Down to one more year?

[bw1990]

Hi everyone!

I am 43, my wife is 38, and we have two kids (4 and 3). We'll likely work thru 2018 and then decide if we make the jump. Since we're down to one more year, I'm starting to seriously crunch the numbers and work out a plan. I appreciate any and all feedback on my plan!

Finances:
Annual expenses: $72,000 + $18,000 for mortgage
Royalty income: $25,000
(This bounces around and could always go to zero, so it is hard to plan. My hope is that with lots of free time, this number is more likely to go up than down. Think of it as a hobby that makes money.)

Taxable: $1,150,000
Tax deferred: $1,275,000
529 savings: $70,000

House is worth $480,000
Mortgage balance: $130,000
(15yr mortgage @ 3% to 2027 @ $18K per year)

SSA predicts I'll receive 33K per year in ss at 70. Wife gets $10K per year at 62. As she may outlive me by 10 years, I want to maximize her survivor benefit.

Withdrawal rate scenarios:

1. Assuming no royalties, I have a 3.6% withdrawal until 2027 (mortgage) and then 2.9%.
2. Assuming royalties, this drops to a 2.6% withdrawal until 2027 and then 2% thereafter.
3. If I dumped the mortgage, I'd have a 2% withdrawal with royalties. Without royalties, it would jump to 3%.

Guaranteeing a 3% withdrawal rate by paying off the mortgage is very tempting, but I'm wondering if it would be better to use that $130K as a 2+ year emergency buffer for market crashes, etc.

Asset allocation:
Currently, I'm 85-15 stocks to bonds. I think we're more likely to repeat last year than perma-crash, so I haven't locked things down yet. My reasoning is we both have good paying jobs that we're unlikely to lose, so if the market crashes, we work another couple years and possibly retire closer to a market bottom instead of a market top. There are worse things in life.

When we do retire, I plan on dropping back to 60-40 and doing a reverse glidepath back to 75-25 over several years. This leads to my concerns...

My concerns:

1. Sequence of return risk. I can help mitigate this with the reverse glidepath and by paying down the mortgage or using the money as an emergency fund. Ensuring the royalty is my best mitigation, though, as a 2% withdrawal rate should be safe.
2. Health care. If our AGI is under 67K, the kids would be covered by the state of Minnesota. I like the sound of that. We could handle a doubling, or tripling, but this expense cannot infinitely grow. This remains a big unknown that will likely get worse before it gets better, but as a family of 4, we're well subsidized and should be better off than most.
3. Two kids concurrently in college. I do not plan on further 529 contributions as I don't want to overfund it. I'm currently estimating $25K per year per kid for a state university education from 2031 to 2035. By the time we get to 2031, we should have a good idea if this retirement thing is working out and what we can actually contribute. It may be a lot more, or they may have to fend for themselves (and we free up $50K per year in our plan).

Anything I'm missing? How does this look to you?

Thanks!

 

[exnavynuke]

1. Sequence of return risk (based on historical data) is negligible at that withdrawal rate (it's already included in the "4% SWR" studies etc.

2. Does the $72k/year include health insurance? Assuming it does, great. If it doesn't include health insurance, adjust your spending numbers upwards by a lot unless you want to pray that the ACA subsidies stick around forever (possible, but I'd put it in the "not likely" category right now myself).

3. $70k isn't likely to fund 2 kids college imo (without scholarships or other ways of minimizing college costs). Even a cheap state school here, with Georgia's Hope scholarship still runs around $15k/year in total out of pocket expenses living on campus. That's $60k for one student with a scholarship today. I can't imagine the growth in costs will underperform inflation over the next 1-2 decades unless something drastically changes in the education world between now and then.

For SS, is that what is predicted in your annual statement (that assumes you'll continue working)? If yes, assume the number will drop by more than a third (or run their full calculator to get a better estimate).

 

[bw1990]

Thanks, all good points. Yes, the 72K per year includes health insurance (as well as a buffer for more). I agree it may get worse before it gets better, which I've tried to cover.

The $70K isn't expected to cover college. It is simply what they have in their 529 account today. I expect at least $25K per year per student, which is what I use when I run firecalc.

The SS estimates come from the annual statement. That covers income thru 2016, so it will be a little higher once we have income thru 2018. How much will it drop in the future? I've no idea, but I find its so late in retirement that it usually doesn't move the numbers much regardless of the amount.

 

[exnavynuke]

Thanks, all good points. Yes, the 72K per year includes health insurance (as well as a buffer for more). I agree it may get worse before it gets better, which I've tried to cover.

The $70K isn't expected to cover college. It is simply what they have in their 529 account today. I expect at least $25K per year per student, which is what I use when I run firecalc.

The SS estimates come from the annual statement. That covers income thru 2016, so it will be a little higher once we have income thru 2018. How much will it drop in the future? I've no idea, but I find its so late in retirement that it usually doesn't move the numbers much regardless of the amount.

When I ran my numbers for SS, retiring in my late 40's (so no income at all in the years beyond that), my SS payout estimates dropped by about 1/3rd. $43k/year turning into $29k/year might make a difference for you if your numbers have similar changes. I'd recommend using their detailed calculator to fine tune your estimates just in case (especially if you don't/won't have 35 years of max or close to max SS earnings). https://www.ssa.gov/OACT/anypia/anypia.html

 

[bw1990]

Thanks, I should have been more clear that is the SS calculator I'm using. It is based on 0 income from this day forward. Still, we have no idea what congress may do to this in the next 30 years.

