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Verge of FIREing, but Questions...
Old 07-27-2016, 06:27 AM   #1
Confused about dryer sheets
 
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Verge of FIREing, but Questions...

Hello, I’m Scorpion. I posted here about a year ago regarding my desire to retire early and my asset status. Here is that post: 40 years old and considering early retirement. I received a lot of helpful comments in that post. I am now back with a much more sophisticated analysis of my situation.

1. I am early 40’s, my wife is late 30’s. My wife just re-entered the workforce a couple of years ago and loves her job. She wants to keep working. I have been in the workforce since completing school and find work very stressful, although it pays very well. We have agreed upon a division of the household tasks that involves me shouldering most of the housework upon retirement. I am fine with that. Retirement will give me more time to work out and to do the hobbies I enjoy. My wife points out that early retirement can be a good example for our kids – work hard, be thrifty, and you won’t need to work your whole life and can pursue what you want to do instead. I am honest enough with myself to admit to having a bit of fear about retirement (from a boredom perspective), but there is no realistic way to “test drive” it – no sabbatical option at work, for example. Note that if I do retire, I never want to have to go back to any job – too afraid of my skills atrophying, etc. My hobbies are very enjoyable to me and very time consuming, so I might be better off than most. My wife is actually supportive of early retirement for me – I admit I do almost nothing to help around the house right now, I guess (probably unfairly) justified by my high-stress, lucrative job. She would love for me to take over all the household stuff while she works.

2. A quick recap of our financial details: Our investment assets are approaching $3M (have saved very aggressively). 67% is in taxable, 33% in retirement accounts. We have two preteen kids – we save moderately in 529s with goal of paying for half of college for each of them. We have no debt other than our mortgage of around 200K. Asset allocation is presently 100% equities (Vanguard index funds) and real estate investments.

3. My expense history for the past few years (have used Quicken to track for many years – the following does not include income taxes but does include property taxes): 2015 - $90k (bought new car with cash). 2014 - $71k. 2013 - $82.6k. I have projected our future spending, including increased costs as the kids get older, saved costs from me doing stuff around the house, but ignoring inflation, and building in a $2k slush fund. That results in annual budget of 93K, which will decrease by 23k when the mortgage is paid off in 12 years. My budget includes the amortized cost of buying a new car every 15 years (have two, buy new and hold them for a long time). It also includes income taxes – I ran a full simulated return and was shocked to see how much my taxes would drop – we would even be eligible for a $1K child tax credit per child.

4. Given my wife’s after tax income, the budgeted expenses and assuming only a 2% dividend yield on the taxable portion of my investments, our cash shortfall each year would be $17,249 (without selling any investments). If I give effect to the 10% yield from that portion of those investments that is in real estate stuff, there is a surplus rather than a shortfall.

5. I ran two simulations in Firecalc. In both, I assumed 93k expenses, that I would live to 100 and I added mortgage payoff timing. I did not assume Bernincke expense reduction. In Scenario #1, I assumed my wife continued to work to 65 and accrued social security and pension income. This Scenario requires only $1.275M to have a 100% success rate on Firecalc, which is less than half of what I have – a no brainer. In Scenario #2, I assumed the sad possibility that my wife died immediately after I retired (she is in fine health), resulting in a small life insurance payout from her job, a small pension death benefit, but no annual income and no social security. Net of those payments, this requires $2.315M to have 100% success rate. I have substantially in excess of that, but it is much closer, obviously.

6. My social security benefit from stopping work now would be approximately 31% less than if I worked to 62. Also, if I stop work now, and my employer is unwilling to vest certain unvested monies that I will receive if I continue working, I would lose ~$400K in unvested funds (none of this is included in my assets above – i.e., I am assuming I lose it all). I could vest $150k of that just by working through end of the year. Unless I wait until age 65 to retire, this vesting problem will always exist, as I keep getting more unvested grants. Would also get around $45K (after tax) in bonus if make it to early spring.


