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Hi, I'm Jerry, 43 in California
Old 09-13-2016, 03:14 PM   #1
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Hi, I'm Jerry, 43 in California

Hi, This is Jerry. I'm an engineer living in Silicon Valley. I'm 43 and I wish I can retire at 55.

Right now, I totally have compensation is a little over 200k per year and my wife has around 180k, we also have rental income for 160k per year.

Right now our asset is around 4.2M.
-Our house value (primary and invest house) is around 5.5M in total, with 2.05M debt in total, so we have equity of 3.45M
-We totally have ~600K in 401k account
-We have other 150k in cash and other securities.

We paid 165k for Mortgage/Property tax/House insurance every year.

Here's my plan for retirement.
In 2028, I will be 55, the total House Equity should reach 9M with 1.2M debt.
401k will be 2M, so totally we should have at least 10M NW.

Rental income can increase to 250K per year. If I pack everything in our primary and rent it out we will get another 50K per year.
The total yearly payment for the house will reduce to 120K per year.
Then we will travel around the world with 180k income.
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Old 09-13-2016, 03:20 PM   #2
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Sounds like a plan, welcome to the forum!
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Old 09-13-2016, 03:20 PM   #3
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Hi Jerry,

Welcome to the board. My original plan was to retire at age 55 too, but I actually stopped at age 47 instead.

Historically isn't the value of real estate on the coasts much more volatile than the rest of the country? I think you may be overweighted in RE relative to stocks/bonds/cash.

I would probably consider diversifying my assets between now and retirement if I were you.

Again welcome!
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Old 09-13-2016, 03:57 PM   #4
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I also invest in real estate. I would have to know more about your rentals to have an opinion of your plan. What type of properties and where are they located? How have you calculated your rental income - is the $160k gross or net after all expenses? What makes you conclude that the real estate will grow in value from $5.5 million to $9 million and the income will grow from $160k to $250k?

For your age and incomes, I would have expected more in the paper asset accounts. Have you focused primarily on real estate and are just now working on the other assets? It will likely take a bit more than maxing out the two 401(k) accounts to get to $2 million in 12 years. How have you allocated your investments? What rate of return are you using to calculate the $2 million?

Based on the limited information provided, I think you may be optimistic about the future. You may want to play with some of the retirement income calculators if you have not done so to see what assumptions are required to meet your plan goals.
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Old 09-13-2016, 04:05 PM   #5
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Hi Jerry - welcome!

You and your wife have great income, but you live in a very high COLA area - especially for real estate. I have friends who moved from a million dollar home in San Diego and ended up needed to spend almost 2 million to buy a house 1/2 the size of their San Diego house. (But it was an Eichler in Palo Alto...).

I would sock away as much as you can in both tax deferred (401k) and taxable accounts since you hope to retire before 59.5. I'd also work on reducing the mortgages. That will give you flexibility if the real estate market dips and you can't pull in as high rent.

I would not consider my primary home equity when figuring retirement plans... You need to live somewhere. Rental property is fair game to include.
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Old 09-13-2016, 04:21 PM   #6
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Thanks

I know I have too much in Real Estate. Most of them come from Appreciation.


Quote:
Originally Posted by gauss View Post
Hi Jerry,

Welcome to the board. My original plan was to retire at age 55 too, but I actually stopped at age 47 instead.

Historically isn't the value of real estate on the coasts much more volatile than the rest of the country? I think you may be overweighted in RE relative to stocks/bonds/cash.

I would probably consider diversifying my assets between now and retirement if I were you.

Again welcome!
-gauss
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Old 09-13-2016, 04:27 PM   #7
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All of them in Bay Area. 160k is the gross income.

$5.5M to $9M is based on history of Bay Area Real Estate and inflation rate for other 12 years.

For 401k, I calculate it based on 10% return for pass 10 years.
So 600k will be 1.88M 12 years later, We also max out 401k plan every year. so they will add other 432K into it even without including its return, so 2M should be achievable?

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I also invest in real estate. I would have to know more about your rentals to have an opinion of your plan. What type of properties and where are they located? How have you calculated your rental income - is the $160k gross or net after all expenses? What makes you conclude that the real estate will grow in value from $5.5 million to $9 million and the income will grow from $160k to $250k?

For your age and incomes, I would have expected more in the paper asset accounts. Have you focused primarily on real estate and are just now working on the other assets? It will likely take a bit more than maxing out the two 401(k) accounts to get to $2 million in 12 years. How have you allocated your investments? What rate of return are you using to calculate the $2 million?

Based on the limited information provided, I think you may be optimistic about the future. You may want to play with some of the retirement income calculators if you have not done so to see what assumptions are required to meet your plan goals.
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Old 09-13-2016, 04:29 PM   #8
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Thanks for your advice, I know Bay Area is not good place to retire, so we plan to either renting the primary out or Sell it and relocate to other place

Quote:
Originally Posted by rodi View Post
Hi Jerry - welcome!

