Hi from PNW

[spikeykiller]

Hi,
I’ve been lurking on this great forum for about a year and thought it is about time I introduce myself. I’m looking to RE in the next 12-18 months. Here is my situation.

Male 53. I am 54 next month. DW is 45. We have 3 kids - 13, 11 and 11.

Pre tax accounts: $1.8m
After tax account: $2.6m
Unexercised stock options: $2.2m (current value)
College savings plan: $0.4m
Other savings: $0.1m
Total: $7.1m

Rental real estate worth approx $4.0m and yields $180k/yr in net income.

Primary residence worth $1.2m. Mortgage is $200k.

No other significant debt.

Spending over the past 4 years averaged in the $180-200k range per year. For retirement I am assuming a $240k/yr spend with the additional to cover health insurance and retirement hobbies.

For the rental income I am assuming an effective fed and state (9%) tax rate of 35%. I believe this is very conservative and could be even 30% or lower with the new tax bill. This will yield $117k cash per year.

240-117= $123k that will need to be funded from investments. If I assume a conservative 30% net tax rate from investments (blend of long term, short term and div income). This means that my investment portfolio will need to yield $176k/yr.

At a 3% withdrawal rate, this would require a portfolio of $5.87m.

So I think I am looking good and will be ready. Comments and feedback welcome.

Spikeykiller

 

[VanWinkle]

400,000 might be a little lean for 3 kids going to college. I see your retirement investment as 6.6m after exercising the options. Healthcare alone will likely add 30-40 thousand to your expenses. All of this doesn't mean you can't do this, just that it is not a slam dunk. I would build up the college fund and the cash account in the last year or two.

 

[spikeykiller]

400,000 might be a little lean for 3 kids going to college. I see your retirement investment as 6.6m after exercising the options. Healthcare alone will likely add 30-40 thousand to your expenses. All of this doesn't mean you can't do this, just that it is not a slam dunk. I would build up the college fund and the cash account in the last year or two.

Thanks for the feedback. Agree on the $400k college fund being light. I expect to fund all 3 kids through undergrad and grad school. This could be as high as $1m for all 3, but I expected to fund the remainder from investments. But I get your point, these college funds should be completely separate from the investment portfolio funding my 3% withdrawal.

 

[MBAustin]

Welcome spikeykiller! If you haven't found them already, we have a helpful list of things to think about as you're preparing to join the ER crowd:

Some Important Questions to Answer

Welcome and we look forward to your contributions!

 

[dvalley]

Welcome. Your $7m should easily allow you to spend your $200-$240k at 4% WR. Of course, a few would say 4% is too generous and one should plan for 3.5%WR or less but I'm sure there's some wiggle room in the expenses too. Speaking of which what you're spending $200k/yr on? I'm just curious as to what are some of the big ticket expenses?

 

[spikeykiller]

Welcome. Your $7m should easily allow you to spend your $200-$240k at 4% WR. Of course, a few would say 4% is too generous and one should plan for 3.5%WR or less but I'm sure there's some wiggle room in the expenses too. Speaking of which what you're spending $200k/yr on? I'm just curious as to what are some of the big ticket expenses?

$200-240k per year is very high but easy to do with a family of 5. I took a look at our trailing 12 month expenses and here are the big categories. I used credit card categories for 60% of below so not exactly sure how accurate the categories are but the total number is accurate. The total is higher than the past 3 years by about $15-20k due to Travel.

$38k Travel (exceptional year, probably 2x normal)
$36k mortgage, prop taxes
$22k groceries
$18k car payments, insurance
$15k restaurants
$12k kids sports and activities
$9k utilities
$8k entertainment
$8k health care costs
$5k club membership
$35k buying $hit amazon and in stores.
Total = $206k.

After tying that up, I realize there is huge opportunity to cut back once I retire. I am not a spender, the wife is. When I retire I will have more time to manage the budget more tightly. It’s not that my wife doesn’t want to cut back, she just doesn’t know how to track what she spends (she more artistically gifted).

 

[Nature Lover]

Given you have some room for adjustments, if needed, I think you just confirmed that it's likely doable (well done!). I do think it would be prudent to consider the concentration of value in your unexercised options. They're significant enough that their liquidity and value could have an impact on your decision.

 

[StuckinCT]

You are in really good shape. I am targeting the same spending level in retirement and for us at 46/36, it will require 6.7mm with no debt. You have some cushion built in. I am debating whether to work another 5 or 6 years in which case I might have the cushion you have. I would say retire and don't look back, it's not too early- you can do a lot more at 55 than at 65.

 

[spikeykiller]

Given you have some room for adjustments, if needed, I think you just confirmed that it's likely doable (well done!). I do think it would be prudent to consider the concentration of value in your unexercised options. They're significant enough that their liquidity and value could have an impact on your decision.

I hear you on the options and I am watching that very closely. It’s a difficult decision b/c they have a lot of leverage on the upside. But a bird in the hand .......

