Planning for ER

[MDJO]

Greetings! I want to thank all of the posters and organizers of this site. What a wonderful resource.

I am 57, DW is 59. DW er'd in Feb 2010. Home (300k) paid for, 500K in ret accounts, 500K in non-ret accounts, 1M total, 70% stock, 20% bond, 10% cash, always LBOM, no debt. Just finished remod on most of the home, a few more things to take care of (paint, carpet etc). Our two kids are pretty much FI. No pensions - our nest egg of $1M and counting, plus SS will be it for us. COL is relatively low where we live.

I have been fortunate to earn about 250K per year for the past couple of years. Before then, we both worked and earned around 100K per year. We still live like we earned much less. I enjoy the work, but the environment (large corporate) can be very stressful.

My current plan is to keep piling up the savings. I would retire as early as Jan 2011 and draw 60K per year. Would reduce draw when SS kicked in at 62. Longer I can last, the better it will be financially.

It is easier to put up with the stress of the job knowing that I could walk away, so I may be able to last longer than I think.

My son would like to buy or start his own business, and he is saving to do so -at 24 he has saved around 100K. He hopes to do this in about 2 to 3 years. I hope to quit at that time and help him with his business. We get along very well and for me, this would be my dream retirement, working with my son.

My fears? Leaving the security of a 250K job and paying for health care on my own until medicare. Will 1M really be enough? It is 10 times what we made for most of my career, but not much compared to what I make currently.

Any thoughts?

 

[bizlady]

Run FireCalc. On the surface, it looks like you might be fine. If you work with your son, maybe you get paid, or insurance? Stocks would be heavier than I would be comfortable with.

Your 60k a year cover health insurance and taxes?

 

[Midpack]

My fears? Leaving the security of a 250K job and paying for health care on my own until medicare. Will 1M really be enough? It is 10 times what we made for most of my career, but not much compared to what I make currently.

Any thoughts?

Different numbers, but I'm right there with you. Everyone here has or will pass through that mental space, some go through it more easily than others (esp SIRE folks).

What does FIRECalc: A different kind of retirement calculator tell you?

Even after FIRECalc, only you can answer when it's right - it's not just a $ calculation, the emotional aspect is just as important. It's when you reach your own crossover point on the conceptual graph below plus what it takes to let you sleep at night (some distance past the crossover on the green line according to your risk tolerance) - it's simple.

At some point you're tolerance for work-stress will overcome your $ or other retirement fears - and you won't have to ask anyone...you'll know. I'm in the same "box" myself...but I took the first step toward retiring last Friday.

 

[Moemg]

Welcome ! You should track all your expenses very closely for at least six months before you pull the plug and sorry to say but I would not retire without a bigger cushion .

 

[haha]

Our two kids are pretty much FI. No pensions - our nest egg of $1M and counting, plus SS will be it for us. COL is relatively low where we live.

I have been fortunate to earn about 250K per year for the past couple of years.

If you can make $250k/yr, and you will rely on SS and the draw from your $1kk stash, I would not retire, given current market conditions, unless you are about to go postal.

Others will explain more adventurous approaches.

Ha

 

[observer]

If you could solve the health care coverage until Medicare issue, with $1m I would retire immediately. One thing that may help is the federal health care reform plan scheduled to kick in on 2014. I don't think eligibility will be means tested but rather based on income, and will provide a pool of affordable insurance choices. In the meantime, a high deductible policy until then to consider.

I agree with bizlady, stock holdings are a bit too heavy at your age. Something like 50% or even less, at the most.

 

[Onward]

MDJO, you left out a critical number: how much can you save/invest per year out of your $250k annual earnings? The greater that number, the more each additional year of w*rk will raise your lifestyle in retirement, and the more reason you have to w*rk additional years.

BTW, if the stress of w*rk is severe or having significant physiological effects on you, I say get out now.

 

[CoolChange]

Different numbers, but I'm right there with you.

+1. So, I can't really offer any advice; but, I hope it helps to know that many of us are struggling with the same issues. (Do a search for "one more dollar" and its variations to see lots of past threads on this issue.)

Congratulations on making it to this point. It sounds to me like you are in a pretty good place with many potentially good outcomes.

Good luck.

