Author Topic: New to MMM and looking for some Early Retirement Advise  (Read 3045 times)

getoutsoon

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New to MMM and looking for some Early Retirement Advise
« on: April 13, 2016, 11:41:35 AM »
Hello all,  I just stumbled across this site yesterday and I have been totally consumed.  Here is a little background.  Im 49 married with two beautiful 6 month old twins (I know Im an old dad)  I have been in the university system for about 27 years and am looking to retire with a pension of about 45k in mid 2019.  I have about 600k in various taxable funds and probably 20k in Roths (got started late) and about another 100k in a 403b.  My wife and I are debt free 100% and own 3 pieces of real estate in total 1) our primary residence 2)an old grocery store building that is my garage and man cave and 3) a home that was left to me that belonged to my grandmother that I currently rent for 700 monthly.  After reading all of the posts my head is spinning and trying to make some tentative plans.  Heres the deal...my taxable accounts are killing me at tax time I find myself pulling from the accounts just to pay the tax bills (this can't be good) and the fees on some of those accounts are nearing 1%..I know the obvious idea would be to transfer all of those to vanguard funds but Im just apprehensive because I know the tax hit will kill me.  I really want to simplify this and be all set up to retire on 4% plus my pension in 3 years just not exactly sure how to proceed.  Ideally I would like for my wife to retire as well so we could spend every waking moments enjoying the outdoors with our kiddos.  Anyone else been here or have recommendations as to how to proceed. 

AZryan

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Re: New to MMM and looking for some Early Retirement Advise
« Reply #1 on: April 13, 2016, 12:31:42 PM »
I think the biggest trick is that cap gains and qualified dividends are taxed at 0% if you're in a low enough tax bracket -which I assume you're not in (at the moment). 4% 'OF WHAT' is the big blank you left out (or I didn't bother doing all the math from everything you laid out).

I didn't have a lot in ROTHs myself, but I've been flipping my taxable investments for a few years now, and they've become effectively tax-free. "Tax GAIN Harvesting".

Turned Total Stock Market Index into nearly identical 500 Index. Turned Midcap blend into Midcap value and growth. Then flip 'em back the next year so you keep raising your cost basis. When you finally retire, tax-wise, it appears that you have almost no profits on taxable investments to tax.
Honestly... should be illegal IMO.

You're obviously doing really well, and you might not want to aim that low to take advantage of that loophole. You're also too late to really plan ahead for retirement if you're looking at ~3 years, but maybe a few years of going this route to put things in order might do it?

Does it really hurt that much to pay some taxes on having so much money?

Maybe some others have some different tricks for you, but just seems to me that you have to take a tax hit because you have lots of investment income and lots of work income. Congrats, you're rich. Enjoy it.

Reading over the general MMM concepts... do you really want it? Seems like that's the first real question you need to answer for yourself. 4% of what you need, to do what you said you want, is probably a lot lower number than you're thinking you'll actually be spending in retirement. That's on you to sort out.

seattlecyclone

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Re: New to MMM and looking for some Early Retirement Advise
« Reply #2 on: April 13, 2016, 12:47:09 PM »
Heres the deal...my taxable accounts are killing me at tax time I find myself pulling from the accounts just to pay the tax bills (this can't be good) and the fees on some of those accounts are nearing 1%..I know the obvious idea would be to transfer all of those to vanguard funds but Im just apprehensive because I know the tax hit will kill me.

I'm not sure what your definition of "killing me at tax time" is, but if you had $600k invested in a Vanguard stock index fund, you would expect to pay tax on a 2% dividend yield, or $12,000 of extra income. This would be taxed at a favorable rate (0-23% depending on other income), so perhaps $2,500 of extra taxes.

Now if you have your funds with an advisor that trades stuff all the time or invests in funds that have a lot of churn, they'll be passing some extra expense on to you in the form of capital gains that you'll be taxed on every year. If this applies to you, not only will you save that 1% by switching to Vanguard, your annual tax bill will go down after the first year.

This is a switch you know you should make eventually. You'll owe those taxes eventually. All you gain by delaying is another year of paying high management fees on your portfolio.

