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27 and dreaming of retirement in 5 years. Am I crazy?
Old 02-15-2012, 01:24 PM   #1
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27 and dreaming of retirement in 5 years. Am I crazy?

Hi folks! This is an awesome community.

I have a couple questions:

My wife and I are in our late 20's. In five years, our financial situation should resemble:

$600k in retirement savings
$150k in home equity

With this, we're thinking of moving to a cheap area of California (Sierra foothills) and retiring on a 4% draw of $600k (annual budget of $24,000). We also plan to have 1-2 kids.

Once we hit 65, we would likely start to slowly draw on our home equity with a reverse mortgage as well.

Living frugal, and having a big vegetable garden, these are my estimated expenses:

Annual Cost of Living 
  
Property Taxes:$3,000
Food$2,400
Electricity/Gas/Water/Sewer$2,400
Internet/Entertainment$1,800
Health insurance$8,000
Car and house maintenance$2,000
Miscellanious$3,000
Home and car insurance$1,200
  
Total$23,800

Is my outlook realistic? What am I missing?

Note: FIREcalc gives me a 82% success rate of making it to 65 years with my 600k. Also, I expect to occasionally do part-time consulting work over the years, which will be additional cushioning if there periods with a down-market.

I appreciate any advice! Thanks!
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Old 02-15-2012, 01:44 PM   #2
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I think you are pretty unrealistic, but if you don't shoot the moon once in a while you never know if you can hit it. As long as you do not have your heart set irrevocably on making it in 5 years, working on building up your net worth can only be a plus.
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Old 02-15-2012, 01:51 PM   #3
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welcome.

Personally, I think you are crazy. from one youngster to another, we tend to be overly optimistic. But I wish you luck. And if you do take the leap, I look forward to hearing about how it goes.
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Old 02-15-2012, 01:52 PM   #4
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Will you have a phone?

Food seems low, particularly if you have a couple kids. Maybe the big garden offsets the food expense, but are there gardening expenses (fertilizer, materials, seeds, water/irrigation, etc)?

Car and house maintenance at $2000 seems low unless you have a cheap house and do all car/house maintenance yourself. How do you account for capital costs like replacing your car or major repairs (such as HVAC, new roof, water heater, appliances, etc)?

You will have some income I presume - will there be state or federal taxes on it? Federal is probably zero especially if you have a couple kids, and I don't know enough about CA state taxes, but if it is like my taxes in my state I always end up paying more in state taxes than fed taxes with kids.

I would recommend adding a budget for increased costs for kids. You can raise kids on the cheap but they aren't free.

Overall, I have to commend you on the approach - setting up a spending plan or budget and then accumulating assets to produce a sufficiently safe withdrawal rate for your desired lifestyle.

Just so you know, we have a similar budget which I consider a "bare bones" retirement budget, and then I plan on adding additional spending for fun things, extra kid expenses, etc. So my $24000 baseline budget ends up being much higher once I add in fluff. Maybe you don't want fluff, but is there a chance you will at some point want fluff? You ok going back to work to fund the fluff?

If you stick around here long, you'll hear of the "one more year syndrome" where people keep working year after year telling themselves that they can increase their margin of safety just by working another year (and they do this year after year!). Well, my version is the "just five more years" which I seem to be perpetually stuck at. I'm 31 now and over the last 5 years we have seen major increases in net worth by living cheaply and saving a significant portion of our income (even in the middle of the Great Recession!!1), so it is very possible to have a huge increase in net worth over 5 years. And where ever we end up financially in 5 more years, we will most likely be much wealthier than we are today (and just maybe FI). So maybe for you you are ok setting this 5 year goal. Once you close in on it you can re-evaluate your priorities and how much work sucks and determine if you want to work "just five more years" or whatever.
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Old 02-15-2012, 02:09 PM   #5
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If you were not planning to have kids I would say go for it. Kids can be expensive and I do not see room in your budget for them. Without kids you could give it a try and work if you needed to shore up your finances. If you were out of the work force for very long you might not be able to find work that would produce enough income to support a family. I am highly impressed that you have done so well and have so carefully considered your future and possible ER. What I think your budget is also missing is money to cover the unknowns. We cannot predict the future. However, I think it is highly likely that sometime in the next 60 years inflation will go sky high like it did in the 70s and seriously effect your finances. I think you should keep your nose to the grindstone for the next five years and see where you actually are. I would think that at that time if you have the 600K portfolio it will still not seem like enough. I hope this does not discourage you because it seems to me that you have a very good chance of a good retirement by the time you are 40. For most of us that was not even a dream.
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Old 02-15-2012, 02:12 PM   #6
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I actually had similar thoughts at your age of getting out of the rat race, buying a small home and 10 acres up in the hills and then living off the land and withdrawals from my nestegg. Then I decided that was taking frugality to too much of an extreme.

