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48 yr old, on the cusp...
Old 06-01-2016, 09:31 PM   #1
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48 yr old, on the cusp...

Hello, 48 yr old with a 44 yr old DW. Two kids 14 and 11. Retired military with pension and now working as a defense contractor earning $120k on top of the pension. DW is an executive at a financial institution pulling in $105k. Together were saving about 25-30% of our salaries by fully funding our 401ks and IRAs as well as paying down one of our rental property mortgages.

We own two rental properties and have built up about $170k in equity over the past 5 years. Both are a net positive for cash flow. We still have a mortgage of 4.25% on our home and have no plans to pay it off early at this point (rental properties and investment portfolio come first).

Currently have about $1.5M in taxable, 401ks, TSP, TIRA and Roth IRAs. Houses, cash and some other knick knacks bring us to just over $2M net worth. Asset allocation is pretty aggressive at 75% equity, 20% bond/G fund, 5% international but I convince myself that's OK since I have a generous inflation protected pension.

My one concern is that a significant portion of the portfolio, $275k, is in individual stocks (Netflix and Facebook) which goes against all logic about investment risk. I know, I know.... but they have performed incredibly well and as long as I can live with the risk I can FIRE sooner rather than later. In addition, it's all in a taxable account and if sell I'll be saddled with a huge tax burden I can minimize if I just wait until I FIRE and get into a lower tax bracket.

We do have a 529 with about $60k for the kids, but our college funding plan relies more on the Post 9/11 GI Bill benefits which I transferred to my kids. That won't cover 8 years of expenses, but it will make a big dent. That in combination with a scholarship, loans or other savings should make up the difference. We're not even sure they'll both go to college.

As I run the numbers we are on the cusp of FIREing now and could theoretically do so. Uncertainties regarding Social Security benefits (I just cant seem to get a straight answer using the on-line calculators), college expenses for the kids (do both kids go, scholarships, in state?), and sequence of return risk in the first several years puts us in a OMY, TMY, FMY situation. I rationalize that, worse case, we work a few more years and end up with more than we needed.

However, I know what our number is ($2.3M) and what our retire no later than date is (55). Whichever happens first will be when we pull the trigger.

Once we do FIRE (55 or $2.3M) we plan on staying local until the last kid is out of college and then want to move. Currently we're leaning towards central Florida since it seems to be the sweet spot for our priorities (, decent taxes, and near cruise terminals, international airport, military base with Space A).
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Old 06-01-2016, 10:16 PM   #2
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Welcome to the forum. You seem to have a good amount saved up and combined with your pension are in good shape, assuming you know your expenses. That is the thing you need to have good understanding of, so that you can figure out what withdrawal rate is required. Keep withdrawal rate low enough and you are good to go! Your military pension and the other benefits like health insurance coverage are great, that takes a lot of risk out of the decision.

I would count on both kids going to college, if not then the extra money is a bonus for you.

Being heavy in stocks does not bother me, I am about the same 75% as you are. I keep telling myself I should become a bit more conservative as I make the transition form working to retirement; or put another way from accumulation to withdrawal.
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Old 06-01-2016, 11:45 PM   #3
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I think you are doing fine.
I'm more into stocks than you and we are retired, so your situation seems ok.

I don't agree with your paying down the rental house mortgages but not your primary residence for the following reason, the rental mortgage can always be deducted against the rental income, you house if you itemize will one day have a mortgage so low that it does not help you at all to itemize and you end up taking the standard deduction.
I would pay off the primary house, and keep the mortgages on the rentals.
I do admit if the primary mortgage is super low (3%) and the rentals are high (6%) then it does make sense to pay off the rentals if you cannot get their rates lowered.
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Old 06-01-2016, 11:46 PM   #4
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Old 06-02-2016, 04:23 AM   #5
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Have you explored hedging your market risk with Netflix or Facebook using options?
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Old 06-02-2016, 07:11 AM   #6
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Originally Posted by 38Chevy454 View Post
.... assuming you know your expenses. That is the thing you need to have good understanding of, so that you can figure out what withdrawal rate is required. Keep withdrawal rate low enough and you are good to go! Your military pension and the other benefits like health insurance coverage are great, that takes a lot of risk out of the decision.
Absolutely agree with you. I have just started to fine focus on our cash flow so I know, to the penny, what our real expenses are. At this point I've got one month done and the results look promising. Of course it's only one data point, and I need at least a year, probably two, of data, but nothing scary at this point.


