Young Dreamer Needs Help

[FlipnSf]

Im John, 36 single and been lurking here this last year and at about the same time started dreaming of early retirement. I have been working for a county government for 5 years and have a db pension plan and a separate 457 plan. I would love to hear your comments on my plans to retire in 6 or 7 years at the age of 42.

Savings Plan:
I am currently earning an annual salary of 78,000 contributing 7.5% to a defined benefit plan. Additionally I am doing a 3 year service buyback of an additional 7.5% annually making my current pretax contribution to this plan at about 12,000. In the last 2 years the retirement plan managers credited this account with 6.25% interest. The current balance of the account is 29,000 and my contributions will go down to 6,000 after I finish the buyback in 3 years. The vesting retirement plan will allow me to leave the balance of the account in the plan and will start paying as early as age 50 where the balance in the account is doubled and divided with an actuarial factor to arrive at the monthly lifetime benefit (currently at 133.7058 subject to change in the future). I calculated that at an annual minimum interest rate of 6% earnings that I expect a balance of 110,000 in 6 years to be left in the account to grow for 8 years and at 50 will have 350000 lump sum or 2,600 a month.

I am also contributing the maximum to my 457 deferred Compensation annuity account (currently 13,000 annualy) which has a current balance of 45,000 invested in a Vanguard S&P 500 Index (70%), Midcap Index (17%), and Small Cap Portfolio (13%). I am projecting an account balance of at least 160,000 in 6 years. Additionally I have another 403 B account from a previous employer with a 7,000 balance in the account and a $16,000 I bond purchased 2 years ago.

Living Expenses:
I live in a 1 br condo i purchased with a fix 5.5% 30 year $180000 first mortgage and a 6% 15 year 40,000 second that allowed me to avoid PMI. With my new 7 year plan I am in the process of refinancing for a 7 year arm of 4% to reduce my monthly mortgage payments. I also owe about 6,000 in credit card debts which I manage to keep between 0-3% annual interest rate through credit card surfing. I have no car payments and I drive a 95 honda civic with 135000 miles and pay a 250 liability insurance annually. I do have a cell phone (free long distance) and satellite tv.

The Plan!!:
Whew!! My financial situation in 2 paragraphs. Like I said I am planning to say adios to my middle management paper pushing position in 6 or 7 years at age 42 and plan on living on my 457 savings while waiting to tap into the pension plan at age 50 and take advantage of the annual COLA currently at 2%. I might not need the $$ at 50 and am planning to reinvest at least the first 5 years of the pension to have extra income at age 65 or 70. I am looking to sell the condo and relocate abroad (I worked in the Peace Corps in Africa after college and have done a lot of 3rd world travelling and slumming since) and am looking at Southeast Asian countries like Thailand or The Philippines expecting to live on 1100/ month. I am also planning on purchasing property in one of those countries and will use the money I save from the mortgage payment reduction (400 monthly) to pay for the property. I havent quite figured out if the moving abroad is temporary or permanent (major flaw of this plan) and have not thought of what I would need if I decide to return to the states after 60.

What I need from the experts:
Does my plan seem reasonable and what other factors should i take into consideration? I do have fears regarding the DB plan's generosity changing in the future but I have checked the last 2 annual reports and the plan is doing very well with over 1.5B surplus last year and the plan has not had to ask the county to contribute since 1996. Thank you very much in advance for all your comments.

 

[Bob_Smith]

Hi FlipnSF,

If I read your post correctly, you're planning a retirement at age 42 with $533,000 (DB plan value, 457, 403b, and I-bond). I'm not sure what equity you'll have in your condo - $100,000? Assuming no debt and $633,000 total assets, that would be a stretch for me at age 42. At 52 maybe...  But at 42 that is a long bridge you must cross to a rather uncertain SS at age 62. I wish I could say it was a no-brainer, but I think it is in the borderline area. Possible... but not something I'd be totally comfortable with.

 

[wzd]

Your plans make me think of the comments on the Terhorst's that various people have made on this site. I would recommend a search of the posts here for "Terhorst", and maybe someone actually familiar with their books could chime in? What living expenses are reasonable for the lifestyle he describes?

