study
« Reply #9 on: August 14, 2014, 01:27:15 PM »
You have certainly laid the groundwork to give yourself the ability to do whatever you want.  The more you cut your expenses the greater flexibility you will have.  You could probably retire outright, TOMORROW, if you (and the rest of the family) are willing to adopt a MMM type lifestyle.  It sounds like you are interested in cutting some expenses.  If that is the case, you have come to the right place.

One thing really stands out to me:

$4500/mo on the credit card, is this a typical month?  If it is, this is more than the total living expenses for most members of the forum, and there are probably a ton of facepunches buried in that number. 

Many of your other expenses appear to by high accross the board and all could probably use some tuning, but it will take time.  I wouldn't pull the plug on Big Oil until you can live comfortably off what your wife would bring home teaching full time.

dandarc

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Re: Reader Case Study
« Reply #10 on: August 14, 2014, 01:48:03 PM »
I feel like my retirement ($620K in today's dollars plus pensions and SS) will leave us in great shape come 59.5 years of age.  The 401K has 20 years to grow, and I will continue to save for retirement to some degree until I stop working.  I agree that it would be wise to work for a few more years at high salary and build up our taxable investments and then maybe a few years down the road withdraw from that as needed while continuing to work but at a reduced income.

This comes up pretty often here, but don't worry about 59.5 - max your 401K / IRAs every year when you can - there are ways to get at that money early should that become part of your plan.

And if you're going to make 100K plus per year, you'll be able to continue adding to the stash, rather than withdrawing - if your wife is really OK with going back to work full time, and you can get a job that pays that well, go for it.  It pushes the date back when you have true "I don't need any job" money, but you've got a fantastic foundation here.

Cut that spending too - it can be amazing how much gets lost due to sloppiness - try writing out a budget and tracking your spending outside of the spend analyzer for a few months - you might be surprised how much you can save just by being intentional and paying close attention.

Thegoblinchief

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Re: Reader Case Study
« Reply #11 on: August 14, 2014, 03:34:10 PM »
Track your spending. The more you own your lifestyle instead of possessions and marketing owning you, the freer you become.

People here usually like either YNAB or Mint. I personally dig old-fashioned pen and paper posted on the fridge.

With your asset pool, I could retire immediately despite having 1 more child and currently being in a higher COL state.

okashira

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Re: Reader Case Study
« Reply #12 on: August 14, 2014, 04:10:59 PM »
My wife makes $25K as a part time school teacher.  I would like us to see us fully or partially retired between 50 and 55.

I think that is a reasonable level of spending, but we could definitely cut back in some areas - cable TV, cell phone bill, me finding a job that eliminates my commute.  Here is some further detail regarding our expenses.

   Average
Mortgage   365.14
Homeowners Ins   171.42
Flood Ins   53.5
HOA   19.25
Auto Ins,   138.63
Property Taxes   318.31
State Farm Life   53.08
Discover   4247.7525
Electricity   173.6658333
Comcast   221.3558333
Verizon   165.9475
Toll   63.33333333
Water   107.7541667
Gas   41.72
M-Card   143.7641667

Ah, so that Tahoe of yours for your 36 mile commute has an electric drive conversion?

okashira

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Re: Reader Case Study
« Reply #13 on: August 14, 2014, 04:12:13 PM »
Here is summary in thousands from 2013 credit card expenses which we pay off each month

merchandise - $22
Services - $10
Gas - $4.6
Supermarket - $3.6
Restaurant - $3
Travel / Entertainment - $2.3
Auto - $2
Education - $2
Home Improvement $1.3
Government $1.3
Medical - $1.3
Warehouse club - $1.1
Department store $0.5

Whoa, I see it now. $400/mo in gas.
You guys are big spenders, but don't want to cut back ? That's what this forum is about...

yddeyma

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Re: Reader Case Study
« Reply #14 on: August 14, 2014, 04:22:50 PM »
I'd recommend you log on to mint.com and just add that one credit card where you put most of your daily expenses.  Don't spend a lot of time loading in every single bank account, just do that one account.  Then, run a spending report.  Should only take you 15 minutes or so to set up and you will be amazed at what you see.  I bumped mine up again MMM's yearly budget analysis on his blog.  I don't try to match him exactly, but if I have a category that is significantly over his, I ask myself why and if I really want to work more hours just to pay for it.

I still have a very luxurious lifestyle and have consciously chosen to work longer so that I can spend money on certain things.  I'm not going to list everything I did, because I'm not sure what will apply to you.  But here's a list of easy, no-brainer things I did that saved almost $300/month

Clothes - I started using an online consignment store, thredup.com, and quit buying new for the kids (and me).

Cancelled Things I Don't Need - including alarm system we never used, lawn weed spray service, cable, magazine subscriptions, etc.

Life Insurance - I still had the same level of life insurance I had when I had $0 net worth.  I'm worth a lot more now, have lots in savings and have paid off all non-mortgage debt.  So my life insurance needs had changed and I hadn't re-evaluated in quite awhile

Auto Insurance - I had way to much coverage for cars that are both worth <$10k. 

Those changes saved me almost $300/month without even trying or causing me any stress.  No "sacrifices" here.

Based on what you did post, you need to ditch one of the cars and get something more fuel efficient b/c one of your biggest categories is gas.  I am a short statured person and HATED our mini-van, we traded it in for a station wagon and I LOVE it.  We don't need the extra "people-mover" space very often and I swear the back can hold more than our van ever did.  Also, if you are contemplating keeping the van b/c you want a people-mover, ask yourself how often you REALLY need that third row.  If its less than once a week you could probably just drive two cars and come out ahead by ditching the gas guzzlers.  We did enjoy being able to fill the van up with people, but the reality was we only did that about once a month.  That's not enough to justify the extra daily gas cost, so we just drive two cars now if we need to.