Anxious in North Carolina

[Palimpsest]

I am 44, and by all outward appearances envied by many for what they assume to be my high income. I "played by the rules" and have had a "good" corporate job for the past 20 years with no stretches of unemployment. I have not always lived frugally but I have always saved. Right now I have about $825,000 in retirement accounts, virtually all of which is in stocks. I have a $50,000 money market emergency fund. I own 4 rental homes that do not quite cover their costs (I have estimated that I lose about $325/ month on them combined). I am about $100,000 underwater on the rental homes combined, so unloading them is a challenge. I dont have any other debt, but I do not own a home because a work move forced me to sell the house I had owned for the past 12 years for exactly $100 more than I had paid for it

As I climbed the corporate ranks I became more and more of a workaholic and subject to work stress. This lead me to 12 years of psychotherapy and antianxiety medication. I also found myself becoming more and more hyperspecialized. Therein lies the problem. I see the writing on the wall and feel quite certain that my job will be gone in less than a year -- I am too specialized and my specialty is no longer in demand.

I have been spending the past year and a half looking for new work in even a tangentially related field. The response has been virtually unanimous -- "Great resume -- why would you want this job you must be making double that now?"

I feel like I have done not the best, but a pretty good job of saving, and indeed I had always thought about ER at 55, but I think I am going to fall just short. I feel like a $3500/month draw rate would be feasible, but only by using a 72t. Three of the main issues that perplex me are
a) I am still wary of fixed income -- historically low rates make it a high risk low reward proposition to me
b) I dont have a house, so a good chunk of any withdrawal will go toward rent
c) I dont know if I will ever be able to get rid of the rental houses short of losing my job, not making any money for 6 months and then declaring chapter 7, which I am loathe to do

The good news is that firecalc seems to confirm that Ive got a 95% chance of pulling it off with a balanced portfolio (which I do not have) and sticking to a $3500 withdrawal. Otherwise I feel like a burnout loser sitting in the corner office waiting to get fired. Any thoughts are appreciated.

[RetireAge50]

Seems like you are in a great position. Congratulations! If it were me I would probably work on getting rid if the rentals, maintain some kind if employment (go work on a cruise ship or something). Your retirement funds should do the work by themselves of growing and giving you the freedom you desire.

[Palimpsest]

Seems like 15 years is a long time to run a 72(t) though

[pb4uski]

In evaluating your properties have you included the tax benefit of depreciation? IOW, if you have $15k a year of depreciation and have a 28% marginal tax rate, then the depreciation is reducing the taxes you pay by $350/month.

Another thing to consider is that pert of your mortgage payment is payment of principal which is increasing your equity.

[Ally]

I think Retireat50 has a great idea. I would get rid of some of the rentals and add that to my funds. If you do want to apply somewhere for less money for a more enjoyable job, I would tell them that you have worked in a stressful job for many years and saved, and now you can do something you can enjoy at a lower salary. I work in a nonprofit and often see people come to work at another nonprofit after retiring from a high pressure job. Or maybe just take it easy and not work at all!

[pb4uski]

If the rentals are underwater getting rid of them would use funds rather than provide (ad to) funds as the seller would have to bring a check to closing.

[Palimpsest]

Quote:

Originally Posted by pb4uski In evaluating your properties have you included the tax benefit of depreciation? IOW, if you have $15k a year of depreciation and have a 28% marginal tax rate, then the depreciation is reducing the taxes you pay by $350/month. Another thing to consider is that pert of your mortgage payment is payment of principal which is increasing your equity.

Part of the problem in getting rid of the rentals is that you cannot realize any depreciation or other expenses until you sell the house, which is dicey right now because each one would likely require a $20000 check to unload. As it stands, the 300 or so a month Im losing is doable, 20k at one swat is much tougher

[Live And Learn]

Can you live in one of the rentals ?

[Major Tom]

I assume that your Firecalc calculation included an extra source of income (SS perhaps?) that you didn't mention in your post. I ran your figures (825K + 50K = total portfolio of 875K) with a 60/40 portfolio, and a $3500/month draw gave a success rate of just under 72% for a 30 year run and 49% for a 40 year run. Were you taking SS or a pension into account as well?

