Author Topic: Reader Case Study: We are 'rich' by most people's standards, but when can we retire?  (Read 17552 times)

TheNewNormal2015

  • 5 O'Clock Shadow
  • *
  • Posts: 66
Long-time MMM blog reader, recent lurker, first-time poster

Age: 43 and 41
Children: 3, ages 13, 10 and 8
Location: somewhere very expensive in USA

All figures annual
Pre-Tax Income: $1.2mm
Taxes: $360k
Expenses: $450k
Net Worth: $4.2mm

Without getting into too much detail, we have an expensive home which is valued at a little more than our net worth, and a lot of the expenses go towards servicing the debt and paying off the mortgage.  We estimate that by 2020, when our first child goes off to college, our annual expenses would drop to $250k if between now and then we purposed all annual discretionary income to pay down principal and sold existing investments to completely pay off the mortgage balance. For simplicity assume straight-line decrease in annual expenses, or $40k a year lower: $450k in 2015, $410k in 2016, $370k in 2017, $330k in 2018, $290k in 2019, $250k in 2020 when the house is owned outright.

I would conservatively estimate that our income will remain constant at $1.2mm pre-tax, $840k post-tax over the next 10 years.

We estimate that in 2020 our net worth would conservatively be $6.5mm in today's dollars, assuming market returns that are in line with inflation (0% real).  By 2025, with all kids out of the house, we would look to downsize to a residence worth roughly 1/3 of our current home, giving us liquid investments (both taxable and tax-deferred) of a combined $5mm.  We also estimate that annual expenses starting in 2024 would decline to $200k, then $150k in 2028, as the kids each graduate from college.

Assuming the above scenario, at what point would it be safe to assume we could completely rely on investment income alone and not have to earn a wage?

iamlindoro

  • Handlebar Stache
  • *****
  • Posts: 1520
    • The Earth Awaits
The quick and dirty math says that once you have 25x your annual expenses in investments, you can retire safely according to the 4% rule.

I'm going to stand aside and let everyone else do all the hard work of trying to convince you, but I can say that were I in your position, I'd already be retired four times.  The summary of all of the advice and opinions you're about to get is:  Do you really, REALLY need to spend that much to truly be happy?

Exflyboy

  • Walrus Stache
  • *******
  • Posts: 6490
  • Age: 58
  • Location: Corvallis, Oregon
  • Expat Brit living in the New World..:)
Your serious right?...:)

$4.2M gives you an income of nearly $170k a year.. Sell everything and move and live with ordinary people.

This may sound flippant but only you can tell if you can live without your country club lifestyles, but we have people here retiring early on less that $0.5M total NW.. I couldn't do that but I got less than half what you have right now and I know I'm well past the point of FI.

Well done.. if you don't HAVE to live like you no doubt do now you have it made by at least 2X


surfhb

  • Guest
Your 2020 estimate is correct.   At your spending rate you need roughly 6.5 million to retire safely.

The real question is why you think you need to spend so much a year?    With your income I could retire, travel all I want, live a happy and healthy life with about 9 months of work....and that would be starting with a net worth of zero!  Think about that for a moment!  What were you doing 9 months ago?   I could have come into your position and retired happily already  LOL     Thats what this site is all about :) 

Unless your career is your life then keep working but, if you have other plans youre wasting your time

BTW....I am your same age.   

« Last Edit: January 11, 2015, 08:42:40 AM by surfhb »

NICE!

  • Pencil Stache
  • ****
  • Posts: 687
  • Location: Africa
What do you do? You don't need to give location or anything, I'm just really curious how you get that firehose of cash.

Retire now. Ditch the house. You could easily cut 75% and not really change much other than where you live and where the kids go to school.

Future Lazy

  • Bristles
  • ***
  • Posts: 350
  • Age: 27
  • Location: Northglenn, Colorado
Do you really, REALLY need to spend that much to truly be happy?

As someone making ~24k/yr and saving a large portion of it, I can't even imagine what you could spend 450k a year on. That's just... Totally completely beyond me.

Assess your priorities. Keep going and retire in 2020... Or cut back and retire now. Whatever makes you happy!

firewalker

  • Bristles
  • ***
  • Posts: 308
You know you're not mustachian when ...
« Reply #6 on: January 10, 2015, 03:02:13 PM »
I think you may have just started a new thread category!  You know you're not mustachian when ...
« Last Edit: January 10, 2015, 03:04:13 PM by firewalker »

Mr. Frugalwoods

  • Bristles
  • ***
  • Posts: 296
  • Location: Greater Boston Area
    • Frugalwoods
Yes.  $6.5 million would mean a $260K / year Safe Withdrawal Rate.

