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!