Meanwhile you have about $700k invested in the market. 4% of that is $28,000. Add in your $45,000 pension, paid-off house, and $700 monthly rental income, and I think you should easily be able to retire on less than $81,400 of annual spending if you adopt even a little bit of frugality between now and then.

Retire-Canada

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Re: New to MMM and looking for some Early Retirement Advise
« Reply #3 on: April 13, 2016, 12:57:29 PM »
  Anyone else been here or have recommendations as to how to proceed.

So in 3yrs you'll have:

- $45K/yr in pension income
- $885K [adding $15K/yr and getting 5% after inflation]
- the $885K will give you about $35K/yr in income

So ignoring your real estate and assuming your wife doesn't work you'll have ~$80K/yr to spend before taxes.

How much do you need to live on?

If it's less than $80K/yr pre-tax than you are golden and you can work at optimizing your life/costs, but it's not a major issue.

If you need more than $80K/yr how much more do you need to live on?

On the tax end of things list what you are invested in with $$ values and how much tax you are paying for 2015. That might make it more obvious what the issue is.
« Last Edit: April 13, 2016, 02:34:31 PM by Retire-Canada »

getoutsoon

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Re: New to MMM and looking for some Early Retirement Advise
« Reply #4 on: April 13, 2016, 01:32:29 PM »
Thanks for all your replies and I apologize for my stupidity on most of this.  I will continue to scour this forum and learn.  It's obvious that I have a lot of that to do.  Thanks again!

MDM

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Re: New to MMM and looking for some Early Retirement Advise
« Reply #5 on: April 13, 2016, 02:18:27 PM »
If you can delay your pension so you have "no income" for a few years (particularly if the delay will increase your monthly payments when you do start), you can take large amounts of long term capital gains and pay 0% tax.

See http://forum.mrmoneymustache.com/ask-a-mustachian/do-lots-of-people-forget-that-they-will-still-need-to-pay-tax-in-retirement/ and links therein for some discussion.

See also http://forum.mrmoneymustache.com/ask-a-mustachian/how-to-write-a-'case-study'-topic/ if you are interested in getting into details.

nereo

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Re: New to MMM and looking for some Early Retirement Advise
« Reply #6 on: April 13, 2016, 02:21:10 PM »
Thanks for all your replies and I apologize for my stupidity on most of this.  I will continue to scour this forum and learn.  It's obvious that I have a lot of that to do.  Thanks again!
no need to apologize, many of us are here to help.

If you can fill in any of the blanks asked by Retire-Canada, seattlecyclone and others we'll be better able to help you.

In the meantime I'd like to say that you are certainly doing a lot of things right to have $600k in taxable accounts plus $100k in a 403(b) plus a pension plus a rental property.  For many of us here that would ensure a plush and very conservative retirement 'stache right now.

A few more questions to add to those already asked:
1) why haven't you been contributing much to IRAs?
2) do you have a mortgage on that rental property, or do you own it outright?
3) how much will you spend/year in retirement (best estimate)
4) what happens to your pension if you quit THIS YEAR vs waiting until 2019

FrugalFan

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Re: New to MMM and looking for some Early Retirement Advise
« Reply #7 on: April 13, 2016, 02:25:11 PM »
Agree with the others that if your spending is reasonable, you should have plenty to retire on as is. Though simplifying is probably a good idea, and it would be good to start doing that now over the course of the next three years.

getoutsoon

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Re: New to MMM and looking for some Early Retirement Advise
« Reply #8 on: April 13, 2016, 02:55:34 PM »
Thanks for all your replies and I apologize for my stupidity on most of this.  I will continue to scour this forum and learn.  It's obvious that I have a lot of that to do.  Thanks again!
no need to apologize, many of us are here to help.

If you can fill in any of the blanks asked by Retire-Canada, seattlecyclone and others we'll be better able to help you.

In the meantime I'd like to say that you are certainly doing a lot of things right to have $600k in taxable accounts plus $100k in a 403(b) plus a pension plus a rental property.  For many of us here that would ensure a plush and very conservative retirement 'stache right now.

