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Old 06-10-2014, 10:35 PM   #1
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Hi - Newbie

Hello,
Just stumbled across this forum and it looks great. Still browsing the frequently asked questions and searching for answers.

Here's my story. I think I have a longer road to hoe than most.

I'm almost 42.
Wife is about 37.
We have three kids. Youngest is 4 years old.
Our combined income is about $130k a year.

I've researched other calculators and based on what I've read, to retire by age 65 and have an adjust for inflation retirement income of $100k, I'm going to need about $4 million to retire.

That makes me question how the hell the other 80% who are financially worse off than us will make retirement some day.


Anyway... here are my stats.
I'd appreciate any feedback or suggestions on how to retire sooner.

We have a house valued at about $450k, balance on it is about $315k.
We have a rental house valued at $280-$300k, mortgage balance is $160k at 5%.

Neither of us have pensions. I'm surprised by how many people on here my age and younger have jobs with pensions.

We have about $300k in investments in an aggressive but well diversified portfolio. Total net worth is about $550k.


I guess a couple questions I have:

1.
Is planning for 100k (adjusted for inflation) higher than what is really necessary? (Kids out of house, less house payments, lower food expenses, etc)? It's hard to predict how much I will spend when we hope to be traveling in retirement, but really unsure how we'd spend the rest of our time. (20 years from now is a long time).

I guess I'd like feedback on what others think.

Current budget:

Income: $130k per year salary, plus $1850 monthly in rental property payment.

Expenses:
Our current budget which is loose right now is about $7000 spent per month.

$3300 is the mortgage on the current house and rental property.
$1200 in misc bills. ($390 car payment, $300 gas, electric, Insurance etc is remainder.)
$2,000 for food, gas for auto, clothes, school, kid expense, as well as short vacation (long weekend to in-laws, etc).

The rest we are working to invest.

I guess I'd like thoughts on what others are spending in real dollars in 2014 for retirement, and how much travel and leisure expenses they have so I can adjust for inflation to bring a reasonable number.
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Old 06-10-2014, 11:37 PM   #2
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Hi dd564,

I like to point people toward "biggerpockets.com" when they mention real estate investing. This site helped me get a better understanding of that path. I recommend starting with the 2% rule and 50% rule articles. My opinion is that real estate investments should always cover the mortgage on 50% of the rent.

The majority are in for a rude awakening. Social security and the proverbial dog food I guess. Savings rates for the bottom 90% are supposedly under 5%, which might as well be nothing.

I'll challenge the "I need 100k" approach. Given your current age and progress, you have plenty of potential for an early retirement, but it probably won't include a 4 million NW. Retiring at 65, sure. 2.5-3 million would give you 100k (3-4% SWR), but I'll ask if you can't also do it on 50k / yr?
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Old 06-11-2014, 06:19 AM   #3
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Hi dd564,

Welcome!

Not sure about your numbers, you might want to do everything in real dollars though, makes it easier. Also, split expenses from investments: paying off a mortgage is partly an investment!

But just off-hand you seem to have a current cost base of about $3.200 per month excluding real estate. If you aim for a withdrawal rate of 4% you would need $960k to sustain that.

Excluding your home you have $420k in investments already (including your rental here), so you are roughly halfway there already

Too lazy to do the full math here, but if you fast forward about ten years it seems you'll end up with:
  • A paid off home
  • A paid off rental generating 1.850 usd (at today's prices)
  • Thus 3.200 - 1.850 = 1.350 usd in net expenses, which could be covered by your current portfolio (at 4% real return)
  • Changed spending profile - beware college costs
So you may or may not be able to retire then! The big known unknowns:
  • Medical costs & insurance
  • College costs for your children (Ivy league or community college?)
  • Current costs for your children
  • Need for your current size of house as time goes on - might want to downsize
  • House repairs and maintenance costs
  • Appreciation and depreciation of your house & rental
  • .. and of course investment returns
Try to narrow down these variables somewhat and you'll get a much better picture. I'd start with the cost of your children, they are most under your control.
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Old 06-11-2014, 06:33 AM   #4
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Quote:
Originally Posted by dd564 View Post
...Is planning for 100k (adjusted for inflation) higher than what is really necessary? (Kids out of house, less house payments, lower food expenses, etc)? It's hard to predict how much I will spend when we hope to be traveling in retirement, but really unsure how we'd spend the rest of our time. (20 years from now is a long time).

