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Old 10-05-2007, 02:54 PM   #21
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What is FIRE (sorry as you said I am newbie)...
Financially Independent Retire Early!!!

There is a whole thread on Acronyms. Just use the search function to find out who your DW and DD are!
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Old 10-05-2007, 02:54 PM   #22
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Originally Posted by tightasadrum View Post
Where did you come up with the growth and std. dev. numbers?
My growth number I chose to be somewhat conservative based on my funds. I have been doing typically better than my target 7.5%

The std dev number is simply the running 3 year std dev average of all the mutual funds in my portfolio as tracked by Morningstar


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And I'm just curious: what age did you start saving so aggressively and what convinced you to do it? So many people making high incomes in expensive areas spend a lot on life style, although I suppose $230000 income does give you some flexibility.
1) My wife and I both lived at home before we got married.

2) When we first got married 12 years ago, my wife and I made 83k combined. We also bought a house we could easily afford and had a large downpayment thanks to #1

3) Up until we got married we both did the standard 6% in 401k and simply saved the rest away in a normal savings account

4) After we got married, everything changed. Being engineers we both got caught up in severe career acceleration in terms of salary in the late 1990's. One of our companies did well enough that we were able to exercise some options and pay down our small mortgage

5) Once the mortgage was removed, it was coupled with another significant bump in salary (up above 200k). Our savings accelerated full speed from that point on which was about the year 2000. We have been saving on average about $90k a year since then. As mentioned above, we don't expect this to last, but we figure the more we save now, the easier it will be to still retire early but not have to carry a huge paying job to do so.
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Old 10-05-2007, 03:32 PM   #23
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Maldini - you your wife are in great shape. I applaud your plan to wait until 50. There is a good chance that your forties will be even better earnings years. If you keep your current LBYM (live below your means) lifestyle you will have an extra margin of security that will make RE all the more comfortable. I think it is a mistake to push for the earliest practicable escape date - unless work has become extremely toxic. Better to take your time and make sure your ducks are in a row. Sounds like you are doing that.
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Old 10-05-2007, 03:51 PM   #24
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Welcome maldini. Before I jumped out of the plane, so to speak, I used the free comprehensive retirement planner from Fidelity. It gave me confidence that I was going to be OK.

Not to push Fido over anyone else, but I found it to be pretty easy to use and sophisticated. One can also do "what if" scenarios with it.
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Old 10-05-2007, 04:18 PM   #25
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oh crap, I just realized something.

Now I understand why everyone is coming up with a much smaller portfolio need than I am expecting to need.

When I said $68k for a pre75 retirement expense, that was the number I expect to need AFTER taxes.

Since a good amount of my money is tied up in tax deferred retirement accounts, the money withdrawn will be taxed at income rate.

I will add this information to the first post for clarity.

I am estimating that I will need between $3.5 and $4M when I retire in 10 years to have a shot of making the model work (with out lowering retirement expenses)
Have you actually modeled a tax return for retirement? It sounds like you're thorough so I'm guessing you have. MFJ plus exemptions and the standard deduction may mean that you don't owe very much tax on the $68K. Sounds like your in CA though, and I know they have high state income taxes.

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Old 10-05-2007, 06:56 PM   #26
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Maldini, my gut feeling is that you'll be able to retire before 50, but the best we can do is guess at what the future will bring.

A previous poster pointed you to FIREcalc -- give it a run if you haven't. I also use the retirement planner in Quicken. There are others on the web. I'm not sure any one planning tool is the best, but I feel a lot better when they all say I'm on track.

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Old 10-05-2007, 07:49 PM   #27
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Welcome Maldini.
I know the feeling when you find this site. You want to figure out how you stack up.
IMO you are in great shape. Just keep saving like you are doing now and when you reach 50 you will have options. If you want to w**k, continue on. If you don't, then RE or some version of it. At that point, you will be calling the shots. Good luck.
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Old 10-06-2007, 12:54 AM   #28
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Have you actually modeled a tax return for retirement? It sounds like you're thorough so I'm guessing you have. MFJ plus exemptions and the standard deduction may mean that you don't owe very much tax on the $68K. Sounds like your in CA though, and I know they have high state income taxes.
yes I do model taxes. I try to take into rough account capital gains from the brokerage account as well as income tax that will come from tax deferred accounts. I live in Mass. State Income are about 5.3% here. I model using todays tax brackets and rules which of course will likely change in by the time I get to and am into retirement so its another inexact science in the modeling.

I do have a question though. Which accounts should I drain first in retirement? The brokerage or the retirement accounts? Instincts tell me to defer the retirement accounts as long as possible but I am not sure.
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so..what keeps you working?
Old 10-06-2007, 08:41 AM   #29
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so..what keeps you working?