A few more questions to add to those already asked:
1) why haven't you been contributing much to IRAs?
2) do you have a mortgage on that rental property, or do you own it outright?
3) how much will you spend/year in retirement (best estimate)
4) what happens to your pension if you quit THIS YEAR vs waiting until 2019

So let me start by saying that I was blessed to have received a sizable inheritance in 2008 which allowed me to become free of all debt and put the rest in funds.  Being a complete newbie to investing I opted to study some funds (managed) and look for ones that had a pretty good track record..failing to pay attention to the fees associated with.  I was able to build up the 403b by applying what I was once paying for my mortgage to this and continue to do so.  I didn't contribute to IRA's because first off I didn't know much about how they worked only that they werent accessible until later in life and I had always planned on retiring at 53sh.  To answer question 2 I don't have any mortgages on any property all are owned outright.  Im having a hard time with question 3 because I know that could be flexible...lack of daycare, property taxes, downsizing vehicles.  I think that is what I have to take a long hard look at..this one will be difficult.  Currently we save about 18% of our income and basically go month to month with little carryover.  We save 100% of our rental income to pay property taxes and insurance on all of our properties.  #4 is the tricky one...as I understand it.  I will have 30 years of service in 2019 but wont yet be 55.  The university has a 30 year plan where if you have 30 you can retire with full benefits prior to turning 55,  and my pension will be based on my last 4 years of service (sizable raise 2 years ago)  so Im kind of between a rock and a hard place there.  If I leave now I will have to wait until I am 55 and take a sizable cut for not having 30 years of service.  I hope that makes sense.

nereo

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Re: New to MMM and looking for some Early Retirement Advise
« Reply #9 on: April 13, 2016, 03:20:49 PM »

So let me start by saying that I was blessed to have received a sizable inheritance in 2008 which allowed me to become free of all debt and put the rest in funds.  Being a complete newbie to investing I opted to study some funds (managed) and look for ones that had a pretty good track record..failing to pay attention to the fees associated with.  I was able to build up the 403b by applying what I was once paying for my mortgage to this and continue to do so.  I didn't contribute to IRA's because first off I didn't know much about how they worked only that they werent accessible until later in life and I had always planned on retiring at 53sh.  To answer question 2 I don't have any mortgages on any property all are owned outright.  Im having a hard time with question 3 because I know that could be flexible...lack of daycare, property taxes, downsizing vehicles.  I think that is what I have to take a long hard look at..this one will be difficult.  Currently we save about 18% of our income and basically go month to month with little carryover.  We save 100% of our rental income to pay property taxes and insurance on all of our properties.  #4 is the tricky one...as I understand it.  I will have 30 years of service in 2019 but wont yet be 55.  The university has a 30 year plan where if you have 30 you can retire with full benefits prior to turning 55,  and my pension will be based on my last 4 years of service (sizable raise 2 years ago)  so Im kind of between a rock and a hard place there.  If I leave now I will have to wait until I am 55 and take a sizable cut for not having 30 years of service.  I hope that makes sense.

Thanks for the info.

I'd argue you are not really between 'a rock and a hard place' - instead you have golden handcuffs, and you're holding the key.  It might very well be that it's best to work ~3 more years before calling yourself retired.  Or you might just decide to retire now if you have enough assets.  Which leads us to...

how much you need in retirement.  Basically, it's always an estimation but most people can get a sense simply by looking at their current budget and then adding and subtracting categories that will change.  For example, you might not have commuting expenses or child care, but you may want to travel more.  You also won't be contributing to your 403(b) or IRA accounts, so those get zeroed out. Remember that you have a huge amount of control in how much you spend.  I'd recommend using mint.com (free) if you don't already.

With your current assets and going on the 4% WR (which is already conservative) you could have a steady monthly income of $3,000/mo.  That's a pretty comfy retirement for someone who owns their own house, and it doesn't include a cent of your pension.  Adding in your pension and you're well over $8k per month with no mortgage.  Don't forget you will also have SS payments for you and your wife in 16 years - that's another level of safety.

Take some time and budget out what you think you might spend in retirement using current spending as a guide.  $36k/mo might not sound like a huge amount, but it's comparible to families earning $75k/year and have a mortgage and are contributing to their retirement accounts. You will certainly be even better off than this.

Gluck and feel free to ask questions as they arise



aceyou

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Re: New to MMM and looking for some Early Retirement Advise
« Reply #10 on: April 13, 2016, 08:41:28 PM »
What nereo said.