Hi! 44 and consumed with FI & RE

[PharmingFIRE]

Hello Everyone,
I have been lurking here for a few months now and finally decided to throw my Introduction into the forum, say "Hi" and maybe get some good advice or possibly a reality check on my plans.

Since the downturn in the economy and the instability in the workplace I had decided that I did not want to have to rely on a paycheck so I began looking for a way out. We had begun researching income properties and finally last year my wife and I bought two, three-family homes. Great income producers that net approx. $500/mth per unit after paying mortgage, allowing 10% mgmt, 10% repairs and 10% vacancy. I am managing now so income is a little better.

OK, so that is 3K/month and we are thinking $5K/mth after taxes would be more than sufficient for the wife and me.

We also have 200k cash (cash and vested options) and about 350k in retirement accounts.

We would like to RE next year but not sure how to go about generating that additional 2K since a good portion of the money is tied up in accounts I can't access until I am 59.5yrs. We could buy another property with the cash but that is a lot of eggs in real estate and leaves a lot of money in the retirement funds. Without such a good return investment like the real estate idea I think we fall very short by not having access to the retiremnent accounts.

We have good salaries so if we wait until next year we'd have another 150k saved in the mix but even then...

Is it too early to retire? Am I intoxicated by the sweet but perhaps too distant smell of freedom?

Thoughts? Advice? Random ponderings?

Thanks
PF

 

[bo_knows]

Welcome to the boards.

Have you played around with Firecalc.com?

Inputting your numbers (550k portfolio, 36k/yr rental income, random guess of $10k/yr each SS at 62, $60k/yr spending) it gives a 100% success rate. (at 95% success, it's guessing $62k/yr spending limit).

While firecalc is not perfect, and doesn't distinguish between taxable and pre-tax accounts, that is a pretty good indicator.

Do you have the potential for health insurance during ER? Have you calculated the cost? This could be a big hurdle.

Again... welcome. A long with your post title, I too am consumed by the idea, but am at least a decade away.

 

[PharmingFIRE]

Hi Bo,
Thanks. I reluctantly admit to tinkering with Firecalc but since I could not separate the retirement accounts or easlily assess the value of the assumptions used in the calculations, I quickly grew frustrated.

Healthcare is not something I have seriously investigated and really have no idea what to budget for this. I would love to have coverage for catastrophic events but for the rest I'd be happy paying out of pocket.

Thanks again and good luck!

 

[REWahoo]

Hi Bo,
Thanks. I reluctantly admit to tinkering with Firecalc but since I could not separate the retirement accounts or easlily assess the value of the assumptions used in the calculations, I quickly grew frustrated.

Why would you need to separate your retirement accounts?

Have you spent some time learning how FIRECalc operates? It could be worth your time: FireCalc: How it works

 

[Dimsumkid]

We would like to RE next year but not sure how to go about generating that additional 2K since a good portion of the money is tied up in accounts I can't access until I am 59.5yrs.

You can access your retirement money w/o penalty and under 59.5 using Rule 72T. This may open up your options, check out this recent post that discussed it:

http://www.early-retirement.org/forums/f28/penalty-free-early-401k-ira-withdrawals-65327.html

 

[bo_knows]

You can access your retirement money w/o penalty and under 59.5 using Rule 72T. This may open up your options, check out this recent post that discussed it:

http://www.early-retirement.org/forums/f28/penalty-free-early-401k-ira-withdrawals-65327.html

True, but the last few years, the rate (the 120% midterm rate) that 72t's are based off of have been terrible.

As of today, it's 1.31%. With $350k in assets, at age 44, OP could get $11,281/yr in income via 72t. I suppose they could supplement with the taxable investments.

 

[NanoSour]

You look in great shape if you only require an additional 2K/month. Look into a low-cost AA of mutual funds or ETFs and draw the 2K a month from the taxable account(s). After that runs out, tap the retirement accounts. If there is a penalty to pay it's only 10% on 24K annually with no conversions into a roth happening prior to withdrawals. Even at 10% penalty, it's $2400/year which is much cheaper than continuing to pay SS and Medicare Tax by continuing to work. I'm looking at the cost as just part of the cost to ER and be free. If it comes to that.