As for withdrawal rate, since we're planning on a 40ish year long retirement, I'm planning on a 3.6% withdrawal rate. I'm studying up on withdrawal strategies so that may/will flex as the years and returns vary, but hopefully only slightly and only for the better.
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Old 06-02-2016, 07:17 AM   #7
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I think you are doing fine.
I don't agree with your paying down the rental house mortgages but not your primary residence for the following reason, the rental mortgage can always be deducted against the rental income, you house if you itemize will one day have a mortgage so low that it does not help you at all to itemize and you end up taking the standard deduction.
I would pay off the primary house, and keep the mortgages on the rentals.
I do admit if the primary mortgage is super low (3%) and the rentals are high (6%) then it does make sense to pay off the rentals if you cannot get their rates lowered.
One rental, the one we're paying off, is at 5.25%. The other rental is at 4.625%.

Our primary residence is at 4.5%.

Your statement has me doing some thinking. Why would I want to pay down my primary residence and expedite the need to take the standard deduction? We do itemize, and the mortgage deductions are a big part of lowering our tax burden.
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Old 06-02-2016, 07:20 AM   #8
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Have you explored hedging your market risk with Netflix or Facebook using options?
The thought has crossed my mind, but at this point I haven't put in the time or study to understand the process or the risks. Can you give me a primer or explain further?
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Old 06-02-2016, 07:58 AM   #9
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One rental, the one we're paying off, is at 5.25%. The other rental is at 4.625%.

Our primary residence is at 4.5%.

Your statement has me doing some thinking. Why would I want to pay down my primary residence and expedite the need to take the standard deduction? We do itemize, and the mortgage deductions are a big part of lowering our tax burden.
Well, rental property interest is deductible from the first penny and home interest is only really a benefit after you hit the standard deduction. The comment was at some point, if you don't hit that threshold you will be paying interest that isn't a deduction. I'd continue to pay the 5.25 off and after that look at your tax numbers. Just something to be aware of. On a rental interest you will never had any non-deductible interest, in your case it's probably not a big deal.
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Old 06-02-2016, 08:09 AM   #10
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You guys are pulling in 225+pension+very low cost health care?

putting away 50 out of that amount means you have a pretty high burn rate...you said you save out of your salaries, what about the pension..

You probably need to do a budget to see where it's all going...you don't have big daycare costs either. I wouldn't look for "scary" stuff in the budget but you need to drill down.
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Old 06-02-2016, 08:55 AM   #11
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Gonna retire just when the kids leave the house is your plan?

I retired at 50 with a one and three year old, govt pension, and $1M. It was priceless being able to be a regular part of my children's daily life. That was 16 years ago. Now I need to make the transition to a life where I'm no longer a regular part, sadly but necessary.

You've won the game if you control your daily burn rate.
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Old 06-02-2016, 10:08 AM   #12
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Welcome to the forum.

If you haven't already, run firecalc. Make sure you fill in entries on each tab. For pensions that are already started, use this year as the start date. I usually model net rental income as a COLAd pension.

For your spending you need to include everything, taxes, healthcare, etc.

You can do a rough idea of spending by looking at your all in gross income, then subtracting your savings/investments, and Medicare and SS taxes ( since those go away in retirement.). From what you posted your spend level is pretty high, and you'll need to reduce spending or increase the nest egg before you can retire.
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Old 06-02-2016, 08:14 PM   #13
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You guys are pulling in 225+pension+very low cost health care?

putting away 50 out of that amount means you have a pretty high burn rate...you said you save out of your salaries, what about the pension..

