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My plan to retire at 35
Old 02-21-2013, 11:37 AM   #1
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My plan to retire at 35

Catchy title, huh?

I wanted to get a reality check from my esteemed fellow ER.org posters, since there are a bunch of smart, financially savvy people here. Here is my retirement plan in a nutshell, and I would welcome feedback and criticism.

First a little background. I'm 32, DW is about the same (29 going on 30 again lol). 3 kids, age 1, 6, and 7 (eldest are in 1st and 2nd grade, respectively). We think it is feasible to be able to retire in 3 years when I'm 35. Maybe we will, maybe we won't.

I keep a written financial plan for ER, which I have copy/pasted and edited to suit my purpose here.

Goal:
To fund our annual spending needs and wants from investments and other sources of income. Over time, our spending will grow with inflation, and our income should keep pace with inflation with a good chance of increasing faster than inflation. Temporary decreases in spending can be achieved during periods of poor market returns by cutting some elements of discretionary spending and postponing large capital expenditures (like new(er) cars, house repairs, long vacations, etc).


Current Financial Position:
Income Producing Assets: Enough right now plus new contributions over the next 3 years to have around $1.4 million in 2013 dollars.



Non-income producing assets: 1 Single Family house, 1800 sq ft, value ~$140,000.


Liabilities: Mortgage: $56,000 (4 years remaining)

Student loans (will be mostly forgiven): $105,400 ($20,000 net present value owed after forgiveness)
Some notes:


Student loans
- Income Based Repayment plan means no payments due when all kids are in the house
- With 2 people in the household, approximately $1500/yr due until 2036 (25 years from start of IBR plan)


Kid expenses through college – The goal is to save enough for 4 years in state tuition per child. That cost is currently about $30,000 per child. Assume funds will grow at the rate of Higher Education Inflation (recently running 6-7% per year). In other words these funds will not have any real growth over time.


SS in the future (total for both of us):
– At age 62: $17,000/yr (2013 dollars)
- At age 67: $25,000/yr (2013 dollars)
- At age 70: $31,000/yr (2013 dollars)
- Assumes working through end of 2015

Health insurance

– Jan 1 2014 – Health ins ~$1000 or free at AGI around $33,000-35,000
- Once there are only 2 of us in HH, ~$2000 per year for Health Insurance


Fed and state tax liability
Federal taxes will be zero with kids in the house. With 2 of us, ~$500 per year (starting 2032).
State taxes will initially be around $500/yr, then increase to around $1500/yr when there only 2 of us.

Structure of withdrawals
- taxable, traditional IRA, Roth – when to 72t?
- use 457 plan as a variable withdrawal source
- determine best structure for withdrawals close to time of retirement


EXPENSES AND DEVELOPING OUR ER BUDGET:

I took our current spending while we are working, which I have tracked meticulously for about 3 years now, and considered a number of additions and subtractions that will be likely during ER.

Then I considered large one time or lump sum expenses we want to plan for.

In order to get a feel for our "number" or how much we need, I created a matrix of target portfolio sizes based on our projected annual ER spending plus the total lump sum amount we forecast.

Annual ER Expenses
Expense Amount
Baseline annual spending right now 23000
Auto - Gas -1000
Health Insurance/Care 2000
Dental costs 500
Free school lunches -576
House maintenance costs 1500
increased kid costs 2000
car replacement 2000
Contingency (10% of Baseline) 2300
Taxes 500
 
"Core" ER Expenses: 32224
 
Vacations/Fun Money 6000
 
Total Annual Spending: 38224
 
 

This means we would need $38,224 in 2013 dollars to live like we want.

We also budget for one time, lump sum amounts that we want to have set aside for specific purposes or reasons:

Expense Amount
College Education 91200
Mortgage Payoff 56000
Student Loan Reserve fund 20000
Children Wedding/Big Expense 15000
Oh $hit! Money 23000
TOTAL: $ 205,200

The bottom line is that we need to set aside $205,200 on top of whatever portfolio is necessary to allow withdrawals.

Target Portfolio:
Withdrawal Rate Amount to meet annual spending Including Lump Sums
3.00% $1,274,133 $1,479,333
3.25% $1,176,123 $1,381,323
3.50% $1,092,114 $1,297,314

I don't have a safe withdrawal rate selected, but these are the portfolio values we will need based on a range of withdrawal rates. In other words, $1.3 to $1.5 million depending on how much margin of safety we want.

Our portfolio is 100% equities right now, all index funds and expense ratios around .2%. I don't have a good plan for getting away from 100% equities yet, but that is on the horizon.

About 35 years after we ER, under the current SS structure we could get enough SS to roughly cover our core living expenses.