Not sure what area you are in, but do you think there's a good chance you won't be underwater on them for long? Of course, it's pretty hard to predict what RE prices will do in the near future, but perhaps you'd be in a better position to sell some of them in a few years without losing money? You say that you lose about $325/month on them combined. Remember to also factor in other costs, such as lost rent when changing tenants, repairs/maintenance etc. Are there any possible big expenses in the near future for those homes, or are they in good shape?

The rental homes could be something of a liability, or quite an asset to you in the future. If your portfolio was bigger, it would be less of a concern, but these are things to bear in mind, of course, and from what you've written, it's obvious that they are foremost in your thoughts.

No answers here I'm afraid, but a bit more detail on those houses would help, as I think they could make quite a difference to your plan.

PS - 2 people posted while I was writing this, in case my musings seem a bit disjointed.

[pb4uski]

Quote:

Originally Posted by Palimpsest Part of the problem in getting rid of the rentals is that you cannot realize any depreciation or other expenses until you sell the house, which is dicey right now because each one would likely require a $20000 check to unload. As it stands, the 300 or so a month Im losing is doable, 20k at one swat is much tougher

My understanding is that in some circumstances you may be able to get a tax benefit from a net loss (after depreciation). IRS Publication 17

Quote:

Active participation. You actively participated in a rental real estate activity if you (and your spouse) owned at least 10% of the rental property and you made management decisions or arranged for others to provide services (such as repairs) in a significant and bona fide sense. Management decisions that may count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions. Maximum special allowance. The maximum special allowance is: $25,000 for single individuals and married individuals filing a joint return for the tax year, $12,500 for married individuals who file separate returns for the tax year and lived apart from their spouses at all times during the tax year, and $25,000 for a qualifying estate reduced by the special allowance for which the surviving spouse qualified. If your modified adjusted gross income (MAGI) is $100,000 or less ($50,000 or less if married filing separately), you can deduct your loss up to the amount specified above. If your MAGI is more than $100,000 (more than $50,000 if married filing separately), your special allowance is limited to 50% of the difference between $150,000 ($75,000 if married filing separately) and your MAGI. Generally, if your MAGI is $150,000 or more ($75,000 or more if you are married filing separately), there is no special allowance.

[Palimpsest]

Quote:

Originally Posted by Major Tom I assume that your Firecalc calculation included an extra source of income (SS perhaps?) that you didn't mention in your post. I ran your figures (825K + 50K = total portfolio of 875K) with a 60/40 portfolio, and a $3500/month draw gave a success rate of just under 72% for a 30 year run and 49% for a 40 year run. Were you taking SS or a pension into account as well? Not sure what area you are in, but do you think there's a good chance you won't be underwater on them for long? Of course, it's pretty hard to predict what RE prices will do in the near future, but perhaps you'd be in a better position to sell some of them in a few years without losing money? You say that you lose about $325/month on them combined. Remember to also factor in other costs, such as lost rent when changing tenants, repairs/maintenance etc. Are there any possible big expenses in the near future for those homes, or are they in good shape? The rental homes could be something of a liability, or quite an asset to you in the future. If your portfolio was bigger, it would be less of a concern, but these are things to bear in mind, of course, and from what you've written, it's obvious that they are foremost in your thoughts. No answers here I'm afraid, but a bit more detail on those houses would help, as I think they could make quite a difference to your plan. PS - 2 people posted while I was writing this, in case my musings seem a bit disjointed.

I am resigned to the fact that the rental houses will be underwater for the foreseeable future and they are a four hour drive away from me, so I cant use any of them myself. I would have sold them when I moved if I could. I used to have 8 and sold four of them "subject to" my mortgage, which is a somewhat risky strategy.

My best idea for getting rid of the remaining four houses is to pony up the 20k to sell one near the end of a calendar year, then reap the considerable tax write off I would get on each one to use as the payoff (or most of it) for the next one, repeat for the next three years.

[2B]

Quote:

Originally Posted by Palimpsest I feel like I have done not the best, but a pretty good job of saving, and indeed I had always thought about ER at 55, but I think I am going to fall just short. I feel like a $3500/month draw rate would be feasible, but only by using a 72t. Three of the main issues that perplex me are a) I am still wary of fixed income -- historically low rates make it a high risk low reward proposition to me b) I dont have a house, so a good chunk of any withdrawal will go toward rent c) I dont know if I will ever be able to get rid of the rental houses short of losing my job, not making any money for 6 months and then declaring chapter 7, which I am loathe to do

Fixed income - I've personally put all my fixed income into a 2 yr CD ladder to reduce interest rate risk. I don't personally see the incremental benefit of longer term maturities when I include the risk.