You probably need to do a budget to see where it's all going...you don't have big daycare costs either. I wouldn't look for "scary" stuff in the budget but you need to drill down.
To clarify:

Income $225,000 salary + $56,000 pension = $281,000 gross

After taxes, 401k contributions ($18k/yr) and FSA, yearly "net" income = $185K

$185k - $11k IRAs - $19.6k primary mortgage - $19.2k rental mortgage additional principal- $9k saving for new cars - $8k travel = $118k spending.

So for our family, we spend about $10k per month on "stuff", "services", "events" and just general "living". I won't speak for certainty, but for our area and our peer group, we are hardly living high on the hog.

I will also admit it is more than what I plan to live on in retirement and is one of the reasons why I need to better understand our expenses. How much is kid related, how much is work related, how much is wasteful? It's one of the reasons I'm here.
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Old 06-02-2016, 08:21 PM   #14
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Welcome to the forum.

If you haven't already, run firecalc. Make sure you fill in entries on each tab. For pensions that are already started, use this year as the start date. I usually model net rental income as a COLAd pension.

For your spending you need to include everything, taxes, healthcare, etc.

You can do a rough idea of spending by looking at your all in gross income, then subtracting your savings/investments, and Medicare and SS taxes ( since those go away in retirement.). From what you posted your spend level is pretty high, and you'll need to reduce spending or increase the nest egg before you can retire.
I've run FIREcalc several times, sometimes several times a day, and I generally get a success rate in the 90th percentile. But again, the big uncertainties of SS and kids college expenses are factors that, if playing worse case, will drive that success rate down into the 80th percentile range. That is unacceptable to me. I also need to better understand my burn rate to give me a "warm fuzzy" before pulling the FIRE trigger.
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Old 06-02-2016, 09:37 PM   #15
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First - firecalc has to include taxes in your spending. It doesn't know what state you live in, whether you've got AMT issues, whatever... you need to put in gross spending.

For kids colleges (I have a 13yo and a 15yo) I excluded the 529's and college savings from my nest egg for firecalc. I estimated college expenses by looking at my state's public universities. In my case Cal State system and Univ. of California system. Pick a campus, look at their website, and get an estimate for costs (including housing). The challenge is that college expenses are going up faster than market growth or overall inflation.

Also travel will probably continue in retirement? At least for me it does. So you need to keep that in your budget. My trade off is I do a "big" trip every few years, and lesser trips in between.
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Old 06-02-2016, 09:38 PM   #16
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Originally Posted by TrophyHusband View Post
To clarify:

Income $225,000 salary + $56,000 pension = $281,000 gross

After taxes, 401k contributions ($18k/yr) and FSA, yearly "net" income = $185K

$185k - $11k IRAs - $19.6k primary mortgage - $19.2k rental mortgage additional principal- $9k saving for new cars - $8k travel = $118k spending.

So for our family, we spend about $10k per month on "stuff", "services", "events" and just general "living". I won't speak for certainty, but for our area and our peer group, we are hardly living high on the hog.

I will also admit it is more than what I plan to live on in retirement and is one of the reasons why I need to better understand our expenses. How much is kid related, how much is work related, how much is wasteful? It's one of the reasons I'm here.
So all the net from your rentals plus 19K goes to paydown the mortgage on the rental? I don't see any rental income listed. Where do you put the 9K for the new cars is it just part of your asset sheet? Good luck working thru your numbers and you have great income some fine tuning on the expense side should be helpful.
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Old 06-02-2016, 10:50 PM   #17
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So all the net from your rentals plus 19K goes to paydown the mortgage on the rental? I don't see any rental income listed. Where do you put the 9K for the new cars is it just part of your asset sheet? Good luck working thru your numbers and you have great income some fine tuning on the expense side should be helpful.
Yes, all rental income goes to paying down the rental mortgages plus an extra $19k/year from our own personal accounts. This should allow us to pay off the first house in 2020, 8 years after purchase. Then we'll roll all rental income into paying off the second house. We have about $20k set aside in a business checking account to pay for immediate business expenses, but that is not included in either our $2M net worth or $1.5M investment portfolio.

The $9k car fund goes to a money market. Currently about $60k. It is part of our overall net worth, but not our investment portfolio. I'm very careful about calculating our FIRE $ based on our investment portfolio only.
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