not quite there yet; would love advice

[CUinFl]

Wow! What a great site. Working at Megacorp, and traveling one week, I decided to do some Early Retirement web surfing and stumbled across this site. Reading the coaching, advice and watch-outs was one of the best road warrior evenings I have spent in my career. Like a great book, I have not been able to put this site down.

Without a doubt, I have found some useful information on this site – the 72t is probably the most useful as I think about “bridging” my family until I am 59. That said, I would like to share our situation with you and find out what you think. I am hoping people can coach me on if we are on track; I think we are, but other eyes and advice would be appreciated.

I am 44, DW is 38 and we have two kids 6 and 4. From a retirement perspective, I am hoping to retire by 50 and the DW is currently expecting to work until 48. My hope is I can convince her to hang it up earlier, but for now she is suggesting 48. I guess I will have a few years chauffeuring my son & daughter as I wait for my wife.

From a portfolio perspective, our account is a follows:
- 529: $40k current value
o 60% US Equity; 40% international
o investing $6k/year split evenly for each child until I retire
- 401k (combined): $765k current value
o 70% Large cap; 20% Small Cap; 10% international
o Investing $35k/year until I retire then ~$18k until DW retires
- Deferred comp: $130k current value
o 70% Large cap; 20% Small Cap; 6% international; bonds 4%
o Investing $40k/year until I retire
o Hoping to use this and potentially tap 72t to bridge to 59.5
- Cash: $35k

From an income / expense perspective, we have:
- 2nd Property bringing in $2k / month with recurring monthly expenses of $1,600. This rental has been rented to 4 different tenants over the past 8 years with only 1 month of non-rental income. $1400 / month expense is mortgage which will be completed before I retire.
- Current mortgage of $3500; higher than we want, but it is in a good middle school & high school district for our kids
- Quicken modeled in expected retirement expenses are between $80k - $100k; taking into account healthcare ($10k/year), rental expenses ($2k/year but will need to raise based on this blog), additional college expenses, wedding expenses, etc
- DW income for the 4 years she works post my retirement should cover 80% of our retirement expense with the deferred comp helping cover any misses and accelerate debt repayment

As for modeling, Quicken has us both making it to over 100 years old. FIRECalc strongly suggests we cannot retire today, but with some conservative assumptions, 50 looks feasible.

I have not been to a FA, and am hoping you can help with identifying what gaps you see or questions / advice you can share so I can course correct on the misses and become more confident with our journey.

[pb4uski]

I think that you would find it helpful to have taxable accounts to help carry you from 50 to 59.5

I'm not as keen on 529 plans only because things can change. In my case, DS has deferred going to college for now, so I'm glad that I don't have a big 529 set up for him.

[CUinFl]

Quote:

Originally Posted by pb4uski I think that you would find it helpful to have taxable accounts to help carry you from 50 to 59.5.

Thanks, I assumed my deferred account would help carry me and that contributing to a deferred account now would hopefully give me a lower tax rate during my bridge years. I will look into this - thanks for the advice

[Fishingmn]

Couple things that look out of place to me -

- Your rental property brings in $2k/mo but you estimate only $200/mo in non-mortgage related expenses? That seems really low. Most real estate investors will estimate 30-50% of the income in non-mortgage related expense. Things like vacancy, insurance, taxes, repairs and utilities. I know I budget 1 mo's rent/year toward repairs/maintenance alone (I have 9 rentals)

- You budgeted for $10k/year for family healthcare? While I suppose that may be possible if Obamacare stays as it currently is and you qualify for subsidies I think you might not plan on that. I'm budgeting $15k/year for a couple and not sure that's high enough.

You're definitely off to a strong start.

[growing_older]

Quote:

Your rental property brings in $2k/mo but you estimate only $200/mo in non-mortgage related expenses? That seems really low. Most real estate investors will estimate 30-50% of the income in non-mortgage related expense. Things like vacancy, insurance, taxes, repairs and utilities. I know I budget 1 mo's rent/year toward repairs/maintenance alone (I have 9 rentals)

Confused. 2k/mo rental = 24k per year
200/mo allowance = 2400 per year.
"one month rent per year" would be 2000 per year

So the 200/mo allowance is larger than the "one month rent per year" benchmark. Why do you suggest that is too low? Is that taxes and insurance on top of the one month per year?

[Fishingmn]

Quote:

Originally Posted by growing_older Confused. 2k/mo rental = 24k per year 200/mo allowance = 2400 per year. "one month rent per year" would be 2000 per year So the 200/mo allowance is larger than the "one month rent per year" benchmark. Why do you suggest that is too low? Is that taxes and insurance on top of the one month per year?

Yes - the 1 month rent toward repairs fits into his formula but that doesn't account for any other costs. Maybe insurance and taxes are included as a part of his mortgage payment but those certainly are significant costs.