Just to be totally clear though... you must love your job like I love pizza.  You could take what you have saved now to most places in the world and never work again.

But hey, if you love it, good on you.  I'm sure a lot of your $1 million + / year peers spend a bunch more than you do.  So relatively speaking... high five!

Credaholic

  • Stubble
  • **
  • Posts: 223
  • Location: Seattle
    • Credaholic
Would love some insight into what you spend that $450k on.

TerriM

  • Pencil Stache
  • ****
  • Posts: 507
All figures annual
Pre-Tax Income: $1.2mm
Taxes: $360k
Expenses: $450k
Net Worth: $4.2mm

Please please tell me how you're only paying 30% taxes with that income?!?  We're paying 26% taxes and making way less than you.

Cottonswab

  • Stubble
  • **
  • Posts: 177
  • Age: 33
  • Location: Boulder, CO
  • Occasional Advice Dispensary
    • My Journal
You seem to have a lot of money tied up in real estate and I will assume that you have no desire to reduce your spending or downsize beyond that stated in the OP.  So, my advice would be to figure out what your expected passive income will be, based on your investments, and use a cash flow calculator (many references floating around the forums) to help project the likelihood of a successful retirement.

That being said, I'm going to leave a link to the "spend less than $10,000 in 2014" thread here... just in case... you feel like... cutting your spending... a little bit.

http://forum.mrmoneymustache.com/throw-down-the-gauntlet/spend-less-than-$10-000-in-2014/100/?topicseen

TerriM

  • Pencil Stache
  • ****
  • Posts: 507
Do you really, REALLY need to spend that much to truly be happy?

As someone making ~24k/yr and saving a large portion of it, I can't even imagine what you could spend 450k a year on. That's just... Totally completely beyond me.

They have a $4.2M house.  Even at 20% down, that's $3.4M loan at 5% is $240K/yr.

I'm guessing OP lives either in Palo Alto or in NYC.  If NYC, the taxes will increase that number.

OP, what places would you consider "retiring" to?  Would you consider private schools or are you already doing private schools?  $1M would go pretty far that direction.

NinetyFour

  • Walrus Stache
  • *******
  • Posts: 6611
  • Location: Southwestern US

TheNewNormal2015

  • 5 O'Clock Shadow
  • *
  • Posts: 66
Outside of our housing, childcare and education expenses (private schools) we are actually not very luxurious.  And all three categories will decrease substantially or be eliminated completely upon kids leaving home and graduating from college.

Our grocery bill is $1000 a month for the five of us plus a nanny, and we don't have a lot of other really crazy expenses for this high cost of living area.  I purposely have not broken down other expense line items as I am sure it would be quite shocking for many readers on this forum, but the reality is it is really easy to spend a lot of money on what feels like 'necessities'.

As mentioned our costs would decrease $200k a year if we paid off our house (I.e. Principal and interest expense) and property taxes and upkeep make up a big chunk of the remaining expenses.

Interestingly we feel that working an extra year or two after FI would really help us increase our quality of life, as we are in our peak earning years and by then almost all of the earnings would go straight to investments, which ultimately lead to higher per year income stream upon RE.

surfhb

  • Guest
Id shoot for about $10 million....it seems like a good round number for you guys.     

Good job....you won the game.   

Honestly though.....do you think this site is really for you?    Maybe try the Boglehead forum?     How your money is invested should be the real issue at this point since you dont feel any need to reduce spending.

Are you paying needless fees?   Are you as efficient with the taxes as you could be? 
« Last Edit: January 10, 2015, 05:36:47 PM by surfhb »

MDM

  • Walrus Stache
  • *******
  • Posts: 9686
Assuming the above scenario, at what point would it be safe to assume we could completely rely on investment income alone and not have to earn a wage?
TheNewNormal2015, welcome to the forums.

Have you tried either www.cfiresim.com or the spreadsheet in How To Write a Case Study to evaluate your position?

Good luck!

TheNewNormal2015

  • 5 O'Clock Shadow
  • *
  • Posts: 66
Id shoot for about $10 million....it seems like a good round number for you guys.     

Good job....you won the game.   

Honestly though.....do you think this site is really for you?    Maybe try the Boglehead forum?     How your money is invested should be the real issue at this point since you dont feel any need to reduce spending.

Are you paying needless fees?   Are you as efficient with the taxes as you could be?