I guess I'd like feedback on what others think

.....I guess I'd like thoughts on what others are spending in real dollars in 2014 for retirement, and how much travel and leisure expenses they have so I can adjust for inflation to bring a reasonable number.
Yes, $100k would be high. We ERd at 56 and spend about $81k a year, but $18k is our mortgage and $12k is recreation ($5k travel, $2.4k dining out, $2k golf, and our other hobbies). The first year we didn't travel, the second year travel was a bit below budget and last winter we splurged and blew the travel budget. Anyway, our core expenses (total excluding mortgage and travel) are about $58k a year and IMO we live quite well, and that $58k includes significant amounts for golf and DW's sewing passion.

I exclude the mortgage only because it is really a leverage play rather than an expense - my rate is 3.375% and I am betting that my investments will do better than that - I have funds available to pay it off anytime I want.
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Old 06-11-2014, 07:01 AM   #5
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dd..for retirement planning, I would not include value of my primary residence and I'll fund 529 plan for kid's college. After emergency fund covered, load up 401K/Roth IRA and if any leftover in taxable account. All the best.
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Old 06-11-2014, 08:00 AM   #6
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One tool you may find useful is Quicken Lifetime Planner, included within Quicken Deluxe and higher, is a reasonably intuitive, easy-to-use retirement planning tool. That is my main plan and I supplement it with Firecalc, which adds a stochastic analysis to QLP's deterministic approach.
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Old 06-11-2014, 08:54 AM   #7
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Hi, and welcome! First of all, congratulations for starting to think about this seriously at such a young age. You're definitely ahead of the curve there.

The first thing I would suggest is get a really detailed look at your expenses. If you haven't tracked them in detail in the past, you might want to start now. I have used Quicken for years (and Microsoft Money before that), and find it really helpful.

Once you know where every dollar is going today, you can do some "what if" scenarios on what your spending in retirement might look like. I took my total spend, excluded taxes (I add them back in when I have a new level of spend to calculate them on), pulled out what I'm putting into savings (since I won't be doing that in retirement), adjusted miscellaneous categories (travel and health insurance up, eating lunch out every day down) and then modeled a few different housing scenarios (stay where I am with paid off mortgage, downsize and buy a new place from my current equity/no mortgage, rent, etc.). I also created a "bare bones" expense summary to level set against various catastrophic occurrences (significant down market, losing my job before I was ready to FIRE, etc.).

I would suggest that doing something like that might give you a better range of what income you will need in retirement, and from there the rest calculates itself out.

Good luck!
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Old 06-11-2014, 10:43 AM   #8
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Yes, you may need far less than you think in retirement.

Taxes can be far less, you probably won't need life insurance anymore, or work-clothes. You won't need to drive as much, and you'll have more time to cook at home and partake in free/cheap entertainment.

If your mortgage is paid off and kids are launched that helps too. On the other hand healthcare costs will probably go up.

Getting a realistic sense of your retirement expenses can be a multi-year project. We're working on it too.
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Old 06-11-2014, 11:09 AM   #9
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Quote:
Originally Posted by FIGuy View Post
Hi dd564,

I like to point people toward "biggerpockets.com" when they mention real estate investing. This site helped me get a better understanding of that path. I recommend starting with the 2% rule and 50% rule articles. My opinion is that real estate investments should always cover the mortgage on 50% of the rent.

The majority are in for a rude awakening. Social security and the proverbial dog food I guess. Savings rates for the bottom 90% are supposedly under 5%, which might as well be nothing.
Agree about BiggerPockets. If anything, it's given me pause about being a real estate investor, at least in my current market. I'm not sure I can charge the rent required to generate cash flow on our home. A good reminder of this is the $2000 plumbing bill I just had to pay. Annualized, that's more than $150/month in unforeseen expenses, and I think a lot of RE investors underestimate the expenses they'll pay on SFH rentals.

The 50% rule is a good one. I'm not so sure about the 2% rule because it involves more assumptions and future forecasting, whereas 50% is "what can I get today to cover this amount today..."