 

[rodi]

Just a note - I think the spending input in firecalc is supposed to be GROSS... not net.
The OP said $5k/month after taxes... so you'd need to input more than $60k/year spending.

Also - the 3k/month rent will come with some taxes owed too... unless that's already accounted for.

Darn these pesky taxes.

 

[REWahoo]

Just a note - I think the spending input in firecalc is supposed to be GROSS... not net.
The OP said $5k/month after taxes... so you'd need to input more than $60k/year spending.

+1

Why don't you have a space for taxable portfolio and another space for nontaxable portfolio?

FIRECalc ignores taxable versus nontaxable portfolios right now. Since it only uses historical data to determine how a portfolio would behave, with no guesses by anyone about what will happen to inflation, market performance, and so forth, and we don't have historical tax rates for the period for which I have market data, I can't add tax planning without changing the philosophy of the program. Just planning on x% tax rates would make all the historical examples meaningless, when changing tax rates would have at least some effect on the market returns.

 

[obgyn65]

Welcome to the forum. Are your $200k in CDs?

 

[PharmingFIRE]

Wow, thanks everyone for your input so far!

Why would you need to separate your retirement accounts?

Well I wanted to separate retirement from accessable money because I need the cash to get me to "official" retirement age.

Welcome to the forum. Are your $200k in CDs?

Thanks Ob, the 200k is actually combination of real cash and vested stock options that I could sell. The stock option value is already discounted here for taxes

Just a note - I think the spending input in firecalc is supposed to be GROSS... not net.
The OP said $5k/month after taxes... so you'd need to input more than $60k/year spending.

Also - the 3k/month rent will come with some taxes owed too... unless that's already accounted for.

Darn these pesky taxes.

Yeah, taxes are rolled up into the mortgage payment.

Bo, I need to research 72t but from your post is seems like I can access the money evenly distributed from now to average lifespan. Is that correct? Even if I did that I would still fall short and be SOL if I happen to live longer than average. No?

I am tempted to buy another rental property this Spring and that would make up a lot of the shortfall but as I said earlier that is the opposite of diversification.

Just... need... a....little......more.....money........Uh! At least that's what it looks like from here.

 

[Midpack]

Welcome aboard. Nothing wrong with being consumed by reaching FI and beyond, one of the greatest gifts you can give yourself & your family. From there all sorts of options open up, RE is but one of them...

 

[someguy]

I'm not convinced of your rental income stream. Many new landlords learn this the hard way -- I did. Can you share more specifics on those rentals? What is the gross rent per month per unit and what is the monthly P&I portion of the mortgage per unit?

 

[GandK]

Here's another calculator to play with:

SmartMoney Retirement Planner - SmartMoney.com

 

[ERhoosier]

+1 to investing time with those retirement calculators. No matter how you plan though, health & health care costs (inc HI) will always be a big variable. Twenty yrs (45-65yrs for Medicare/SS) is a HUGE cone of uncertainty. IMHO- Always best to have a nice cushion of FI before deciding to RE, especially if you w@rk in an area where getting back in is not easy once you leave.

While ER is an admirable goal, don't forget to live your life while you pursue it.
Good luck!!!

 

[Mulligan]

Hi Bo,
Thanks. I reluctantly admit to tinkering with Firecalc but since I could not separate the retirement accounts or easlily assess the value of the assumptions used in the calculations, I quickly grew frustrated.

Healthcare is not something I have seriously investigated and really have no idea what to budget for this. I would love to have coverage for catastrophic events but for the rest I'd be happy paying out of pocket.

Thanks again and good luck!

As Hoosier was saying, you better make sure you have some healthcare costs baked into your monthly budget. You will not be able to get catastrophic health insurance real soon thanks to the new healthcare act. I am 48 and a link that provided me a "guess" was $500 monthly or so with a 2k deductible, or so. This was a low cost area estimate too. Fortunately, I am on a grandfather HD plan. So you could be on the hook for possibly $15k or so in yearly healthcare costs.

