ready at 39...have i missed anything?

[ozarkjohn]

getting ready to ER early next year, and looking for input from you experts on if i'm missing anything fundamental. here are the key facts:

• age 39, married, no debts (own our home)
• 2 small kids, each with 529Bs that are well enough funded to pay for a 4yr college education
• taxable savings/investments of approx. $350k
• 401k and IRA savings of approx. $375k
• current and target budget is $25k/yr (we live in rural PA), this includes health care.

my plan would be to use my taxable savings/investments to get me to age 55, and then start using the 401ks/IRAs (using 72(t)/SEPP from age 55-59.5).

firecalc suggests a $25k annual withdrawl on the $350k has a 83% chance of lasting 15yrs. a few thousand $'s worth of part-time/seasonal work each year would raise it over 90%. the 401k/IRA should at least double in the 15yrs before its needed, providing at least $33k/yr for my final 35yrs with a 95% confidence. i have not assumed any social security income, but the IRS suggests mine and my wifes combined accounts would provide $18k/yr at age 65 (in 2002 $'s).

any comments/input on my basic plan?

 

[Nords]

Maybe, maybe not.

As you hint, you could always revert to the extreme "solution" of a job.

But 6.7% is a pretty aggressive "S"WR, even if the portfolio has to last 15 years. How tight is that $25K budget-- could it handle a 20% rise in property taxes or healthcare premiums, a new roof, a replacement car/appliances?

How much volatility can you & your asset allocation handle? If you had to, how much could you cut back expenses if you encountered another 2000-2003 market?

You know the best answers to these questions. If you're willing to risk a return to the workplace, then you're ready to ER. If you're not willing to risk that, then might another year or two of work pile up enough extra savings to make you all feel more comfortable?

 

[brewer12345]

What kind of inflation are you assuming for your budget? What kind of healthcare inflation are you assuming? The legendary intercst has indicated that his health insurance costs have increased something like 20% a year since he retired in 1994.

Personally, I would want a better chance of success than you seem to have, but that is up to you.

 

[haha]

getting ready to ER early next year, and looking for input from you experts on if i'm missing anything fundamental.   here are the key facts:

• age 39, married, no debts (own our home)
• 2 small kids, each with 529Bs that are well enough funded to pay for a 4yr college education
• taxable savings/investments of approx. $350k
• 401k and IRA savings of approx. $375k
• current and target budget is $25k/yr (we live in rural PA), this includes health care.

my plan would be to use my taxable savings/investments to get me to age 55, and then start using the 401ks/IRAs (using 72(t)/SEPP from age 55-59.5).

firecalc suggests a $25k annual withdrawl on the $350k has a 83% chance of lasting 15yrs.  a few thousand $'s worth of part-time/seasonal work each year would raise it over 90%.   the 401k/IRA should at least double in the 15yrs before its needed,  providing at least $33k/yr for my final 35yrs with a 95% confidence.   i have not assumed any social security income, but the IRS suggests mine and my wifes combined accounts would provide $18k/yr at age 65 (in 2002 $'s).

any comments/input on my basic plan?

Congratulations. You put together a lot of money at an early age. Your plan is not a guaranteed loser. OTOH, there is a not a lot of slack in it either.

I would hate to have to raise 2 kids on $25,000 a year, though you may feel that it will be fine for you. It's one thing to have $50,000 at your disposal, but scrimp down to $25,000 in order to save money. That is voluntary, and it can be abandoned if you want or need to. But if the die is cast-that means you, your wife and your family grow up on $25,000 a year come hell or high water.

Resources including financial are never a hindrance, often a help in preparing children to face the world.

All I can say is I'm glad my Dad didn't make that decision.

Are you under pressure to leave the workforce?

Mikey

 

[Zipper]

Be a productive member of society for 30+ years.

Pay into SS/CPP.

Don't try to get something for nothing.

Be debt free. Pay off the mortgage.

Pay yourself 10% each and every year into 401k's or RRSPs.

Raise productive members of society to carry on your line.

Another 10 years and you should be close.

 

[ordway]

I think I'm missing something here...

