ER Retirement plans derailed

[Liltime]

Hi everyone New to forum but have followed RE homepage since early 2002.

Have thought about ER since I was around 24, now 32. Unfortunately I did more dreaming then planning saved only a small amount in tax defered plan.
I contributed 7.5% of my salary from age 25 thru 31 to my job's 457 plan(no matching). At that time the plan was to retire at 40.

Now major change in lifestyle. Stay at home parent with a 5 year old and an infant. 1 salary no contributions for me in any plan or investment, husband contributes to job plan. No plans to work full time too soon. Childcare alone will be $1,000-$1,200 month.

I believe I suffer from "paralysis analysis", have obtained a wealth of information, I am an eager reader who has read numerous books over the past few years too many to include in this post. Attended wealth building seminars, real estate, and multi level marketing, was involved with two and currently an inactive member of one.

At this point I feel a little deflated starting all over again. Would like to retire before 50, would have to have income again at some point. Save for college, house, and travel with kids and without.
Is it possible to do all of this? Pursue interests like travel now while I'm in my early 30's compared to 20 years from now or am I just dreaming? My first step has been tracking spending with little help from my husband.
Kind of long for my first post but it would be nice to hear from people on this forum who seem to have it together and those already living the dream of early retirement.

 

[unclemick]

Looking back(before ER in 1993) the thing that made 80-90% of our ER possible was living paycheck to paycheck AFTER maximum contribution to every tax deferred plan available over as long a period of time as possible. My side stuff - individual stocks, rental real estate, raw land, second jobs contributed at most 10%. We (childless) learned to enjoy living on what we had.

 

[Liltime]

That is great advice for all the young dreamers, particulary if they have no kids. Definitely wait until 30 yrs. old to have kids to accumulate more before major expenses. I believe I would have had a very nice nest egg right now if I 15%. It would also make it easier to adjust to living on one income and just LBYM in general. I believe LBYM is the key to ER. For me it's also taking action rather than "analysis paralysis". I guess I still have a shot once I have some income again.

 

[newellcr]

liltime,

You seem particularly deflated about your current situation. I'm 36 and we have our first child in daycare. If there are more, they will go to daycare too. You say you'd like to return to work and that child care is expensive. Your first is only a year away from 1st grade, that will knock down the cost of daycare considerably. Read the ER books now, go back to work when you are comfortable with doing so. You have already learned the biggest lessons that will help you reach ER - investing 7.5% of your paycheck to fund your retirement a) will not kill you, b) it is not too difficult, and c) it is not too expensive. These are big, big lessons - the rest of the lessons are much easier in my opinion.

You have saved, hopefully invested, 7.5% for 6 years and you are only 31. Unless you cashed out your 457, you ~are~ actively pursuing your ER goal. This 457 is going to grow. Could you have saved more or at a younger age? - Sure, who couldn't have? Don't sweat the sunk costs. It's unproductive. Your husband is contributing to his plan. You two are married - it's your money too. You have two retirement plans that are growing. This is a good thing.

Have you run the numbers to see what you will have? I did a couple of quick calculations. If you go back to work in the next couple of years and save at the same rate, 7.5%, you will have about 4 times your annual salary in the 457 plan at age 50. Double your savings and you will have 6 times your annual salary. Then add in your husbands projections. Age 50 isn't an easy goal to meet if you haven't been maxing out your benefits. Run the numbers - you might still be pleasantly surprised.

Good luck,

Chris

 

[Liltime]

Thank goodness 1 smart thing I did was not to touch my 457 account when I left the job. My husband is set with his plan (Thrift Savings) and his pension, which I advised him on how to invest. However if we are not togethert it will do me no good, you never know. I will not work until the infant is 2. Although I am still considering other ventures such as MLM or real estate that will help me reach my goal, not having to work the 9-5 grind after late 40's or 50. Too many things in between that with kids and wanting to travel whilw I am still young. By the way what calculators did you use? At the least any small amount of money invested now for the kids will create a nice nest egg by the time they are in their 30's so I can give them a head start even if I don't reach my goal. I plan to invest a small amount in a Roth IRA for 2003 since I am not contributing to an employer's plan at this time.
Your comments and advice is greatly appreciated!