 

[HMMY]

I agree you need to recalculate your SS. The statement estimates assume you work to full retirement age (FRA). I believe the current maximum at FRA is $34k assuming 35 yrs at the maximum contribution rate. If you have less than 35 years and less than the maximum contribution rate, your payout could be significantly less.


My other concern is your sequence of return risk. Assuming your $2.4M portfolio at 85/15 and 50% drop in stocks and no change in bonds, your portfolio value would drop to $1.4M. On the other hand, since you are young, you need a strong dose of stocks since inflation could be a bigger risk. To address this, I moved from 80/20 to 55/45 as I approached FIRE. As I get closer to SS age, I will allow my equity allocation to glide up to 70/30, although I haven't figured out exactly how and when I will implement that.

 

[StuckinCT]

I think your retirement plan looks pretty solid and a 3% withdrawal rate is about right for a 60/40 portfolio; the SWR increases as you add more equities.

I would not comment on education but since you mentioned it one of your bullet points, if you are planning to foot the bill for two kids, you will likely need $300-400k for state school for two kids 4 & 3 in future dollars. My associate just finished paying for Notre Dame and Georgetown which cost $700k today! I am planning on $2mm for three kids. Sounds crazy but even state school will be $600k and then they will likely need a graduate degree.

 

[Aerides]

Your kids being so young means a lot of expenses that might be unplanned - and college estimates could be way way off. For example, my niece takes dance classes which are quite expensive (and the shoes...and the outfits) but it's probably the smartest investment my sister ever made, and would not have been able to plan for when niece was 4.

So I'd probably put a 10k buffer on your annual expenses for kids activities as they age, vacations, school camps, etc., as (if I were you) I'd hate to be RE'd but saying No to perfectly reasonable requests from my kids every time.

90k expenses - does that include HI for a family of 4? that can be a huge wild card at your ages.

I think you're close, but if your house was paid off - AND - you had a nice buffer/cash/emer fund (vs. deciding between them as you mention) then I'd be more confident.

Since SS/MC is 20-30 years away, you need to be more conservative on sustaining assets to get there, vs. say a 55 year old.

The silver lining? That 25k royalties. Can you do more of whatever that is? If you gave yourself a plan to double that in 3 years is that viable? Whether that means another publication, or more time invested in it as a part time hobby effort? I've done something similar and it's really pushing our WD rate down, but even now at 2 years into RE I'm wondering how many more years I'd want to keep doing it.

 

[bw1990]

Thanks for the comments. It is good to have a critical eye on this.

My college estimates were based on the University of Minnesota being $25K per year and most other public universities in the state being less than that. One flaw I see is tuition expenses will likely outpace inflation, so doubling it is probably recommended if we want to fully cover it.

As for $700K in tuition, it would really depend on the student, plans, and degree. There are very few degrees worth sinking $700K into. That $600K price difference would be 9 million if invested at a 7% average equity return from age 18 to 58.

I have $3K buffer for child activities, but it sounds like some additional padding may be required there. They are too young to know what their interests will be.

I could slowly increase the royalties but it would take luck to double them with a day job. We are socking away $120K per year with the day job, so 3 years of it should greatly improve our numbers if mr market doesn't trip and fall. I'd like to be at a point where the royalties are a hobby and not a requirement.

 

[StuckinCT]

Your kids being so young means a lot of expenses that might be unplanned - and college estimates could be way way off. For example, my niece takes dance classes which are quite expensive (and the shoes...and the outfits) but it's probably the smartest investment my sister ever made, and would not have been able to plan for when niece was 4.

So I'd probably put a 10k buffer on your annual expenses for kids activities as they age, vacations, school camps, etc., as (if I were you) I'd hate to be RE'd but saying No to perfectly reasonable requests from my kids every time.

90k expenses - does that include HI for a family of 4? that can be a huge wild card at your ages.

I think you're close, but if your house was paid off - AND - you had a nice buffer/cash/emer fund (vs. deciding between them as you mention) then I'd be more confident.

Since SS/MC is 20-30 years away, you need to be more conservative on sustaining assets to get there, vs. say a 55 year old.

The silver lining? That 25k royalties. Can you do more of whatever that is? If you gave yourself a plan to double that in 3 years is that viable? Whether that means another publication, or more time invested in it as a part time hobby effort? I've done something similar and it's really pushing our WD rate down, but even now at 2 years into RE I'm wondering how many more years I'd want to keep doing it.

I totally agree with this regarding unforeseen expenses with kids. I always joke that I have a fund for kid expenses I don't yet know about! Also, we don't know what the economy will be like when they fly the nest so I anticipate paying cell phones, health insurance, car insurance etc etc through college and maybe after. I worked part time my final two years and was out of the house at 23 but it doesn't always work that way! I also have a wedding fund for my daughter- anticipate $75k future dollars. It just never ends and only gets more expensive as years go on...

 

[PartIrish]

BW1990, As others have mentioned, your Social Security estimate from ssa.gov is based on an assumption of 35 years of contributions. At your age, I am guessing you have maybe 20-22 years of contributions, so the remainder will be 0s in your calculation, not your most recent salary. The link here is a great tool that you can use with your online record of SS contributions. I like it much better than the anypia tool because you can change lots of variables about expected future income. Directions are easy to follow: https://socialsecurity.tools/app.html

 

[Senator]

I personally think you have a ways to go, but that is just me...

 

[pj.mask]

700k from the parents!? Hard to imagine college costs have 10x in 8 years from when I graduated. I’m sure you can but I don’t know if that is really required (or helpful in building joint responsibility)