As you know, you are probably in the top 1% of americans as far as savings go, but, I'd expect to have saved more with a house paid -- i mean, earning 231K/year, no mortgage, only 1 kid, and both adults working.....

i am looking to find a way to FIRE in the next 2 years. I just dont want to wait longer than that (personal choice). Currently searching for a few "second career" options - which is taking time- not sure I want to own my own headache..er business.... so maybe thats not really fully FIRE.
When I FIRE (which means tell the corporate bozos to go have a coke and a smile...) i dont want income to drop to zero - am now considering what will intrinsically make me happy and whether or not I'd be OK if i can just persist (let the retirement money grow, but not add more to it and not dip into it for the next 5 to 7 years). I've always wanted to be a high school teacher....god knows the public schools need qualified, capable, motivated educators. Salary is so low, it's almost charity work...but rewarding....!

So...what keeps you motivated to work til age 50? In your financial position, I'd definitely quit as early as possible. Your estimates are pretty conservative. Only thing that would be a concern is your mix of cash to retirement/deferred is 50/50 - you might wind up running out of cash until you can dip penalty-free into the retirement accounts.
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Old 10-06-2007, 09:05 AM   #30
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Keep in mind you could always spend the house rather than passing it on- that would cover you if the money started to run out.

As for inheritance, best thing you can do for your kids is to teach them to earn for themselves, to not expect anything and to be financially self reliant. Then, anything you ARE able to pass along (house, other assets etc) becomes total upside for them later in their lives, well after they've hopefully learned to be financially capable.

One of my all time favorite books is an oldie but goodie - millionare next door. Dont see that talked about a lot in the forums here but it's good refresh reading when teaching the kids about money and teaching how to be financially responsible.

Same goes for you - if you/wife have parents who pass on inheritance to you, that becomes upside. So does social security if there is anything left for us at that point, future pensions, etc.
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Old 10-06-2007, 09:13 AM   #31
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I do have a question though. Which accounts should I drain first in retirement? The brokerage or the retirement accounts? Instincts tell me to defer the retirement accounts as long as possible but I am not sure.
As a fellow engineer, I appreciate your intense detailed approach .

I would personally say that you can't use a hard-and-fast rule on your question: what if one of your holdings distributes a big taxable distribution in your taxable account one year? Or if you sell a position due to rebalancing or a large run-up? You sure wouldn't want to also have made a large withdrawal from your retirement account earlier in the year, since that would jack up your taxable income even more.

I would say approach retirement with 1 year (or more) of expenses in a MM account. Using that as your spendable cash, as the year goes on, you will see what your taxable account brings as far as taxable sales/distributions/dividends. Then, as the end of the year approaches, you will know exactly how much you 'should' be taking out of retirement accounts to minimize your taxes - or if you should let it ride and sell taxable positions with capital gains (if cap gains rates are still this low in the future).

There are also points to be taken with delaying SS until age 70, and taking out of retirement accounts before age 70. This has a two-fold effect:
1) Delaying SS increases your SS benefit permanently (only worth doing if you have a reasonably good health history in at least one spouse's family).
2) Drawing down your retirement accounts up to age 70 leaves a lower balance to take Required Minimum Distributions from when you turn 70.5 (which is also the age you could take SS at ). If you never take out of your retirement account until age 70, your balance will be much larger, and your subsequent RMD will be that much larger, possibly throwing you into higher tax brackets. If you start taking from your retirement account earlier, your RMD will be lower, and thus help reduce your marginal tax bracket.

Of course, if you SEPP your accounts, your strategy will be modified for the 59.5/5 year duration.

To sum it up - depending on actual retirement age, you could SEPP it until 59.5/5 years, make up the difference (if any) with taxable account sales. Then, at 60, review your account balances, figure out income needs, and calculate your withdrawal strategy for delaying SS until age 70, with an eye on taking as much out of your retirement accounts (to reduce age 70 RMD), while still not ballooning into 2 higher marginal brackets because of large retirement account withdrawals.
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Old 10-06-2007, 11:37 AM   #32
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Moorebonds hits on a lot of the common strategies you might consider. If you hang it up at 50, since the retirement accounts were designed for you to retire around 60 or later , taxable accounts first offers you a better choice I think. You can set things up to withdraw equal amounts at 55, but here are two other things to consider if you wait until 59 1/2:

1. When you decide to draw from the retirement accounts, look carefully for any stocks that you can pay the taxes on and transfer into a taxable account as equity, not income, during the 401K rollover to an IRA, I believe it's called Unrealized Appreciation. That allows you to reduce the MRA at 70 1/2 but still keep the good stocks working for you with fewer taxable considerations.