Wayne

 

[Billy]

Spending is a personal issue..what we did and still do, is to track our spending...this is not a budget..but simply using "money Programs" it's easy..Everyday on paper we write what we spent on this and that..then about every ten days enter it into the program...you'll really be able to get a handle on things after a few months of data.

Follow your dreams,
Billy
Web-site http://www.geocities.com/ba264

 

[BUM]

John,

Your plan is very ambitious. It will work fine if you decide to become a citizen of the Third World. If you want to remain a citizen of the usa, it might need additional funding. You dont need too much help. At your age you've got leverage! Keep earning, keep saving!

Remember there are no dryer sheets in the third world.

BUM

 

[unclemick]

? If your single, still reasonably flexible, with 6-7 yrs to go, why not do a little research and try some practice runs(on vacations) in various parts of the world. ? Why do you need to own property( I'm thinking Terhorsts, Greaney).

 

[Skylark]

Question regarding your defined benefit plan: Did you compare cashing out early to purchasing additional service years?

I am asking because I am in a similar situation and had not considered buying service years. The thought of continuing to work until I reach 25 years of service is just too horrible to contemplate, although it is quite likely that it will happen unless I take some action.

My strategy is to focus on the 457 and a taxed investment portfolio (also learning how to live well on little money!). My issue, and maybe yours too, is that by the time I have enough 457 and savings investments together to retire early, I will be just 5 to 7 years away from my 25 years of service and full retirement at 61 years. If I leave early, I will have to wait an additional 4 years until I reach 65 to start collecting the pension.

Right now I just want out ASAP and have decided that the 457 and taxed investment is the way to go. But I am interested in hearing the strategy behind your plan. I have not really gotten into studying the details of my defined benefit plan, which I should do.

I think it is a good idea to set yourself up for a good income after about 65 years of age, then take off with a lower income at a younger age and try to find an interesting low cost lifestyle, or to sample a number of low cost lifestyles. You can also find interesting work that may not pay a lot but helps you bump your income up a little bit. So between now and age 65, you can either live very cheaply or find interesting work to keep your income up a bit. I think it would be a lot of fun to live in asia or another low cost location for a few years. I would love to visit Chile and rent an apartment for awhile.

The years between 40 and 60+ are healthy active years and I hate to think that most of them would be spent in a cubicle. As long as you have enough future income to live well on after age 65, and you have your minimum living expenses covered today, you can get out and live an adventure and know that you won't be forced to wage slave your life away.

 

[FlipnSf]

Once again, thanks for the comments I checked out bill's and the terhorst web site which strengthened my resolve that this is really feasible.

I did contemplate cashing out at 50 with the 350,000 lump sum but remaining a member of the retirement program has the advantage of having a healthcare plan. Like I said the plan will double the balance whether I cash out or decide to collect a monthly benefit at the age of 50. I am definitely thinking of collecting less dollars in my earlier years of retirement perhaps even delaying tapping the full 1100/month The choice of the expat lifestyle living a cheaper can be supplemented by taking consulting projects which I have done before. I have done extended 6 weeks vacations in various parts of the world and lived well on less than 50 dollars / day.

Like I said cashing out the 457 at 42 will provide me an income for 8 to 13 years (age 55) and my thinking is to reinvest the monthly pension which I hope to collect at 50 at the current numbers add up to 2600/month minimum adds up to an extra 156000 (sans interest and 2% annual cola) in 5 years. I am planning to leave it in the investment account for 5 to ten years tapping it at 60 or 65 to supplement the 2600 monthly paycheck. I am not counting on any social security income at this point.

jp

 

[john]

Ronin,

I was in Nigeria in West Africa from 91-94. What about you?

John

 

[EH73]

As a non US citizen, having lived abroad for a while and currently in the Philippines some thoughts:

- living in the Philippines on USD 1100 a month is very feasible as long as you stay away from the big cities and the very touristy spots

- buying a property in the Philippines (and Thailand) is more complicated unless your plan includes getting hitched to a local. In the philippines you'd need to keep a fairly big chunk of money in a government assigned investment before you'd be allowed to purchase certain properties

- when planning early retirement also look at tax, not only asset value and living expenditure. Retiring outside western countries can be very attractice: lower living expenses AND lower tax. Panama has been named many times as a great place to retire: cheap proerty, low living expenses, relatively stable and reasonable crime levels and no tax on foreign income. In additoin there are supposed to be many benefits for retirees. I haven't validated these claims so don't fly blind, but a good place to start reading in more detail about retiring abroad is

http://www.escapeartist.com/retirement/havens.htm

As young dreamers (30) these places are on our radar screen, but I our current preference is to build a very tax efficient strategy for Europe/Australia.