 

[chinaco]

Welcome and Congrats

It really depends on the income level you will need. The rule of thumb is that a 60/40 mix of stocks and bonds might sustain a 4% withdrawal rate for 30 years. Some are now saying 4% may be too high. $60k would be 6% of your portfolio. Using the 4% rule of thumb, would mean you need around $1.5M

IMO - If you do not have a pension and are in decent health... consider working a few more years... say till 59.5. At $250k/yr, you should be able to put away another $250k to $300k in savings/investments. If the market is good to us, you might add another $200k in growth... You might get to $1.5M.

 

[79protons]

Work just one more year, and during that year try to live on $40,000. If your work pays for your health care currently, try to live on $36,000 instead. With no house payment, it sounds doable to me, and if you prove you can live on 4% of 1 million, then you could use the SS payments at 62 to take cruises or buy an RV or whatever. Besides, during that one year if you do manage to live on $40K, you should have at least another $100,000 saved up in addition to the current 1 million. Keep the $100,000 in almost cash, and you can use it to reduce the amount you have to withdraw from the 1 million during down market years. Also, with a good chunk of already taxed dollars, you can arrange things to have low taxes when you would desire that.

 

[mickeyd]

Hey MDJO,

Welcome here.

What we did prior to full retirement is to try to live on an amount of money that represented the minimum amount of money that we could live on during retirement. We lived on that minimum amount for 6 months or so with no problem. We then knew for sure that if our income ever dripped to that low amount, we could easily adjust our ways and live ultra-frugally.

Kinda like trying on a new girlfriend prior to marrying her.

 

[Sam]

I have been fortunate to earn about 250K per year for the past couple of years...

My current plan is to keep piling up the savings. I would retire as early as Jan 2011 and draw 60K per year. Would reduce draw when SS kicked in at 62...

We get along very well and for me, this would be my dream retirement, working with my son.

My fears? Leaving the security of a 250K job and paying for health care on my own until medicare. Will 1M really be enough? It is 10 times what we made for most of my career, but not much compared to what I make currently.

Any thoughts?

Welcome.

It's refreshing to read your post. You are among the very few who could look past your current high earning and consider early retirement.

Your numbers look fine to me. True, that you'd be starting at a 6% withdrawal rate but for only 3 years (until your wife starts collecting SS). In another two years that rate would drop even more (when you begin SS). Another drop when both of you reach 65 (when medicare kicks in). If your calculation tells you that the future rate (7 to 9 years from now) will be 4% or lower then you're all set.

The only thing that comes to my mind is how certain you're about spending 60K a year. I assume that you have tracked your expenses meticulously in the past few years.

Best of luck.

 

[aida2003]

Welcome and Congrats

It really depends on the income level you will need. The rule of thumb is that a 60/40 mix of stocks and bonds might sustain a 4% withdrawal rate for 30 years. Some are now saying 4% may be too high. $60k would be 6% of your portfolio. Using the 4% rule of thumb, would mean you need around $1.5M

IMO - If you do not have a pension and are in decent health... consider working a few more years... say till 59.5. At $250k/yr, you should be able to put away another $250k to $300k in savings/investments. If the market is good to us, you might add another $200k in growth... You might get to $1.5M.

I thought pretty much the same.

 

[obgyn65]

It seems quite a few of us think the same way. My numbers are different, but I find it very challenging to "pass through that mental space".

Different numbers, but I'm right there with you. Everyone here has or will pass through that mental space, some go through it more easily than others (esp SIRE folks).

 

[MDJO]

All posters: Excellent suggestions!

To all: Thank you for all of your observations and suggestions. It's taken me a week to digest all of the really good thoughts you have posted. There are some really high quality people out there - thank you for sharing.

In just one week, the situation has changed again, DW is thinking about going back to work because she is bored. If that happens, she will make about $60,000 per year, taking us over 300k in annual income.

Unfortunately other things happened as well. I had a slight hiccup with my health that is causing me to re-examine work. I am now talking to an old friend about joining his company. We've known each other for the last 25 years and we've had a lot of fun on three different jobs together. Only thing is, I will likely take a cut of 50% or more from my current salary (250k). But if DW was working, we'd still be saving a significant amount each year.

I've re-run all of my numbers, using firecalc and my own spreadsheets, re-examined my budget. Did a very in-depth analysis of one year of spending with actual data. It turns out my current lifestyle costs about 80,000 per year, including health care, and all taxes except federal and state income taxes. I see a way to get to 60K per year but I have come to the conclusion that several of you have - it would be good if I could work a little longer. I'd feel much more comfortable retiring when DW turns 62 and I am 60, and by then I could save another 500K if investments cooperate and I stay in my current job. I plan to take steps to adjust the percentage of stocks downward. For 2011 I will attempt to live on $60,000....we'll see how close I can get and how it feels.

