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dpac1960 01-08-2008 11:01 AM

Hi, Im seriously considering ER within a year and need advice
Hello, Its always been my goal to retire early as soon as I could afford it and I think Im about there. I'd really appreciate any advice, suggestions, warning, etc, about what to avoid or things to think about before I take the plunge.

I am 47 years old. I am not married and have no dependents. I live in Kansas City and own a home worth about $145,000 and owe about $80,000 on the mortgage. I have a second mortgage that I owe about $39,000 on and have no other debt. I currently have $1.4 million in an extremely high growth, high risk 401k mutual fund account. I am a contract computer programmer making $83,000 a year for the government.

My plan is to roll this money into a very secure long-term government bond fund account that is set up as a SEPP account so I can receive periodic redemptions from it and not have to pay the 10% penalty for premature redemptions. I plan on staying in my house for at least another five years, then buy something more upscale once the housing market improves. After I retire I'd like to travel extensively, but keep a relatively moderate standard of living.

I'd appreciate any thoughts/advice/feedback on my plan. Is it doable? Is there a better way to utilize money? Are there any mutual fund companies that will help setup my sepp account? What are some of the pitfalls to avoid? Any and all replies are welcome. I really want to do this right.

RunningBum 01-08-2008 11:51 AM

A switch from 100% high risk equities to 100% govt bonds is as extreme as it gets. A more graceful transition makes more sense to me. If the market tanks this year, your plans are ruined because you won't have anywhere near $1.4M. First thing I recommend is to diversify now. Even an 80/20 stocks/bonds equity would be good, even if you keep working for awhile longer.

100% bonds at age 47 or 48 also seems unnecessarily conservative and if you've misjudged expenses or have a couple fairly catastrophic events you could get wiped out. A 4% withdrawal rate on 1.4M yields $56K, but there's an assumption that you're getting a decent yield on your principal for that to work, more than I think you'll get with a govt bond fund. I would stay at least 50% in stocks early in retirement, but that's up to you to decide where you think the greater risk is--protecting your capital vs. unforeseen expenses.

Remember that out of your $56K you'll be paying income taxes, health insurance, and a mortgage (or two), plus your travel. Nobody can answer whether your plan is doable without knowing your future expenses and how accurately you can predict them.

If you want a nicer house, why not strike while the market is soft rather than when it recovers in a few years? Your house will be worth more after the recovery, but won't the cost difference on the upgrade be even greater?

The second mortgage is an alarm to me. Too often it indicates that people don't have their expenses under control. Only you can answer that.

Congrats on amassing a nice 401K nest egg and putting yourself in a position where you can legitimately consider ER.

dpac1960 01-08-2008 12:20 PM

Thanks for the advice. I have to apologize, I forgot to state that the majority of the $39,000 second mortgage is a loan to a very reliable friend that he is paying me back with interest, plus I get to write off my interest expense, which he's paying.

Question: If I set up my sepp plan in a more aggressive mutual fund account am I stuck with that account till I reach retirement age, or can I shift my money again at some point in time to a more secure investment? Also, can I change the withdrawal amount at some time or am I stuck with it till retirement age.

Rambler 01-08-2008 02:42 PM

Don't know a darn thing about SEPP but I certainly would not go 100% govt bonds. At your age, I would say closer to 65/35 or 60/40 equity/bond ratio. Personally, I am 83/17 if only equities and bonds are considered (also have some real estate to sell, with the proceeds divided to rebalance the equity/bond allocation...in a few years). Good luck. Let us know how the SEPP situation works out.

lace 01-13-2008 03:23 PM

I would focus on paying off your mortgage if you plan to stay in the house. Then take your mortgage payment amount and save it outside of retirement. That way you have some money to live on for awhile without starting distributions from your retirement funds and you can be a little mor agressive in the investments. That is what I did and it worked well for me. I retired at 51 with no debt, which helps my monthly expenses be extremely reasonable.

Rich_by_the_Bay 01-13-2008 03:29 PM

How much do you need to spend per year after retirement?
Do you have health insurance paid for in early retirement?
Will you have a pension?

We'll need that information to help you know whether you have enough for such a long early retirement.

Agree with the others that a diversified portfolio is your best bet against volatility, inflation, and safety. Only you can decide the allocation, but I suggest some reading.

I like Bogle's Common Sense Investing, Solin's "Only Investment Book You'll ever need" and Lucia's "Buckets of Money." (My titles may not be quite right.)

You might also want to play around with FIRECalc (link on the opening page).

dpac1960 01-13-2008 06:15 PM

I'd like to have at least 80 thousand a year to live on. I have no pension and I buy my own health insurance since Im an independent contractor. I'll probably work part time on my hobby making furniture, but Im sure it won't bring in anywhere near what Im making now.

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