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37 and wondering when (or if) to retire
Old 07-18-2004, 09:55 PM   #1
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37 and wondering when (or if) to retire

I wanted to ask for some advice from the experienced people on this board. Let me tell you about my situation.

$875K stock and bond investments (taxable and retirement); own $840K house with no mortgage; no other debts. 37 years old, married, two kids (4 and 5). My wife doesn't work but has extensive high-tech experience. She focuses on the kids because "they're only young once". I have a great job that pays very well (~$175K/year plus many stock options) and requires working 45 hours/week. We are easily able to save $40K/year.

I've thought about retiring in the next 5 years. Not planning to stop work completely but wouldn't be focused on a full-time position. My wife has also talked about going back to work part-time when both kids are in school all day.

We love where we live (Bay Area) but are intrigued with the thought of selling our home and buying in a lower cost area (expect house in another area to be $250K).

Questions
1. How to handle the issue of health care? It seems that this is a huge issue and one of the major drawbacks to not working at a large company.
2. How do you calculate how much is enough before changing your lifestyle? I could leave work now but it would make me nervous. It seems that I "always need more". There are so many variables, especially at our age.
3. How to put a value on early retirement? We could leave the Bay Area and have considerably more liquid assets. However, we absolutely love where we live and worry about making this decision based solely on finances.

Any advice is appreciated. Thanks in advance.

Mike K
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Re: 37 and wondering when (or if) to retire
Old 07-18-2004, 10:15 PM   #2
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Re: 37 and wondering when (or if) to retire

Quote:
1. *How to handle the issue of health care? *It seems that this is a huge issue and one of the major drawbacks to not working at a large company.
It won't be a huge issue for you initially. * You're young and individual health insurance should be relatively affordable. * As HSAs and high-deductible plans become more widely available, my hope is that insurance costs will become even less of an issue.

Quote:
2. *How do you calculate how much is enough before changing your lifestyle? *I could leave work now but it would make me nervous. *It seems that I "always need more". *There are so many variables, especially at our age.
The rule of thumb is 25x your cost of living. *If you're spending $135K/year (without a mortgage!), then you'll need at least $3.375M to make the break. * Or start spending less.

Quote:
3. *How to put a value on early retirement? *We could leave the Bay Area and have considerably more liquid assets. *However, we absolutely love where we live and worry about making this decision based solely on finances.
Obviously, it's a personal decision, but start by asking yourself what you love about the Bay Area and see if you can find other places with the same qualities.

I lived in the BA for a few years, had sort of a love/hate relationship with the area, moved to a semi-rural seaside community (across the water from a metropolis), and I don't miss a thing. * *There are plenty of places with good food, interesting culture, more recreational opportunities, less traffic, and lower costs of living.

Often, it really comes down to proximity to friends and family.
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Re: 37 and wondering when (or if) to retire
Old 07-19-2004, 05:48 AM   #3
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Re: 37 and wondering when (or if) to retire

Quote:
The rule of thumb is 25x your cost of living. If you're spending $135K/year (without a mortgage!), then you'll need at least $3.375M to make the break. Or start spending less.
He's right. To expand on this, my suggestion Mike K, would be that if you want to retire now or very soon, go ahead and make those lifestyle changes that are going to put you on the right track towards ER. Before you actually pulling the trigger though, I think you should take a disciplined approach and actually live at least 2 years on an income thats 4% of your net worth just so that you are sure that you can live that disciplined. You're accustomed to 135k/year, and your level of saved income only provides 35k/year.

Mike, i'm just middle class (92,500/year income), and I wouldn't dream of retiring on less than 1 Mil unless I were over 60. Now that being said, with your level of income and saved assets (875K, paid off mortgage), i'd only be 3-5 years away from retiring cause I have no problem living well below my means, and my means is only average.
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Re: 37 and wondering when (or if) to retire
Old 07-19-2004, 01:44 PM   #4
 
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Re: 37 and wondering when (or if) to retire

I ERed at your age but don't have any children (yet). You should think about what you like and don't like about your job, and the area where you live. More importantly, why do you want to ER? What would you do if you didn't have to work 45 hours a week? I ERed because I have many hobbies and interests that I couldn't fully enjoy because I was working 50 hours a week. In my case, the hobbies and interests took priority over work.

I have friends who took a year off and ended up going back to work.