You and your wife have great income, but you live in a very high COLA area - especially for real estate. I have friends who moved from a million dollar home in San Diego and ended up needed to spend almost 2 million to buy a house 1/2 the size of their San Diego house. (But it was an Eichler in Palo Alto...).

I would sock away as much as you can in both tax deferred (401k) and taxable accounts since you hope to retire before 59.5. I'd also work on reducing the mortgages. That will give you flexibility if the real estate market dips and you can't pull in as high rent.

I would not consider my primary home equity when figuring retirement plans... You need to live somewhere. Rental property is fair game to include.
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Old 09-13-2016, 05:23 PM   #9
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Just lost a long reply...pushed the wrong button.

short reply
I think you could use ESplaner software to do your estimating. Its not perfect but so much better than you as to estimating future dollars.
Future profits should go into stock portfolio...index funds...instead of bonds for a portion of your portfolio pay down mortgages....maybe primary first as you probably are getting hit by alt/min tax.
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Old 09-13-2016, 05:26 PM   #10
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The bay area is a great place to live and you have the dough to do it. Lot's of stuff to do, great restaurants and great weather.

Should be no problem. Have fun!
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Old 09-13-2016, 07:15 PM   #11
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Jerry:

I have lived in the Bay Area for over 60 years. In general, the real estate prices here have outpaced inflation since WWII because demand has always exceeded supply. That has not always been the case, however. Prices dropped in 1991 and did not recover until around 1999. Prices dropped dramatically from 2007 to 2012 and have only exceeded the 2007 peak in the last couple of years.

The tech industry is increasingly responsible for real estate prices in the southern part of the Bay Area. That industry is highly cyclical. The overseas demand for Bay Area and coastal southern California real estate is subject to government, economic and currency pressures. Prices can only increase with effective demand. They cannot increase at a consistently high percentage without increasing numbers of people and commensurate increases in salaries and even more money coming from overseas economies. The percentages are not sustainable without these factors.

Vancouver is already experiencing a chill from the imposition of a 15 percent tax on purchases by non-residents. Projecting high value increases over the next few years is risky and in my opinion unrealistic.

Rents are a direct function of jobs and salaries. Rents have gone down several times in the last 30 years. Projecting strong rental growth over the next 10 years may also be optimistic.

On the paper asset side, bonds will decrease in value when interest rates rise. Not if, but when. Equities are in nosebleed territory by many measures. There is a lot of discussion here and in other financial forums of both real and nominal returns going forward. 10 percent nominal may not be achievable over the next 12 years.

In your shoes, I would use some more conservative assumptions in projecting where you will be in 12 years. Using the paper asset retirement income calculators that are based on a long market history can help there, especially in figuring out where your 401 (k) and taxable accounts are likely to be when you want to retire and how much you will likely be able to rely on them.

Not knowing exactly where your rentals are, I would be cautious in protecting myself. Outer suburbs and more marginal demographics will not do as well as, say, the Peninsula. I would not put myself in the position that my current household would be needed to support the real estate debt in a rental market with 15 or 20 percent vacancy and a 20 to 25 percent decrease in market rent. That's exactly the time one or both of you will lose your high tech jobs. In your shoes, I would make the properties self supporting at 20 percent vacancy and 75 percent of the current rent. I would also up my cash holdings to insure I could make up any deficiencies in net rental income needed to pay those mortgages.

I have seen a lot of real estate portfolios like yours collapse due to lack of liquidity and lack of reserves when things went south. You do not want to give properties back to the bank and start over at, say, 52 or 53. Take a more conservative approach and you won't have to.
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Old 09-14-2016, 08:53 PM   #12
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Quote:
Originally Posted by jerry2016 View Post
Here's my plan for retirement.
In 2028, I will be 55, the total House Equity should reach 9M with 1.2M debt.
401k will be 2M, so totally we should have at least 10M NW.

I've live in the Bay Area for almost 50 years and your extrapolation of home values into 2028 is not realistic. The Bay Area has had a couple of real estate bubble bursts over the past 50 years and I'd be surprised if we don't have another one before 2028. Depending on the severity of the correction, high end homes also tends to take a big hit. I'm going mostly by memory but I recall corrections in 1989, 2000 and 2008. How much of a correction and how fast of a recovery depends on location. Since the last correction, most homes along the Peninsula are above the peak valuation of 2008 but a lot of homes elsewhere have yet to reach their peak valuation from the last bubble.
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Old 09-15-2016, 02:50 AM   #13
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You are in excelent financial shape and time is on your side. 4.2 M Net Worth in your age .........

Sounds like realistic plan.
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