I reserve the right to bail and ER at anytime if my health dictates it, and whatever I have, I'll just make it work at that point. We are fortunate to have as much as we have.

Thank you all for your insight and I welcome any additional thoughts you have.

 

[aida2003]

It turns out my current lifestyle costs about 80,000 per year, including health care, and all taxes except federal and state income taxes.

Just for my curiosity, could you make a rough breakdown what kind of expenses comprise $80K expenses? How much of it goes to mortgage payments, property taxes, and health care?

If your DW started working at $60k/year, you went to work for your friend, and you both managed to cut down from $80k expenses to $60k/year, you would still save a lot of dough for your retirement. But of course you'd have to feel 100% comfortable working FOR your friend, instead of WITH your friend. Sometimes it impacts some friendships.

 

[MDJO]

Actual spend

Aida, here is my current spend with the exception of income tax, which is much higher....this is my WAG of what it might b e in ER.

Hope this comes thorugh ok - I copied it out of my excel spreadsheet










Non Discretionary Expenses
Annual

Water and Sewer $ 600
Electric $ 1,250
Natural gas $ 1,250
Insurance - Auto and Home $ 5,000
Food $ 6,000
Property taxes $ 6,500
Income taxes $ 5,000
Medical and Dental $ 9,000
Subtotal $ 34,600

Discretionary ExpensesAnnual

Entertainment $ 625
Travet, other $ 850
Books and news $ 850
Rotary $ 1,000
Clothing $ 1,250
Home improvement $ 1,375
Sports tickets $ 1,725
Gasoline $ 2,000
Quilting $ 2,000
Quilting Trip $ 2,000
Household supplies $ 2,500
Eating Out $ 2,500
Tucson Trip $ 2,750
Insurance - Life $ 2,600
Beach Trip $ 3,250
Phone/Cable/Cell/Internet $ 3,250
Cash - atm $ 3,500
Car maintenance $ 4,000
Other- contingency $ 4,000
Golf $ 4,000
Home maintenance $ 5,000
Subtotal $ 51,025


Total spend $ 85,625

 

[aida2003]

Non Discretionary Expenses/ Annual

Water and Sewer $ 600
Electric $ 1,250
Natural gas $ 1,250
Insurance - Auto and Home $ 5,000
Food $ 6,000
Property taxes $ 6,500
Income taxes $ 5,000
Medical and Dental $ 9,000
Subtotal $ 34,600

Discretionary Expenses/ Annual

Entertainment $ 625
Travet, other $ 850
Books and news $ 850
Rotary $ 1,000
Clothing $ 1,250
Home improvement $ 1,375
Sports tickets $ 1,725
Gasoline $ 2,000
Quilting $ 2,000
Quilting Trip $ 2,000
Household supplies $ 2,500
Eating Out $ 2,500
Tucson Trip $ 2,750
Insurance - Life $ 2,600
Beach Trip $ 3,250
Phone/Cable/Cell/Internet $ 3,250
Cash - atm $ 3,500
Car maintenance $ 4,000
Other- contingency $ 4,000
Golf $ 4,000
Home maintenance $ 5,000
Subtotal $ 51,025
Total spend $ 85,625

To be honest, I was really curious to learn how high earners spend their money with no kids under their roof. This is not to criticize you at all, because that's your money and you can spend the way you want and besides you spend your earnings and do not use your house as an ATM.
My observations? Based on your salary, you've got a modest home , so you'd earn kudos from the author of "The Millionaire Next Door", but I'm not so sure whether you'd get a handshake on the spending part. I think you've got LOTS of room for cutting expenses if you're inclined to do so. Considering that you claim to be residing in a "relatively low COL" area, expenses are pretty high for 2 persons, IMO. E.g. food and restaurants claim $8,500 of your budget. This was the first item to jump out

 

[MDJO]

Excellent observations

Thanks AIDA. Yes, the house is modest compared to a lot of the others in our neighborhood. I follow my dad's advice about houses. When I asked him why we did not have a bigger house when I was a kid. He said, "Son, you can't eat your house." That was a simple statement from a simple man who earned his living as a steamfitter and never used credit. He paid cash for our home and cars. He also built up large cash reserves to get through the times when the steamfitters were on strike.