 

[Jarhead*]

Flipinsf

From your post, it appears to me you have a good deal of experience living in low cost areas.
If you are willing, and desire to long term, appears to me you should be able to without too much problems.
If you are single, as it sounds like, you will not have to convince, or be subject to we shouldn't have done this
Personally, it would not work for us, with family obligations, etc.
I also doubt that even without obligations, I personally would not be enough of a free spirit to do so. ( I have far too many ingrained cultural habits to comfortably drop them.
I spent 2 years in the Far East while in the military, and couldn't wait to get back to this country.
In any case, from what I have been led to believe about the cost of living in Panama, Thailand, etc., the amount that you have appears to adequate.
Make sure that is what you really want to do, as you are still very young.
Regards, Jarhead

 

[unclemick]

The nice thing about LA and New Orleans - you don't need a passport and its a short drive back to the 'regular' USA. Enjoyed the Terhorst post on Lafayette,LA. Outside the big cities - cost of living is reasonable.

 

[haha]

The nice thing about LA and New Orleans - you don't need a passport and its a short drive back to the 'regular' USA. <snip> Outside the big cities - cost of living is reasonable.

UncleMick, I think I remember that you are an ex-Washingtonian. Did you find it hard to adjust to the hot humid summers in Louisiana?

Mikey

 

[unclemick]

Mikey

Yes and no. If memory serves, moving from Seattle to Denver my adjustment was to catch the local bugs - colds/sniffles for 3-6 months, eat red meat, itchy dry skin and take a lot of breaks while backpacking and ski sloping - until my body got used to 'high and dry'.
Then Denver to New Orleans - catch the local bugs/sniffles for 3-6 months, eat too much, clammy and hot while fishing and slimed up with skin so soft. Interestingly - a lot of A/C in office work so a lot of people catch the sniffles going in and out.

Both climate changes took about 3 months minimum to get used too - the body adapts - especially since I made a point to get 'outside a lot' whenever I could.

 

[BunsGettingFirm]

SF, check out the Hi I Am section for Lancelot's post on ER in Thailand.

 

[FlipnSf]

Thanks for the tip!

 

[FlipnSf]

1 year later....


Plans havent changed much but assets and its allocation changed a little bit. My 457b plan statement said i earned an annualized rate of 12.5% gain on my latest statement and has a balance of 66k. I also took advantage of the our plans ability to put half of the balance of the 457 in a brokerage account which allowed me to buy virtually any mutual fund from the 9000 funds they offer. I redistributed my allocation to include about 40% exposure to international funds (MSCI EAFE index and some emerging markets ex japan in asia), sectorial mutual funds in energy 5% and Health Care 5%. The rest are in domestic S&P and small cap and mid cap indexes. My I bonds bought 3 years ago will earn 5.25% for the next six months (1.6% fixed rate) now worth about 18k. Starting June of this year my employer will pick up 2.5% of the 7.5% db contribution and by June 2006 they will be picking up the full 7.5% contributiion to the db plan. I have about 160k equity on my condo.


Problem:
My db plan changed the policy regarding buy backs of service retirement requiring employees to shoulder the employer contribution of 4.5 % in addition to the 7.5% of the employee's annual salary (currently @ 80,000). I am currently doing a salary deduction to pay off the 2 years of my 5 years service buyback which is pretaxed and isnt charged the 4.5%. I've decided to pay cash (18,000) for the 3 years so that I will only be charged 7.5% instead of 13% of my annual salary. What would be the best way to finance this 18k buy back? Should I get a cash advance on my credit card with a 0% grace period of a year or cash in my savings bonds or refi my 40k 2nd loan currently 5.5% at prevailing 6.5 - 7.5% rates. I can handle a 400/ month payment plan.


Can you also weigh in on my current asset allocation which I have had for 7 months. Seems to be doing well YTD considering its still up 1.5% with all the fluctuations.

Thanks.

 

[Janie]

John,

Nice coincidence reading your post... husband and I have been discussing a similar scenario (whether to take an early out from his federal job if early outs are offered in the near future).

