How are we doing?

[atfourty]

Guys,
Here is our situation:
My age 30,My wife's 27.
Total Annual salary:135,000.

Home Equity:160K
Non-Retirement Investmnets + Cash = 110K
Retirement Investments=110K
Total Networth :380,000

I am planning on putting away about 25K in retirement for next 10 years.
Also planning on putting away about 24K in non-retirement for next 10 Years.

Can we retire in 10 yrs when i am of age 40?

Thanks,

 

[obgyn65]

Hello - have you tried FireCalc or even this calculator :

Merrill Edge| See Where You Stand

 

[plex]

Need to know expenses to be sure.

My guess from your savings goal each year and your income is that your expenses are $35k/year, home equity does not matter, assuming you have a paid off house when you retire, otherwise some net worth needs to be subtracted (or a multiplier used if you want to see a scenario where you never pay the mortgage). Also assuming you have a reasonable portfolio that has lasting power.

My spreadsheet says you can retire at 39, with an inflation adjusted amount of $35k/year. If you live on less (and have a reasonable portfolio), it could be sooner.

 

[Sam]

Guys,
Here is our situation:
My age 30,My wife's 27.
Total Annual salary:135,000.

Home Equity:160K
Non-Retirement Investmnets + Cash = 110K
Retirement Investments=110K
Total Networth :380,000

I am planning on putting away about 25K in retirement for next 10 years.
Also planning on putting away about 24K in non-retirement for next 10 Years.

Can we retire in 10 yrs when i am of age 40?

Thanks,

+135 Income
-25 Income (tax estimated)
-49 Saving
===============
61 Annual expense

380 current networth
1305 conservative networth 10 yrs from now (380+490)*1.5

4% of 1305 = 52

Looks good to me.

 

[travelover]

4% may be too high a SWR at age 40. How about health care, which is probably an under the table income item now?

 

[DoraM]

4% may be too high a SWR at age 40. How about health care, which is probably an under the table income item now?

If they are living on $35K a year healthcare costs will be a non-issue as they will qualify for a very subsidized insurance premium by 2014. This is one of the beautiful things about Obamacare and ER.

The cutoff level for a single individual is $44,000/yr and they are married and will be well below that. I would say they will have less than 10% of their income as medical expenses, maybe as little as 5% depending on how they withdraw their savings (for example, if there are a couple of years where they pull from a taxable account and have small gains over that time, they could actually pay almost no healthcare insurance premiums...but maybe some amount out of pocket).

 

[ronocnikral]

If they are living on $35K a year healthcare costs will be a non-issue as they will qualify for a very subsidized insurance premium by 2014. This is one of the beautiful things about Obamacare and ER.

The cutoff level for a single individual is $44,000/yr and they are married and will be well below that. I would say they will have less than 10% of their income as medical expenses, maybe as little as 5% depending on how they withdraw their savings (for example, if there are a couple of years where they pull from a taxable account and have small gains over that time, they could actually pay almost no healthcare insurance premiums...but maybe some amount out of pocket).

your assumption is how the rules are currently written (Which have yet to actually be put into practice) will be the same over the subsequent 40-50 years post retirement. I personally, find this to be a poor assumption. The good thing is, the OP will get a few years to watch how things actually pan out.

you also mention pulling from "a taxable account and have small gains over that time," which would indicate larger problems than future insurance premiums under the yet-to-be-put-in-place rules.

healthcare is on my ER radar, and is still a large uncertainty, just as travelover mentions.

 

[DoraM]

your assumption is how the rules are currently written (Which have yet to actually be put into practice) will be the same over the subsequent 40-50 years post retirement. I personally, find this to be a poor assumption. The good thing is, the OP will get a few years to watch how things actually pan out.

you also mention pulling from "a taxable account and have small gains over that time," which would indicate larger problems than future insurance premiums under the yet-to-be-put-in-place rules.

healthcare is on my ER radar, and is still a large uncertainty, just as travelover mentions.

I personally find an assumption based on a current written law to be not as poor as an assumption based on speculation of how that law may or may not be changed in the future.

But at any rate, even currently in some states there is help in the form of subsidized health insurance for low earners. I put in the numbers for a married couple age 45 - 54 in the state of washington system (just happened to have that website handy) and it had premiums as low as $90 a month.

As for the "pulling from a taxable account", what I meant was that because the OP said he would have money in a 401K and also money in a taxable account at ER, he could arrange things such that the higher gains are in the 401K and maybe do some tax loss harvesting from the taxable account, or have some of it in municipal bonds which don't get added to income. Seems like a smart person could figure all of this out in a way to work the system to their advantage.