Quote:
Questions
1. How to handle the issue of health care? It seems that this is a huge issue and one of the major drawbacks to not working at a large company.
2. How do you calculate how much is enough before changing your lifestyle? I could leave work now but it would make me nervous. It seems that I "always need more". There are so many variables, especially at our age.
3. How to put a value on early retirement? We could leave the Bay Area and have considerably more liquid assets. However, we absolutely love where we live and worry about making this decision based solely on finances.

Mike K
1) your health insurance depends on where your going to live. You can go on cobra and continue whith your currrent group plan for at least 18 months. After your cobra expires you'll need to purchase insurance. I suggest looking into organizations (professional for example) that you can join that offer group insurance in your state.

2) Others have already answered this. I strongly agree that you should look into how your spending your hard earned money, and try to cut spending as much as possible. Think about the $ that you spend in terms of the hours that you need to work, and what you'd rather have, the time, or the material goods.

3) Only you can put a value on your time. What do you want to be doing for the next 10 years? Working making the big bucks, or something else?

If I were you I'd:

a) cut my spending and start thinking about the value of your free time. (when I was working I never had enough free time. I'd would have accepted more time off for less $, but in my field it's just not practical. SO I worked really hard, made a lot of money, then bought my time back.)

b) Invest your savings reasonably conservatively.

c) save like crazy and plan to retire when you can live off 4% of your investments.

d) decide what you want to do if and when you ER. Weigh in family, schools, and cost of living, and decide whether of not you want to move.

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Re: 37 and wondering when (or if) to retire
Old 07-19-2004, 05:36 PM   #5
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Re: 37 and wondering when (or if) to retire

I support everything said so far. The only thing I can
add is that, IMHO, you really, really need to be motivated to ER at your age. You need to want it
desperately. I sense that with your "great job" that
you are pretty ambivalent about it right now. Try to
save more and spend less and have a solid plan in
place before you cut any umbilical cords.

Cheers,

Charlie
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Re: 37 and wondering when (or if) to retire
Old 07-19-2004, 05:43 PM   #6
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Re: 37 and wondering when (or if) to retire

My wife & I were pondering the pros/cons of selling house in Bay Area and moving closer to our daughters & grandkids/family. This is the third week of our retirement, but already I can see that we get enough of the summer dry heat of where we were thinking of moving. There is so much to do and see right here. In fact the kids are making plans to spend a few nights with us now that our grandkids are almost a year old.

We live near Los Gatos and less than a half hour to the beach.

So, we decided not rush into a fast sell even though the market is good now (but will get worse fast with rising interest rates ahead).

If you can live here you can live just about anywhere. It is a quality of life issue - for time being we will stay at our little portal to the Pacific.
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Re: 37 and wondering when (or if) to retire
Old 07-19-2004, 06:32 PM   #7
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Re: 37 and wondering when (or if) to retire

I had a little shack down in the south bay not that long ago.

Its a really great place to live. I do miss it sometimes.

What you have now is several things to trade on. You dont need to live close to work or in an area where you can find a job quickly. You have time and energy to make compensations, such as doing a little driving now and then. You have a very expensive house with a highwire price...and the insurance and property taxes to go with it.

You may also find that as you "decellerate" you have less patience with traffic and crowds and long for a little slower pace to life.

I moved up to sacramento back in 96. Prices were dirt cheap. Fine dining was limited, but I got seated within 2 minutes on a friday night at 7pm and didnt have to dress up much. Stores were a little further between. Kinda hot, but you get used to it. All the golf you can stand at really nice courses for under a buck a hole. You can fish a different stream every day and probably never see the same part twice. And within an hour or two drive, I could be anywhere around lake tahoe, napa, or in most of the nearby parts of the bay area. Little bit of driving, but hey, I have the time.

But it got a little too crowded. Lots of restaurants and stores. Plenty of traffic. Last year, I sold my highly appreciated house there and moved a little north to Yuba city. Again got a nice place at a much lower price for what I got. Not so nice an area, but not so different from the sac area of 7 years ago. Less crime and whatnot than was evident in my old bay area digs.

I'm already starting to sniff at areas a little further north and east where a few other members here live, and the area north of mendocino.

So I guess the point is, you can make some tradeoffs and not lose everything! Look up and down the coast at the places where the prices just start to break. Look for some inland areas that are still reasonable. After all, once you're done sleeping until 10, you can take a leisurely drive back to Los Gatos (or wherever, take in a day of shopping or hanging out at the beach, enjoy a nice dinner at your favorite restaurant, and then drive home later in the evening after the traffic breaks.