Ozarkjohn's total nest egg is $725K. A $25K draw on that is only about 3.4%. That seems pretty conservative to me. I don't see that there's any relevance to the fact that he'll be drawing first from one "pool" of money while letting the other untouched, and then switching to the other pool - isn't it the whole portfolio that matters?

I can't speak to the costs of kids (don't have any, don't plan to) but a $25K budget that does NOT include housing seems pretty sweet to me. If we didn't have to pay rent, my & my husband's annual expenses would be somewhere around $12K, and we don't feel even remotely deprived. For us, $25K before housing costs would give us a TON of slack.

Except for the kids part, I'm working toward being in a very similar situation to Ozarkjohn in the next 4-5 years. I hope it's not necessary to have a million or two before ER...

Incidentally, I feel that "working" and "being a productive member of society" are entirely orthogonal. For some (probably most) people they coincide. Not for everyone.

 

[bruce1]

I wish I could do a test year at $25,000 per year. It seems tight for a family. I am planning something close to 25K per year soon but I am a single homeowner. I am getting close, had another wake up call yesterday when a friend of mine who retired three years ago told me his wife is gravely ill and is unlikly to have another year.

Bruce

 

[Zipper]

The saving grace Bruce, is she's in OHIP!

 

[haha]

If we didn't have to pay rent, my & my husband's annual expenses would be somewhere around $12K, and we don't feel even remotely deprived. For us, $25K before housing costs would give us a TON of slack.

Holly, I wish you might post your budget. I am alone, own my house, and this year I will bring it in @ $26,000. This is with no unusual expenses. And this is less than the last few years, and also it involves staying home when I would like to go out. While I don't feel deprived per se, I would increase my pleasure in living if I spent another $10,000 per year, no doubt.

Incidentally, I feel that "working" and "being a productive member of society" are entirely orthogonal. For some (probably most) people they coincide. Not for everyone.

Me too. My negative comments on Ozarkjohn's idea had only to do with the economic feasibility of it.

Mikey

 

[Bob_Smith]

If we didn't have to pay rent, my & my husband's annual expenses would be somewhere around $12K, and we don't feel even remotely deprived. For us, $25K before housing costs would give us a TON of slack.

Holly, let's assume you could eliminate rent. How could you make it on $12,000 and pay for health care? I spend more than $12,000, just on health insurance for my family. FWIW, I have included my expenses below. I updated it about three months ago. There is quite a bit of slack built into this, for sure, but if I had to cut it by half, I'd be back working. I own my home free and clear, but there's no way I could make it on $12,000 - and I'd really struggle with $25,000. All these items are based on actual spending. I'd be interested in seeing yours (and I'll admit it - I have been looking for an excuse to play with Wayne's neat table generator. )

APPLIANCES $51.00 CABLE TV $34.00 COST OF CAR $144.00 CAR MAINTENANCE $50.00 CAR INSURANCE $60.00 CAR LICENSE $15.00 CHRISTMAS GIFTS $80.00 INTERNET $40.00 CLOTHING $38.00 DECORATING/FURNITURE/CARPET $40.00 DENTAL $31.00 UTILITIES $164.00 FOOD $413.00 NATURAL GAS/HEAT $74.00 MISC/ENTERTAINMENT $520.00 HOUSE INSURANCE $64.00 HOUSE MAINTENANCE $84.00 PHONE $25.00 PROPERTY TAX $125.00 MEDICAL $1055 TAXES $305 MONTHLY TOTAL $3412 ANNUAL TOTAL $40,949

 

[Jarhead*]

Holly, let's assume you could eliminate rent. How could you make it on $12,000 and pay for health care? I spend more than $12,000, just on health insurance for my family. FWIW, I have included my expenses below. I updated it about three months ago. There is quite a bit of slack built into this, for sure, but if I had to cut it by half, I'd be back working. I own my home free and clear, but there's no way I could make it on $12,000 - and I'd really struggle with $25,000. All these items are based on actual spending. I'd be interested in seeing yours (and I'll admit it - I have been looking for an excuse to play with Wayne's neat table generator. :