 

[PharmingFIRE]

I'm not convinced of your rental income stream. Many new landlords learn this the hard way -- I did. Can you share more specifics on those rentals? What is the gross rent per month per unit and what is the monthly P&I portion of the mortgage per unit?

You're not convinced, uh, OK. Thank you for your post but if you read my original post, the point of it is to come up with an additional revenue stream for approx another 2K/mth not have someone check my ability to add and subtract

Here's another calculator to play with:

SmartMoney Retirement Planner - SmartMoney.com

Thanks GandK, I will give it a look!

While ER is an admirable goal, don't forget to live your life while you pursue it.
Good luck!!!

It is kind of hard to find balance but you're right.

As Hoosier was saying, you better make sure you have some healthcare costs baked into your monthly budget. You will not be able to get catastrophic health insurance real soon thanks to the new healthcare act. I am 48 and a link that provided me a "guess" was $500 monthly or so with a 2k deductible, or so. This was a low cost area estimate too. Fortunately, I am on a grandfather HD plan. So you could be on the hook for possibly $15k or so in yearly healthcare costs.

This is definately an area I need to understand more especially as the new laws go into effect. It just has not been my focus as I do my best to maintain an active, healthy lifestyle and unfortunately use this to justify my avoidance of Drs as much as possible. I know I have to do it though especially if it may mean another 1+K/mth. Thanks.

 

[Letj]

You're not convinced, uh, OK. Thank you for your post but if you read my original post, the point of it is to come up with an additional revenue stream for approx another 2K/mth not have someone check my ability to add subtract

I think you are taking this too personal and may have missed the poster's intention. As a long time real estate investor myself, I tend to take with a grain of salt the profits relatively new investors claim they are making. The reason is that residential real estate investments have a real high operating cost associated with them. For example, if you collect $1,000 a month in rent,only $500.00 will be available to service debt and throw off a profit since the other half will go in operating expense. This is a universally tried and true formula in every market in the US. Some years you will be up and some down but in the long run, that will always more or less be the case. I have proven that to be true myself.

 

[someguy]

This was exactly my point. As Letj pointed out, it is impossible to keep operating costs on rentals under 50% (maybe 45% if you're lucky and self-manage) in the long run. It's entirely possible for short periods, but that's not what you're talking about.

Just to expand on Letj's example, if you collect $1,000 a month in rent, $500 of that is spoken for for operating costs (taxes, insurance, vacancy, repairs, evictions, et cetera). The principal and interest portion of your mortgage on the property comes out of the remaining $500. So, if your mortgage's P&I is $600/mo, you're losing money in the long term ($100/mo).

I pointed this out not to offend you, but because you're counting on that $3000 as more than half of your RE income stream. I would also suggest that you make sure you write your rental contracts to include a 3%+/year increase in rents, because your operating costs will go up. Rentals with this provision are essentially COLAd, which is critical in the extended timeframes RE typically entail.

I think you are taking this too personal and may have missed the poster's intention. As a long time real estate investor myself, I tend to take with a grain of salt the profits relatively new investors claim they are making. The reason is that residential real estate investments have a real high operating cost associated with them. For example, if you collect $1,000 a month in rent,only $500.00 will be available to service debt and throw off a profit since the other half will go in operating expense. This is a universally tried and true formula in every market in the US. Some years you will be up and some down but in the long run, that will always more or less be the case. I have proven that to be true myself.

 

[Aiming_4_55]

Welcome OP to the forum.

We're in the same boat - I'm turning 44 this year, own a few rentals, earn a good living, etc.

I'll echo what others have said about rental income, I think new real estate investors feel they have the numbers down, but sometimes a reality check is nice. I like counting on only 50% of rent even without a mortgage as it's a good surprise. I'm pretty conservative.

The other thing, as you accumulate more rentals, it is a part time job even with property management to some degree ;-)

I've kinda made up my mind, unless it's a killer deal (25% or better), I'm not touching it as I have a handful of units which covers my general living budget. I have a reasonable lifestyle budget. No need to get greedy. Good luck.