The majority of people think retirement is something they'll worry about later. They don't do enough reading/research to figure out that you don't really have to "plan" for retirement until later, but you damn sure need to "save and invest" for retirement as soon as possible... or else you're screwed. The bulk of the country is screwed.
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Old 06-11-2014, 11:38 AM   #10
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Agree about BiggerPockets. If anything, it's given me pause about being a real estate investor, at least in my current market. I'm not sure I can charge the rent required to generate cash flow on our home. A good reminder of this is the $2000 plumbing bill I just had to pay. Annualized, that's more than $150/month in unforeseen expenses, and I think a lot of RE investors underestimate the expenses they'll pay on SFH rentals.

The 50% rule is a good one. I'm not so sure about the 2% rule because it involves more assumptions and future forecasting, whereas 50% is "what can I get today to cover this amount today..."

The majority of people think retirement is something they'll worry about later. They don't do enough reading/research to figure out that you don't really have to "plan" for retirement until later, but you damn sure need to "save and invest" for retirement as soon as possible... or else you're screwed. The bulk of the country is screwed.
I agree on the 50% rule on real estate investing. Right now that's hard to pull off. What has helped me with mine is just the time that I've owned it. It was our primary residence. We essentially were making just a bit of money on it when we started renting it. I fix a lot of stuff myself, but the house is newer so repairs are less as well.

I'd like to add another because having a big mortgage on property is my best counter to inflation. If I can get in a position where the cash flow now provides a good portion of our income, it will help ease us transition into retirement as time passes.
With inflation, property values tend to go up. My 30 year mortgage payment tends to look smaller and smaller as the value of the dollar decreases. Cheap money becomes cheaper money with inflation.

That's why I don't mind carrying mortgages over 30 years if I'm buying assets that appreciate with the money borrowed.
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Old 06-11-2014, 11:40 AM   #11
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Yes, $100k would be high. We ERd at 56 and spend about $81k a year, but $18k is our mortgage and $12k is recreation ($5k travel, $2.4k dining out, $2k golf, and our other hobbies). The first year we didn't travel, the second year travel was a bit below budget and last winter we splurged and blew the travel budget. Anyway, our core expenses (total excluding mortgage and travel) are about $58k a year and IMO we live quite well, and that $58k includes significant amounts for golf and DW's sewing passion.

I exclude the mortgage only because it is really a leverage play rather than an expense - my rate is 3.375% and I am betting that my investments will do better than that - I have funds available to pay it off anytime I want.

Thanks for providing some real numbers. That's helpful and is in the lines of what I'm penciling out.
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Old 06-11-2014, 11:54 AM   #12
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+2 or +3 to biggerpockets regarding RE rentals and the rules. New or newish landlords often dispute the 50% rule but sooner or later it asserts itself.

As others have said, it's probably easier to plan in today's dollars and simply subtract what you expect inflation to average off your rate of return.

I am also a fan of Quicken's lifetime planner and definitely recommend checking it out. Plus, Quicken is probably the easiest way to get a true handle on your current expenditures and to benchmark any changes.

I've found retirement planning on a long horizon to be an iterative process. Your first pass will be really fuzzy and inaccurate. But as you do successive passes and as time goes by, you will start homing in.

Welcome!
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Old 06-11-2014, 12:36 PM   #13
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+2 or +3 to biggerpockets regarding RE rentals and the rules. New or newish landlords often dispute the 50% rule but sooner or later it asserts itself.

As others have said, it's probably easier to plan in today's dollars and simply subtract what you expect inflation to average off your rate of return.

I am also a fan of Quicken's lifetime planner and definitely recommend checking it out. Plus, Quicken is probably the easiest way to get a true handle on your current expenditures and to benchmark any changes.

I've found retirement planning on a long horizon to be an iterative process. Your first pass will be really fuzzy and inaccurate. But as you do successive passes and as time goes by, you will start homing in.

Welcome!

I've been tracking on mint.com and personalcapital.com.. both seem to have their benefits.
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Old 06-11-2014, 08:35 PM   #14
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Old 06-12-2014, 03:42 AM   #15
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I would stress the importance of a budget, and wish someone had told me the importance of it when I started making money.
Once I realized what we spent money on, it was easy to say no to things I didn't see adding a whole lot of satisfaction or benefit to my life. Spent $15-20k/year extra prior to setting a budget. We had tracked it previously, accepting it for what it was, but had not cared to set a budget.
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