Lili

 

[newellcr]

Lili,

I'm glad to hear that you are working on a plan - going back to work when the infant is 2. See if you can flesh the plan out a little more with training/certification, career plan, etc, and an expected ER budget. Then run some numbers and see if you can go early and meet your budget. If you can - stick to the plan. If you can't make ER with those numbers, see if you can earn more, save more, reduce spending, or any combination of the three. If you still can't make it, or decide these changes would be too uncomfortable, move the ER date out a little bit. Whatever the plan is write it down and stick to it as best as you can. If you don't know how you are going to get to ER, you might not get there.

You asked about which calculators I used. Here is a link for calculators that I use all of the time, http://www.interest.com/hugh/calc/. You can also build an excel (or any other brand) spreadsheet to do the same calculations for you. I like the spreadsheet approach when one calculation feeds another. I did this with pencil and paper for about 10 years - it isn't too hard, but it does take time. When I ran your numbers, I just picked an arbitrary salary number of $40k/yr salary (it doesn't matter what number you use as long as you take everything back to percentages) and took 7.5% of this for x years and then let it grow for a few years and then started with new contributions after you went back to work. The whole exercise took about 5 minutes.

Another comment on calculators, some will allow you to put in inflation numbers and some don't. Make sure you take inflation into account. I find it to be much easier if I handicap my return by the inflation rate and work in constant year dollars. Let me explain. I use a stock market return of 11% and an inflation rate of 3%. Subtract the inflation rate from the market return rate to get a real return of 8%. If you use this rate of return, your numbers will always reflect money at it's value today and you don't need an extra calculation to find out what the real spending power of your future money is. This simple subtraction isn't entirely correct or accurate, but it is plenty good enough to use for a 20 year plan. Also, this simplification assumes that your contributions are also going up each year by the inflation rate. If you stick to percentage numbers, it works out without additional thought, but just remember this.

You are correct in that you should each have your own nest egg for retirement. Ownership of a nest egg does wonders for your attitude and feeling of security. This is a good way to look at retirement funds. However, don't think that you don't have rights to your husbands retirement funds and that he doesn't have rights to yours in the event of a split. It's terrible to think about, but it is true that the money is considered communal property. (That probably isn't the correct terminology, and hopefully I will never know the correct terminology from experience.)

I guess I'm trying to say - use the "ours" numbers rather than a his and her set of numbers. Sit down at your computer with a pencil and paper, your account balances, and your monthly savings numbers. Then run the "simple savings calculator" for each account and add up the totals. You can then run the "retirement payout calculator" to see if the money will last, or just run the FIRE calc once you have the nest egg totals. See what the numbers are.

You mention "thrift savings" for your husbands plan. If he works for the Federal government, here is the online info and some additional calculators, http://www.tsp.gov/. If he is about the same age as you are, he isn't eligible for a pension until he is about 57 or 58. This is an early retirement, but not as early as you are talking about. If he quits and then collects a pension at 60, he will see his pension purchasing power drop due to inflation effects.

You also mention college savings. If you can save $100 a month from the time a child is born, you will have a real nice college fund. Try this calculator from Kiplinger, http://www.calcbuilder.com/cgi-bin/calcs/5.8/SAV4.cgi/Kiplinger.

There is a lot of stuff here, if you need help with it, keep posting here. All of my comments are based on investing in the stock market (like a S&P 500 index). If you are not risk tolerant enough to keep your monies in the stock market, then disregard my general statements and run our own numbers with a suitable rate of return.

Best of luck,

Chris

 

[adviceseeker]

While using average annual returns is one way to determine whether your money will outlast you relative to a specified withdrawal rate, averages can be misleading. For example, if you start with $1,000 and experience a 90% loss the first year of ER, then have a 100% gain the second year, you have a $200 portfolio. If you anticipated an average annual return of 5% over that two year period you are forecasting that you will have about $1,100. While a 90% loss may not be likely, neither is a 100% gain - replace these % with your own numbers, and you see using the same average annual return every year may not be logical. Does anyone incorporate losses in certain years in their calculations?

 

[sgeeeee]

Does anyone incorporate losses in certain years in their calculations?