 

[Nature Lover]

I hear you on the options and I am watching that very closely. It’s a difficult decision b/c they have a lot of leverage on the upside. But a bird in the hand .......

Sounds good. My comment wasn't an admonishment, of course; simply recognizing their character and importance in the equation. How you will ultimately incorporate them into your financial plan at- or post-retirement will be something you might want decide before you pull the trigger.

 

[walkinwood]

It is quite easy to estimate current health insurance costs. Predicting future costs is almost impossible at this time. Go to your state's health exchange or the federal one if you don't have a state exchange and get an estimate. If you're all healthy, get a bronze plan. You have enough capital to handle the occasional big out of pocket expense.

If you plan to use taxable accounts to fund your initial ER, your tax burden maybe less than you estimate. Model it in turbotax. A number of tax calculators were linked to in the discussion of the new tax bill. Maybe one of them will work for rental and investment income.

Good luck.

 

[dvalley]

$200-240k per year is very high but easy to do with a family of 5. I took a look at our trailing 12 month expenses and here are the big categories. I used credit card categories for 60% of below so not exactly sure how accurate the categories are but the total number is accurate. The total is higher than the past 3 years by about $15-20k due to Travel.

$38k Travel (exceptional year, probably 2x normal)
$36k mortgage, prop taxes
$22k groceries
$18k car payments, insurance
$15k restaurants
$12k kids sports and activities
$9k utilities
$8k entertainment
$8k health care costs
$5k club membership
$35k buying $hit amazon and in stores.
Total = $206k.

After tying that up, I realize there is huge opportunity to cut back once I retire. I am not a spender, the wife is. When I retire I will have more time to manage the budget more tightly. It’s not that my wife doesn’t want to cut back, she just doesn’t know how to track what she spends (she more artistically gifted).

Thanks for adding in the expense details. It's easy to forget how some expenses easily add up in a household of 4 or 5. Travel, groceries and buying $hit stand out a bit but again for 5 people that's still not bad...and this is coming from someone who spends $75-80k per year and lives comfortably in SoCal in a household of 2.

 

[Bigdawg]

$38k Travel (exceptional year, probably 2x normal)
$36k mortgage, prop taxes
$22k groceries
$18k car payments, insurance
$15k restaurants
$12k kids sports and activities
$9k utilities
$8k entertainment
$8k health care costs
$5k club membership
$35k buying $hit amazon and in stores.
Total = $206k.

WOW! There is a regular poster on here (Fuego) who has a family of 5. His TOTAL spend for the year isn't 35K. They went to Europe for 9 weeks this summer. Holey Moley! Off the top of my head if I add up everything in my 3BD/3BA house I doubt I have 35K in stuff. I can see the 22K in groceries if you eat almost every meal at home but then another 15K in eating out? Wow!

Good luck. Seems like you have the numbers to go soon.

 

[lhamo]

Given your home value I am going to assume you are in the greater Seattle area.

Your spending on groceries is INSANE!!!! We are a family of 4 (two teens that eat like adults) and in a splurgey month we'll spend 700-800. More typical is around 600. We shop primarily at Fred Meyer (weekly) and an Asian Market and Costco(1-2 times a month usually for those).

You could bump up your kids college fund pretty easily just by being a bit more attentive to what you are spending on groceries. Do you guys shop only at Whole Foods/PCC/QFC? QFC is owned by Kroger and carries mostly the same stuff that Fred Meyer does, but at a 10-25% premium.

I'd be FIREd yesterday on your stash. I already am, actually -- but on much less! What you have saved for kids college is plenty to put them through the UW. Save the expensive schools for grad school (where chances of funding may be higher).

 

[Closet_Gamer]

I hear you on the options and I am watching that very closely. It’s a difficult decision b/c they have a lot of leverage on the upside. But a bird in the hand .......

If you have to cash them before/at the time of departure, I would give serious thought to starting to drain.

Leverage on the upside means leverage on the downside as well...and you have a specific time horizon in mind. Something goes hay wire in NK tomorrow having nothing to do with your company and suddenly you could find yourself trapped waiting for those options value to recover.

If it was me, I'd be starting to sell those off very deliberately.

YMMV

 

[flintnational]

Welcome to the forum. Congratulations. It appears you are in great shape. Your future expenses will likely decline as the mortgage is paid off and the kids are off the payroll.

 

[NanoSour]

First off, congratulation for coming out into the ER open wilderness. I know this guy Spikeykiller Jones. Lucky for me, a close friend once suggested I be weary not to try to keep up with these Jones'. Now I know why. Although I'm sure I'd like to drive your cars instead of my 12 & 11 year old rigs.

I'm much more like Fuego; ER'd over 4 years ago with 3 kids (10, 11 & 14 at the time). Now the oldest is a freshman at a private LAC.

Our annual spend for the past 4 years for what I consider a pretty decent middle, to upper-middle, class lifestyle has been:

63K
63K
65K
66K

Given these numbers compared to yours, I've no doubt you are financially ready for ER if you so choose. Best of luck to you, and again welcome to the board.

