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Can I afford to early retire?
Old 06-28-2014, 10:05 PM   #1
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Can I afford to early retire?

I have been struggling with the issue whether to early retire next year. Some background information: I am currently 45 and my spouse is 43. We have two kids 8 and 5.

My portfolio is mostly indexed with low-cost Vanguard and Schwab ETFs. The equity/bond ratio is approximately 55/45 and the portfolio value is $3.5m.

We currently owned a home in a high cost-of-living area (California). Recently, we had an extended visit to DFW in Texas and liked the place. We are thinking of selling the house in CA, and then relocate and early retire in TX. By selling the house in CA, and fully paying for a new house in TX, we will still have excess money to add on to the portfolio. By the middle of next year, with the addition of money from the home sale, as well as vested company shares, I estimate that the portfolio value will reach $4.5m.

My estimate of household annual expenses is $80k a year. This includes $8k for health insurance and $12k for property tax. I expect to be in the 10% or 15% federal income tax bracket after retirement, because I have structured the portfolio to be very tax efficient, holding tax-free municipal bond funds and tax-efficient equity ETFs. So the federal tax obligation should be very manageable. Currently, I have about $80k put aside in college 529 accounts.

Annual expenses of $80k is about 1.8% portfolio withdrawal rate. I think this is a sustainable perpetual withdrawal rate. Also, we are eligible for social security.

I would like to hear comments if I can take early retirement? Or if I had missed out some other considerations? Thank you for your comments.

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Old 06-29-2014, 06:37 AM   #2
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It appears you are good to go for early retirement from a financial standpoint.

Two very big (huge, actually) questions not addressed:

- What will you do all day? I've observed many guys who retire prior to age 50 or so still have the urge to "accomplish something" and end up going back to work. Do you have a clear vision of what you do with your time?

- Is your spouse on the same page? Retirement changes the dynamics of a relationship and the results aren't always what we envisioned them to be. Two illustrative retirement quotes: "I married you for life, not for lunch" and "Twice the spouse and half the money".

My only other thought is to your plans to relocate. I'd recommend renting something for a few months and giving the DFW area (or any other place you consider for relocation) a long test-run before buying. I don't know how long your extended visit was, but it takes a while to really get the feel of living somewhere.

Best of luck.

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Old 06-29-2014, 11:16 AM   #3
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+1 with REWahoo.

Also, while you don't indicate how much of your portfolio is taxable/tax-deferred/tax-free, I find it more tax efficient to skip munis and just hold bonds in my tax-defferred accounts. If you do have significant tax deferred amounts, you will have many years to do Roth conversions at low tax rates to avoid higher taxes once SS and RMDs start.
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Old 06-29-2014, 12:30 PM   #4
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Thank you for your comments.

#1 mentioned by REWahoo is indeed a big question mark for me. I'm still trying to figure this out.

#2 : My spouse and I are on the same page on this. In fact, DW will retire next year, regardless of whether I retire or not.

@pb4uski: My portfolio should be approximately $800k in tax deferred tIRA and $200k in tax-free Roth (rIRA) next year. The tax advantaged accounts are not large enough to hold my desired level of bonds.

By using tax-free municipals, my plan is that when we retire, we will immediately start converting the tIRAs to rIRAs while keeping in the 15% federal tax bracket. In this way, by the time we reach RMDs, the conversions would have made a significant dent on the tIRA and RMDs.

On health insurance, am I correct to assume that as long as I keep within 4x the federal poverty rate, my out-of-pocket premium would be around 10% of the sum of taxable income (AGI) and tax-exempt interest?
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Old 06-29-2014, 12:53 PM   #5
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Your nest egg is much bigger than mine, and I'm older, but other than that there are some similarities to your situation and mine.

I retired a week ago - I have 2 kids still at home, ages 11 and 13.

Some things that popped out - your healthcare number is quite a bit lower than what I priced. Are you assuming an ACA subsidy? We don't qualify for a subsidy this year and our all-in healthcare costs are over $14k. Granted, I'm over 50, and DH is over 60 - so that kicks our price up a bit. But you want to verify your numbers. Next year we should qualify - but this year, with income/bonus/paid out PTO, we could not fit into the ACA povertyX4 limits.

