40 years old and considering early retirement

[Scorpion]

Hi, I'm Scorpion. I'm 40 years old and actually made my account on this website a number of years ago when I was pretty frustrated at work and fantasizing about early retirement. Since then, I have weathered the financial crisis and continued to save very aggressively. I have a very well-paying job that, when coupled with my saving mentality, has allowed my wife and I to amass investment assets slightly in excess of $2 million (and that is net of our mortgage). Other than the mortgage, we have no other debt. We have two children in the preteen years and save moderately in 529s for each of them, although we would like each of them to fund about half of their college education on their own (loans, etc.). My wife recently went back to work and makes about $55,000 a year. Unlike me, she loves working and has no desire to retire. I think she has good job security, but of course nothing is certain.

Of the net $2 million, $1 million is in taxable accounts and is easily accessible. The rest is in illiquid real estate investments (~$350K) or retirement accounts ($750k). I also have various employee incentive programs not accounted for here which are subject to a vesting schedule. If I retire early, my hope is that my employer might consider fully vesting me, but that is far from a guarantee. I will be approximately $150,000 vested out of $400,000 in value at year end. Because new grants are made every year, the vesting will always be an issue.

My asset allocation is entirely in stocks (index mutual funds) and the illiquid real estate investments. Presumably, that allocation would need to shift materially more towards bonds if I were to retire. Although I do not believe in timing the market, this does seem like a horrible time to be buying bonds.
Our expenses in 2014, net of mortgage payments were about $49,000. We presently get health insurance through my job, and my wife’s job pays her extra salary because we have made that election. Her salary would drop to the mid $40ks if I retire and we put the family on her insurance.

If I retire, it would be a must that I not go back to work. All other things being equal, I would rather be safe and work a little longer to ensure that I never have to go back.

My main motivation for retiring is that I tend to find work stressful and frustrating, and I also have certain health issues that I believe may being exacerbated by work. Of course, there is no way to know for sure without retiring. I have no interest in trying to take a leave of absence or disability.

I do have a number of hobbies that I would be interested in pursuing during retirement; however, my health issues have caused me to have to cut back on some of those.

So, I am not sure where to begin. I believe that I have enough assets to retire right now if I want to. Do you agree? What would you suggest as my next steps as I consider my options here?

Thanks for any help you can provide.

 

[rb35]

Hi Scorpion, great job saving. Why do you say you must not go back to work after retiring? Is that a self-imposed requirement or do you have some sort of non-compete agreement?

It seems that if your wife is planning on working, her wages will almost cover your family's living expenses so from a financial perspective, it seems you're free to stop working.

 

[Ready]

Welcome Scorpion.

You have done very well for yourself - congratulations! It would be impossible for anyone to give you advice on whether you have "enough" without knowing what your total annual expenses are. And you will need to think about how those expenses might change after you retire as well.

Having an asset allocation entirely in stocks is pretty aggressive. Have you thought about how you would feel about retiring if we had a 40% market correction?

I felt the same way you did at 46 when I retired. But I ultimately settled into some very low stress part time work which I find very enjoyable. I was certain I would not want to do this when I retired because I was so burned out. But over time, some people tend to rethink those things once the stress wears off and you realize how much free time you have at such an early age. Others, many of whom are on this forum, are perfectly happy being fully retired.

I'm sure others will have additional thoughts and insights for you, but again, congratulations on doing so well for your age!

 

[Scorpion]

Hi Scorpion, great job saving. Why do you say you must not go back to work after retiring? Is that a self-imposed requirement or do you have some sort of non-compete agreement?

It seems that if your wife is planning on working, her wages will almost cover your family's living expenses so from a financial perspective, it seems you're free to stop working.

Thank you for the props on the saving. I do feel fortunate to have gotten to this point, and I have a indulgent spouse who is willing to do budgeting, etc.

My motivation to not work is based on the feeling that my skills will atrophy quickly at retirement (as I focus on other things that hold greater interest for me). If I were to then go back to work, I think I would have a hard time replicating the job I have now. I would say that my job duties now are substantially better than what I had when I made my account on this site a few years ago. I only want to walk away if it is nearly risk-free.