Historical based retirement calculators such as Firecalc do this for you. They use historical data for equity and bond rate of returns along with inflation from US history going back to 1871. This data is then applied to your nest egg balances along with spending patterns you supply to come up with a survival probability. You can download a copy of Firecalc from this web site. (I think there's an icon at the top of the home page.) The primary problem with historical calculators is that Past performance is no guarantee of future results.

People also have used Monte Carlo analysis for this type of study. Monte Carlo simulators establish a norm and variance for return rates and inflation. The simulators also attempt to account for correlations between them. Then a random number generator is employed on a year by year basis to establish what rates to apply to your portfolio. Unfortunately, Monte Carlo analysis depends on establishing appropriate norms, variances and correlations for all of the variables and this task is very difficult for real world senarios. Monte Carlo analysis tends to be far more pessimistic than most people believe is real.

You can learn a little bit from performing simple investigations with your own spreadsheets. Build a spreadsheet that uses fixed rates of return for 30 or 40 years, then go in and modify a few lines to simulate a single bad year and look at the effect. Move the bad year from the beginning of your 30 year interval to the middle and see the effect.

 

[Liltime]

hey newellcr,
I will have to run some numbers on the calcs you provided. I have visited TSP site in the past to determine value and possible payout of account in 15-18 years. You also have the option of having it distributed through an annuity or taking the lump sum, or rollover to an IRA. My husband will be able to receive a pension at 56 he also has military time. The pension will also be supplemented by a special payment that continues until he is eligible to receive Social Security, if it is still solvent for us He is older and has a long work history meanwhile I am just starting out in a sense and then starting over again after taking 2 breaks to raise kids.
Using his numbers my husband could retire and I could work part-time or even temp and we could live comfortably. I believe the pension is indexed for inflation and if he chooses the annuity option for the the TSP there is a choice of level payments or gradually increasing payments. I will not suggest this option to him because I do not believe it is beneficial to have two sources of income that are annuities. The pension is an annuity you can't outlive it. There are also options for continued payments to the spouse with both the pension and TSP. However even with all of that security I don't think I can sleep at night without being able to fund my own retirement. I guess I can run both scenarios the "us" portfolio and just myself. That is why I am willing to take risks. I belive I have to earn a better than average return to RE. I have researched and read about different methods of accumulating wealth such as investing (options, short selling,hedgefunds), real estate and the like. Of course right now I don't have much time do dedicate to many outside activities but I continue to read when I can.
I am impressed that you were running your own calculations with pen and paper. I would not know where to begin to create my own excel spreadsheet. I can only plug in numbers on the ones I find online. BTW have you read this often quoted scenario. If someone saves $1,000 a year from age 25-35 they will wind up with alot more money at age 65 than the person who starts at 35 or 40 saves $1,000 every year until age 65? That stat kinda keeps me going although I will not make it to 35, will probably start with an IRA for next year. I still have the option of rolling over my 457 plan account into an IRA. You were pretty close with the numbers (salary) although it did not start out at when I opened my account, more like 36k then gradually increased. Do you you post on any other topics?I am wondering what your plan is for ER. Also plans you made for your child. I need to contribute $100 a month times 2 for each child for college. Needless to say I am pretty happy with the 2. Any hopes to RE certainly need creative planning with little ones

 

[newellcr]

Lili,

You sound like you have a pretty good handle on the benefits, that's good. It is also good that you desire your own retirement funds, my only real point was to not get hung up on whose account held the funds. Displaced spouses almost always have rights to retirement accounts... Any way, I could do the math with pencil and paper, but that isn't really what I meant. There are published tables of "how $100/month will grow" for various interest rates and number of years. I have one I clipped out of a mutual fund booklet long ago. I used this to see how the money grew and kept track of the different accounts using it and the pencil and paper. You can do the compounding of a lump without the addition of funds by multiplying the account balance by 1.08 for each year of growth. These calculations are very easy to do on paper. My point is - don't make it too difficult on yourself. I recommend the pencil and paper approach because you see how the money grows. This can be beneficial for a few times through the calculations anyway. Then it just gets repetitive.

Your husbands pension is indexed to inflation, but instead of getting a full COLA indexed to inflation - he gets one percent less COLA adjustment. If inflation is 3 percent, your husband gets a 2 percent plus up the next year. At least this is how I understand it. So he will loose some purchasing power but is much better off than getting no COLA.