Probably the biggest forum for real estate investors is at BiggerPockets Real Estate Investing Social Network: Connect & Learn There you will see lots of discussion about the 50% rule which states that when evaluating a potential deal you should figure about 50% of the income will go to expenses BEFORE calculating lending. Now they assume that you hire a property manager in there and I think you can safely go a little lower too if it's single family. That said, most experienced real estate investors would say that planned expenses should be significantly higher than he's calculating.

[CUinFl]

Quote:

Originally Posted by Fishingmn Yes - the 1 month rent toward repairs fits into his formula but that doesn't account for any other costs. Maybe insurance and taxes are included as a part of his mortgage payment but those certainly are significant costs.

Not sure what happened to my prior post, but for some reason it was lost on the super highway....

Thanks FishingMN and GrowingOlder. I hope the road has been kind, the waters have been calm and the fish have been plentiful.

To answer the two topics raised above (Healthcare Costs and Rental Expense)....

On the healthcare side, we do not know what to plan for as it relates to health care expenses for a family of four. Based on FishingMN's comments, we are most likely underestimating healthcare expenses after the DW retires. We will look into this and adjust.

As for the Rental Expenses, we are not at the 50% non-mortgage expense levels suggested. If we refi'ed, we would be, however, we really like the current rate and the term aligns well to my retirement date. While we are making some positive CF each month (after factoring in RE taxes and insurance), it is not enough to cover a major one-timer. We understand that risk and are comfortable taking that risk on.

I do know that last comment will beg a few questions I have seen on other Rental posts like "are you being rational" or "would you buy this investment if you didn't own it". My answer is that if we were to refi, it is a good investment. With the current expenses it is risky bet due to any one time expenses. However, the location, multi-year leases, and demand make up for the out of pocket one time expenses we may have to incur.

Thanks for all the thoughtful comments and suggestions to date.

[Live And Learn]

For Healthcare you can look to see what your potential costs may be under the Exchanges in Obamacare:

Subsidy Calculator | The Henry J. Kaiser Family Foundation

You can play with different levels of income to see how the subsidies come into play.

I am budgeting for the full HI cost ($20k) plus $7.5k in out of pocket (max out of pocket is $12.5) to cover DH and I.

[pb4uski]

Quote:

Originally Posted by CUinFl Thanks, I assumed my deferred account would help carry me and that contributing to a deferred account now would hopefully give me a lower tax rate during my bridge years. I will look into this - thanks for the advice

If you can access your deferred comp without penalty prior to age 59.5 then that would serve the same purpose as having taxable accounts - actually it would be better if you are currently in a higher tax bracket than you will be in ER.

[CUinFl]

Quote:

Originally Posted by pb4uski If you can access your deferred comp without penalty prior to age 59.5 then that would serve the same purpose as having taxable accounts - actually it would be better if you are currently in a higher tax bracket than you will be in ER.

pB4uski, that is my plan. There is a portion of our deferred comp which is not beholden to the 59.5 rule. Our goal is to build that up quickly from the $130k base that it is today. Between and DW income and this deferred account, that should bridge us until I am 59.5.


Thanks for the thoughts...

[CUinFl]

Just "bumping" this thread to update folks on current progress towards our goal.

It was a year ago I found this site and, in reading the advice from many, we have learned a lot. There are a few of you out there - you know who you are - who have given thought-provoking advice to a number of others, which I have considered and, where it made sense, applied. Thanks for the financial coaching advice. It allows us to be more confident in our DIY approach.

Ok, now for our current financial update....

Well, our two kids (7, 5), DW (39) and I (45) have aged another year. We are still on the retirement glide path to 50 (me) and 48 (DW).

As you most likely saw from other threads, our goal is to retire before our kids head to college and, through our savings, reduced retirement income, and different college financial packages, the kids college expenses will be addressed.

From a portfolio perspective, over the past year, the market has been kind and our current account is a follows:
- 529: $50k current value
o 60% US Equity; 40% international
o investing $6k/year split evenly for each child until I retire
- 401k (combined): $915k current value
o 70% Large cap; 20% Small Cap; 10% international
o Investing $35k/year until I retire then ~$18k until DW retires
- Deferred comp: $210k current value
o 70% Large cap; 20% Small Cap; 6% international; bonds 4%
o Investing $40k/year until I retire
o Hoping to use this and potentially tap 72t to bridge to 59.5
- IRA (had not included this last year): $35k

