Reader Case Study - Can I Retire Now? (Spouse would continue working)

[WantToRetire]

I feel like I am at a real crossroads and could use some unbiased opinions.  Thank you in advance to anyone who takes the time to read and/or comment on my situation.  We are considering having me "retire" while my spouse continues to work.

Family of Four – Two Spouses Working Full Time, Two Children (4 and 2)

Income:
Me Gross:  11,466/month (+ annual bonus of approx 20K, which I prefer not to consider in this analysis)
Me Net:  6,816/month

Spouse Gross:  14,515/month (+ annual bonus of approx 30K, which I prefer not to consider in this analysis)
Spouse Net:  7,838/month

Rental Income:  1,570/month

Total Gross:  27,551/month
Total Net:  16,224/month

Current expenses:
-   Mortgage + Property Tax = 3,750/month
-   Vacation Home Mortgage = 810/month
-   Vacation Home HOA = 405/month
-   Electric/Gas = 162/month
-   Cell = 150/month
-   Water = 55/month
-   Netflix + Phone = 30/month
-   Grocery = 900/month
-   Dining out = 300/month
-   Misc Shopping = 780/month
-   Gas = 90/month
-   Pre-school = 575/month
-   Childcare + Related Expenses = 3,280/month
-   Vacation = 500/month
-   Kids Activities + Supplies = 460/month
-   Misc (entertainment) = 220/month
-   Cleaning = 40/month
-   Insurance = 300/month
-   529 Accounts = 700/month
-   Cable Internet = 65/month
-   Security System = 50/month
-   Credit Protection = 25/month
-   Uncovered Medical Expenses = 245/month
-   Misc Services = 50/month

Total = 13,942


Assets:
-   401k = 605,000
-   IRA = 240,000
-   Small Pension = 10,400 cash value
-   House = 875,000 (290k equity)
-   Vacation Home = 180,000 (75k equity)
-   2005 Honda Accord = 5,000
-   Emergency Fund = 50,000
-   Liquid Savings = 65,000 (planning to invest somewhere)
-   529 = 22,500

Total = 2,052,900

Liabilities:
-   House 585,400 – 3.875%
-   Vacation Home 105,000 - 5%

Total = 690,400

Net Worth = 1,362,500

Notes:
-   The Accord is paid off and my spouse has a company car
-   Spouse and I are both maxing out 401K accounts
-   Spouse's job covers medical insurance at 120/month (great price, I know)
-   We have a lot of wiggle room with the following expenses: Misc Shopping, Childcare (would be largely eliminated), Kids Activities and Supplies, Groceries, and Entertainment

Specific Question(s):
Spouse and I both have demanding, high profile jobs (although I am afforded the opportunity to work from home).  With having two young children, we are looking for a better quality of life, and to have the opportunity to be the primary influence in raising them (vs. paid childcare).  We are considering me "retiring" to be with the children and also potentially pursue other potential opportunities down the road, TBD.  However we are both very risk-adverse and don't want to jeopardize our financial future having worked so hard to get to even where we are today.

1.   Is an early retirement for me reasonable at this point in time, considering our general "risk-adverseness"?  Is it foolish considering we are in our "peak earning years" to retire now?
2.   Welcome any advise on investment strategy or debt reduction (e.g. should we be putting extra money each month to our primary mortgage?  Best ideas on investing liquid income beyond emergency fund?)
3.   If early retirement is not reasonable at this point in time, welcome any advice on steps to achieve this sooner than later.

[deborah]

You have a total net worth of $2m, and at your current rate of spending you would need $4m ($13107 per month x 12 months x 25 (4% SWR)) - so you are half way there. If you can reduce your spending by half, you are possibly there, but you don't own much of either house.

What can you do to reduce $13107/month to $6553/month (which is still enormous)?

[seattlecyclone]

If one of you retired, the other's net income would go up because your combined tax bracket will go down. You currently have about $1 million in cash/investments. At a 4% SWR this can provide about $3,300 per month. Let's assume your spouse's net income goes up by $1,000/month due to lower taxes. That, plus their current net income, plus investment income comes out to about $12k/month. This is a lot, but it's still $4k/month short of what you currently spend.

If you sold your vacation home and invested the equity, that would add $250/month in investment income and reduce your expenses by $1,215/month. That brings you about $1.5k closer, leaving another $2.5k/month to find somewhere. That's basically what you spend on childcare (which you won't need anymore), so you could probably make the single-earner thing work if you're willing to cut out the vacation home.