The other thing is that your SS in retirement will be minimal because you will not have been in the workforce long enough to get the credits that you need to get some decent retirement benefits.

Also, I would not count on a reverse mortgage in my planning. What if they are no longer available when you reach 65? You don't want to have to eat dog food later in life or rely on your kids to support you.

I suggest that you continue saving and investing but continue to enjoy life and reassess in 5 year increments. If you do have kids, it will make a difference especially since I don't see much room for college expenses in your budget.
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Old 02-15-2012, 02:13 PM   #7
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Possibly missing: college fund. I see you have car & home maintenance listed, but IMO $2000 is too low since some items will need to be entirely replaced periodically.
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Old 02-15-2012, 02:26 PM   #8
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haha. You guys are awesome.

Thanks for the wake-up call. Maybe I'll change from a 5 year plan, to a 8-10 year plan.

Thanks for the feedback!
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Old 02-15-2012, 02:33 PM   #9
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Originally Posted by ponchoape View Post
haha. You guys are awesome.

Thanks for the wake-up call. Maybe I'll change from a 5 year plan, to a 8-10 year plan.

Thanks for the feedback!
Absolutely. Keep your nose to the grindstone and you'll be doing awesome at age 32 with 600k in your investment portfolio and $150k in home equity.
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Old 02-15-2012, 02:53 PM   #10
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$200 a month for food is doable for 2 adults. However, throw that out the window if you have 1 kid, muck less 2. And that's just ONE budget category.

If DW and I did not have kids, we would have retired years ago. That being said, I would not trade anything for them..........
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Old 02-15-2012, 03:00 PM   #11
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Quote:
Originally Posted by ponchoape View Post
Is my outlook realistic? What am I missing?

Note: FIREcalc gives me a 82% success rate of making it to 65 years with my 600k. Also, I expect to occasionally do part-time consulting work over the years, which will be additional cushioning if there periods with a down-market.

I appreciate any advice! Thanks!
Do you live on that amount of money now? That seems like a tight budget to me. But if your dream is to move to the Sierra Foothills, I'd look into what your part-time consulting work could pay. If you do it a little more than occasionally, even 5-10k takehome every year would probably make a big difference.

Good Luck!!
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Old 02-15-2012, 03:21 PM   #12
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I wish when I was your age I would have learned more about investing so I could have more productively grown my investments. No one cares about growing my investments more than me. Also now that I have these skills, I can sustain myself through retirement.

I also wish now that I wouldn't have spent money on certain things like sports cars when we were rolling in the money. If I would have been more aware of what I really needed instead of what I wanted the past 20 years, lots more money could have been saved.

Good luck!
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Old 02-15-2012, 04:19 PM   #13
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Originally Posted by ponchoape View Post

Annual Cost of Living
Property Taxes: $3,000
Food $2,400
Electricity/Gas/Water/Sewer $2,400
Internet/Entertainment $1,800
Health insurance $8,000
Car and house maintenance $2,000
Miscellanious $3,000
Home and car insurance $1,200
Total $23,800

Is my outlook realistic? What am I missing?
Can't comment on taxes.
Food seems low. I'm sure a couple can make that work. But you want two kids? My family of four (with no garden) tries to shop for deals. We aren't extreme, but try to be thrifty. We spend $850-$1000.
Electric etc seems okay. But over the long timeframe you're talking? I think commodities will outpace inflation.
Internet/Ent. seem okay if you're happy being thrifty. I'm probably about 20% higher.
Health insurance-Who knows with Obamacare. Seems like a huge gamble right now. Also seems like you are WAY low.
Home and car insurance-Pretty close to what I pay.
Maintenance is WAY low. One car or house problem would blow the budget.
Miscellaneous-Too vague to know. But you did misspell it.

Seems to me you are missing a lot on this budget. Medical? Kids? Mortgage? Car replacement?
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Old 02-16-2012, 08:42 AM   #14
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while i've never actually tried, I have investigated becoming a part-time consultant in my field. I would love to work half the year and reap 40-60% of my current income. I have found it difficult to become a consultant, especially part-time. In my field, those I know who consult either work too much or always trying to scrounge up work (and they have 25-30+ years experience). I wouldn't underestimate the amount of effort required for the part time consulting gigs. Then again, maybe you're in the right industry and are a super star.

Again, please let us know how it turns out.
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Old 02-16-2012, 02:30 PM   #15
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inflation could wreak havoc on those numbers... the 4% draw mixed with an inflation period similar to the late 70's (which is bound to happen at some point in the next 5-70 years) would put you in a very difficult position.

If you have the means to accumulate that much capital and equity over the next 5 years, my advice would be to continue working like you are now for a minimum of 10 more years, if you can handle it. At that point you're looking at a number more like $1,000,000... and annual income closer to $40,000. Seems, with such a long retirement coming (50+ years) working an additional 5 years to give yourself an extra 60% to live on for 45+ years would be a great investment.