Bob: I think both of us would be kicking ourselves in the backside for retiring early if we had to try and get by on $25,000. You do what you have to do, but it wouldn't be pretty.
That's a great list you put up, and very close to my outgo on the set stuff, and amoritizing the maintenance, etc.
I remember the last time you put up your list, and thought my spendable was about the same, but in further checking ours is more like $4,000.00 a month.
(Mainly the misc. entertainment area).
My wife qualifies for Soc. Sec. in Feb., so we're feeling a little bit "cocky now"
We're both a little too old to go back to a "hippy" lifestyle, and too young to want to spend more than 2 weeks at home without a short trip to Reno, or San Francisco.
Facing facts, my guess is that if you had to try and get by on $25,000 a year, you'd be hitting all the networks you've got to supplement it.
In my case, I'd be screwed, because I'd never go to work for anybody that would have me as an employee
Again, great list, and should be very helpful to a lot of people.
Regards, Jarhead

 

[Bob_Smith]

Bob: I think both of us would be kicking ourselves in the backside for retiring early if we had to try and get by on $25,000.

I agree Jarhead. I wouldn't do it - especially if I were 39 and had young children. That's awfully young for a family to lock in to $25,000 per year. I'd like to see an analysis of his monthly expenses.

 

[retire@40]

but there's no way I could make it on $12,000 - and I'd really struggle with $25,000.

My yearly real total is $40K too with a family of 3.  When I take out entertainment and gifts I come to $30K.

I can't see raising 2 kids and not having some gifts and entertainment built into my budget.  If I were single I could do that to myself, but not to my wife and kids.

I have my ER budget at $50K since I plan on increasing my entertainment budget by 35-40% in a few years.

 

[bruce1]

Also besides being single my $25000 is after tax and exclusive of medical.

Bruce

 

[John Galt]

We (2 people) have been living on about 25K
annually for years now without any deprivation
whatsoever. I agree it could spell trouble for
younger people with kids. For us, it is not even a strain.

JG

 

[ordway]

I'm not the "official keeper of Quicken" so I don't have really detailed numbers at my fingertips. But I do know that for the past 5 years or so (ie. since we got out of grad school and got real jobs) our expenses have consistently been below $30K, sometimes a lot below. (Even the year we bought a $10K car for cash was in that ballpark.) Just recently we were looking at the charts in Quicken and my husband pointed out that for the past year or so, if you take rent and taxes out of the equation, our monthly expenditures on *everything else* runs consistently at $1K or less. And that's with not feeling deprived at all... and even with both of us being geeks who like the occasional techno toy (we have 5 functioning computers, for instance, and two console game systems). Admittedly one bonus right now is that our health insurance is 100% employer paid, so that has to be taken into consideration.

Anyway, here's a hypothetical budget, based on real averages of spending. This assumes no mortgage but it does add in a guesstimate of $350/month for health insurance.

Gas/electric $65.00
Internet $40.00
Phone $25.00
Insurance $80.00
Property taxes $175.00

Car Insurance $40.00
Gas $30.00
Maintenance $10.00
Replacement $50.00

Food $250.00

Pet care $10.00
Biking $40.00
Books $5.00
Movies $10.00
Games $10.00
Fencing $100.00
Photography $5.00
Computer $80.00
Dining out $10.00
Vacation $150.00
Misc $30.00

Furnishings $10.00
Clothing $5.00
Misc $5.00

Personal care $35.00
Health insurance $350.00

Total expenses $1,620.00 montly / slightly under $20K yearly.

Before you laugh at things like $5/month for clothing, let me assure you that these are based on real averages. Many years we literally spend 0 on clothing - a couple of geeks can live quite well in jeans and t-shirts And I'm a good cook, so there's really not much temptation to go out to eat - just every so often for a birthday or something. This budget also includes a generous allowance for my fencing hobby, and almost $2000 in vacation expenses that could easily be switched to something else - we don't go on vacation every year, but some years we do buy something more expensive than the norm, like a new road bike.

 

[Hyperborea]

I think the summary is sure you can do it but do you want to do it.

You're planning on $25K + imputed income from owning a home + some seasonal income + effect of lower taxes ~= $35-50K taxable income. A lot of families in the US live on this and get by. Do you want to live at that level of income? Have you tried it for a year or so? You mention rural living - does this planning involve any "back to the earth" stuff (raising goats, making your own clothes, etc.)?