Yes, I have heard those rules of thumb about age and investing. Sometimes those simple facts are enough to get folks to start early. It's great that you listened. My plan was to bolt at 50 or at any point where I could maintain my standard of living without working. I've been tweaking my plan over the last few years and don't want to just maintain my standard of living, I want a plus up on an already pretty nice lifestyle. Most of the plus up will be travel money. I am 36 now. I started investing right out of college in my own TSP and also started a modest IRA. I bumped up the contributions on both with each raise and COLA and have been maxing it out for quite a while. It's been a little painful at times. Right now, I am on track even with the market carnage the last couple of years. I married at 26 and my wife is a teacher and has been working full time for over 5 years. My son is 15 months old and has about $1500 in his 529 plan. We plan on having more kids and moving into a larger home. Even with living below our means, it is difficult to save enough for college and a new home and still hit the max on our retirement funds. The retirement plan ALWAYS comes first, but we may need to scale back just a little on the retirement fund to make it all work. When we can, we will bump up his college fund contribution to $200/month.

Right now, he will probably have about $50k when he starts college. $50k won't send him to U of M for 4 years, but it's $50k more than I had when I started school. We can probably bump up the savings in a few years to give him another $30-40k.

You asked about other posts. I started two threads in the young dreamer section and post occasionally here and there.

Kind Regards,

Chris

 

[Telly]

I often see newspaper articles, and internet savings articles that say "if you save X per month for Y years, it will compound to a gazillion dollars in Z years". Those are usually simplistic "happy happy" articles that almost always leave out of the calculation the effects of inflation.

With 3% annual inflation over 30 years, $1 Million today will be down to $412,031 of purchasing power. At 6% inflation, it would be down to $174,125!

And over 40 years, that $1M in todays dollars would be down to $306,560. At 6%, down to $97,219 in today's dollars.

Someday, everyone will be a Millionaire!

 

[newellcr]

Hello Telly,

Yes, at some point a kid's weekly allowance will be more than a million... The cute sayings can oversimplify, but I kind of like this particular one. Anything that gets someone to invest for retirement now rather than to keep putting it off for "better times" is a good thing. This saying only says that you will have ~more~ later.

Take care,

Chris

 

[Liltime]

Newellcr,
Will post again soon just got back from a few days away which also included my college reunion
Telly made a good point about inflation however anything that will make young people invest sooner rather than later is a good thing. I told my girlfriend that often cited example of investing at a younger age a few years ago and insisted she join the 457 plan. I finally convinced her to conribute 1-2%. At that time she was maybe 26 or 27. I'm sure she will never regret that decision, even a very small contribution makes a big difference especially starting at that age.

 

[patnbj]

Definitely wait until 30 yrs. old to have kids to accumulate more before major expenses.

Lil,

I think that there is a Catch-22 here. Delaying the start of your family until your thirties may mean that it will be more difficult to the harder it is to get pregnant, since fertility rates drop with age.

 

[unclemick]

Delaying also means possible college expenses when you might want to be in ER - depending on what age your planning to retire.

 

[Mr._johngalt]

Re. delaying children and college costs, it can be a
problem. I never saved specifically for any of my 3 kid's
college and still have one (sophomore) in after being
retired 10 years. Ouch!

Re. formulas, calculators, analysis, projections,
spreadsheets, etc etc. I still use a stubby No. 2 pencil
and the back of an envelope. "What ifs" are fun up to a point.

 

[Jack]

And don't forget being able to REALLY enjoy the grandkids - assuming, of course, that your own kids have theirs at a normal age as well.

As a (relatively) young, ER'd grandpa, I can attest to the joy of being available on a moments notice to watch the grands. Just part of `smelling the roses' for me.

This is what life is all about!!

 

[Liltime]

You guys are all correct!
Patnbj,
It is a catch-22 if you wait(for a women) you might have a very hard time trying to concieve. I think I waited till about the right time, 27 1st, 32 2nd. Although I do miss being able to just go ahead and celebrate New Years with my girlfriends in Vegas!

