Am I there? Will this work?

[nun]

I posted this over at Bogleheads, so I'm interested to see the ER.org resposes.

My question is pretty open ended. How to arrange $500k in tax deferred funds and $100k in taxable accounts so that I can ER.

I'm 50, my mortgage is paid off, I get $1200 a month from rent, I've done my budgeting, planned for healthcare, decide what I want to do after work and to make early retirement a reality all I need to do is generate $24k in the first year from my capital and then keep up with inflation.

I plan to account for the variation in return by using a cash/short bond
buffer that I will replenish from dividends and gains in the good years and draw down in the bad years to avoid selling at a loss or if income and dividends are off.

I will have to do a 72t to bridge the years between 50 and 59.5.

As things stand now I'll get a $5k/year COLA pension at 59, $15k/year US SS and $15k UK SS at 66, but I don't want to consume principal between 50 and 66 so the that's why I'd like to gear the portfolio to produce $24k the first year and increase it by 3% inflation annually. Here's my portfolio plan.

Taxable
$25k cash
$75k International Admiral

Tax Deferred
$200k Total Stock Market Admiral
$75k Wellesley Admiral
$75k Short Term Bond Admiral
$75k Total Bond Market Admiral
$75k Inflation Protected Securities Admiral.

[eytonxav]

From just an eyeball perspective, I would be concerned about generating sufficient return (eg 4% year 1) and being able to increase for 3% annual inflation while doing a 72T with $600K, without eating into principal. Even if you can make the numbers work, is there enough margin for error or bad times built in?

[landover]

I don't have an answer for you. I have one question for you, you plan to live on less money in your younger ER years when I presume one have more energy to ... (spend more money), how did you come to this conclusion?

[nico08]

So in addition to the $24,000 that you will pull from your retirement investment assets on annual basis, you will also have $1,200 in monthly income in the form of rent from a real estate investment? If this true, is the $1,200 monthly income reliable?

[nun]

Quote:

Originally Posted by DFW_M5 From just an eyeball perspective, I would be concerned about generating sufficient return (eg 4% year 1) and being able to increase for 3% annual inflation while doing a 72T with $600K, without eating into principal. Even if you can make the numbers work, is there enough margin for error or bad times built in?

I have options. I can increase my annual rental income from $14400/year to $21600 by moving into the smaller flat I rent out now and renting out the flat I live in now. That would reduce my annual requirement to $17.5k and then there's also a certain amount slack in my budget.

Quote:

I don't have an answer for you. I have one question for you, you plan to live on less money in your younger ER years when I presume one have more energy to ... (spend more money), how did you come to this conclusion?

When SS kicks in I'll have a surplus of income, I don't intend to spend it.

Quote:

So in addition to the $24,000 that you will pull from your retirement investment assets on annual basis, you will also have $1,200 in monthly income in the form of rent from a real estate investment? If this true, is the $1,200 monthly income reliable?

Yes I own a 2 family house and the $1200/month is rent from the ground floor apartment. I live in a college town so there are lots of renters, it's never been empty in 15 years.

[brewer12345]

I don't like the setup. What you are exposed to is a large drop in your portfolio in the early years of your retirement. 4% annually sounds great on average, but you need to mitigate that the market crashes in the next few years (sound familiar?). I think you can do that a variety of ways:

- have a plan to go back to work if necessary
- buy puts on the indices to limit your losses
- have a bigger wad of cash handy to cover the first few years of living expenses

and so on.

[W2R]

Quote:

Originally Posted by brewer12345 I don't like the setup. What you are exposed to is a large drop in your portfolio in the early years of your retirement. 4% annually sounds great on average, but you need to mitigate that the market crashes in the next few years (sound familiar?). I think you can do that a variety of ways: - have a plan to go back to work if necessary - buy puts on the indices to limit your losses - have a bigger wad of cash handy to cover the first few years of living expenses and so on.

+1 It seems a little borderline to me, too. On the other hand, if you could manage with lower withdrawals, maybe as low as $15K-$18K if necessary, I'd feel more confident in this plan.

[Amethyst]

Do you have enough budgetary slack/emergency funds to cover major repairs to the rental unit?

In a 15-year-old unit, we had virtually every appliance go bad at the same time (partly due to a chain reaction from a bad water heater). Resulted in very negative rent income that year.

Amethyst

Quote:

Originally Posted by nun I Yes I own a 2 family house and the $1200/month is rent from the ground floor apartment. I live in a college town so there are lots of renters, it's never been empty in 15 years.

[Animorph]

Yeah, watch out for the next few years by making sure you can cover it with cash equivalents. What you have may do the trick, but you will be on the aggressive side with 4% and drawing down your bonds if the market is bad for the next few years.

Consider doing the Roth conversion thing while your income is in a lower tax bracket early on. You'll have to calculate the specifics for your case, but it seems like you have a nice opportunity to reduce taxes. It will mean that you will be drawing on your taxable accounts very heavily at the start, so that may mean bonds in the taxable account and equities all in the retirement account. You should quickly, in a few years, reach a point where you have just a Roth account and a smaller original retirement account. One big consideration is that you may not be able to withdraw from the Roth for 5 years after you open it, so that may limit what you can put into it, or require a larger 72t amount.

[nun]

Quote:

Originally Posted by Amethyst Do you have enough budgetary slack/emergency funds to cover major repairs to the rental unit? In a 15-year-old unit, we had virtually every appliance go bad at the same time (partly due to a chain reaction from a bad water heater). Resulted in very negative rent income that year. Amethyst

I've done major repairs; new siding, decks, roof, boilers, water heaters, bathroom and kitchen in rental unit.