It sounds like you do not have any concerns with retiring at 40 years old under the circumstances. Are there any resources you think I should read or considerations I should ponder before going further? Early retirement is something that sounds attractive to me almost every hour of the day while I am at work and a little scary whenever I am at home and think about it.

 

[Scorpion]

Welcome Scorpion.

You have done very well for yourself - congratulations! It would be impossible for anyone to give you advice on whether you have "enough" without knowing what your total annual expenses are. And you will need to think about how those expenses might change after you retire as well.

Having an asset allocation entirely in stocks is pretty aggressive. Have you thought about how you would feel about retiring if we had a 40% market correction?

I felt the same way you did at 46 when I retired. But I ultimately settled into some very low stress part time work which I find very enjoyable. I was certain I would not want to do this when I retired because I was so burned out. But over time, some people tend to rethink those things once the stress wears off and you realize how much free time you have at such an early age. Others, many of whom are on this forum, are perfectly happy being fully retired.

I'm sure others will have additional thoughts and insights for you, but again, congratulations on doing so well for your age!

Thanks for the compliment on the savings. As to the annual expenses, last year they would have been about $50,000 net of my mortgage (which I assume I might pay off immediately were I to retire). I think it is fair to assume that my expenses could go up by, say, $10,000 if I retire as I pursue hobbies, etc.

As to asset allocation, I had almost 100% allocation to stocks during the financial crisis, and I bought all the way down and all the way up. I would say I am now 75/25, with the 25% being the real estate investments I mentioned (they are partnership interests that throw off distributions, rather than me actually owning real estate). I do assume that I would need to move some into bonds when I retire, but I have been postponing that until then. I guess you're right that I have been willing to take the risk that the market drops by 50% or so like it did last time.

So would you also say that from an assets perspective alone, it would appear that I am ready (subject to allocation issues)?

 

[jerome len]

When is the actual right time to plug into a decision that could last you 50 years?

2m puts you into a leage that many will say is enough. But is this the time? Frankly, I don't know but I do know you should get the best of advice. I'd put a financial plan on paper, take it to a trusted friend or advisor, talk to a clinical Doc for the social side of your retirement and then build in a financial and emotional cushion. What would happen if we have a 2009 drop in the market? What will happen to bonds when interest rates go up? Will you have enough in the kids 529 accounts so they don't end up behind the 8 ball as tuition rates continue to skyrocket?

Now, after you answer all these questions ask yourself if today is the day or do you wait another year or two if you have concerns. Could you be happy in a different less stressful job if needed? Would you be happier in a couple of years still having 48 years of retirement ahead of you?

I don't have your answer; my DW is a clinical Doc, I have close friends that are financial advisors.....I'm a lot older and I know the world has changed since I was your age.....my youngest son is a PHD candidate and he would nevery have had the chance if I hadn't helped financially......CNN is running a special on the 1970's....boy life is different now than then. Again, I don't have an answer.....only questions that you should answer before you make such a life altering decision. Good Luck!!!!!!

 

[cooch96]

Scorpion, I think you can make it work. Having a gainfully employed spouse is a wonderful thing!

I also feel that this is not a good time to buy bonds, eventhough about 9% of my AA is tied up into it. But that's because the only way I can buy foreign funds in my 401k is through a "balanced fund of funds" that includes bond funds. When I ER, I plan on switching my 401k bond allocation over to cash and TIPS in my IRA, at least enough to last a five year bear market. Does that sound like something you'd be more comfortable doing?

 

[rb35]

It sounds like you do not have any concerns with retiring at 40 years old under the circumstances. Are there any resources you think I should read or considerations I should ponder before going further? Early retirement is something that sounds attractive to me almost every hour of the day while I am at work and a little scary whenever I am at home and think about it.

The consideration that stood out most to me was your concerns about your health. No amount of money is worth risking your health.


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[someguy]

I would probably talk to DW and make sure she's okay working through any immediate downtown (e.g., one that occurs in the next 3ish years) and possibly until you've reached an acceptable college savings point for the kids. If she is, then I'd pull the plug.