 

[ronocnikral]

an understanding of "legs and regs" could benefit us all.

surely, we can all "work the system." my point is, that shouldn't always become our goal. there are plenty of welfare recipients who work the system, but i wouldn't trade my life for their's.

independent of if I am "smart" or not, health care continues to be a major uncertainty and concern of mine. ymmv.

 

[DoraM]

an understanding of "legs and regs" could benefit us all.

surely, we can all "work the system." my point is, that shouldn't always become our goal. there are plenty of welfare recipients who work the system, but i wouldn't trade my life for their's.

independent of if I am "smart" or not, health care continues to be a major uncertainty and concern of mine. ymmv.

I am gradually coming around to the view that everyone "works the system" to some extent.

 

[Ronnieboy]

I am gradually coming around to the view that everyone "works the system" to some extent.

I need to flip the switch, because it seems like I am just getting 'worked by the system'

 

[atfourty]

Need to know expenses to be sure.

My guess from your savings goal each year and your income is that your expenses are $35k/year, home equity does not matter, assuming you have a paid off house when you retire, otherwise some net worth needs to be subtracted (or a multiplier used if you want to see a scenario where you never pay the mortgage). Also assuming you have a reasonable portfolio that has lasting power.

My spreadsheet says you can retire at 39, with an inflation adjusted amount of $35k/year. If you live on less (and have a reasonable portfolio), it could be sooner.

Thanks you all for the replies first of all!. To be specific to your reply...our current expenses are 35K per year(Excluding the Mortgage)...Also medical insurance is not included as our employer pays for it.

 

[atfourty]

+135 Income
-25 Income (tax estimated)
-49 Saving
===============
61 Annual expense

380 current networth
1305 conservative networth 10 yrs from now (380+490)*1.5

4% of 1305 = 52

Looks good to me.

I had a question based on my projections in 10 years of that 1305..half will be in 401(K) and Roth...we can't really touch that can we at 40?....

 

[DoraM]

I had a question based on my projections in 10 years of that 1305..half will be in 401(K) and Roth...we can't really touch that can we at 40?....

Exactly the opposite, you want to have your greedy little hands all over the 401K...google 72T provision.

When your taxable account does poorly and you have losses for the year, or you have carryover losses, you can convert a portion of the 401K into a Roth with no tax due (or very little).

the trick would be figuring out how much to withdraw each year from the 401K...it has to be "substantially equal", whatever that means...

 

[atfourty]

+135 Income
-25 Income (tax estimated)
-49 Saving
===============
61 Annual expense

380 current networth
1305 conservative networth 10 yrs from now (380+490)*1.5

4% of 1305 = 52

Looks good to me.

Can you please briely explain how you go to 1305?....

 

[ronocnikral]

I had a question based on my projections in 10 years of that 1305..half will be in 401(K) and Roth...we can't really touch that can we at 40?....

you can touch, as someone else pointed out. But, it may not be as easy as they indicate, especially as a "swing" account. here is a good source I have found on 72(t) distributions. it is important to note that you must schedule out your distributions and changing this schedule could mean you owe the 10% penalty on every distribution you have taken to date. also of note, is that the government takes a keen interest in ensuring your ER experiment is successful (another way to look at it is they want to discourage you from doing it so you continue to work), so their limits tend to be conservative. Currently, the max annual withdrawl rate is <3%. once you embark on this adventure, you must stick with it for at least 5 years

any contributions to a roth IRA can be withdrawn at any time, without penalty. it is not clear to me if you can hold seperate roth and trad accounts under 72(t), or if the IRS makes you pile it all up.

i also recommend you read both boglehead books (investing and retirement). they are good reads and go fast, with lots of good information in them.

Exactly the opposite, you want to have your greedy little hands all over the 401K...google 72T provision.

When your taxable account does poorly and you have losses for the year, or you have carryover losses, you can convert a portion of the 401K into a Roth with no tax due (or very little).

the trick would be figuring out how much to withdraw each year from the 401K...it has to be "substantially equal", whatever that means...

to the OP, it has been implied that I am not "smart," but I think it would be wise to do some more homework before setting out thinking you can go on a 72(t) schedule and convert anytime when taxable funds do poorly, as has been outlined here. Here is an E-R.org thread, see post #6 on why it isn't a good idea.

 

[DoraM]

any contributions to a roth IRA can be withdrawn at any time, without penalty. it is not clear to me if you can hold seperate roth and trad accounts under 72(t), or if the IRS makes you pile it all up.