Does your spending include taxes? Firecalc assumes gross spending... so you need to make sure you have considered taxes as part of your spending.

And yes - you need to have a plan/idea of what you are retiring "to".

But financially - you're much stronger than we are - and we pulled the cord and retired.
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Old 06-29-2014, 01:36 PM   #6
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@rodi, thanks for your comments.

Yes, I am assuming ACA.

Here's my calculations. My portfolio will generate about $35k of tax-exempt income and another $40k of qualified dividends. I would need to sell some shares to generate another $5k but this should be tax-free for a while since I have lots of harvested CG losses to offset.

Assume the 4x poverty rate (for a family of 4) is $95k.

In keeping with ACA, I can convert 95k - 35k - 40k = $20k from tIRA to rIRA every year. If I keep to this, the out-of-pocket health insurance premium would be limited to 9.5% of $95k, approximately $9k (not the $8k I estimated earlier).

On the other hand, my federal AGI will be $40k + $20k (from tIRA conversion) = $60k. This is within the 15% tax bracket.
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Old 07-01-2014, 09:52 AM   #7
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It seems you have a pretty good understanding of the financial aspects and have some reasonable assumptions for costs. Only potential issue is if you can still get he healthcare subsidy and also hope you stay healthy as ACA has some high deductibles. Still better than no coverage though.

College costs may be another unknown, good you have the 529 now and what value is in there may be sufficient to avoid any big surprises, assuming your kids go to in-state public schools.

I agree with the comment you have a job to retire from, but do you have something to retire to? You have obviously done well in building up your nestegg, so it becomes an emotional decision, not a financial one.
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Old 07-10-2014, 07:50 AM   #8
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Originally Posted by 38Chevy454 View Post
I agree with the comment you have a job to retire from, but do you have something to retire to? You have obviously done well in building up your nestegg, so it becomes an emotional decision, not a financial one.
Many folks, like the OP, must spend their w*rking lives focused almost exclusively on w*rk in order to build the sizable nest egg we're discussing. This leaves little, if any, time to focus on what comes next. This is where the OP may be, namely, waiting until RE to figure out what he wants to do with the rest of his life. As we've seen on this board, many REs with young kids (pre-teens and young teens) want to travel and expose their kids to foreign countries and experiences. Again, this may be one of the things the OP wants to do. Others simply want to spend more time with their kids (see my comment above about focusing on w*rk), since they've often missed pivotal moments in their kids' lives and don't want to miss any more of them.

I don't get the sense that the OP is going to drift listlessly in ER. Folks like the OP don't amass a sizable nest egg in such a short period of time without having the ability to focus on whatever they put their minds to at a given moment.
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Old 07-10-2014, 08:29 AM   #9
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Old 07-10-2014, 09:34 AM   #10
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Cat, congratulations on your situation. I am a recent finder of this forum and very much engaged, but this is my very first post. This is a great community.

I am in a generally similar place to yours, a few years further on. Without knowing any more about the particulars or your needs, objectively I think you have more than enough to ER and your are certainly FI unless I am missing something significant.

The issue is the psychic one - what do you really want from the rest of your life and how will you get it and know that you have found what you are looking for?

You may have an idea of what that is, or perhaps not or not completely. That is precisely the issue I am dealing with now and it is the main hurdle to clear for me.

Good luck with your journey.
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Old 07-10-2014, 02:54 PM   #11
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Thanks for the additional comments. As of now, we started researching for a house but taking it slowly.

I also did a trial run with a tax return on TurboTax based on the income we will have during retirement. I am astonished at the amount of tIRA to rIRA I can convert before I even start to pay one cent of tax. It will be quite a change from the 40%+ combined federal and California state tax brackets I am paying now.

PS. My income, not including the tIRA to rIRA conversions, would be primarily tax-exempt interest and qualified dividends. Qualified dividends are not taxed in the 10 and 15% tax brackets.
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Old 07-10-2014, 03:08 PM   #12
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Try Toll Brothers site. They are building some beautiful homes in Plano Texas.

"A man is a success if he gets up in the morning and goes to bed at night and in between does what he wants to do" --Bob Dylan.
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