We have similar ideas about our retirement lifestyle- we've both lived and traveled overseas, mostly Latin America but also Thailand, for extended periods, living out of backpacks on next to nothing. Great lifestyle, we both love living in the tropics.

The main deciding factor for us is that we'd be able to keep our federal health insurance if we take the early out. Would you be able to keep your insurance? This may not seem to be such a big deal if you are healthy and in your 30s.... it's extremely important if you have any health problems and are too young to qualify for Medicare.

Here's our reasoning- we looked at our fixed income and expenses:

1. Can keep health insurance- costs $220/ month in today's dollars

2. Cola'd pension with early out would be about $1300/ month.

If this is all we had to live on, we could get along if we both continued to do contract work occasionally or seasonal work to up our income to $24,000/ year.

We are satisfied with what we have accumulated in 401Ks and IRAs. We will let these grow until we are 60. If you have enough saved in retirement accounts now and can leave these alone until you are 60, you should be fine.

I don't think life has to be as expensive and complicated as so many people in this country make it. One exception: health care is extremely expensive. Make sure you are insured, and you're set. Good luck.

 

[tozz]

I don't want to nudge this thread off-topic, but I too am interested in other's experiences in less expensive (read: third world) countries.   

I've traveled fairly extensively in the third world, and am trying to get a feel for what a more extensive sojurn would be like.  My needs are minimal, my travel mode is backpacker+ (i.e. I'll sling a pack, but there better be a freakin air conditioner there when I arrive...) My preliminary "ER" plan calls for a year or so in Thailand/Malaysia, then probably a return to "work" albeit with an infinately more flexible schedule.  I'm fortunate enough to have health care forevermore under a Federal Early Retirement program, though did wrestle with the significant pension penalties incurred for retiring under age 55.  I'll be free from my shackles in two months.

Didn't want to hijack your thread, Flip, but just liked the dream!

 

[Janie]

Hey tozz,

Again, not to lead the thread astray-- just for one more message-- but under the Federal early retirement provision (Voluntary Early Retirement) my understanding was that the penalties for retiring before age 62 (5% per year pension reduction) were lifted. Was this not true for you?

We spent 7 weeks in Thailand several years back (post 9-11) and could have stayed much longer. Thailand is such a relaxing, safe, and delicious (culinarily speaking) place to be. We never got sick, the public transportation is clean and safe and easy to use, and the people are kind. It's much different than traveling in much of Latin America, where I've typically become pretty tired after a while and ready to relax back in the States. We met many European pensioners in Thailand and they seemed happy and relaxed, but it's pretty easy to beat living in a crowded apartment complex in an industrial town in Germany.

I lived in Guatemala for a winter (Quetzaltenango, in the highlands). There are always stories of how dangerous Guatemala can be, but I never had any problems. It's significantly less comfortable than Thailand. I rented a small apartment from a local family for about $60/ month (this was 10 years ago) and studied Spanish and did volunteer work- I just found a notice on the bulletin board at one of the Spanish-language schools and had a place to live within a day. I met a great group of ex-pats. There were local cafes with book exchanges and movie nights to provide a nice social life. I bought my food at the local outdoor market and cooked at home, lots of fresh produce available all winter long. It was a pretty good life, but it gets hard to see the poverty all around you every day.

Long term, it would be easy to fall into an expat community in many places in Thailand-- rent a small house or apartment from a Thai family, find a local doctor and dentist, eat great food, relax, use the abundant and cheap internet cafes to keep in touch with folks at home, etc. It's pretty simple, really. The only catch, and I'm not familiar with how this is done in Thailand, is figuring out Visas and limits on how long you can stay without leaving briefly to renew your Visa. I liked Thailand because people are generally healthy and living reasonably well, and there aren't nearly as many have-nots as in many 3rd world countries.

Sounds like you have a lot to look forward to!
Janie

 

[Eagle43]

Speaking of Thailand, On CNN I saw this Australian gal, Schapelle Leigh Corby, who had been arrested in Bali for drug possession and could face the death penalty. When I googled it, I was led to this site: http://www.phaseloop.com/foreignprisoners/news-indonesia04.html

I don't know the bonafides of this URL, could be just internet chatter, but am assuming it's valid.