We are pretty efficient generally.  A large % of our expenses could be cut dramatically in the event of necessity, but we are trying to balance present day enjoyment and giving our children as much of an advantage as we can vs quitting work a little earlier.

Additionally, while we could have liquidated all of our investments and almost paid cash with a very small mortgage when we purchased our home a few years ago, we decided to take out a large mortgage, borrowing as much as we could, thinking our portfolio would outperform the low mortgage rate - this turned out to be a good decision in boosting our net worth.  At this point we are content having a diversified portfolio of low cost index investments - but since the end goal seems to be in sight we plan to reduce liabilities dramatically over the next few years to just preserve what we have accumulated.  I guess I was just looking for some additional opinions on whether the timeline made sense.

surfhb

  • Guest
Yes....Your timeline absolutely makes sense

bugbaby

  • Bristles
  • ***
  • Posts: 387
Seriously though, how about a breakdown of expenses? Promise No Facepunches, we get you're not trying to cut costs..... just really curious how the 1% live, as I (and I bet many here) don't know any IRL....

chasesfish

  • Magnum Stache
  • ******
  • Posts: 3281
  • Age: 37
  • Location: Texas
Outside of our housing, childcare and education expenses (private schools) we are actually not very luxurious.  And all three categories will decrease substantially or be eliminated completely upon kids leaving home and graduating from college.

Our grocery bill is $1000 a month for the five of us plus a nanny, and we don't have a lot of other really crazy expenses for this high cost of living area.  I purposely have not broken down other expense line items as I am sure it would be quite shocking for many readers on this forum, but the reality is it is really easy to spend a lot of money on what feels like 'necessities'.

As mentioned our costs would decrease $200k a year if we paid off our house (I.e. Principal and interest expense) and property taxes and upkeep make up a big chunk of the remaining expenses.

Interestingly we feel that working an extra year or two after FI would really help us increase our quality of life, as we are in our peak earning years and by then almost all of the earnings would go straight to investments, which ultimately lead to higher per year income stream upon RE.

Can I ask the really stupid question here?  If you're paying that much for a house, isn't it in an area where private schools aren't necessary?  I've worked in two different big cities and there are usually pockets of very high dollar houses that don't require the private school tuition as well.

As Mr. Frugalwoods put it, you must love your job like I love pizza!  And you can also retire immediately if you want to

Future Lazy

  • Bristles
  • ***
  • Posts: 350
  • Age: 27
  • Location: Northglenn, Colorado
I purposely have not broken down other expense line items as I am sure it would be quite shocking for many readers on this forum, but the reality is it is really easy to spend a lot of money on what feels like 'necessities'.

Sure, and the reality is also that it's really easy to not spend money on things that aren't necessities, once you learn to differentiate and downgrade. I feel like your choice to not break down your spending here isn't to avoid "shocking many readers", but has more to do with asking for advice from a crowd of people that understand the differences between wants and needs that you might not want to acknowledge.

+1 Check out Bogleheads.org

TerriM

  • Pencil Stache
  • ****
  • Posts: 507
Can I ask the really stupid question here?  If you're paying that much for a house, isn't it in an area where private schools aren't necessary?  I've worked in two different big cities and there are usually pockets of very high dollar houses that don't require the private school tuition as well.

As Mr. Frugalwoods put it, you must love your job like I love pizza!  And you can also retire immediately if you want to

I have no idea where the OP lives, but I think this is one of the most interesting school/neighborhood combos:

https://www.redfin.com/city/820/CA/Atherton/real-estate#!sf=1%2C2&v=8&sst=3&region_id=113613&region_type=7&market=sanfrancisco

Selby Lane is rated a 3, but the houses are $4M-$14M.  This isn't a joke.  You just put your kids in private school if you live in that section of Atherton.

surfhb

  • Guest
Can I ask the really stupid question here?  If you're paying that much for a house, isn't it in an area where private schools aren't necessary?  I've worked in two different big cities and there are usually pockets of very high dollar houses that don't require the private school tuition as well.

As Mr. Frugalwoods put it, you must love your job like I love pizza!  And you can also retire immediately if you want to

I have no idea where the OP lives, but I think this is one of the most interesting school/neighborhood combos:

https://www.redfin.com/city/820/CA/Atherton/real-estate#!sf=1%2C2&v=8&sst=3&region_id=113613&region_type=7&market=sanfrancisco

Selby Lane is rated a 3, but the houses are $4M-$14M.  This isn't a joke.  You just put your kids in private school if you live in that section of Atherton.
So odd.    Says its 90% Latino enrollment

TerriM

  • Pencil Stache
  • ****
  • Posts: 507
Can I ask the really stupid question here?  If you're paying that much for a house, isn't it in an area where private schools aren't necessary?  I've worked in two different big cities and there are usually pockets of very high dollar houses that don't require the private school tuition as well.