Don't own a house! - So what? If you lose your job, evaluate whether it makes sense to move into one of your rentals or rent something cheaper.

Rental house disposal options may include defaulting. I don't know if NC is a no-recourse state or not. If it is, you won't be held liable for defaulted mortgages. You say you are $100K underwater but that loss is probably not spread evenly between the houses. Get a RE to give you their opinion on their value. You might be able to get rid of one without a serious loss. If you're willing to move into one of them, you can look at raising the rent knowing that if your tenant bolts you can just move in. Of course, that would only make sense if you were out of work and didn't have a 4 hour commute.

You didn't mention a spouse or any other financial obligations so I'll assume there are none. That makes planning easier. I suggest you go on a starvation (not literal) budget and cut all your expenses to the bone. See what you can really live on non-including rent. Evaluate ways that you can reduce your rent. Without strong ties to NC, you could evaluate lower cost of living areas.

If you really think you'll lose your job and would like to keep working, start researching options. What Color is My Parachute is the long time favorite. Start looking aggressively for something in your field. Your specialty my not be in great demand but other employers are still using people with your skills. I don't know what makes you think you'll soon be out of work but don't panic until they tell you you are gone. There may be a decent severence package so that could go a long way to bridge any gap.

[jimnjana]

How much do you owe on the rental homes? You could lease to own them or offer them for sale with owner financing. That would give you an alternative to traditional fixed income.

[Palimpsest]

Difficult to lease to own underwater property -- thats just another form of sale. Knowing the rental stock in the neighborhood I would not want to take on the risk of owner financing -- it would be the fixed income equivalent of Greek junk bonds.

[jimnjana]

Quote:

Originally Posted by Palimpsest Difficult to lease to own underwater property -- thats just another form of sale. Knowing the rental stock in the neighborhood I would not want to take on the risk of owner financing -- it would be the fixed income equivalent of Greek junk bonds.

If the mortgage is small, you pay one off. Its a form of sale, that pays you a monthly income stream. If the rentals are in such a bad neighborhood, begs the question why they were ever purchased in the first place.

[Palimpsest]

Quote:

Originally Posted by jimnjana If the mortgage is small, you pay one off. Its a form of sale, that pays you a monthly income stream. If the rentals are in such a bad neighborhood, begs the question why they were ever purchased in the first place.

I didnt intend to hurt your ego. Looking back 8 years, no, I wouldnt have bought in that neighborhood, but at the time it was stable. Did I make an investment that didnt go the way I would have liked? Absolutely. "Begging the question" after the recessionary period of 08-09 is of little use to me in 2014.

[militaryman]

If I were you .... I would try to stretch out my existing work situation as long as possible and unload a rental property each year as you have described until they are gone -- sooner if possible.... Sure .. 72T to bring in some cash but realistically when it comes down to it must you have work in a "tangentially related field" ?

You could go work at The Gap for $10.10 hr -- forty hrs a week and make $1750 a month so you surely have the youth and options to make your savings stretch for many decades....

[Palimpsest]

Quote:

Originally Posted by militaryman If I were you .... I would try to stretch out my existing work situation as long as possible and unload a rental property each year as you have described until they are gone -- sooner if possible.... Sure .. 72T to bring in some cash but realistically when it comes down to it must you have work in a "tangentially related field" ? You could go work at The Gap for $10.10 hr -- forty hrs a week and make $1750 a month so you surely have the youth and options to make your savings stretch for many decades....

Yeah, I pretty much come down at the same place you do -- buy as much time and savings in status quo as and when that runs out try to maximize earning opportunity, even if that maximum is unskilled labor. I think the strength I have to play to is the current amount in the retirement accounts. If those have a great ten years, ER will be a no brainer, if they dont at least I will have appropriately downsized.

[jimnjana]

Quote:

Originally Posted by Palimpsest I didnt intend to hurt your ego. Looking back 8 years, no, I wouldnt have bought in that neighborhood, but at the time it was stable. Did I make an investment that didnt go the way I would have liked? Absolutely. "Begging the question" after the recessionary period of 08-09 is of little use to me in 2014.

No, you didn't hurt my ego. Good luck with your situation. Hope it works out for you.