Dad would be upset with my spending. But then again, I make a lot more than Dad did, thanks to him pushing me to go to college and expecting me to be successful, and I think he would be proud of what I've accomplished. And, as you said, I'm not using the house as an ATM. Most of my friends would say that "its about time" I spent something on myself. I've only increased my spending in the past few years.

I agree, we have lots of room for reducing expenses. The "non descretionary" part of my budget is only about $35K per year. We could sell the house and move to an area with lower property tax, but I like the area and the services we get (great police and fire protection, snow always removed immediately, beautiful park system, lots of trees and old homes, easy commute to work, great library, great golf course five minutes from my house, lots of universities in the area, etc.) Plus our property values have held up very well because of a premier school system.

My current plan is to build the nest egg to $1.5 M over the next two years and then re-assess. I hope it will be enough for me to hang up my current spikes at age 59 and play a lot of golf. I want to do volunteer work, work on my physical fitness, and travel to visit friends and family I have not seen for many years. If I feel good about the job, I may stick it out a little longer and go for $2M.

To be honest, I was really curious to learn how high earners spend their money with no kids under their roof. This is not to criticize you at all, because that's your money and you can spend the way you want and besides you spend your earnings and do not use your house as an ATM.
My observations? Based on your salary, you've got a modest home , so you'd earn kudos from the author of "The Millionaire Next Door", but I'm not so sure whether you'd get a handshake on the spending part. I think you've got LOTS of room for cutting expenses if you're inclined to do so. Considering that you claim to be residing in a "relatively low COL" area, expenses are pretty high for 2 persons, IMO. E.g. food and restaurants claim $8,500 of your budget. This was the first item to jump out

 

[jstriding]

Props to MDJO for sharing these expenses - I'm in the process of tabulating ours and couldn't figure out how expense numbers can diverge so much. I think "taxes" have a lot to do with the fluctuation. Household utilities, food etc... these can remain relatively stable for the family from year to year.

 

[aida2003]

I follow my dad's advice about houses. When I asked him why we did not have a bigger house when I was a kid. He said, "Son, you can't eat your house."

Dad would be upset with my spending. But then again, I make a lot more than Dad did, thanks to him pushing me to go to college and expecting me to be successful, and I think he would be proud of what I've accomplished.

My current plan is to build the nest egg to $1.5 M over the next two years and then re-assess. I hope it will be enough for me to hang up my current spikes at age 59 and play a lot of golf. I want to do volunteer work, work on my physical fitness, and travel to visit friends and family I have not seen for many years. If I feel good about the job, I may stick it out a little longer and go for $2M.

I liked your dad's answer about the house. But, alas, in the modern times many people were 'eating' their houses so to speak and in the end many of such people are stuggling to put that roof back on their house (meaning that they're going through hell to get modications on their mortgages) or got foreclosed.

Have you decided to remain in your current position or move to your friend's co.? Just curious.

Another note. Don't wait until retirement to 'work on your physical fitness'. It's an ongoing process.

With regards to your current spending, I do think it needs some "fat trimming", but as I'm reading S.Burns & L.Kotlikoff's book "Spend till the End", it seems that you are enjoying your life now and that's good. I just began to read the book, so I cannot decide whether it's good to recommend or not. I myself don't know where I fit yet: as an oversaver or just over an edge to become one, according to the authors.

 

[MDJO]

Thanks Aida.

Just finished rebalancing my portfolio and resolving to trim the fat from my spending and my body.

I'm staying in my current position with a goal of getting out either in January of 2012 or 2013.

 

[SecondCor521]

Welcome to the board!

One thing that jumped out at me from your provisional retirement expenses list that might be pretty easy to cut is the life insurance in your discretionary expenses.

If you're both retired, then neither is really dependent on the income, so it's probably not replacement income. You said your kids are FI or nearly so, so it's not for them. Your assets very probably don't exceed the estate tax exemption amounts (at least what they'll probably be like, since Congress is fiddling with those at the moment), so you probably don't have it for estate tax reasons.

The only thing I can think of that might be going on is that you bought into an annuity or whole life policy and you have a number of years to go. If that's the case, I personally would look into whether it would make sense to get out of that situation.

My 2 cents, worth what you paid for it.

2Cor521

 

[MDJO]

Thanks 2Cor521. You read my mind - I will probably be dropping my policies this year. They are term = switched to term many years ago. Have always intended to drop them when I hit my 50's.