 

[karen1972]

Some concerns. What if your wife doesn't work because something comes up, how does that impact your planning, not sure how much health care would cost you out of pocket and if you have budgeted for that. Also quitting at 40 will lower your SS payout so you will need to factor that in.


Could you make it probably, but only you would know what type of risk tolerance you have and how tight that $50k budget is.. If things come up is there stuff to cut or are you pretty trim already?

 

[Scorpion]

Thanks for the responses. To respond to some of the questions:

1. My wife took 10 years off work to stay home with the kids, even though she loves her job. She started working again just last year and really liked it, and she wants to work to normal retirement age. So, I don't really have a concern about her not wanting to work. Even if she didn't want to work, couldn't a reasonable case be made that we could both be retired? Again, I think that is highly unlikely, but a 3% withdrawal rate would still exceed our annual expenses. If she works, our withdrawal rate is near zero.

2. I'm not sure I understand how quitting early will reduce my Social Security. I already have the 40 quarters or whatever, and I have been hitting the Social Security maximum for many years. Doesn't that mean that I would receive the maximum amount once I become eligible?

3. I think I'm pretty trim on budget already. I would not want to dip below 50 K of expenses. On the other hand, aren't my assets plenty to cover almost any eventuality? I would have thought so. I guess I assumed that people were retiring early with less than this as a general matter. Maybe I'm wrong.

4. As to asset allocation, I think I would be comfortable moving some amount over to bonds or cash if I retired. Would anyone recommend any books that focus not so much on the saving for retirement, because I think I'm there, but rather how to allocate your assets upon early retirement?

Thanks for your help everybody.

 

[2017ish]

Re social security, you will take a haircut, as you will have nowhere near 35 years in. You would profit from reading this contemporaneous thread and the links to the detailed Social security benefits calculator given in a couple of the responses: http://www.early-retirement.org/for...ing-on-social-security-77983.html#post1614749

 

[someguy]

I may not be putting all the pieces of info together correctly, but I think you're saying $50K is your bare bones budget and, realistically, your retirement budget is more like $60K, including the mortgage. Does this include income taxes? Does it include college savings? What about car(s) and insurance for the kids?

Best case scenario: If your wife is making $45K/year with HI, then she's taking home roughly $36K which leaves a spending gap of $24K/year which is easily covered by your $2mm. But that's still not a zero WR.

Worst case scenario: Your wife stops working. So now you should probably budget $15-20K/year for HI for all four of you (dropping to 10-15K when the kids leave). And say taxes weren't included in your $60K expenses number. Now you're looking at $75-80K, and need to gross that up for taxes. You're pretty close to needing $100K/year gross which is a scary 5% WR on $2mm. Put another way, to keep the 3% WR you'd need $3.3mm.

To answer one part of your question 3: some people have retired on less. Some significantly less. But the critical factor is the RATIO of assets to expenses. Someone who only needs $30K/year all in needs a lot less of a nest egg than someone who needs $150K/year.

 

[MichaelB]

Thanks for the compliment on the savings. As to the annual expenses, last year they would have been about $50,000 net of my mortgage (which I assume I might pay off immediately were I to retire). I think it is fair to assume that my expenses could go up by, say, $10,000 if I retire as I pursue hobbies, etc.

Scorpion, this might help http://www.early-retirement.org/for...-answer-before-asking-can-i-retire-69999.html

 

[rb35]

4. As to asset allocation, I think I would be comfortable moving some amount over to bonds or cash if I retired. Would anyone recommend any books that focus not so much on the saving for retirement, because I think I'm there, but rather how to allocate your assets upon early retirement?

Check out Wealthfront. They have a neat survey that helps you determine an appropriate asset allocation which they implement with low cost ETFs. You can use them to do it at a cost of 0.25% or just take the results and do it yourself in your own brokerage account.

Another alternative is to use one of the Vanguard LifeStrategy funds. They have a few depending on risk appetite and objectives.


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[45th Birthday]

Congrats on the savings and for obviously LBYM.