As Mr. Frugalwoods put it, you must love your job like I love pizza!  And you can also retire immediately if you want to

I have no idea where the OP lives, but I think this is one of the most interesting school/neighborhood combos:

https://www.redfin.com/city/820/CA/Atherton/real-estate#!sf=1%2C2&v=8&sst=3&region_id=113613&region_type=7&market=sanfrancisco

Selby Lane is rated a 3, but the houses are $4M-$14M.  This isn't a joke.  You just put your kids in private school if you live in that section of Atherton.
So odd.    Says its 90% Latino enrollment

Yes.  The school is districted across Atherton and Redwood City, and parts of Redwood City are highly latino.  It's gentrifying, but a lot of people in that school district from Redwood City also send their kids to private schools.  It's kind of hard to overcome the perception that it is essentially a low-performing Spanish immersion program. 

Future Lazy

  • Bristles
  • ***
  • Posts: 350
  • Age: 27
  • Location: Northglenn, Colorado
Can I ask the really stupid question here?  If you're paying that much for a house, isn't it in an area where private schools aren't necessary?  I've worked in two different big cities and there are usually pockets of very high dollar houses that don't require the private school tuition as well.

As Mr. Frugalwoods put it, you must love your job like I love pizza!  And you can also retire immediately if you want to

I have no idea where the OP lives, but I think this is one of the most interesting school/neighborhood combos:

https://www.redfin.com/city/820/CA/Atherton/real-estate#!sf=1%2C2&v=8&sst=3&region_id=113613&region_type=7&market=sanfrancisco

Selby Lane is rated a 3, but the houses are $4M-$14M.  This isn't a joke.  You just put your kids in private school if you live in that section of Atherton.
So odd.    Says its 90% Latino enrollment

Yes.  The school is districted across Atherton and Redwood City, and parts of Redwood City are highly latino.  It's gentrifying, but a lot of people in that school district from Redwood City also send their kids to private schools.  It's kind of hard to overcome the perception that it is essentially a low-performing Spanish immersion program.

Doesn't seem like a mystery to me. I went to a school with a high latino population - perhaps even 50% at the time, or more... However, the "college prep" programs were 10-15% latino, at the most. Chances are that the school in this area just doesn't preform well, so the school remains underfunded and lacks the momentum to change, despite being in an area of high property value. It'd be interesting to know what the difference would be if the affluent residents sent their kids to the public school - affluent residents that can more easily afford tutors, extra circulars, summer education and SAHPs, and with children whose first language is english. I would bet on the side of better school performance, based on an influx of students with stronger academic support at home.
« Last Edit: January 10, 2015, 10:07:33 PM by KaylaEM »

NICE!

  • Pencil Stache
  • ****
  • Posts: 687
  • Location: Africa
Again, what do you do? Giving us a profession isn't going to reveal you to everyone or anything.

Also, a basic expense breakdown might bring some facepunches but I think you're going to get some solid advice. Just think about what you can learn from people that spend a fraction of what you spend.

TheNewNormal2015

  • 5 O'Clock Shadow
  • *
  • Posts: 66
Outside of our housing, childcare and education expenses (private schools) we are actually not very luxurious.  And all three categories will decrease substantially or be eliminated completely upon kids leaving home and graduating from college.

Our grocery bill is $1000 a month for the five of us plus a nanny, and we don't have a lot of other really crazy expenses for this high cost of living area.  I purposely have not broken down other expense line items as I am sure it would be quite shocking for many readers on this forum, but the reality is it is really easy to spend a lot of money on what feels like 'necessities'.

As mentioned our costs would decrease $200k a year if we paid off our house (I.e. Principal and interest expense) and property taxes and upkeep make up a big chunk of the remaining expenses.

Interestingly we feel that working an extra year or two after FI would really help us increase our quality of life, as we are in our peak earning years and by then almost all of the earnings would go straight to investments, which ultimately lead to higher per year income stream upon RE.

Can I ask the really stupid question here?  If you're paying that much for a house, isn't it in an area where private schools aren't necessary?  I've worked in two different big cities and there are usually pockets of very high dollar houses that don't require the private school tuition as well.

