32 year old newbie planning ER

[jvmarathon]

Hey folks!
Well, the internet has long intrigued me with stories of folks retiring in the 30s and 40s. I’d love to jump on the bandwagon, but I’d like to get feedback from y’all on how on track I am. Don’t sugar coat things and telling me I’m crazy and not on track is feedback I need!

I’m 11 years into a career at a downstream oil refining company, and my husband has nearly as much time there as I do. We are degreed engineers. The first year, we couldn’t contribute to the 401k plan, so we’ve been saving in the plan for 10 years. Also, there were a few years our contributions were capped due to the “highly compensated employee” rules. We cannot contribute to a Roth IRA. We have two daughters, one in third grade and the other a toddler. We’d love to retire in our mid 40s but to qualify for retiree health benefits, we have to work till age 50. We are both 32 years old.

Now for the numbers: our only debt is our house mortgage at $206,000. Our combined income pre tax is $290,000, and we max out our 401ks. I have $374,000 in my 401k; hubby has $332,000 in his. We are invested in index funds that track the s and p and the Dow, and he is in a Fidelity commingled pool as well. We both have sizeable amounts of company stock in our portfolio; our plans are to sell some of it and rebalance over the next few months. We are aggressive investors with our portfolios entirely in equities.

Our company offers cash balance pensions. Our current balances are $61000 and $62000. Our company matches a percentage of your salary based on age and years of service, minimum 7%. Unfortunately, the interest rate at which those savings grow is tied to the Us Treasury 30 year, which is barely 3% these days. So, the pot of money doesn’t look like it’s going to grow super quickly.

We have $160,000 in savings, we are getting ready to remodel our basement and paying cash. What’s leftover after subtracting 6 months of living expenses is going in a brokerage. Due to our high incomes, I don’t think traditional IRA can offer us much. My plan is to sock as much cash as we can into brokerage, investing in indexes with low expense ratios. I am planning on the brokerage coupled with our pensions as our income stream that will get us buy until we can withdraw from our 401ks penalty free at age 59 1/2.

How are we doing? Are we on track or dreaming to think retiring at 50, or maybe even 40s is an option?

 

[retire2020]

You are doing well and way ahead of many at your age. There is a way to put money in Roth IRA. Read up on ‘Backdoor Roth IRA’. From your posts looks like you only have 401Ks which will make it easier for you. You can contribute to Non-deductible IRA and then convert to Roth IRA almost immediately if you like. I did that for last four years of my career.
Also look into After tax 401K contribution in addition to your regular 401K. If your company allows it then you can have Max of about 55K put away for each of you...sum of all retirement contributions and company match cant go over 55K or whatever this limit is now a days.

 

[nash031]

Yeah, you’re on track. You’re better off than most at 32. In order to get a good idea of when you can pull the plug, you’ll need to know how much you need or want to live on, which means tracking your spending for several years and predicting college and other major expenses along the way.

But no question you have the savings part well on track to pull the plug in your 40s or 50s, IMO.

 

[SamuelLigert]

Yeah, you’re on track. You’re better off than most at 32. In order to get a good idea of when you can pull the plug, you’ll need to know how much you need or want to live on, which means tracking your spending for several years and predicting college and other major expenses along the way.

But no question you have the savings part well on track to pull the plug in your 40s or 50s, IMO.

Very well said. I agree with this.

 

[DrRoy]

You are well on track. You might be able to do 40's but having the health insurance is worth it to me to go to 50.

 

[NgineER]

You are doing well. Enjoy life on the way as well. Investigate to see if you can do after tax 401(k) contributions. These can be rolled over into Roth IRA immediately if your plan allows for it and it would help you with ER. The contributions can be withdrawn without penalty prior to 59.5.

 

[jvmarathon]

Thank you for the reply!

You are doing well and way ahead of many at your age. There is a way to put money in Roth IRA. Read up on ‘Backdoor Roth IRA’. From your posts looks like you only have 401Ks which will make it easier for you. You can contribute to Non-deductible IRA and then convert to Roth IRA almost immediately if you like. I did that for last four years of my career.
Also look into After tax 401K contribution in addition to your regular 401K. If your company allows it then you can have Max of about 55K put away for each of you...sum of all retirement contributions and company match cant go over 55K or whatever this limit is now a days.