2. When you stop working and get to the ripe old age of 59 1/2 you can also reduce MRD by withdrawing as much from the taxable account as you can, up to the point where your tax rate increases, and throw it into a Roth. This assumes that the rules don't change in the next 20 years...a huge assumption. At the moment, I can't think of anything bad about Roth accounts. I wish I had more of that.

Based on your comments so far, I'm sure you've considered these angles already. By building up your taxable accounts you get more flexibility between 50 and 59 1/2. (See your CPA for details.)
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Old 10-06-2007, 05:01 PM   #33
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As you know, you are probably in the top 1% of americans as far as savings go, but, I'd expect to have saved more with a house paid -- i mean, earning 231K/year, no mortgage, only 1 kid, and both adults working.....
Thats disappointing.

I thought we have been doing quite well saving >$90k a year the last 6 years after taxes especially considering my wife is just a part time worker. Last year we put away $109k for the year in savings and that is not including the $11k we put into the 529 plan. I guess we could always cut our expenses more but I think we are living so far under our means as it is, that it starts to get a little much to continue to chop things.

Perhaps my investments are not aggressive enough and thats why the portfolio number looks low to you at my age of 39.

How much do you figure we should be saving noting that we live in a relatively high cost of living area of Mass?



Quote:
So...what keeps you motivated to work til age 50? In your financial position, I'd definitely quit as early as possible. Your estimates are pretty conservative.
If I could quit tomorrow I would. For now my models tell me I have a shot at 50. Until my conservative numbers tell me I can quit I won't because the last thing I want is to have to find a job in my 60's.




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Only thing that would be a concern is your mix of cash to retirement/deferred is 50/50 - you might wind up running out of cash until you can dip penalty-free into the retirement accounts.

I think I will be easily covered under the SEPP (substantially equal periodic payments) rule.

Thank you for your feedback. I do need to consider more on why my savings may not be as strong as you think they should be.


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Old 10-06-2007, 05:09 PM   #34
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Keep in mind you could always spend the house rather than passing it on- that would cover you if the money started to run out.
Yes, we always look at the house as the last gasp emergency in late retirement. At the very very very worst of times,we could take out a reverse mortgage. But we are only looking at that as an emergency vehicle and do not plan for that occurrence in any sort of way.


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As for inheritance, best thing you can do for your kids is to teach them to earn for themselves, to not expect anything and to be financially self reliant. Then, anything you ARE able to pass along (house, other assets etc) becomes total upside for them later in their lives, well after they've hopefully learned to be financially capable.
I agree 100%.

my 8 year old daughter, ends up listening to my favorite personal finance radio show for hours on end every Saturday and Sunday (the people who are behind this site www.bestmoneyinfo.com) and we always talk to her about finances. She doesn't get a lot of it yet but I will keep pounding it in as the years go on.


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Same goes for you - if you/wife have parents who pass on inheritance to you, that becomes upside. So does social security if there is anything left for us at that point, future pensions, etc.
Agreed. I am pretty confident that I will be receiving an inheritance some where along the line but like social security, I model 0$ for it because I want it to be gravy since its not under my control.

Thanks again for your feedback!
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Old 10-06-2007, 05:12 PM   #35
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As a fellow engineer, I appreciate your intense detailed approach .

I would personally say that you can't use a hard-and-fast rule on your question: what if one of your holdings distributes a big taxable distribution in your taxable account one year? Or if you sell a position due to rebalancing or a large run-up? You sure wouldn't want to also have made a large withdrawal from your retirement account earlier in the year, since that would jack up your taxable income even more.

I would say approach retirement with 1 year (or more) of expenses in a MM account. Using that as your spendable cash, as the year goes on, you will see what your taxable account brings as far as taxable sales/distributions/dividends. Then, as the end of the year approaches, you will know exactly how much you 'should' be taking out of retirement accounts to minimize your taxes - or if you should let it ride and sell taxable positions with capital gains (if cap gains rates are still this low in the future).

There are also points to be taken with delaying SS until age 70, and taking out of retirement accounts before age 70. This has a two-fold effect:
1) Delaying SS increases your SS benefit permanently (only worth doing if you have a reasonably good health history in at least one spouse's family).
2) Drawing down your retirement accounts up to age 70 leaves a lower balance to take Required Minimum Distributions from when you turn 70.5 (which is also the age you could take SS at ). If you never take out of your retirement account until age 70, your balance will be much larger, and your subsequent RMD will be that much larger, possibly throwing you into higher tax brackets. If you start taking from your retirement account earlier, your RMD will be lower, and thus help reduce your marginal tax bracket.