Me...I might be living on a couple of acres within a few miles of the ocean up near eureka or around fort bragg in a couple of years...
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Re: 37 and wondering when (or if) to retire
Old 07-19-2004, 08:00 PM   #8
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Re: 37 and wondering when (or if) to retire

Hey MikeK,

In 5 yeras you will be 42 years old. *Even if you do not receive a pay increase in the next 5 years you will be making $175K/yr in 2009. *

Mike listen to me....keep this job as long as you can make it. *With small kids and your youth you have a lot of livin' to do and you may never get a gig that pays like this again in your life.

BUT if you hate your job...walk away from it and keep a smile on your chops.

Healthcare is expensive and there is no getting around it. *Can your spouse get a job with health benefits and hook you on?

Long term Q: How do you and Mrs MikeK make it until you are age 95?

Don't know??

That's the 500 pound bear parked *in the living room Mike!

At age 42 you will have 50+, count 'um 50+ years to live in retirement. *Is that what you really want to do? Is your accumulated *dough going to last that long?

Sounds like fun to me but you should count your pennies before you submit the resignation.

Reality.

regards,
mickeyd

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Re: 37 and wondering when (or if) to retire
Old 07-19-2004, 10:26 PM   #9
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Re: 37 and wondering when (or if) to retire

I havent got any 500lb bears in my living room.

However, I do have a couple of dogs doing their best imitation of a "downer cow", and they eat like a 500lb bear.

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Re: 37 and wondering when (or if) to retire
Old 07-19-2004, 10:56 PM   #10
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Re: 37 and wondering when (or if) to retire

Thanks to everyone for the great advice. I've had many insights reading your postings. Specifically, (1) make sure you're going "toward" something that you really want -- such as a full-time hobby, charity work, etc, (2) even though I think I live frugally I am spending a great deal of money, (3) the kids will only get more expensive so consider that my expenses will actually increase during the next 15 years and (4) I've got a great gig at my company and have to wonder why I'd want to give it up. Food for thought. Your posting were very valuable.

I also loved the perspective on living or moving from the Bay Area. I actually moved to the North Bay/Wine Country because the South Bay/Silicon Valley was too expensive, congested and money-focused. The North Bay is also changing. Perhaps it's time to look for another place. We have talked about Sacramento...

I do have some questions on figuring your living expenses and tax consequences when retired. I looked at last year's expenses and found my living costs were $91K, personal taxes were $50K (fed, state, soc sec), property taxes $7K and I was able to save $50+K. My back-of-the-napkin calculation would state that most of my living expenses would be paid with investments. A small portion of withdrawals would be capital gains (10 to 15%) since I've already paid capital gains on many of my gains and a house sale would be tax free. Does this mean that if I cut down my expenses to $80K (which would be VERY easy to do, especially moving to a lower cost area) then I would only need about $100K/year to live on?

I would then calculate that a 4% withdrawal would be $2.5M. Take into account some inflation and increased capital gains would give a conservative number of $3M. I sell my house today and move to a lower cost area equates to a invested capital of about $1.5M. Conservative 6% return, $50K savings/year calculates to $3M in 9 years. It seems many of you are experts in the calculations. Any advice on how I'm setting my targets and calculating the "point of early retirement".

For now I'll continue with the point of view that I've got a great life, I can define my future and all the money in the world won't improve my health, create a happy family or build friendships.

Mike K.
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Re: 37 and wondering when (or if) to retire
Old 07-20-2004, 09:42 AM   #11
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Re: 37 and wondering when (or if) to retire

Mike,

Don't forget to account for inflation. At 3% per year
your $100k requirement today would be about $130k
in nine years and your nest egg would have to be
about $3.25 million at a 4% withdrawal rate.

Take a close look at all the expenses related to working
like commuting, lunches, clothes, etc. You might save
a bunch there. Also, your personal income taxes will
be much lower and you won't be paying FICA taxes
if you don't have earned income. Keep in mind that
the tax rate on dividend income is lower now. Be
smart about your after tax investments .... you may be
surprised at how much you can reduce your tax bill.

Finally, IMHO, you should use I-bonds for new investment in your bond allocation in your after tax account. These will grow tax deferred and track inflation. Also, I recommend that you use low cost
tax efficient index funds for your after tax stock allocation.

Personally, I think you should squeeze that $100k
requirement some more.