[nun]

Quote:

Originally Posted by brewer12345 I don't like the setup. What you are exposed to is a large drop in your portfolio in the early years of your retirement. 4% annually sounds great on average, but you need to mitigate that the market crashes in the next few years (sound familiar?). I think you can do that a variety of ways: - have a plan to go back to work if necessary - buy puts on the indices to limit your losses - have a bigger wad of cash handy to cover the first few years of living expenses and so on.

I thought I was well prepared for market down turns with 4 years or cash and short term bonds and a 50/50 asset allocation. I can trim my need for portfolio return to $15k by a little economizing and renting out the large flat I live in right now. Part time work is also a possibility, and I have a $100k inheritance at some stage, although i never include that in my plan as it's ghoulish and may be a lot less depending on my mother's health care needs.

[brewer12345]

Quote:

Originally Posted by nun I thought I was well prepared for market down turns with 4 years or cash and short term bonds and a 50/50 asset allocation. I can trim my need for portfolio return to $15k by a little economizing and renting out the large flat I live in right now. Part time work is also a possibility, and I have a $100k inheritance at some stage, although i never include that in my plan as it's ghoulish and may be a lot less depending on my mother's health care needs.

But you only have 25k cash readily accessible in your taxable account, which is what worries me a bit. That said, it sounds like you have downside contingency plans, so it should be Ok.

[nun]

Quote:

Originally Posted by brewer12345 But you only have 25k cash readily accessible in your taxable account, which is what worries me a bit. That said, it sounds like you have downside contingency plans, so it should be Ok.

If I need to tap the short duration bond in the tax deferred I just sell the International in the taxable and transfer the same amount from the short bond fund to International in the tax deferred.

[FIREd]

Quote:

Originally Posted by nun If I need to tap the short duration bond in the tax deferred I just sell the International in the taxable and transfer the same amount from the short bond fund to International in the tax deferred.

But if the international is way down at that time, you may not be able to clear as much cash as you hope.

Also, the fact that most of your income will come from 72t distributions means that you'll have little income flexibility.

Overall it's not a bad plan. But I would like to see a bit more liquidity and flexibility.

[yakers]

Overall I like the plan. If the market really tanks you sound competent enough to figure out 'backup plan 'B' or 'C'". Since cash flow may be the issue if a major unplanned repair is necessary you might arrange for a HLOC to smooth things out.

[Alan]

If it were me I wouldn't do it here in the USA, as it is too close to the line for my liking for a retirement planning horizon of 40 years at age 50.

However, since you plan on RE'ing back to the UK, there are more safety nets as you get older plus the healthcare costs are mostly taken care of. You just need to get through the next 10 years without any major financial crisis, and your plan for riding out stock market downs looks pretty sound.

Among some of the added benefits as you age you should get free bus travel to anywhere in the country from age 60, your prescriptions will be free at age 60 plus other benefits kick in as you age. (e.g. free TV licence at 75 ).

The Benefits of Growing Older -* concessions, discounts and special offers

[nun]

Quote:

Originally Posted by Alan If it were me I wouldn't do it here in the USA, as it is too close to the line for my liking for a retirement planning horizon of 40 years at age 50. However, since you plan on RE'ing back to the UK, there are more safety nets as you get older plus the healthcare costs are mostly taken care of. You just need to get through the next 10 years without any major financial crisis, and your plan for riding out stock market downs looks pretty sound. Among some of the added benefits as you age you should get free bus travel to anywhere in the country from age 60, your prescriptions will be free at age 60 plus other benefits kick in as you age. (e.g. free TV licence at 75 ). The Benefits of Growing Older -* concessions, discounts and special offers

Yes, that's the final backup plan. I won't have the $500/month healthcare cost (at today's prices) and my 2 family will buy a lot of house in the UK and and leave me with a lot of cash in hand too.

[Mulligan]

Quote:

Originally Posted by Alan If it were me I wouldn't do it here in the USA, as it is too close to the line for my liking for a retirement planning horizon of 40 years at age 50. However, since you plan on RE'ing back to the UK, there are more safety nets as you get older plus the healthcare costs are mostly taken care of. You just need to get through the next 10 years without any major financial crisis, and your plan for riding out stock market downs looks pretty sound. Among some of the added benefits as you age you should get free bus travel to anywhere in the country from age 60, your prescriptions will be free at age 60 plus other benefits kick in as you age. (e.g. free TV licence at 75 ). The Benefits of Growing Older - concessions, discounts and special offers

Those are some nice benefits! Any chance we can talk you into returning to the role of the worlds policeman so we can shift our resources over to ones you have before I turn 60? If I can convince them to throw in the NFL Sunday Package on the free tv deal, I'll be moving across the pond in a few years

[Alan]

Quote:

Originally Posted by Mulligan Those are some nice benefits! Any chance we can talk you into returning to the role of the worlds policeman so we can shift our resources over to ones you have before I turn 60? If I can convince them to throw in the NFL Sunday Package on the free tv deal, I'll be moving across the pond in a few years

This last trip we did, we managed to use the buses for the vast majority of the time and realized how important they are to the elderly. They have to pay a small fare if they travel before 9:30 otherwise it is totally free. It also means they get a lot of exercise walking to/from bus stops etc.

[nun]

Quote:

Originally Posted by Alan This last trip we did, we managed to use the buses for the vast majority of the time and realized how important they are to the elderly. They have to pay a small fare if they travel before 9:30 otherwise it is totally free. It also means they get a lot of exercise walking to/from bus stops etc.

I have a while to go before I qualify for anything other than the NHS, but just for fun I once planed a trip from the North Yorkshire down to London traveling only on local buses. It's possible to do it without paying any fares, but it takes a couple of days so there are hotel costs.