Early on, if you can live on 24K, then it'll just make things even easier for you in the long run as your egg continues to grow, but I'm sure inflation and other expenses (kids tuition, medical, etc...) will cause you to be drawing way more than 24K in the future, compared with today's dollars.


Lastly, a lot of people who are looking at extremely early retirement forget that about every 25-30 years it takes twice as much money to buy the same stuff. So essentially, if your $600,000 is being held back by your 4% annual pull then you can expect $600,000 to feel more like $200,000 (in buying power) when you're in the 70's/80's

This is why I'm shooting for $2.5 million in my retirement account... even though in today's dollars $1 million looks good enough.
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Old 02-16-2012, 02:36 PM   #16
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Lastly, a lot of people who are looking at extremely early retirement forget that about every 25-30 years it takes twice as much money to buy the same stuff. So essentially, if your $600,000 is being held back by your 4% annual pull then you can expect $600,000 to feel more like $200,000 (in buying power) when you're in the 70's/80's
My understanding of the 4% WR, as stated in the trinity study, is that it will keep up with inflation. Recent experience has shown this may be a bit overly optimistic. But whatever WR one chooses, it should account for inflation.
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Old 02-16-2012, 02:45 PM   #17
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My understanding of the 4% WR, as stated in the trinity study, is that it will keep up with inflation. Recent experience has shown this may be a bit overly optimistic. But whatever WR one chooses, it should account for inflation.
I think it depends a lot on what you're invested in... if you're getting a 10% yearly return (average) in stocks and can handle the swings emotionally I'm sure the 4% model will let you ride indefinitely... 3% inflation + 4% consumption means you're breaking even if the market is getting you 7% a year...

for someone looking at ER in their 30's knowing they could jump back into the game if things turn south, this might work... but as they reached 50's/60's a financial speed bump (in their savings or the economy) could be disastrous. I've always interpreted the 4% rule as being pretty solid for a 20-30 year period, but when talking about 50+ years there is more risk involved. I'd be looking at a number more like 3-3.5%
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Old 02-16-2012, 03:07 PM   #18
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I guess I don't know enough to toss out which WR to use, especially never having walked in those shoes. If your 3-3.5% WR over your 50+ years retirement has gotten you where you need to be, that is certainly a more valid point than I have. I personally don't know what the answer is, and we can all choose for ourselves what WR we use. And understanding where the 4% rule came from, is a good place to start.
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Old 02-16-2012, 03:13 PM   #19
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I'm just playing devils advocate here... since I like to always look at the worst possible scenario to see if I could survive it.

Here is an example:

The decade of the 1970's saw an average annual return of 5.8% for the stock market but inflation far outpaced that, making the price of everything skyrocket. What $100 would buy in 1970 would cost you $212 in 1980.

If the same thing happened again today this is what it would mean for us:

Lets say a person retired today (2012) with $600,000 and pulled 4% a year to live on. They had an average annual return of 5.8% from 2012-2022 (same as the 1970s)... it would probably be less because that individual would not invest entirely in equities, but we'll use it as a best case number... and inflation also mirrored the 70's. That individual would see their retirement account grow to approximately $717,000, while living on $24,000 a year (4%). Good so far.

Inflation however drove prices to more than double over the decade, meaning they now needed $51,000 in 2022 to have the same buying power as what $24,000 got them in 2012. The $717,000 in 2022 now has the buying power of $337,000 from 2012.

So lower than average stock market returns mixed with inflation like we saw in the 70's would essentially cut a person's retirement nest egg in half (not the actual number, but the buying power).


If we saw another decade exactly like the 70's the OP's $600,000, drawing 4% a year and a 5.8% return would feel more like $337,000 in 2022 and they would have to adjust their budget to live on half what they planned for, since everything now costs more than twice as much (due to inflation). For a decade like this (worst case scenario)... the 4% rule breaks down.

My point was not to shoot down the plan, but to point out the dangers of living so long on such a tight budget in retirement. We'd like to think, or hope rather, that the government would never allow inflation like we saw in the 70's again... but it might be smart to plan on it coming at some point if you're looking at a 50+ year retirement.

Extreme inflation is not all that bad for the working class (much less the youngest workers - salaries catch up to inflation eventually), but for retired and near retired individuals living on income from investments, it can really hurt - since it cuts straight into the buying power of retirees. 10% inflation for a single year would essentially mean a 10% loss in retirement cash.

The 8 years from 1974-1981 saw an average inflation rate of 9.4% a year... you can see how that would decimate a retirement accounts buying power.
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Old 02-16-2012, 03:47 PM   #20
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What everybody else said ponchoape.

The fact that you're 27 and already thinking like this is a very good sign (for early-retirement purposes at least - you might drive others a bit crazy with your number-crunching but that's their problem!)

Hope for the best, plan for the worst. Sounds like that is what you're doing. You're going to do very well, I think.
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