As Mr. Frugalwoods put it, you must love your job like I love pizza!  And you can also retire immediately if you want to

The public schools in this area are ok, and considered 'good' by the masses, but mainly because people equate high test scores to quality of education without adjusting for demographics.  In other words, we feel our children are getting a superior education in the private schools which is why we have made it a priority.

Edit: typo

TheNewNormal2015

  • 5 O'Clock Shadow
  • *
  • Posts: 66
I purposely have not broken down other expense line items as I am sure it would be quite shocking for many readers on this forum, but the reality is it is really easy to spend a lot of money on what feels like 'necessities'.

Sure, and the reality is also that it's really easy to not spend money on things that aren't necessities, once you learn to differentiate and downgrade. I feel like your choice to not break down your spending here isn't to avoid "shocking many readers", but has more to do with asking for advice from a crowd of people that understand the differences between wants and needs that you might not want to acknowledge.

+1 Check out Bogleheads.org

You are correct in your statements.  I am being honest in that there are certain things we probably are not willing to change in our spending priorities, and rather than list them and make excuses in response to face punches I figured it would be best to focus on the whether our timeline is realistic/practical.  Everyone has different priorities, but our end goal is probably not that different from most on this forum, which is to be financially independent and have the freedom to spend our time the way we want to.

TheNewNormal2015

  • 5 O'Clock Shadow
  • *
  • Posts: 66
What do you do? You don't need to give location or anything, I'm just really curious how you get that firehose of cash.

Retire now. Ditch the house. You could easily cut 75% and not really change much other than where you live and where the kids go to school.

I am an executive at a large company.  The best way to describe to 30 Rock fans would be a nicer, younger less cutthroat Jack Donaghy.

NICE!

  • Pencil Stache
  • ****
  • Posts: 687
  • Location: Africa
Cool, good for you. Please try to not "be evil" - you have a lot of power & prestige and that can often result in things you wouldn't consider possible when you were younger. I know, it has happened to me and the most people I've lead was 100 and a few million dollars in budget.

I also think the timeline is realistic. I still think you should consider putting some numbers out there. Are you absolutely sure that this board can't produce any efficiencies for you? Since you're an executive I highly doubt you're putting much brain power into your cell plans, ISP, car choices, etc. I'm sure your career sucks up most of your brainwaves.


TheNewNormal2015

  • 5 O'Clock Shadow
  • *
  • Posts: 66
I am reminded of this article:

http://www.nytimes.com/2009/02/08/fashion/08halfmill.html

This is a pretty good article.  Although I am not in the league mentioned ($2-3mm salaries) we have a lot of friends like this, who make great incomes but basically have little left over at the end of the year besides forced savings (mortgage principal), 401k's, deferred compensation and expected inheritances.

TheNewNormal2015

  • 5 O'Clock Shadow
  • *
  • Posts: 66
Assuming the above scenario, at what point would it be safe to assume we could completely rely on investment income alone and not have to earn a wage?
TheNewNormal2015, welcome to the forums.

Have you tried either www.cfiresim.com or the spreadsheet in How To Write a Case Study to evaluate your position?

Good luck!

Good resources - thanks!

chasesfish

  • Magnum Stache
  • ******
  • Posts: 3281
  • Age: 37
  • Location: Texas
Can I ask the really stupid question here?  If you're paying that much for a house, isn't it in an area where private schools aren't necessary?  I've worked in two different big cities and there are usually pockets of very high dollar houses that don't require the private school tuition as well.

As Mr. Frugalwoods put it, you must love your job like I love pizza!  And you can also retire immediately if you want to

I have no idea where the OP lives, but I think this is one of the most interesting school/neighborhood combos:

https://www.redfin.com/city/820/CA/Atherton/real-estate#!sf=1%2C2&v=8&sst=3&region_id=113613&region_type=7&market=sanfrancisco

Selby Lane is rated a 3, but the houses are $4M-$14M.  This isn't a joke.  You just put your kids in private school if you live in that section of Atherton.

Its still surprising to me.  I've lived in both Atlanta and Dallas and if you're going to put $1mil or more into a home, you can find it both close to town and in a public school district that might as well be private. 


To the OP's question, I think the timeline entirely depends on your desired housing consumption at retirement (value, location, ect).   

Earthling

  • Guest
I'm confused about OP's net worth numbers. Do they reflect reductions in all liabilities, including the mortgage, as they should?

It seems as if OP is counting the value of his house as part of his net worth without subtracting the indebtedness attached to it.