Thanks for reading what may be the longest but hopefully not the most convoluted ER forum post ever.

Thoughts?
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Old 02-21-2013, 11:48 AM   #2
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Thanks for your plans on weaseling out of your student loans. I'll add a little more in my tax budget to help cover it.
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Old 02-21-2013, 12:03 PM   #3
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Hey, you've been here a long time, so what does firecalc tell you?
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Old 02-21-2013, 12:12 PM   #4
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Originally Posted by DFW_M5 View Post
Hey, you've been here a long time, so what does firecalc tell you?
Good question.

100% success.

"
FIRECalc looked at the 96 possible 45 year periods in the available data, starting with a portfolio of $1,200,000 and spending your specified amounts each year thereafter.
Here is how your portfolio would have fared in each of the 96 cycles. The lowest and highest portfolio balance throughout your retirement was $470,050 to $30,333,742, with an average of $6,751,243. (Note: values are in terms of the dollars as of the beginning of the retirement period for each cycle.)
For our purposes, failure means the portfolio was depleted before the end of the 45 years. FIRECalc found that 0 cycles failed, for a success rate of 100.0%."


Using .2% expense ratio, 80% equities, projected SS starting in around 35 years, 45 year portfolio, $38,224 annual spending, $1.2 million starting portfolio. Withdrawal rule is adjust withdrawal for inflation each year keeping withdrawals at 3.2% of initial portfolio value in real terms (the default withdrawal rule).

A few of the trajectories from FIREcalc look very spooky. But since we will probably use a "% of portfolio each year" rule, that trajectory will tend to self correct.
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Old 02-21-2013, 12:23 PM   #5
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How do you get student loans forgiven?

I don't have any outstanding loans but know people who do.
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Old 02-21-2013, 12:30 PM   #6
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Originally Posted by explanade View Post
How do you get student loans forgiven?

I don't have any outstanding loans but know people who do.
Income based repayment plan. Also Public Service Loan Forgiveness (though I decided not to use this program). Google it.

In the past things got political when discussing income based repayment and my thread was shut down. If you want to start the thread and ask the question "what is it", I will elucidate further. But I don't want to risk this thread getting shut down.
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Old 02-21-2013, 12:47 PM   #7
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FPL for a family of 5 is 27.6k. Your base spending is 10% below that. How is that possible ?
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Old 02-21-2013, 12:48 PM   #8
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Some of my concerns with your budget. You say $500/year for taxes. Is that including property taxes? (I know you said you won't be paying fed taxes... and presumably state taxes.)

My nest egg is in the same ballpark, but I'm significantly older. Our budget is also significantly higher... maybe it's our high COLA. Maybe we're not as frugal as you.

I assume you used the estimator on the SS website to come up with those numbers. They seem high to me if you stop working so young... but what do I know. If the numbers are from the estimator, then you're good.

The mortgage. You've got 4 years left - but three years till retirement. Have you adjusted your nest egg to account for a lump sum payoff, or adjusted your first years budget to include mortgage payments?

I assume you'll house your kids during college? (they attend school locally)... Public university tuition is the smaller part of the college puzzle... the dorms/food is more expensive. (At least with CSU and UC schools.) We're budgeting $25k/year/kid to include that part.

Health insurance for a family of 4 for $2000. That seems VERY low.

What is your plan if some of your tax provided items change. Free lunches, student loan forgiveness, no tax for low income?

I admire your planning... I just am not sure it's quite fleshed out yet.
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Old 02-21-2013, 12:50 PM   #9
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Originally Posted by Live And Learn View Post
FPL for a family of 5 is 27.6k. Your base spending is 10% below that. How is that possible ?
I don't know - I'm good with money?

Housing costs are a big one. No mortgage is included in my $23k baseline spending. Specific categories of spending that are exclusively costs of working (like childcare) are also not included in my baseline spending.
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Old 02-21-2013, 12:50 PM   #10
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Did you take any discount on the SS benefit estimates?
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Old 02-21-2013, 01:06 PM   #11
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Originally Posted by rodi View Post
Some of my concerns with your budget. You say $500/year for taxes. Is that including property taxes? (I know you said you won't be paying fed taxes... and presumably state taxes.)
$1400/yr for property tax for the house is included in my "baseline spending" totaling $23000. $500/yr taxes is all state tax - we won't owe any federal tax while the kids are in house.

Quote:
My nest egg is in the same ballpark, but I'm significantly older. Our budget is also significantly higher... maybe it's our high COLA. Maybe we're not as frugal as you.
We live in the southeast but in a fairly well off urban area. However it is in the more lower income area of town. Plenty of LBYM people around, and shopping to match.