Of course, if you SEPP your accounts, your strategy will be modified for the 59.5/5 year duration.

To sum it up - depending on actual retirement age, you could SEPP it until 59.5/5 years, make up the difference (if any) with taxable account sales. Then, at 60, review your account balances, figure out income needs, and calculate your withdrawal strategy for delaying SS until age 70, with an eye on taking as much out of your retirement accounts (to reduce age 70 RMD), while still not ballooning into 2 higher marginal brackets because of large retirement account withdrawals.
wow, lots of good info in here! Thank you.

Let me absorb most of this and then get back to you with questions if I have them.
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Old 10-06-2007, 05:17 PM   #36
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1. When you decide to draw from the retirement accounts, look carefully for any stocks that you can pay the taxes on and transfer into a taxable account as equity, not income, during the 401K rollover to an IRA, I believe it's called Unrealized Appreciation. That allows you to reduce the MRA at 70 1/2 but still keep the good stocks working for you with fewer taxable considerations.
Fascinating info!!

I don't own any stocks though. All investments in the retirement accounts are in mutual funds.


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When you stop working and get to the ripe old age of 59 1/2 you can also reduce MRD by withdrawing as much from the taxable account as you can, up to the point where your tax rate increases, and throw it into a Roth. This assumes that the rules don't change in the next 20 years...a huge assumption. At the moment, I can't think of anything bad about Roth accounts. I wish I had more of that.
Only thing "bad" about a Roth is that I have never been able to join one.

I am hopeful that my company will some day offer a Roth 401k which I could join.


Quote:
Based on your comments so far, I'm sure you've considered these angles already. By building up your taxable accounts you get more flexibility between 50 and 59 1/2. (See your CPA for details.)

Actually no. Taxes are by far my weak spot in personal finances. The information alone in this thread is going to give me enough impetus to get off my ass and start educating myself more.
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Old 10-06-2007, 05:20 PM   #37
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One more question for the kind group of people here.

Up till now I have never met with a financial adviser. I assume if I want to retire at 50, I should likely try and meet with one, even if its only for a one time look over of the numbers to make sure I am on target and that I have not made any mistakes.

My wife worries though that we will end up paying someone who will simply run the numbers through a similar sw package to the ones we use on Fidelity, Schwab and in Quicken for retirement.

What is the common thought here regarding the few years before early retirement and meeting with a financial adviser, not to manage the money, but to look everything over?
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Old 10-06-2007, 05:34 PM   #38
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You're getting a lot of great advice here. But it is a lot of money, and it is your money and your future. Would you sleep better at night having spent 0.05% of your portfolio having a professional look things over?

You're obviously doing great. I think you're a bit conservative in your outlook -- unless I missed something, $3.5 mil is huge overkill for $70k per year. Saving $100k per year is awesome, and your current savings are good (wish I had them). Again, you're on the right track, and if hiring a financial advisor makes you feel more comfortable, go for it.
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Old 10-06-2007, 09:36 PM   #39
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But it is a lot of money, and it is your money and your future. Would you sleep better at night having spent 0.05% of your portfolio having a professional look things over?
I honestly would sleep a little better.

By the way, do financial advisor's offer this type of one time look everything over service?


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You're obviously doing great. I think you're a bit conservative in your outlook -- unless I missed something, $3.5 mil is huge overkill for $70k per year.
The ~$70k is after tax needs and in todays $'s. I think that may be throwing everyone off who say I am being too conservative in my portfolio goal.

By the time I retire in 10 years and hope to have the $3.5M, the first years expenses before taxes in tomorrows dollars will be ~$123k (assuming a 4% inflation and an effective tax rate of 20%).

Every model I run tells me I am going to need between $3.5 and $4M to meet my goals, assuming my after retirement growth stays at 2.5% ahead of inflation.
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Old 10-06-2007, 10:09 PM   #40
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By the way, do financial advisor's offer this type of one time look everything over service?
Yes, but remember that the vast majority of those are financially incentivized to persuade you to become involved in a long term relationship with them. Making you afraid is one way to persuade people like you.

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The ~$70k is after tax needs and in todays $'s. I think that may be throwing everyone off who say I am being too conservative in my portfolio goal.
Most folks here have pretty sharp pencils. I got the "today's dollars" part in my first reply to you and the "after tax" part after you mentioned it later.

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Every model I run tells me I am going to need between $3.5 and $4M to meet my goals, assuming my after retirement growth stays at 2.5% ahead of inflation.
You might want to familiarize yourself with FIRECalc: A different kind of retirement calculator and see what it says about you retiring at 50. Just plug the numbers in for where you expect to be at that age and it'll tell you the historical chances of success.

2Cor521
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