Zaga

  • Handlebar Stache
  • *****
  • Posts: 2196
  • Age: 39
  • Location: North of Pittsburgh, PA
    • A Wall of Hats
I worked for Heinz, which was recently bought out and many executives (as well as many people at all levels) lost their jobs.  The only thing I would make sure you have in your plan is a strategy to deal with life if the shit completely hits the fan and you aren't able to find another similar paying job fast.  It could happen.  Like many here said, you have the net worth to be retired comfortably in many areas of the country, and still be able to send your kids to a great school.  Have an exit strategy that will still work for your family in a worst case scenario, incomes (high or low) are never guaranteed.

surfhb

  • Guest
What do you do? You don't need to give location or anything, I'm just really curious how you get that firehose of cash.

Retire now. Ditch the house. You could easily cut 75% and not really change much other than where you live and where the kids go to school.

I am an executive at a large company.  The best way to describe to 30 Rock fans would be a nicer, younger less cutthroat Jack Donaghy.

Oh great....you're my boss!   I work for NBC Universal..... Can I get a substantial raise?    Or at least, put in a decent total market index fund into our 401k.   ;).   Better yet,  can I just have your gig for 9 months?   HaHa
« Last Edit: January 11, 2015, 08:41:24 AM by surfhb »

Cassie

  • Walrus Stache
  • *******
  • Posts: 5783
Congrats! You can retire whenever you want.

mm1970

  • Walrus Stache
  • *******
  • Posts: 6965
Long-time MMM blog reader, recent lurker, first-time poster

Age: 43 and 41
Children: 3, ages 13, 10 and 8
Location: somewhere very expensive in USA

All figures annual
Pre-Tax Income: $1.2mm
Taxes: $360k
Expenses: $450k
Net Worth: $4.2mm

Without getting into too much detail, we have an expensive home which is valued at a little more than our net worth, and a lot of the expenses go towards servicing the debt and paying off the mortgage.  We estimate that by 2020, when our first child goes off to college, our annual expenses would drop to $250k if between now and then we purposed all annual discretionary income to pay down principal and sold existing investments to completely pay off the mortgage balance. For simplicity assume straight-line decrease in annual expenses, or $40k a year lower: $450k in 2015, $410k in 2016, $370k in 2017, $330k in 2018, $290k in 2019, $250k in 2020 when the house is owned outright.

I would conservatively estimate that our income will remain constant at $1.2mm pre-tax, $840k post-tax over the next 10 years.

We estimate that in 2020 our net worth would conservatively be $6.5mm in today's dollars, assuming market returns that are in line with inflation (0% real).  By 2025, with all kids out of the house, we would look to downsize to a residence worth roughly 1/3 of our current home, giving us liquid investments (both taxable and tax-deferred) of a combined $5mm.  We also estimate that annual expenses starting in 2024 would decline to $200k, then $150k in 2028, as the kids each graduate from college.

Assuming the above scenario, at what point would it be safe to assume we could completely rely on investment income alone and not have to earn a wage?
I was about to feel really really bad about myself, as we are 3 years older than you two with only about 40% of the NW.  Then I realized we have 20% of the income, and I don't feel so bad.

We have the same grocery bill though.  I should do better, we aren't feeding as many people.

I'll let the others let you know when you can retire.  The key for me has been to have "FU" money.  The job market being what it is, we are fine.  But there's always a possibility that one of us loses a job and becomes "unemployable" (aka, too old, we are in our 40s, after all.  I see people have hard times maintaining a particular level of job in their 50's).  I expect if I retire before my youngest graduates from college (I'll be 64 then, spouse 66), it will be  not of my choosing.

MarciaB

  • Bristles
  • ***
  • Posts: 484
  • Age: 58
  • Location: Oregon
My first take on your numbers is that you've got the 840K takehome, and spend 450K of it, which is about 54%. Meaning your savings rate is about 46%...which is quite mustachian.

Your numbers are a lot like other folks' numbers on this site, except that you just add a zero to the end of them. The principles are the same for anyone's numbers though - the thinking on the 4% safe withdrawl rate, the savings rate and the timeline to FI, etc.

And the philosophical issues (What do I need to make me happy? What's the best use of my time? Am I being intentional with my spending/priorities/time/consumption/etc.) are the same for us all.

Good for you for finding this site, reading up on this, and posting on the forum. My prediction is that you will figure all of this stuff out in short order and be the better for it.

Keep us posted!