Quote:
I assume you used the estimator on the SS website to come up with those numbers. They seem high to me if you stop working so young... but what do I know. If the numbers are from the estimator, then you're good.
Yep. We will have ~11-12 years of solid employment and a smattering of piddly years of employment during HS, college, etc. One of the odd rules of SS is that you can work a relatively short amount of time at a well paying job and still get decent SS.

Quote:
The mortgage. You've got 4 years left - but three years till retirement. Have you adjusted your nest egg to account for a lump sum payoff, or adjusted your first years budget to include mortgage payments?
$56k reserved as an additional lump sum to pay off today's mortgage balance. I am realizing that is too much since in 3 years it will be closer to $14000 remaining balance. So my financial model has another $40,000 of fluff in it.

Quote:
I assume you'll house your kids during college? (they attend school locally)... Public university tuition is the smaller part of the college puzzle... the dorms/food is more expensive. (At least with CSU and UC schools.) We're budgeting $25k/year/kid to include that part.
There is a great university (my alma mater) very close to us and the kids could live at home. There's an even better university (my other alma mater) a moderate drive away to which they could commute (but would probably be best served living there). Either way, we didn't explicitly budget extra for those room and board items. I figure between our financial resources, loans, grants, scholarships etc they could piecemeal together an adequate financial plan for college. (DW and I did after all).

Your cost figures are spot on though. The local university says $22000 per year total cost of attendance.

Quote:
Health insurance for a family of 4 for $2000. That seems VERY low.
Obamacare, waiting to see how it plays out. This figure may be low though. That's based on our historical medical spending plus an estimate for obamacare premiums after the subsidy. The cost will probably escalate significantly as we age.

Quote:
What is your plan if some of your tax provided items change. Free lunches, student loan forgiveness, no tax for low income?
Spend less, side hussle, go back to work, conform to new policy changes.

One good thing about increases in tax expenses (not due to tax policy or welfare programs) are that they should be closely and directly correlated with increases in income (= portfolio size). So if we owe more taxes it will mean the portfolio is generating more income.

Quote:
I admire your planning... I just am not sure it's quite fleshed out yet.
Thanks! We have at least a few years to fine tune it. And then maybe a few more "just one more year"'s.
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Old 02-21-2013, 01:08 PM   #12
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How would you deal with a catastrophic illness that required custodial care? In my state you would have to spend down your portfolio to about 100k than the state would take over. Where would that leave your kids? My job offers long term disability insurance which provides 60% of my income to 65. For this reason I will wait until my kids are in college or very close to leave my job. If I can save enough to self insure a 3 to 5 year stay at care facility I would leave before then. In my opinion 35 is very young and your children are very young. A lot can happen in the next 15yrs that firecalc can't account for. I personally do not find ER important enough to put my kids at risk because the numbers say I can. Obviously this is a very personal decision for me and ymmv.
On the flip side I like your plan. Your numbers mirror mine.
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Old 02-21-2013, 01:08 PM   #13
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Did you take any discount on the SS benefit estimates?
I just did a quick sensitivity analysis and discounting them 100% keeps the FIREcalc success percentage at 100%, although the worst financial outcome leaves me with a $70,000 portfolio value. I'd call that a failure personally. I'd be crapping my Depends if I only had that much left when I was 70 or 80...

I figure SS will get cut in the next three decades, but we are starting with a ~3.25% WR and SS is a pretty small part of our financial plan. If we can make it the first 35 years without SS, we'll probably be ok.
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Old 02-21-2013, 01:15 PM   #14
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How would you deal with a catastrophic illness that required custodial care? In my state you would have to spend down your portfolio to about 100k than the state would take over. Where would that leave your kids? My job offers long term disability insurance which provides 60% of my income to 65. For this reason I will wait until my kids are in college or very close to leave my job. If I can save enough to self insure a 3 to 5 year stay at care facility I would leave before then. In my opinion 35 is very young and your children are very young. A lot can happen in the next 15yrs that firecalc can't account for. I personally do not find ER important enough to put my kids at risk because the numbers say I can. Obviously this is a very personal decision for me and ymmv.
On the flip side I like your plan. Your numbers mirror mine.
Do the best I can I guess, as I don't have a contingency plan for that. I guess it is a very personal decision.

With the ER scenario, I would be free to spend as much time as I could with my kids before they grow up, and have a slight risk that something catastrophic would happen that would blow up our financial plan. Or I could keep working, piling money away, and not spend nearly as much time with them (and be stressed from work). Then have something catastrophic occur. Somehow the ER scenario seems better for the kids (ie at least I get to spend SOME quality time with them before the catastrophic event happens).