If you both want to retire in a reasonable amount of time, also take a look at your grocery budget ($900 is huge), general shopping budget (what is this even for?), expensive kids activities, cell phones, and cleaning service, for starters. Your spending is an exploding volcano of wastefulness. The upside to this is that there's plenty of room to improve. You have the income side of the equation handled, now get your expenses under control.

[WantToRetire]

Thank you SO much for reviewing!  I agree 100% that our spending is out of control, and we have done some analysis on what we believe we could very easily/conservatively bring it down to - which would be to about 9,700/month (which is still very high - although we live in an area that has a ridiculous cost of living, I still think we can bring it down closer to 9K/month).  This also includes savings of 500/month.

But being conservative, let's go with the 9,700 figure.  Am I thinking about it correctly if I say that 9,700 minus my spouse's monthly net income of 7,838 (which will go up, as you mention) minus 1,570/month in rental income = 292/month difference.  So then that is 3,504/year multiplied by 25 which is 87,600.  Is that right?  And, if so, guessing that would put us in a good position for me to retire now?

[Retired To Win]

Since you brought up that you are in a high cost of living area, my immediate question is whether you have looked into the feasibility of changing that.  I know it's not something that can be done overnight, but I have been realizing more and more that one's CHOICE OF LIVING LOCATION has an overpowering impact on the length of one's journey to financial independence.  A move might instantly get you comfortably FIRED.

[deborah]

Where would the rental income come from? The holiday house? These are usually not good as rentals.

[WantToRetire]

Yes exactly. I'm basing that off of what we currently receive in income each month, which has averaged 1,800/month for the past three years. For this analysis I reduced the amount to the lowest monthly income we have received, to remain conservative.

[feelingroovy]

You can do it.

You are in a really great position and have obviously done a great job investing so far.  Let that work for you.

I was able to cut just over $7000 from your monthly budget by doing the following:

Completely cutting the following categories to 0:

- Vacation Home (Sell it)
- Childcare (you won't need it)
- 529 Accounts (put the proceeds from the vacation house sale to college savings.  It, plus what you already have in 529s, should grow to $200k by the time your kids are in college.  That should (at least mostly) cover two kids for in-state tuition, room, and board.
- Credit protection (can't imagine a need for this)

Cutting the following categories in half:
- Groceries
- Dining out
- Misc Shopping
- Vacation (you won't need them as much)
- Entertainment

You spend a LOT on all of these, and many could go lower.  I understand needing to buy time when you're both working high-demand jobs and have toddlers, but you won't need it if you quit.

Cutting more on a few spendy categories:

- Cell phones: cut to 50, there are many good options
- Kids' activities: cut to 50.  I can't imagine what this contains or why toddlers need expensive activities.  Swimming lessons, sure, but really rethink anything else.

So that's your entire take-home.  You're basically working to pay for a few luxuries, daycare, and taxes.

Remember too that this isn't forever.  You've obviously someone with great skills, and you could certainly earn something on a freelance basis, or go back in a few years once the kids are in school to cover more savings or luxuries.

You also have enough already in liquid investments that your spouse could still retire in about 10 years anyway, assuming the market doesn't tank.  Even without saving anything else.   There is no risk here.  You already have great savings.  (If you moved to a lower cost area, you could BOTH retire now).

Let your little green employees do their work and enjoy a more relaxed lifestyle with your kids. 

[WantToRetire]

@feelinggroovy, thank you SO much!  This is incredibly helpful and you bring up an excellent point that I hadn't considered about front-loading the 529 accounts with the proceeds from the sale of the vacation home.  Love that idea!  (And also in agreement with you on many of the budget cuts as well - thank you so much for taking the time to go through that for me!!)

[larmando]

Wow, such a low savings rate for such a high income... Definitely do something about it!! (You live in a high cost of living area?  Tough luck, so do a lot of people with lower income than you and some of them save more: don't find excuses ,  tighten) Deborah: they have 1.3 mil, not 2, after debt.

[NICE!]

I'm surprised the MMM forum pitchfork-wielders haven't come out against you! Maybe you softened the blow by admitting that the spending is a volcano of waste?

I think you've had some good replies so far so I'll pick at one budget item beyond the obvious shopping issue you need to handle. What is this "Uncovered Medical Expenses" line item? Seems a little high to me. My wife and I pay about $30/month out of pocket for co-pay on family planning and her feminine product needs, which also includes the occasional bottle of aspirin/other medicine. I'm not saying $30 is some magic number, but I'd be interested to hear what costs so much, assuming it isn't just a mislabeled premium payment.

[Gin1984]

Does your wife have a health care FSA?