Cheers,

Charlie
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Re: 37 and wondering when (or if) to retire
Old 07-20-2004, 01:23 PM   #12
 
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Re: 37 and wondering when (or if) to retire

Quote:
Hey MikeK,

Mike listen to me....keep this job as long as you can make it. With small kids and your youth you have a lot of livin' to do and you may never get a gig that pays like this again in your life.
I walked away from a big-bucks job and never looked back. Having said that, my investments to spending ratio was favorable. Who knows, if I live to 100, I may have to work again. Then again, I could pass on in 10 years. You never know.

I wouldn't keep a big-bucks job for the money. In fact, most people I know with these jobs, should be saving for ER, but aren't. For some reason, big-bucks jobs seem to coincide with big-bucks spending.

BTW, I thought I liked my job too.
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Re: 37 and wondering when (or if) to retire
Old 07-20-2004, 05:33 PM   #13
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Re: 37 and wondering when (or if) to retire

HI Mike,

It appears we are in quite similar positions, albeit that you are slightly ahead in age, cash and kids.

We too are aiming for that ER date sometime around our early 40's (6 to 7 years time). However, we do not intend to completely cut the umbilical cord with work. We both enjoy our occupations, but are looking forward to being able to wind them down steadily in terms of the time commitment and so on without worrying about the reduced income. Being relatively young we both feel that we have too much productivity left in us to simply quit and spent our time entirely on leisure. Our idea is to first achieve that financial independence goal, then take a significant downshift in work by working consultancy, part-time, or opportunity specific.

By the way, my idea of a downshift is to get to 45 hours a week from the 65 hours I currently do. The kids education is my biggest concern as it is a costs that will only increase and will continue for a good number of years into the future. In this respect, I am providing myself a BIG safety net on the Education Fund.

As regards the healthcare question, one solution I have not seen posted very often is 'Move to Europe'. May be it is a possibility for you??

Good luck!

Simon888
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Re: 37 and wondering when (or if) to retire
Old 07-20-2004, 10:03 PM   #14
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Re: 37 and wondering when (or if) to retire

Up until four years ago I was making, and just about spending, in the high six figures.

I am far, far happier now.
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Re: 37 and wondering when (or if) to retire
Old 07-21-2004, 09:20 PM   #15
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Re: 37 and wondering when (or if) to retire

Quote:
As regards the healthcare question, one solution I have not seen posted very often is 'Move to Europe'. May be it is a possibility for you??
Simon, I actually have another option. My wife is Canadian. We have seriously considered moving to Canada after we stop working, or go to part-time. My wife is from Winnipeg (where her family lives now) and it is too damn cold for me . I've been there for two Christmases and it hit -40 air temperature both times. We now visit in the Summers. It is also a concern to have a high income because of their high taxes. I've asked around for a tax expert who can coach me on the risk and implications of retiring in Canada. No good leads yet but an old friend is a cross-border tax attorney and I'm thinking of calling him soon.

Just two weeks ago we visited and brought my daughter to the Dentist. I was very impressed with the service and low cost. Dentistry isn't part of the Canadian Health System but I talked to my Father-in-Law. He mentioned that for everyday health activities it is fine. Some of his friends still come to America for surgery because of the long delays, for things such as back surgery.
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Re: 37 and wondering when (or if) to retire
Old 07-21-2004, 09:35 PM   #16
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Re: 37 and wondering when (or if) to retire

Quote:
I'm already starting to sniff at areas a little further north and east where a few other members here live, and the area north of mendocino. ... I might be living on a couple of acres within a few miles of the ocean up near eureka or around fort bragg in a couple of years...
Fort Bragg has experienced an increase in home prices as a number of Bay Area retirees try to find more affordable housing. Have a good friend who bought on the Oregon border due to the prices. Loves the area adn the lifestyle.

I found it best to ER when work was interfering with what I wanted to do each day.
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Re: 37 and wondering when (or if) to retire
Old 07-21-2004, 09:43 PM   #17
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Re: 37 and wondering when (or if) to retire

Yeah I've seen some of the price hikes if you're in the most desirable areas.

I'd probably be a little ways outta town. If that ever happens. Plus it'd be 6-10+ years from now.

Who knows...
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Re: 37 and wondering when (or if) to retire
Old 07-22-2004, 07:22 AM   #18
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Re: 37 and wondering when (or if) to retire

Don't get too far out of town. In a medical emergency you want help as quickly as possible. Sometimes not possible if you live " in the bush". And John.......not the "bush" you are thinking. :P
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Re: 37 and wondering when (or if) to retire
Old 07-22-2004, 11:11 AM   #19
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Re: 37 and wondering when (or if) to retire

The wifes a medical professional, and I've been known to contemplate limb reattachment with duct tape and a staple gun.
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