- Cash / short term stocks: $33k

From an income / expense perspective, we have:
- 2nd Property bringing in $1,950 / month with recurring monthly expenses of $1,600. This rental has been rented to 4 different tenants over the past 9 years with only 1 month of non-rental income. $1400 / month expense is mortgage which will be completed before I retire.
- Current mortgage of $3500; higher than we want, but it is in a good middle school & high school district for our kids
- Quicken modeled in expected retirement expenses are between $90k - $115k; taking into account healthcare ($25k/year), rental expenses ($2k/year but will need to raise based on this blog), additional college expenses, wedding expenses, etc
- Fidelity Retirement Income Planner, at 95% confidence, suggests we cannot retire when we are targeting yet, but we are ok at 50%. The goal would be to track this and drive the confidence level higher
- Since our post last year, we have a better model of expenses with our first 10 years of my retirement being ~$150k with some of the years being offset by DW's income, the 2nd 10 years being reduced by ~$30k per year as we eliminate mortgage payments, and the last 30 years of retirement being half the initial retirement expense, and closer to Quicken's model, as we age.

I hope this post helps others in some way....

[CUinFl]

Another year, another "bump" to this thread to update folks on current progress towards our goal.

It was 2 years ago I found this site and, in reading the advice from many, we have learned a lot. I have scaled back in my participation on the site, but am glad to know the group is here when I am ready.

Ok, now for our current financial update....

Well, our two kids (8, 6), DW (40) and I (46) have aged another year. We are still on the retirement glide path to 50 (me) and 48 (DW).

As you most likely saw from other threads, our goal is to retire before our kids head to college and, through our savings, reduced retirement income, and different college financial packages, the kids college expenses will be addressed.

From a portfolio perspective, over the past year, the market has been kind and our current account is a follows:
- 529: $60k current value
o 60% US Equity; 40% international
o investing $6k/year split evenly for each child until I retire

- 401k (combined): $1,025k current value
o 70% Large cap; 20% Small Cap; 10% international
o Investing $35k/year until I retire then ~$18k until DW retires


- Stock: $225k current value
o 70% Large cap; 20% Small Cap; 6% international; bonds 4%
o Hoping to use this and other assets to bridge to 59.5

- Deferred comp: $180k current value
o 70% Large cap; 20% Small Cap; 6% international; bonds 4%
o Winding this portfolio down
o Hoping to use this and other assets to bridge to 59.5

- IRA (had not included this last year): $65k

- Cash / short term stocks: $33k

From an income / expense perspective, we have:
- 2nd Property bringing in $2,100 / month with recurring monthly expenses of $1,600. This rental has been rented to 5 different tenants over the past 10 years with only 1 month of non-rental income. $1400 / month expense is mortgage which will be completed before I retire.
- Current mortgage of $3500; higher than we want, but it is in a good middle school & high school district for our kids
- Quicken modeled in expected retirement expenses are between $90k - $115k; taking into account healthcare ($25k/year), rental expenses ($2k/year but will need to raise based on this blog), additional college expenses, wedding expenses, etc
- Fidelity Retirement Income Planner, at xx% confidence, suggests we cannot retire when we are targeting yet, but we are ok at yy%. The goal would be to track this and drive the confidence level higher
- Since our initial post, we have a better model of expenses with our first 10 years of my retirement being ~$150k with some of the years being offset by DW's income, the 2nd 10 years being reduced by ~$30k per year as we eliminate mortgage payments, and the last 30 years of retirement being half the initial retirement expense, and closer to Quicken's model, as we age.

I hope this post helps others in some way....

[Katiek]

Thanks for the update, great to see you making good progress on your goals.

[MikeWillRetire]

Are you planning to adjust your asset allocation as you get closer to retirement?

[pb4uski]

Have you run your situation through Quicken Lifetime Planner? Given your long time horizon that is a good tool to look at different scenarios and sensitivities. Then use a stochastic tool to test your plan for sequence of returns risk.

[Golden sunsets]

What is your anticipated withdrawal rate once you are both retired?

[CUinFl]

Mike, I will adjust our AA, not sure I have a target yet, but I would assume it would be close to the AA levels of a target date fund

Also, I did not due the QLP this year, but will look in

My withdrawals will be heavier when I am younger and lighter as we age.

For example we will spend a large amount my first 20 years of retirement with offsets being my wife's salary for some of those years. My last 30 years we run about 65% of the inflation adjusted amount.

[papadad111]

What is value of real estate. Home and rental. Likely your 2 largest single assets ...

[ivinsfan]

One thing that jumps out at me is the assumption that after 20 years of retirement your expenses will drop by one-half to 75 k...not sure that is realistic.

You'll drop 30 from the house payment, but still have property tax and insurance and house upkeep. Where is the additional 40 plus in reduced expenses coming from.

[CUinFl]

Papadad, I am not looking to my home as a retirement investment, but I probably could. As for the rental, I either model the rental income (which I assumed) or the house sale as retirement $$

As for the drop in required income, that is driven by kids leaving the nest which has been conservatively estimated.


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