I am kind of at the point of knowing I can plan for 95% or 99% of outcomes and there will always be a few percent chance that something totally crazy happens (that I couldn't have planned for anyway).
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Old 02-21-2013, 01:17 PM   #15
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A few more thoughts...
Does the baseline spending also include homeowners insurance?

How many years do you have firecalc going for? 45 years (you mention 45 year portfolio)... What happens if you live longer?

Don't get me wrong... I'm not discouraging you. I'm just trying to figure out why I get such different results when I run firecalc... (biggest reason is probably bigger budget... but we've got higher SS coming online sooner, and one fewer kids.) But I've been running firecalc assuming age 90 for myself, and 100 for my husband. (His parents are age 86 and 89 currently, mine are already dead... so these figures are reasonable.)
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Old 02-21-2013, 01:33 PM   #16
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I will put as much of this information as I can in ESPlanner and see what she says. Will report back shortly.
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Old 02-21-2013, 01:37 PM   #17
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Originally Posted by rodi View Post
A few more thoughts...
Does the baseline spending also include homeowners insurance?

How many years do you have firecalc going for? 45 years (you mention 45 year portfolio)... What happens if you live longer?

Don't get me wrong... I'm not discouraging you. I'm just trying to figure out why I get such different results when I run firecalc... (biggest reason is probably bigger budget... but we've got higher SS coming online sooner, and one fewer kids.) But I've been running firecalc assuming age 90 for myself, and 100 for my husband. (His parents are age 86 and 89 currently, mine are already dead... so these figures are reasonable.)
Yes, homeowners ins is included in baseline budget. $500-600/yr IIRC (based on historical actuals). That $23000 baseline essentially includes everything we spend now minus vacations, childcare and mortgage.

I iterated through 25, 30, 35, 40, and 45 years and it was successful 100% across those iterations. We obviously hope to live longer than age 80, but with firecalc you start getting less valuable data the longer the retirement period. If you go to 50 or 60 year periods, you exclude analysis periods starting in 1962 or 1952 (respectively) and later. I personally would like to include the 1968-1982 lackluster market in my analysis to the extent possible which is why I also looked at 25 and 30 year retirement periods.

My thinking was a 3.2% withdrawal rate based on portfolio value each year should last forever (or close to it).
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Old 02-21-2013, 01:51 PM   #18
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Several things stand out to me:

$2,500 a year medical & dental for a family of five? You're going to need a private plan and I think it'll be about five times that. Have you priced some plans at ehealthinsurance.com?

Free school lunches (and medicaid if that's why you were assuming such low medical costs) -- qualification is based not just on income but total assets, and I don't think $1.4 million in liquid assets will let you qualify.

Forgiveness of student loans -- doesn't that require full time employment in a qualifying non-profit or government agency? So, basically quit your well-paying job (I'm guessing) to work at a non-profit for $40K a year just to save the monthly loan payment? Doesn't make sense.

Taxes -- you need to include property taxes. Also when you withdraw you'll need to pay taxes on the gains. My federal & state tax bill has been about 13-16% of my annual withdrawal the past few years, just as a comparison.

Car and homeowners insurance are missing in your budget, or is that rolled into something else?

Also I don't see car repairs in there. It looks like you're thinking of one new car every 10 years? You'll need to account for maintenance. Also is that realistic for a growing family?

House maintenance I think is low if you're trying to include depreciation in that -- eventually you'll need a new furnace, maybe new windows, new roof, appliances, and probably at some point want to update furniture, carpet, etc. $1500 a year won't cover all that, I think.

So, I think your fixed budget will be higher than you think, and above a safe withdrawal rate (especially considering you need it to last 50-60 years!). You have to be careful not to be too rosy-eyed and assume too much in the excitement of possibly making it work, only to run into problems and need to return back to the workforce a lot older, out of skills and with a long gap in your resume. I'd be really cautious with your numbers!
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Old 02-21-2013, 02:01 PM   #19
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OK,

I ran what numbers I do know through ESP and you look to be in very good shape.

ESP suggests a living standard of 23,257 per household adult. For your household you would multiply times appx 2.6 to get household discretionary spending. Discretionary spending does not include fixed housing costs (PITI), college cost, nor taxes.

For your situation, discretionary spending is 60,500 until 2026 when I have the children starting to leave the household.

My assumptions were $25K/year per child for college.
SS at age 62
1.4 all taxable as I didn't know the breakdown of assets.

This number is conservative as the calculated taxes were considerably higher than I imagine they will be due to tax advantaged accounts.

I think you are all set.
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Old 02-21-2013, 03:52 PM   #20
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What are your utilities and food each month? That is not in the 23k above. How much money do you have in taxable? Can you make it to 59.5 with your taxable money. I am guessing you have a super low income so as to get pell grants for the kids in college.
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