Peony

  • Bristles
  • ***
  • Posts: 368
For the MMMs who are shocked at the numbers: Three full-freight private school tuitions in NYC could cost $150K per year. Tutors, activities and summer camps would cost thousands more. The nanny would add still more thousands. Not saying it's necessary, but that's what it costs if you're going that route.

TerriM

  • Pencil Stache
  • ****
  • Posts: 507
Still curious, OP, whether and where you would consider "retiring" to, if you could do it now.  You could still put the kids in private school using your stash.  Even at $40K/yr, you have 23 student/years= $1M plus, say another $720K ($60Kx3x4) for college.  That would leave you with $2.5M plus whatever you got if you sold your house, which I'm assuming is a minimum of 20%x4.2M=840K.

So, let's say you moved somewhere cheaper where a nice house cost $1M, you could still live on:

$4.2M - $1M private school - $720K college - $1M new house + $840K min house sales=$2.3M.

At 4-5% that's $92K-$115K/yr which leaves maybe $72K-$92K to retire quietly somewhere less expensive right now.  Thoughts?

TheNewNormal2015

  • 5 O'Clock Shadow
  • *
  • Posts: 66
Still curious, OP, whether and where you would consider "retiring" to, if you could do it now.  You could still put the kids in private school using your stash.  Even at $40K/yr, you have 23 student/years= $1M plus, say another $720K ($60Kx3x4) for college.  That would leave you with $2.5M plus whatever you got if you sold your house, which I'm assuming is a minimum of 20%x4.2M=840K.

So, let's say you moved somewhere cheaper where a nice house cost $1M, you could still live on:

$4.2M - $1M private school - $720K college - $1M new house + $840K min house sales=$2.3M.

At 4-5% that's $92K-$115K/yr which leaves maybe $72K-$92K to retire quietly somewhere less expensive right now.  Thoughts?

You are spot on

One of the few advantages of living in a high COL area is the ability to earn a high income and save a bit but then move to a cheaper area with a nest egg that took less time to accumulate

This is, in effect, a backup plan for us if the unfortunate unexpected were to occur

TheNewNormal2015

  • 5 O'Clock Shadow
  • *
  • Posts: 66
Long-time MMM blog reader, recent lurker, first-time poster

Age: 43 and 41
Children: 3, ages 13, 10 and 8
Location: somewhere very expensive in USA

All figures annual
Pre-Tax Income: $1.2mm
Taxes: $360k
Expenses: $450k
Net Worth: $4.2mm

Without getting into too much detail, we have an expensive home which is valued at a little more than our net worth, and a lot of the expenses go towards servicing the debt and paying off the mortgage.  We estimate that by 2020, when our first child goes off to college, our annual expenses would drop to $250k if between now and then we purposed all annual discretionary income to pay down principal and sold existing investments to completely pay off the mortgage balance. For simplicity assume straight-line decrease in annual expenses, or $40k a year lower: $450k in 2015, $410k in 2016, $370k in 2017, $330k in 2018, $290k in 2019, $250k in 2020 when the house is owned outright.

I would conservatively estimate that our income will remain constant at $1.2mm pre-tax, $840k post-tax over the next 10 years.

We estimate that in 2020 our net worth would conservatively be $6.5mm in today's dollars, assuming market returns that are in line with inflation (0% real).  By 2025, with all kids out of the house, we would look to downsize to a residence worth roughly 1/3 of our current home, giving us liquid investments (both taxable and tax-deferred) of a combined $5mm.  We also estimate that annual expenses starting in 2024 would decline to $200k, then $150k in 2028, as the kids each graduate from college.

Assuming the above scenario, at what point would it be safe to assume we could completely rely on investment income alone and not have to earn a wage?
I was about to feel really really bad about myself, as we are 3 years older than you two with only about 40% of the NW.  Then I realized we have 20% of the income, and I don't feel so bad.

We have the same grocery bill though.  I should do better, we aren't feeding as many people.

I'll let the others let you know when you can retire.  The key for me has been to have "FU" money.  The job market being what it is, we are fine.  But there's always a possibility that one of us loses a job and becomes "unemployable" (aka, too old, we are in our 40s, after all.  I see people have hard times maintaining a particular level of job in their 50's).  I expect if I retire before my youngest graduates from college (I'll be 64 then, spouse 66), it will be  not of my choosing.

We have definitely not been prodigious accumulators of wealth, and we have also made our fair share financial mistakes, but we have been very fortunate in the grand scheme of things: a happy family life, good health, a few fortunate breaks in career which led to high income, and no major unexpected emergencies.  We are blessed.