I don't think you can make it if your wife suddenly didn't work. Does your $50K include taxes? If it does, and you spend $10K more, you are at $60K. While this is 3% of $2 million, you will not have access to at least $650K of that (without burdensome penalties) for many years. Will $1.35 million last until you can tap the rest if your wife suddenly became unable to work? Also, as someone mentioned, health care costs if not included in your expenses could be high.

I'm wondering if you've talked through the family dynamics issues of dad quitting work to pursue hobbies while mom continues to work? I was never in that situation, but could see how there could be issues.

 

[jim584672]

Looks like you are in a position of FU, according to John Goodman:

 

[Ready]

Thanks for the compliment on the savings. As to the annual expenses, last year they would have been about $50,000 net of my mortgage (which I assume I might pay off immediately were I to retire). I think it is fair to assume that my expenses could go up by, say, $10,000 if I retire as I pursue hobbies, etc.

As to asset allocation, I had almost 100% allocation to stocks during the financial crisis, and I bought all the way down and all the way up. I would say I am now 75/25, with the 25% being the real estate investments I mentioned (they are partnership interests that throw off distributions, rather than me actually owning real estate). I do assume that I would need to move some into bonds when I retire, but I have been postponing that until then. I guess you're right that I have been willing to take the risk that the market drops by 50% or so like it did last time.

So would you also say that from an assets perspective alone, it would appear that I am ready (subject to allocation issues)?

If you paid off your mortgage so that your actual annual expenses were $50K, how much would you have left in liquid assets, and what portion would be in taxable vs tax deferred accounts? Once you figure that out, take a look at a 3% and 4% withdrawal rate and calculate what your annual withdrawal would be, and whether that would cover your expenses. That will make it easier to help you assess this.

My annual expenses for the two of us are about $100K, and that is with no mortgage or debt of any kind. I do live in Southern California, so I know my expenses are higher than average. But a family of four, with two teen age kids, living on $50K is quite low, even by us LBYM folks here. I'm not doubting that those are your expenses if you say you've been carefully tracking them, but are you sure you're including everything, like eventual car replacement, home repairs, vacations, uncovered medical expenses, college fees, weddings for the kids...etc?

 

[karen1972]

Look at the thread Calculating SS When FIRE'ing Under 40? the details are there and depending on if you made it to the second bend curve will determine the impact. It will be hundreds a month loss even if you made it to the third curve.


As for making it, my concern is it appeared you only had $1M in accessible assets until you hit 59 1/2 when you could start pulling out from your 401k. Even if you cash in the $150k stock by the time you get your check the taxes will cut that down quit a bit. So given that your talking about living 20 years on $1M w/ $50k required to be covered and if your wife doesn't work, it would be more like $65k needed to include healthcare and again not sure if that included taxes.. see how that dwindles away rather quickly. Plus if your 40 and you or your wife live to be 95, that's 55 years of drawing down and 27 years before SS kicks in... its just a long time with a lot of unknowns. Even a few more years changes those numbers quit a bit.

 

[nash031]

Financially: you have $2MM invested assets, expenses that amount to $49K and your wife makes $55K, so if I'm reading that right, you'd only have to fund whatever's left on your mortgage from the $2MM every year until DW retires and/or the mortgage is paid off. I'm going to guess that's well below 1% of total invested assets in annual payments (so why would you pay it off... dunno since you get to pay it with inflated dollars over time... JMO), so from a financial standpoint, it looks like a no-brainer to me.

Emotionally: I think about this a lot as I'm working to potentially retire at 42 (in four+ years), with DW at 39, still working and she loves what she does as well. I wonder if my retirement and her continuing to work for X or XX number of years wouldn't drive a wedge between us as we'd be in different phases of life? Kind of like keeping your HS girlfriend when you go off to college... those things tend to not work.

What do you want in retirement? If you want to travel, are you OK doing so without your wife or subject to her work schedule? Will your hobbies occupy enough of your time without her around? Are you OK on your own? Are you OK doing everything at the house and with the kids for the next few years? (It'll be tough to justify having her cook/clean/whatever when you're "at home all day").

These are the things that I think are more important than the financial piece at this point for you (and hopefully someday soon, me!).