 

[Hyperborea]

Car Insurance      $40.00
Gas      $30.00
Maintenance      $10.00
Replacement      $50.00

This one jumps out at me as out of whack.  At $50/month for replacement you're planning on only $6000 for a vehicle every 10 years.  That will not be getting you a new vehicle or even a recent used vehicle with good reliablility.

$10 / month for maintenance will probably just about cover the routine maintenace items (oil, oil filter, air filter, plugs, battery, plug wires, coolant, etc.) if you do the work yourself ammortized over a couple of years (the battery replacement will eat half the budget or more one year).  That won't cover the more expensive bits as they wear out - radiator hosing, ball joints, CV boots, etc. - or any of the big items like transmission rebuild, head gasket, etc.  That $10 / month won't cover the ammortized over the life of the vehicle maintenance cost of a high reliability new car never mind a $6000 when bought used vehicle planned to be run for 10 more years.

I budget more like $60 / month for the maintenance.  I haven't been spending that much and it's been building up but the car is soon to be 7 years old and the costs will rise.

 

[ordway]

This one jumps out at me as out of whack. At $50/month for replacement you're planning on only $6000 for a vehicle every 10 years. That will not be getting you a new vehicle or even a recent used vehicle with good reliablility. [...] I budget more like $60 / month for the maintenance. I haven't been spending that much and it's been building up but the car is soon to be 7 years old and the costs will rise.

That's a good point, and I'm probably too low there. That's been a difficult thing to get a meaningful average on, since I have less data over time for car purchases. OTOH, we really don't use the car much at all any more - bicycles or feet are lots better for going to work or doing errands. (If I want to drive for fun, I'll play a video game!) Most weeks, the car gets used maybe once or twice.

 

[Bob_Smith]

Holly, thanks for posting your expenses. We often hear from two different groups - some are doing well spending $20,000 or so, and others say they need twice that. So I took your budget and consolidated some of your categories so I could compare my expenses directly to yours, and examine just what (if anything) I'd have to give up to make it on your budget. Here are the numbers. After each category you can see the annual difference between what you spend, and what I spend (or plan to spend at some point).

We always discuss these differences in spending patterns in very general terms. Maybe someone will benefit by seeing more detail. Clearly health care and taxes are a big difference (but there are others). Although my taxes will be almost zero for 10 years, that is likely to increase once I start drawing from retirement plans - so I'm trying to account for that by including taxes in my plan. But there are other differences too - here are the numbers:

CATEGORY HOLLY BOB ANNUAL DIFFERENCE Appliances $0 $51 $612 Gas/electric/Utilities $65 $238 $2,076 Internet $40 $40 $0 Phone $25 $25 $0 Cable TV $0 $34 $408 Christmas Gifts $0 $80 $960 Home Insurance $80 $64 -$192 House Maintenance $0 $84 $1,008 Property taxes $175 $125 -$600 Car Insurance $40 $60 $240 CarMaintenance $10 $50 $480 Car Replacement $50 $144 $1,128 Car Lisence $0 $15 $180 Food $250 $413 $1,956 General/MISC $520 $520 $0 Furnishings $10 $40 $360 Clothing $5 $38 $396 Health insurance $350 $1,055 $8,460 Dental $0 $31 $372 Taxes $0 $305 $3,660 TOTAL MONTHLY $1,620 $3,412 TOTAL ANNUALLY $19,440 $40,944 $21,504

 

[JWR1945]

ozarkjohn

getting ready to ER early next year, and looking for input from you experts on if i'm missing anything fundamental. here are the key facts:

• age 39, married, no debts (own our home)
• 2 small kids, each with 529Bs that are well enough funded to pay for a 4yr college education
• taxable savings/investments of approx. $350k
• 401k and IRA savings of approx. $375k
• current and target budget is $25k/yr (we live in rural PA), this includes health care.

my plan would be to use my taxable savings/investments to get me to age 55, and then start using the 401ks/IRAs (using 72(t)/SEPP from age 55-59.5).

You can meet most of your financial goals with TIPS and ibonds.

For the first $350K, consuming the entire principal at year 15:
You can withdraw $23.33K each year for 15 years at zero percent interest.
You can withdraw $25.24K each year for 15 years at one percent interest.
You can withdraw $27.24K each year for 15 years at two percent interest.