Unclemick+Johngault,
Yes if you wait too long you will pay at the end. My husband will be eligible to retire before the infant graduates from highschool!, which I don't think he will be able to do. The other child will be about finished with college.He has an adult daughter in college (he did not save any money for her). She got a full athletic scholarship. He did what a lot of men do. Got remarried to someone younger and started a second family. So he could be a grandfather and have a child in the first grade at the same time!
As I named my original post, ER plans derailed at this point I do not see how it is possible. At the moment I am not contributing to any retirement plan or investments, not currently employed. The only possibility I could come up with now is to take $1,000 from tax refund next year to contribute to a Roth IRA. Have several thousand in my former employers 457 plan in another state, just sitting there have'nt touched it. If I go back to work full time in the next couple of years I will be paying an average of $1,250/ month for childcare. Could be less or more.I would also only get to see the little ones for 2 hrs. after work in the evening.
Unless I look at some other means of income than the traditional 40-45hr. workweek most of my income will go toward childcare and work related expenses. They even have a calculator to figure this out: actual contribution toward household income. So it seems like a catch 22.

 

[Mr._johngalt]

My second wife and I both have kids by our first
marriages, all grown now. New families or step-
children can surely complicate things ER-wise. My
son was born when I was 21 and my youngest
daughter when I was 40, so from time to time it was
assumed that I was with my grandchild.

 

[Liltime]

johngault,
since you have been in a similar situation and you mentioned before you did not plan for ER do you have advice on how else to go about it. Like I stated my husband can retire with a pension at 56. H e also has a TSP plan(equivalent of 401k). I am just getting started had 8 years in the workforce before a break for childcare. Small amount invested in former employers retirement plan. did you pay for college for your other kids? I know you did not pay for your 37 year old son. If was not married and didn't have any kids I think I would live a similar kind of life. Oh athe joy of being able to stop working and /or travel on a whim.
Well one day when the kids are big!

 

[haha]

He did what a lot of men do. Got remarried to someone younger and started a second family.

No doubt about it, this is an attractive idea. I asked myself, is this worth another 20 or so years of work? Part of my thinking apparatus says, sure, man! But in the end I am too lazy.

Congrats to your husband for having the energy to start again.

Mikey

 

[Mr._johngalt]

Hey Mikey. I am too lazy too. Almost fell in love and
"started over" once or twice. Man. I dodged a bullet there!

 

[Jack]

I'd say the assumptions made routinely about me (that I'm the father and NEVER that I'm the grandpa), are far more flattering!

 

[Mr._johngalt]

Hello Liltime! Well, nothing in my life is more important than my kids. And, as you have noted, I did no planning
whatsoever as far as their post high school education.
When my first 2 graduated from high school, I paid
50% of their total (net) college expenses (after
scholarships, etc). This was back in my peak earning years. My youngest was born in 1984 and her mother
and I divorced in 1998. Unfortunately, when she was
ready for college, I was dragged back into court to see
what could be extorted. Of course, I had planned to
contribute. Alas, the court ordered quite a bit more than I had intended. Anyway, I am reconciled to it now
as my daughter is happy where she is and is doing well,
so I am done fighting over that. As far as my very early
retirement, I don't know what to tell you. It was basically a combination of willpower and brainpower.
I cut way back on my lifestyle and got a bit lucky with
my situation in terms of investments and stuff I owned
which I could turn over for major gains. Real estate
has been good to me. Never in my 60 years made any
real money on common stocks. Owning my own company was very helpful, but I worked night and day to make it successful. The irony is that my former spouse
refused to work when I decided to semiretire in 1993. Now she
works full time and I don't work at all. Poetic justice?

 

[Liltime]

Yes that is poetic justice! Glad u are enjoying your ER! It helps when you have a partner who is on the same page. As you noted you paid for college when you were in your peak earning years. I will probably still be working when the baby goes to college, my husband will prabably be retired on his horse farm. That's his dream. College is a headache, by the time the kids go the cost will be astronomical! My plan is they go for 2 years at a community college and 2 at a private college. Plan to save for the 2 years at comm. college and half of the private school tuition. BTW I went to a small private college without a dime from anyone. School expenses or living expenses. Survived on lots of Ramen noodles and campus jobs when they were available.
Thanks for the input I value your opinion I have reas many of your posts on other topics. Good to know there is still hope even later if plans get off track. I definitely see real estate as a way to help get to the ER goal.

Liltime