Thank you, I've heard of the backdoor Roths. I guess my only hesitation is IRAs, like 401ks, have penalty fees for early withdrawls, and I'm really wanting something to bridge us over from the age of 50-55. Unfortunately, me and my spouse are considered "highly compensated employees" and our company 401k will not allow us to put more after-tax dollars in our 401ks besides the IRS limit.

one thing I forgot to mention is that this past year, we did a high deductible health plan (my husband carries all of us) and my hubby opened an HSA and has put $6750 with our company match. My understanding is this grows tax free. Next year, I think I will carry myself on a HDHP and hubby will carry kids. The advantage of that is I will then have access to an HSA with a company match ($3900 I think is the limit for employee only) and he will get to put another $6900 in his (the limit for employee plus kids). These are two other pots of money growing tax free! They won't add up to tons, but they may help us cover health care costs in an early retirement.

I'm thinking the brokerage it the way to go, and our target over the next 18 years will be to contribute a minimum of $30,000/year to it and hope the market cooperates with us

One final note - our company offers us a Roth 401k option. Depending on tax reform, we may start putting some money in a Roth 401k just for tax diversity in retirement. This will especially be the case if congress decreases the traditional 401k tax deduction down to $2,400 from $18,000, but who knows what will happen there. I have always theorized that our tax rate would be lower in retirement since we would be retiring early, and withdrawing less than what many retirement planners think we need (85% of pre-retirement income!). We don't plan to have any debt in retirement, so health care, property tax, insurance and basic living necessities (food, utility bills) and maybe some nice vacations here and there are what we really plan to need money for.

People look at us like we are nuts and say "there's no way" when we say retirement by 50. It hurts my confidence sometimes, but I try not to second guess myself. These people have no idea what our financial situation is most of society has accepted a "must work till I die" philosophy it seems!

 

[jvmarathon]

Yeah, you’re on track. You’re better off than most at 32. In order to get a good idea of when you can pull the plug, you’ll need to know how much you need or want to live on, which means tracking your spending for several years and predicting college and other major expenses along the way.

But no question you have the savings part well on track to pull the plug in your 40s or 50s, IMO.

Thank you. Right now our spending is right around $100k a year. Nearly $35k of that is childcare (we have a nanny). That's a cost we won't have forever, but we will have it for awhile as our toddler is special needs.

In retirement, with health care costs and inflation, I am guessing we will need $120k-$150k to cover property taxes, food, bills etc.

My oldest goes to college in 10 years and we plan to just foot tuition bills out of pocket as we go. We've thought about starting a 529 for her, and I've been researching that.

 

[jvmarathon]

Thank you! One thing I had forgot to mention was my hubby opened an HSA this past year (has $6750 in it) and is investing it. I plan to open one up next year (I'll be able to put $3900 in mine with a company match, carrying myself on my own plan, while he'll still be able to put $6750 in his carrying himself and the kids). My plan is to let these pots of money grow and in 18 years hopefully we will have a nice tax free amount to use on health care costs.

 

[brucethebroker]

You are well on track. You might be able to do 40's but having the health insurance is worth it to me to go to 50.

It bothers me to see people basing their future plans on keeping employer sponsored health plans. Health care is now available through the ACA and most likely will continue in some form. Insurability is no longer an issue. It then becomes a matter of affordability. There are two options that come to mind:
1. Reduce income at ER to get your MAGI under the threshold for tax credits.
2. Start a business, PT or otherwise, and deduct the premiums. #2 has worked very well for us.

What are the reasons to want to retire early? More leisure time? Remove job related stress? More time w/kids? (Doubtful, since you are talking about a long term goal with your 40's-age 50 timeline). Would your goal work if ONE of you RE, or changed careers or started PT work? That might allow the other person to fully retire at an earlier date.

As far as investing goes, have you thought about paying off your mortgage? (If you have one). Since your tax favored investing options are limited, why not take a "guaranteed" 3-4% (by NOT paying interest) on a mortgage.

You are well on your way. Good luck.

 

[exnavynuke]

Thank you! One thing I had forgot to mention was my hubby opened an HSA this past year (has $6750 in it) and is investing it. I plan to open one up next year (I'll be able to put $3900 in mine with a company match, carrying myself on my own plan, while he'll still be able to put $6750 in his carrying himself and the kids). My plan is to let these pots of money grow and in 18 years hopefully we will have a nice tax free amount to use on health care costs.

The contribution limits for HSA's are combined for married couples (currently $6,750/year) meaning the sum of all contributions from the two married people, with their employer's contributions added in, cannot exceed $6,750/year.

Here's an article on it https://www.zanebenefits.com/blog/how-hsa-contribution-limits-work-for-spouses

 

[jvmarathon]

6 mo later - Update

Hey folks! I thought the 6 month mark would be a good time to post again and share an update as some things in our lives have changed.