So, my questions:

1. Do you agree I can retire at any time based on these facts?

2. My mortgage interest rate is 2.875%. It is very tempting to pay it off early to avoid having the debt, but I believe I have read that is the wrong decision and that having a mortgage is kind of like owning bonds (of which I otherwise have none). Advice?

3. Given scenario #2, is getting life insurance on my wife a no brainer for peace of mind? I hate to even contemplate her death, but I need to be clear-eyed on this. How much? $1M, 500K? I estimate that $1M policy would be $1K a year. Could pay that for at least a few years – if portfolio keeps growing, could stop paying for it.

4. Suggestions on timing of retirement?

Questions 1-4 are probably most important right now, but here are a couple of longer-term questions:

5. I will need to figure out a post-retirement asset allocation. I assume equities and real estate with no bonds isn’t the greatest, but bonds are so expensive… Firecalc seems to recommend 75% stocks / 25% bonds for my time horizon to get to age 100. I know this question opens up a huge can of worms, so maybe not urgent right now.

6. Would I or my wife continue to contribute to 401(k)s or IRAs? I assume not. We have been doing backdoor Roths for years – could rollover 401k to IRA and then start converting that to Roth while in low tax bracket, too.

Sorry for the long post - thanks for your help!
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Old 07-27-2016, 06:43 AM   #2
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Scorpion, a quick review of your old thread shows MichaelB suggesting you review Some Important Questions to Answer Before Asking - Can I Retire?. I saw no response from you after he posted, so I wonder if you answered all those questions to your satisfaction, especially how you would cover the cost of health care for you and your family should your spouse lose her job.
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Old 07-27-2016, 07:10 AM   #3
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I know you said that you're saving to cover 50% of college costs, but you also indicated that by working to the end of the year, you'd have an additional $150K of vested assets. People have different views about education and many people think it's important that children fund part of their education in order to truly appreciate it. However, it does seem like just a few more months could save your kids a lot in potential student loans. As you mentioned, there is a risk of OMY and always seeing the potential for another year of vested stock, but it would be hard for me to give up this year's benefit when you're already half way there and the money could make a big difference to your kids.

However, I understand that is a personal call and I'm not trying to suggest what you "should" do.
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Old 07-27-2016, 07:17 AM   #4
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Quote:
Originally Posted by Scorpion View Post
.....So, my questions:

1. Do you agree I can retire at any time based on these facts?

2. My mortgage interest rate is 2.875%. It is very tempting to pay it off early to avoid having the debt, but I believe I have read that is the wrong decision and that having a mortgage is kind of like owning bonds (of which I otherwise have none). Advice?

3. Given scenario #2, is getting life insurance on my wife a no brainer for peace of mind? I hate to even contemplate her death, but I need to be clear-eyed on this. How much? $1M, 500K? I estimate that $1M policy would be $1K a year. Could pay that for at least a few years – if portfolio keeps growing, could stop paying for it.

4. Suggestions on timing of retirement?

Questions 1-4 are probably most important right now, but here are a couple of longer-term questions:

5. I will need to figure out a post-retirement asset allocation. I assume equities and real estate with no bonds isn’t the greatest, but bonds are so expensive… Firecalc seems to recommend 75% stocks / 25% bonds for my time horizon to get to age 100. I know this question opens up a huge can of worms, so maybe not urgent right now.

6. Would I or my wife continue to contribute to 401(k)s or IRAs? I assume not. We have been doing backdoor Roths for years – could rollover 401k to IRA and then start converting that to Roth while in low tax bracket, too.