Everyone has a different starting point and variant circumstances, but I think maximizing one's station in life is one of the key points I have taken from this website and forum: there will always be someone richer, smarter and more attractive, but it shouldn't determine whether that person is happier.

Unique User

  • Pencil Stache
  • ****
  • Posts: 651
  • Location: NC
All figures annual
Pre-Tax Income: $1.2mm
Taxes: $360k
Expenses: $450k
Net Worth: $4.2mm

Please please tell me how you're only paying 30% taxes with that income?!?  We're paying 26% taxes and making way less than you.

Probably many small reasons including mortgage interest, but I imagine the big one is Social Security Taxes.  For 2014, the maximum amount of taxable earnings was $117,000.  So he is only paying the 6.2% on a fraction of his income whereas most of us pay it on our whole income. 

TerriM

  • Pencil Stache
  • ****
  • Posts: 507
Please please tell me how you're only paying 30% taxes with that income?!?  We're paying 26% taxes and making way less than you.

Probably many small reasons including mortgage interest, but I imagine the big one is Social Security Taxes.  For 2014, the maximum amount of taxable earnings was $117,000.  So he is only paying the 6.2% on a fraction of his income whereas most of us pay it on our whole income. 

Good point, but if there's something else I'm missing, please let me know!  The taxes are really getting to me, especially knowing that being self-employed, I get to add 15% to the top of the 30% we're already paying on my husband's salary.  It's a real disincentive to go back to work. :(

bacchi

  • Magnum Stache
  • ******
  • Posts: 4024
Good point, but if there's something else I'm missing, please let me know!  The taxes are really getting to me, especially knowing that being self-employed, I get to add 15% to the top of the 30% we're already paying on my husband's salary.  It's a real disincentive to go back to work. :(

Stock grants with LTCG tax treatment.

randymarsh

  • Handlebar Stache
  • *****
  • Posts: 1374
  • Location: Denver
Part of their comp could be stock instead of straight W2 cash and OP is counting the value as income.

chasesfish

  • Magnum Stache
  • ******
  • Posts: 3281
  • Age: 37
  • Location: Texas
Part of their comp could be stock instead of straight W2 cash and OP is counting the value as income.

I'm not quite sure this works any more.  I also get stock grants and they're taxed as regular income.

MDM

  • Walrus Stache
  • *******
  • Posts: 9686
Please please tell me how you're only paying 30% taxes with that income?!?  We're paying 26% taxes and making way less than you.

Probably many small reasons including mortgage interest, but I imagine the big one is Social Security Taxes.  For 2014, the maximum amount of taxable earnings was $117,000.  So he is only paying the 6.2% on a fraction of his income whereas most of us pay it on our whole income. 

Good point, but if there's something else I'm missing, please let me know!  The taxes are really getting to me, especially knowing that being self-employed, I get to add 15% to the top of the 30% we're already paying on my husband's salary.  It's a real disincentive to go back to work. :(

Below is a quick rough guesstimate that gets federal + state income taxes to $360K.  Many other possible ways to get there.

CategoryMonthly amt.CommentsAnnual
Salary/Wages$90,000$1,080,000
Healthcare Flex Savings Acct. (FSA)$105$1,258
FICA base salary/wages$89,895$1,078,742
401(k) / 403(b) / 457(b) / TSP /etc.$1,500At maximum$18,000
Income subject to IRS tax$88,395$1,060,742
Qualified dividends$10,000$120,000
Federal Adj. Gross Inc.$98,395$1,180,742
Federal tax$22,1282015 rates, item. ded., 2 exemptions$265,541
State/City tax$7,872Guess, using 8.00% * Fed. AGI$94,459
Soc. Sec.$612Assumes 1 earner paying$7,347
Medicare$1,963$23,550
Total income taxes$32,575$390,900
Add Health care reimb.$105$1,258
Income before other expenses  $65,925$791,100
Monthly Expenses:
Mortgage$26,841$322,093
Property Tax$5,000$60,000
Charitable contributions$2,000$24,000
Non-mortgage total$7,000$84,000
Total Expense$33,841$406,093

TerriM

  • Pencil Stache
  • ****
  • Posts: 507
Ok.  I'm *still* confused.  Even if he works somewhere with no state income tax (Thanks Cathy, I totally forgot such lovely places exist in the US), the federal tax rate for just $1M income is still at best $124K plus 39.6% of excess over $457K which still amounts to just a federal rate of 35% not counting medicare, SS, or the house deduction, or state taxes if they exist.  And he's making more than that.

So my question stands!   How can I pay less taxes?