Actually this was answered in the (quite good) thread you mentioned:

"Once this is set up, everything else dealing with IRA's is totally separate. If you have an IRA that is not designated as part of the applicable 72t set, you can take distributions or make contributions just as if you didn't have a 72t program. You cannot however merge anything outside of the 72t set into the 72t set."

Obviously you and the OP can do anything you want to do, but we plan to implement 72T with our 401K and keep our separate two traditional IRAs (non Roth) out of it. During lean years when we have losses to harvest in the taxable account such that even with the 72T payout we are well under the 15% tax bracket cap, we will convert a portion of the traditional IRA to a Roth. If there are crazy good years where the 72T payout plus realized gains from our taxable account places us at the 15% threshold, then we will leave the traditional IRA untouched that year.

I still need to do a lot of research on the nuts and bolts of this plan, but it is in the back of my mind as to how we will navigate our ER (in 6 years).

 

[arebelspy]

+135 Income
-25 Income (tax estimated)
-49 Saving
===============
61 Annual expense

380 current networth
1305 conservative networth 10 yrs from now (380+490)*1.5

4% of 1305 = 52

Looks good to me.

Can you please briely explain how you go to 1305?....

looks to me like he did: 380 current , saving 49 / yr x 10 yr = 490. he then added those (870) and multiplied by 1.5 (assuming your money will gain 50% over 10 yrs .. which is a 4.14% gain / yr.) however it doesn't take into account that you don't have all 870 right now.

a little more accurately, 380 now, 49 / yr for 10 years, at 4% would be 1150, rather than his 1305. to get to 1305, you'd need a rate of 5.77/yr for the next 10 yrs.

 

[ronocnikral]

Actually this was answered in the (quite good) thread you mentioned:

"Once this is set up, everything else dealing with IRA's is totally separate. If you have an IRA that is not designated as part of the applicable 72t set, you can take distributions or make contributions just as if you didn't have a 72t program. You cannot however merge anything outside of the 72t set into the 72t set."

Obviously you and the OP can do anything you want to do, but we plan to implement 72T with our 401K and keep our separate two traditional IRAs (non Roth) out of it. During lean years when we have losses to harvest in the taxable account such that even with the 72T payout we are well under the 15% tax bracket cap, we will convert a portion of the traditional IRA to a Roth. If there are crazy good years where the 72T payout plus realized gains from our taxable account places us at the 15% threshold, then we will leave the traditional IRA untouched that year.

I still need to do a lot of research on the nuts and bolts of this plan, but it is in the back of my mind as to how we will navigate our ER (in 6 years).

D, your plan sounds fine as long as your assumptions hold true. how much money do you plan to hold on the sidelines so you can do these conversions? and how much time w*rking does that translate to. and if you plan to always be in the 15% tax bracket, what's the point of converting in the same tax bracket you always plan to be in? if you plan to somehow significantly increase your spending power without w*rking over 5-40 years, I am all ears...

 

[Sam]

a little more accurately, 380 now, 49 / yr for 10 years, at 4% would be 1150, rather than his 1305. to get to 1305, you'd need a rate of 5.77/yr for the next 10 yrs.

What arebelspy said.

In reality I think your networth would be even higher due to the increase value of your home equity. But the bottom line is that anyone (or couple) who can save 30% or more of their gross income in bound to do great as far as early retirement is concerned.

 

[DoraM]

D, your plan sounds fine as long as your assumptions hold true. how much money do you plan to hold on the sidelines so you can do these conversions? and how much time w*rking does that translate to. and if you plan to always be in the 15% tax bracket, what's the point of converting in the same tax bracket you always plan to be in? if you plan to somehow significantly increase your spending power without w*rking over 5-40 years, I am all ears...

Seems like we are slightly hijacking this thread, but I guess it is good conversation for the OP as well.

I don't have it all worked out, but we currently have a 401K worth 400,000 and two traditional IRAs worth 90,000 and 55,000. We are not eligible for Roth IRAs right now because of income level, and it is painfull to convert the traditionals to Roths because they have little basis (even though I know the conversion income limits were lifted in 2010). I also know about the backdoor approach by hiding the IRA in a solo 401K if you want to start your own business, but seems like a lot of work.

So in 6 years? Maybe we will have 700K in the 401K with our 21,000 contribution plus some market luck. The IRAs will probably be on the order of 250K total by then. Taxable account should be around 500K.

The point of converting is that when we start to draw SS, if a large portion of our income is from Roth then we should pay little tax on the SS payments, and also it gives us greater flexibility having the Roth vs having it all still in the 401K and IRAs. Also, there may be some years where without the 72T money or IRA conversion we would not even owe tax (is possible I guess). Seems like those are good times to get money from a tax deferred account.