Sorry for the long post - thanks for your help!
1. Yes.
2. Keep mortgage...it is not significant to your net worth so not a huge risk if things go sideways and most likely you will make a spread between your investment return and your mortgage rate.
3. No need for life insurance on either of you since you have enough resources to continue at your current standard of living should either of you die prematurely.
4. Wait until year end.
5. Given you impending retirement, fixed income will provide some stability and reduce volatility. I would divert contributions and income to target maturity bond ETFs or CDs or low duration bond funds until you get to an AA that you feel comfortable with.
6. If/when your current marginal tax rate is greater than your marginal tax rate in retirement then continue tax-deferred contributions, if not, then cease contributions and consider Roth conversions.
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Thanks
Old 08-11-2016, 12:25 PM   #5
Confused about dryer sheets
 
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Thanks

Just wanted to say thanks for these responses. tentatively targeting Feb 2017...
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Old 08-11-2016, 01:46 PM   #6
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Looks good ! How much did you budget for Health Care ? For the two of us I have budgeted 30k / year (I assume that we will hit the Out of Pocket max each year - its a good portion of my cushion).
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Old 08-11-2016, 01:55 PM   #7
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Also curious about insurance or lack there of. Any travel plans? Also how did you get from about $2mil last July to almost $3mil today?
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Old 08-11-2016, 07:30 PM   #8
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Hi Scorpion -- I hope you don't sting me for asking this (I have heard that you scorpions can be pretty dangerous) but what impact would it have on the feasibility of your plan if a year or two after you retire your wife were to decide to retire too? I realize that is not the current plan, but it seems at least possible your wife might decide at some point that if you are retired, she might as well do the same. Does your plan work OK if she decides that she would also like to retire, or does the plan depend on her working for a long time? Also, does the plan work if you were to end up divorced?
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Old 08-12-2016, 09:18 AM   #9
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what impact would it have on the feasibility of your plan if a year or two after you retire your wife were to decide to retire too? Does your plan work OK if she decides that she would also like to retire, or does the plan depend on her working for a long time? Also, does the plan work if you were to end up divorced?
I asked myself these same questions and made sure that the plan still worked if DH stopped working. Divorce is a different ballgame since the assets would be split. That would probably send me back to work .... incentive to keep him happy !
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Old 08-15-2016, 10:11 AM   #10
Confused about dryer sheets
 
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Sorry it took me a bit to get to these questions - thought the thread was dead. I would love any more input anyone has, as I’m starting to become very enamored with the decision to retire and don’t want to jump the gun. Here goes on the questions:

1. It’s probably a good point that I’ve not budgeted for worst-case healthcare but rather continued status quo, which is only about $4,500 including both premiums and out-of-pockets. As we get older, those expenses could increase, but as our kids get out of the house, expenses will decrease as well. The good news is that Firecalc would indicate I am fine with much less in assets so long as my wife doesn’t die right after I retire. I’ve been thinking I need to increase my slush fund substantially, so maybe I need to take account of this.

2. Regarding insurance generally, my wife has health insurance and is a teacher. I think her job is among the safest jobs you can have in terms of job security.

3. I don’t think I would travel without my family, but I would expect us to take normal family vacations.

4. As to the increase in assets, I was estimating downwards last year and upwards this year. I thought about how that looked weird when I wrote my post. It feels weird to me to talk about such large amounts of money on the Internet, even if theoretically anonymous. I’m a detailed person, so it would be easy to put the exact amount, but just feels wrong. Also, I think in 2015 I was trying to get a sense for whether it was doable with a lesser amount than what I had or expected to have in near future. I also have some investments that are not marked to market like a stock would be every day, and I was not assuming any growth over basis in my 2015 post. Many of those investments have since paid out in full.

5. My wife and I have discussed her retirement extensively. She only went back to work recently and loves it. I think it highly unlikely that she will want to retire anytime soon. For example, as a teacher she is super eager to get back to work even while we are enjoying our summer. For me, the bigger issue is making sure that I can entertain myself while no one is home. I have begun reading Ernie Zelinski’s “Retiring Happy, Wild and Free” book to confirm that that will not be an issue for me. Also, since FireCalc indicates I can still make it if she were to die the day after my retiring, I would think that would mean we would be okay if she didn’t die and just retired instead.

Thanks for the thoughts and questions - please keep them coming (including encouragement if you think I'm in good shape!)
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