Note of Caution: With that kind of money, make sure you're not giving away up to 25% of your gains to the financial advisor community. 1% of AUM and a 4% real return. Sorry, I'll get off my soapbox now.

 

[rodi]

I have to say - the groceries seem high even if you shop exclusively at Whole Foods. I have two teenage boys at home. We eat all the expensive stuff (nice meats, fresh organic veggies, etc.) We top out at a hefty $12k/year. That includes everything bought at any kind of grocery store (Vons, sprouts, trader joes, costco, ranch 99, zion market, pacific seafood). It includes booze, and sometimes electronics or clothes from costco. It includes all the sundries (shampoo, vitamins, toilet paper).

Did I mention I have teenage boys? They eat. A lot. Really a lot! Especially during school swim team season. And we're somewhat foodies.... Searching out good fresh ingredients to try whatever dish we're experimenting with learning to cook.

To put it in more perspective... we live a very comfortable life for under $90k for a family of 4. One big difference is we're mortgage free. But we travel, we splurge, we do not deny ourselves. I'd say we're debt free - but I recently got a new car and I couldn't turn down 0% financing. (Planned on paying cash.)

But you have the money to retire. You have lots of room to trim expenses if you need to.

 

[Bir48die]

Given your home value I am going to assume you are in the greater Seattle area.

Your spending on groceries is INSANE!!!! We are a family of 4 (two teens that eat like adults) and in a splurgey month we'll spend 700-800. More typical is around 600. We shop primarily at Fred Meyer (weekly) and an Asian Market and Costco(1-2 times a month usually for those).

You could bump up your kids college fund pretty easily just by being a bit more attentive to what you are spending on groceries. Do you guys shop only at Whole Foods/PCC/QFC? QFC is owned by Kroger and carries mostly the same stuff that Fred Meyer does, but at a 10-25% premium.

I'd be FIREd yesterday on your stash. I already am, actually -- but on much less! What you have saved for kids college is plenty to put them through the UW. Save the expensive schools for grad school (where chances of funding may be higher).

Like myself, the OP must live in Oregon as they have the 9% state tax (Wash is sales tax state). Houses in PDX are appreciating like crazy and many parts of the city support that value.

Two comments from me: One is the budget of $8k for healthcare which is very low unless I misread something. Second is your yearly budget which I would dream to have. Nice job on the real estate and wealth accumulation.

Also a couple of posts about kids schooling. As the costs continue to rise I don't think we are responsible for 100% of our kids college expenses. I had both sons take a nominal amount out in loans so they would have a bit more "skin in the game" so to speak. As they paid on them for a couple years I did come in and help them out to pay off.

 

[slv1]

Rental income. It comes and it goes. What will you do it you have 50% vacancy? Will you be able to get past that?

Have you considered selling it, taking you 4 mil from property sales and using the market as your only means of income?

 

[flyingaway]

People spend more money because they have more money. You just cannot ask someone with a portfolio of $7M to spend $36k a year. I think most people will make their money work no matter what is the exact amount.

 

[spikeykiller]

Lots of great input. Thank you. I think it is clear that I need to do more research on my expenses as obviously there is a lot of opportunity to cut back. But just the be clear so you know who I am, I started with nothing, inherited nothing and spent the last 30 years living below my means earning a median salary. I invested Early and stuck with it. That is how I accumulated a NW of approx $12mil. I am known as a tight wad, a label I do t mind. However to this community I must admit I am a little embarrassed that my spending has now gotten out of control.

The spending categories in my OP are auto generated by Amex. I will do a more detailed review and report back to the group. There might be a different view that provides different insights.

Thanks again. More later.

 

[spikeykiller]

Note of Caution: With that kind of money, make sure you're not giving away up to 25% of your gains to the financial advisor community. 1% of AUM and a 4% real return. Sorry, I'll get off my soapbox now.

There is very little chance of that. My wealth and net worth is all self made and self managed. Althing recently I have start to employ a few paid advisor.

 

[spikeykiller]

Rental income. It comes and it goes. What will you do it you have 50% vacancy? Will you be able to get past that?

Have you considered selling it, taking you 4 mil from property sales and using the market as your only means of income?

Good question but it is low risk and low impact. For the past 20 years I have been leveraging my gain in real estate while also paying down the mortgage with all my positive cash flow. The result is that I will be mortgage free by the end of 2018.

As for a 50% vacancy scenario, I think that is a very low risk since I have +20 unit diversity in a city whose population has doubled in the past 30 years and continues to be one of the top destination cities for young people starting their life/career.

This real estate investment provides diversification against my stock portfolio. I view it as more stable and a guaranteed income. However I will eat crow if we have a 9+ earthquake in the PNW!

 

[wingfooted]

Tax management is going be an issue with before tax savings, options and likely capital gains on rental property. And if indeed you live in Oregon, the 10% tax on income greater than $100K per annum is also going to take a big bite.

Nice problem to have however writing those tax checks is going to be painful.