I prefer to think in terms of the entire portfolio of $725K. It has to last you 50 years.
At 2.0% interest, you could withdraw $23.06K each year for 50 years.
At 2.2% interest, you could withdraw $24.04K each year for 50 years.
At 2.4% interest, you could withdraw $25.05K each year for 50 years.
At 2.5% interest, you could withdraw $25.56K each year for 50 years.

Longer term TIPS are yielding close to 2.0% if held to maturity.
Shorter term TIPS and ibonds are yielding close to 1.0% if held to maturity.

These calculations do not consider taxes, which is a problem with TIPS since adjustments in principal are taxed immediately (if held in a taxable account).

These calculations do consider inflation. These calculations assume that you adjust your spending to match interest payments. This is similar to cost of living increases in employment and in Social Security. (There is a subtle timing mismatch between inflation and interest payments that causes FIRECalc's numbers to be spread over several years.)

THEREFORE: You can invest in a highly conservative manner. There is no need to put your retirement dreams at risk. Considering today's valuations (for the S&P500 index), I recommend remaining conservative at this time.

I recommend that you look at unclemick's posts regarding his hobby stocks. He allocates about 15% of his portfolio to satisfy his male hormones.He has been successful in pursuing a dividend-based investment strategy. It is sound.

Have fun.

John R.

 

[haha]

I always kept close track of expenditures. Then for about three years starting in 2000 I didn't. On Jan 1, 2004 I started up again. So in 3 weeks I'll have a year's expenses to report on. I could project from what I have, but I prefer to get actual cash values.

Regarding replacement costs for an auto, a method I used in the past was to guess the longevity of the car based on my mileage driven and my personal experience with auto durability. Then I make a sinking fund at a low or 0% interest rate to provide the starting cost of the car at the expected time of need. By choosing a low or 0% interst rate, I allow for the likelihood that the cost of a replacement car will increase about in line with the return that I will actually earn on my sinking fund.

I have never tried to account for appliances, but I guess this would be a simple way to do that too.

As to housing expenses, my father lived in the same house for over 40 years. During that time, there were some things replaced that one might not think of when planning a budget. Like the main sewer pipe out to the street. $15,000. Like the city deciding the sidewalk needed to be relaced. I can't remember what that one cost, but it was clearly an attempt on the part of the city to get money from the only ones they could get a lien on- property owners. There were plenty others, but these were big ones. And the bigger your house and lot are, the more all that stuff sets you back.

Overall, I think stuff costs more than many people think. Food is one area. Fruit, fresh vegetables, fresh wild fish, nuts-- all are good for you and all cost a bundle.

I bought that stuff when I was feeding four, and I continue to buy it now. But for me alone, and being very careful at the butcher case, I still spend about $300 a month. This is down from earlier, as I have tried harder. Of course region matters. Some places are much cheaper than the Northwest.

BTW, those of you who will soon have teenage boys will learn a lot about food costs that you might not have expected!

Mikey

 

[Hyperborea]

Regarding replacement costs for an auto, a method I used in the past was to guess the longevity of the car based on my mileage driven and my personal experience with auto durability. Then I make a sinking fund at a low or 0% interest rate to provide the starting cost of the car at the expected time of need. By choosing a low or 0% interst rate, I allow for the likelihood that the cost of a replacement car will  increase about in line with the return that I will actually earn on my sinking fund.

So, do you actually take the withdrawal as part of your yearly/quarterly/etc. withdrawal and then stash this money into something else (bank account, CD, etc.)? Or is it an accounting device for budgeting and you just leave the balance of the "fund" in your invement accounts?

 

[Bob_Smith]

Like the main sewer pipe out to the street. $15,000. Like the city deciding the sidewalk needed to be relaced.

Yep, I have had both. In fact, I even had to tear up the concrete floor in the basement, and replace the entire sewer underneath the house. I also had to tear up the street and replace the sewer - and also replace the section of street I tore up. Sewers are a pain. Then the city decided we all needed a new sidewalk. It all adds up.

 

[John Galt]

More reasons not to live in the city

JG