First things first, I got a promotion at work, which is great. It raised my base pay to $143,000 and lifted my bonus potential to 50% of my salary. With this promo, I also will receive an annual stock grant of $25,000 in a fidelity account every April 1st. So, starting next april, I will get $25,000 worth of company stock....it takes 3 years to fully vest, and granted, you have to hope over time your company stock continues to grow in value, at least in line with market returns. But still, I considered that 25k/year a gamechanger and a huge bonus towards our early retirement goal of age 50.

Our updated stats:
My 401k - $514,000
Hubby 401k - $370,000
My pension - $74,000
Hubby pension - $71,000
Hubby Health Care Savings Account - $13,000
Roth IRA - $5,000
Brokerage - $16,000
Cash - $187,000

We are still in progress on our basement, thus the reason our cash on hand is so high. We are paying that out of pocket at an estimated remaining cost of $70k. After that, I'd like to add another $10,000 to our brokerage, add $20,000 to 529 for our child. The wild card is we may be buying a property adjacent to our house -- we anticipate this will be around $150,000, and as much as I hate to take on more debt, I also hate not having the privacy my family needs. This may not happen, but its a possibility, and I think it shouldn't hamper our early retirement plans.

Annual Income - $330,000
Annual Expenses - $100,000
Debt - $202,000 mortgage
Home Value - $475,000

So -- am I right that the $25,000k/year in company stock could potentially seal the deal in terms of us retiring at age 50? Or am I dreaming? We plan to put 20-30k/year in our brokerage, and at least 10k/year in a 529. We try to carry 6-12mo worth of living expenses in our checking, that may seem high, but I like to have cash on hand for the unexpected.

Thanks!
jv

 

[thumbs]

Hey folks! I thought the 6 month mark would be a good time to post again and share an update as some things in our lives have changed.

First things first, I got a promotion at work, which is great. It raised my base pay to $143,000 and lifted my bonus potential to 50% of my salary. With this promo, I also will receive an annual stock grant of $25,000 in a fidelity account every April 1st. So, starting next april, I will get $25,000 worth of company stock....it takes 3 years to fully vest, and granted, you have to hope over time your company stock continues to grow in value, at least in line with market returns. But still, I considered that 25k/year a gamechanger and a huge bonus towards our early retirement goal of age 50.

Our updated stats:
My 401k - $514,000
Hubby 401k - $370,000
My pension - $74,000
Hubby pension - $71,000
Hubby Health Care Savings Account - $13,000
Roth IRA - $5,000
Brokerage - $16,000
Cash - $187,000

We are still in progress on our basement, thus the reason our cash on hand is so high. We are paying that out of pocket at an estimated remaining cost of $70k. After that, I'd like to add another $10,000 to our brokerage, add $20,000 to 529 for our child. The wild card is we may be buying a property adjacent to our house -- we anticipate this will be around $150,000, and as much as I hate to take on more debt, I also hate not having the privacy my family needs. This may not happen, but its a possibility, and I think it shouldn't hamper our early retirement plans.

Annual Income - $330,000
Annual Expenses - $100,000
Debt - $202,000 mortgage
Home Value - $475,000

So -- am I right that the $25,000k/year in company stock could potentially seal the deal in terms of us retiring at age 50? Or am I dreaming? We plan to put 20-30k/year in our brokerage, and at least 10k/year in a 529. We try to carry 6-12mo worth of living expenses in our checking, that may seem high, but I like to have cash on hand for the unexpected.

Thanks!
jv

I'd say you are in great shape. Stay the course and as long as you get decent market returns, you should be more than good. We are talking about a 15+ year time horizon, right? That's a long time to compound wealth and you are already well on your way.

 

[NgineER]

You are doing great!
Do your expenses include taxes?
What is your spending goal and how much do you think you need?
If you are going to work until 50, you can probably afford to loosen the purse strings a bit too.

 

[pb4uski]

Have you run your plan through Quicken Lifetime Planner? or Personal Capital?

Looks like you are doing great, but it takes a lot to retire as early as you want to.

 

[ocean view]

I recommend you start regularly selling your company equity to diversify that income stream . It can build up fast and you don’t want to get caught with all your eggs in one basket. Think of it as dollar cost averaging diversification.

We suffered big paper losses in 2001 when the tech bubble burst. After that we started quarterly transactions, maybe an ESPP traunch (that was LT) one quarter, then a NQ exercise the next. All of my proceeds went into my taxable brokerage account to grow, which is now 2/3s of my total portfolio. Enough to live on while we bridge the years from ER to 59.5.

 

[pjigar]

Just don't let the lifestyle inflation creep in and you will be fine to FIRE at 50 (or sooner). Steady and slow always wins in this race.