[iamadummy]

your saving rate looks great and net worth too. keep it up

[olderone]

your saving rate looks great and net worth too. keep it up

How do you figure the savings rate?  I see $380,612 gross income and only $35,000 savings.  9%.

In addition, the budget doesn't appear to include all of the spending.  There is still $24,000 of net pay and bonuses of $50,000 unaccounted for.  It doesn't look like that's been going into savings every year.  I think there are bigger cuts to your lifestyle to be made than what you have posted.  That doesn't mean I think it's not possible, just more to consider.

I would recommend to the op to sell the vacation home and make whatever cuts have been recommended and then live on that budget while still working to see if you really can do it.

[Rustyfa]

Want to Retire, looking over your salaries and expenses is pretty amazing.  Most of us cannot even fathom either.  Thanks, very interesting if nothing else.

Can you retire?  Yes.  Should you?  I'd say no until you square away your spending.  I think you can cut so much there.  By selling your vacation home, cutting your groceries, misc spending, stopping the childcare, entertainment,kis activites etc. you can easily knock out 6000 from your spending.  I assume your older kid is in private pre school?  There are just so many ways to save.  If you worked another 6 months while cutting your budget I would say you are there.

[feelingroovy]

How do you figure the savings rate?  I see $380,612 gross income and only $35,000 savings.  9%.

In addition, the budget doesn't appear to include all of the spending.  There is still $24,000 of net pay and bonuses of $50,000 unaccounted for.  It doesn't look like that's been going into savings every year.  I think there are bigger cuts to your lifestyle to be made than what you have posted.  That doesn't mean I think it's not possible, just more to consider.

Well, I think it's fair to consider the $700/month going into 529s as savings.

And usually savings rate is done (around here) out of net income + pretax savings, not gross.  I suspect OP is paying a LOT in taxes.

When I do that, I calculate 22%.  Still not great, but I suspect that at least some of that $24k unaccounted for in the budget is going into the cash savings.

But olderone has a point.  Are there still extra costs not being accounted for?  What would the loss of one of the bonuses lead to giving up? 

[happy]

Look its definitely doable, the question is, are you capable of doing it? Can you rein in that exploding volcano of wastefulness?

As others have pointed out, you will save quite a lot just by not working. Your figures though, don't demonstrate very much mustachian muscle, so I have concerns. I would suggest you sell the vacation home, and spend 12 months practicing reining in your spending, then retire once you have demonstrated to yourselves you can live with the cuts.

[Participant]

Can I ask why you're considering retiring instead of your spouse? It seems like you live in a very high cost of living area. Since you can work from home and he can't, it would make more financial sense for him to leave work, and for your family to move to a much more affordable area. With you working from home, you could relocate to basically anywhere.

[DoNorth]

My spouse and I are in a similar situation.  Our children our 5 and 3; we are 36 and 34 with a combined income of $19,000/month net after both maxing 401ks and  IRAs contributions etc. (wife is self-employed) .  The big difference is that our monthly expenses are $6500 which I still feel are too high. 

We also have a "vacation" home in addition to our house in the DC area. so about 6 months ago we started funneling every extra penny at about $12K/month in principal only payments toward the vacation place (worth $135K; loan is now $27K at 5.75%).  Once paid off, we're going to sell the DC house this summer, minimize to one vehicle and move in with the parents while I renovate the vacation place so we can begin living there full time.  It's an acre with 100' feet of Lake Superior frontage with endless nature to hike and explore.  We just couldn't take the DC concrete jungle anymore.

 Between dividends, interest, my military pension from medical retirement, and spouse's self employed income + not having a mortgage or property taxes, expenses should drop to about $2500/month and income will be around $6K-$7K.  Our roughly $450K in retirement assets will sit quietly for the next 25-30 years to do what they do best.

With your assets, you can definitely retire now, but to be comfortable, I think a relocation to a lower cost of area with no mortgage.  The nice part is that 2 and 4 year olds don't really have ties to anything!

[Rustyfa]

Congrats DoNorth.  Good for you and your family!

[Ricky]

You can do this now quite easily. Keep the vacation home. It grosses $7k a year so why get rid of if? Using a real return of 4% from investments, that puts your house worth $175k to you. You paid just over that so its up to you whether the extra headache is worth trading for a dividend portfolio or something.

With income hovering around $10k if you quit, and expenses at $14k, cutting the childcare and grocery bill alone would solve your problem. But I wouldn't stop there to be safe. I would downsize my primary residence and cut the ridiculous cell phone bill. Others are saying to move but I don't see how this is possible wince your wife isn't location independent yet.  You could also basically eliminate shopping. This isn't to mention you have some other potentially frivolous categories. Then you'd be really safe.