Perusing it, I found there are hundreds of prisoners in Thailand, of all places, facing the death penalty, many for drug possession. Travel is great, but having to sweat somebody putting something in your bags is nerve-wracking. This gal insisted someone put stuff in her bag; of course, everybody's innocent when they get caught.

On the other hand, a lot of the youngsters think nothing of taking drugs into other countries; talk about risk, that's simply stupid. When I was working, we had engineers going to Saudi Arabia. To get a visa, they were required to sign an explicit sheet of paper informing them of the death penalty, should they get caught with drugs in the Kingdom. I think I wouldn't bring anything but hand-carried luggage into any of these "death-penalty for drugs" countries, so I could keep an eye on them. But, I would have never thought of Thailand as being one to worry about. You guys living or traveling over there, Are there any stories we should know? The only drug I take is prescription, other than booze, so this isn't a personal. I hope this Aussie Gal gets out, but I doubt it.

 

[Mr._johngalt]

I may have posted this before. If so, please cut me some slack.

I will never have to worry about "death penalty for drugs"
countries as I am probably never leaving the USA
(unless deported as a subversive) Anyway, I was sitting in
my sleeper on an AMTRAK train in New Mexico, waiting for my
dinner reservation to come up. A knock at the door. It's a cop.
He wants ID. I produce it. Being an inquisitive sort I ask what
is going on. He says that people are moving lots of drugs back and forth on AMTRAK. (That I believe - back then they had zero
security). He says "they" noticed I had a Texas driver's license,
Michigan license plates. an Illinois mailing address and I had left my truck in Kansas. I suppose that might look a little funky if you are the
suspicious type. Anyway, then he says "Can I come in and look
around?" I say "Absolutely not!" I had nothing to hide really
but I resented the intrusion, plus the thought that he could easily "drop" something or slip it into my bags....well, it was
a no-brainer decision to keep him out.

JG

 

[tozz]

Hey Janie,

I'll retire under the older CSRS which has a 2% per year pension "penalty" for retiring under age 55.  Penalty notwithstanding, I will still come out ahead for 21 years (until age 68) in total gross pension received than if I waited until age 55 to retire.  And according to actuarial tables, I will then only have 11 additional years of life to bemoan the fact that the government came out ahead.  So I perform the upper-level calculus, and I am "ahead" of my pension payer for 2 out of 3 years of my remaining life.  See?  I can rationalize Early Retirement so many ways...

After reading your message, maybe I should qualify "extensive" travel.  I've never been able to get away for seven weeks, much less years.  But I have been through most of South America and concur that Southeast Asia seems easier and safer.  The grinding poverty in South America can wear you down after a while, and you generally have to have your wits about you in any urban area after nightfall.  If the figures are to be believed, Caracas has more murders per holiday weekend than my city has during a year.

...under the Federal early retirement provision (Voluntary Early Retirement) my understanding was that the penalties for retiring before age 62 (5% per year pension reduction) were lifted.  Was this not true for you?

 

[Janie]

Hi Eagle,

Ever seen Midnight Express? Drugs in most Asian countries are serious... It's good to make an effort to look somewhat clean-cut while you're traveling- at least while you're in transit or crossing borders. While traveling with my husband I've always found officials to be very polite and respectful.


Tozz,

I think your math (or was that new math!?) makes perfect sense. As long as you can keep your health benefits and receive a modest, COLA'd pension, what more does a guy need? Hold onto your outside investments and don't touch them for awhile, do some contract or seasonal work between travel adventures, and enjoy your life beyond the cubicle. We are really hoping an early out program is offered in the next couple of years... otherwise we have 5.5 years left, not impossible to get through, but it'd be nice to have our freedom sooner.

best,
janie

 

[preben]

Well at a net worth of around 650-700k and budget around $14k/year in Asia you certainly do not have any problems! We are talking a 2% w/r! (yes some of it is in bricks but still...).

I can confirm that $1100/mth is fine in Thailand. A serviced studio (meaning incl. furniture/kitchen/ maid service, sheets/towels etc) at $300/mth at www.bosstower.com (having pool/gym/sauna) or similar will leave plenty for fun and food.

Your nest egg/apt value (rental income?) would grow while your job simply is to keep spending within reason - not too hard in SEA.