Late 40s, ready to FIRE right now, but....?

[The Cosmic Avenger]

Hi, my parter and I are in our late 40s, gross income about $220K/year (of which at least $62K goes right into retirement or other savings); NW about $2.6M including about $500K of home equity, most of the rest in retirement accounts. No debt except for about 25K on a 0% auto loan. (We were ready to pay cash for a new car, but they offered us 0% financing, so we took the lump sum and paid off the mortgage early instead!)

Even before I read this forum, I figured we could have retired already if our COL was low. I was brought up in a LBYM household while partner's upbringing was more comfortably middle-class, and while I've learned to enjoy spending money, part of the reason I can enjoy it is because I pay myself (save for my future) first.

So our child is going to go to college in 2020, and although we have a 529, it probably won't cover more than one semester at a private school, or one year at a state school if we're lucky. We plan on paying cash for the rest, as we don't want the kid to be saddled with debt like I was -- that's not very conducive to FIRE! And we know we have no problem saving like crazy and LBOM, so we're not worried about that.

So right now, if the markets do well, we might retire in 6 or 8 years, although once our kid's educational expenses are gone and we really feel completely financially independent, we might telework or consult or otherwise work part-time for a few more years to subsidize our early retirement.

I guess I'm here to learn more about the fine points in two areas:

First, to start to plan out the next phase, like, how much should we have in cash? Neither of us has a pension, so should we take a big chunk of our retirement money and buy annuities or ladder some bonds to generate guaranteed income?

Second, what do people do in retirement? We would like to travel a lot, so we might want to work a little longer to subsidize that. And we've kind of gotten used to nice things, I wouldn't mind if we can spoil ourselves in retirement. We need to consider whether we'll sell our current house or rent it out; and if we sell it, do we buy another place with cash? Or maybe invest the proceeds and take out another mortgage, because if I have 15, 20, 30 years I'm sure I can make more than current mortgage rates on my money!

EDITED TO ADD: We saw a USAA financial advisor for a free check-up in 2014, and they said basically that we were doing pretty much what they would advise. We've got an appointment with a Fidelity advisor later this month to start asking questions about retirement planning and income-generating investments, which were never my focus before.

 

[The Cosmic Avenger]

Oh, here are my FIREcalc results:

Because you indicated a future retirement date (2024), the withdrawals won't start until that year. Your contributions will continue until then. The tested period is 6 years of preretirement plus 34 years of retirement, or 40 years.

FIRECalc looked at the 107 possible 40 year periods in the available data, starting with a portfolio of $2,100,000 and spending your specified amounts each year thereafter.

Here is how your portfolio would have fared in each of the 107 cycles. The lowest and highest portfolio balance at the end of your retirement was $-2,423,387 to $32,580,149, with an average at the end of $7,053,556. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 40 years. FIRECalc found that 8 cycles failed, for a success rate of 92.5%.

 

[Mdlerth]

All the answers are known... not!

Dear Avenger,

Welcome to the forum! I love the name!

Also, for your edification, I am presenting below the definitive, unanimously agreed answers to your questions on how much cash to hold, the attractiveness of annuities, bond ladders, where to and how much to travel, buy vs rent, and how to while away the limitless free time you'll have in ER:


<crickets>


Okay, so much for my attempt at humor. There will be plenty of perspectives on each of those topics. Present them one at a time and you will get a lively discussion on each.

My genuine advice is this: gather some more data. Confirm what your expenses will be. Run FIREcalc many times, varying the assumptions each time. Do some research on where you envision living, and board the pros and cons.

Take some reassurance that you've done pretty well already, even without advice from this forum! It could very well be that you could FIRE this minute and never look back, although I don't recommend making decisions on impulse. Bold decisions, yes; impulsive ones, no.

I look forward to your future posts.

 

[The Cosmic Avenger]

Thanks, @Mdlerth! Nice avatar! Precious, shiny avatar...

I've been reading the email highlights for a few weeks, and doing searches on topics of interest, I just haven't waded in yet. I always have something to say, but usually if I get to a thread after it's been up a day or two, someone else has already made my point for me!

I keep joking with my partner that we could retire right now, even paying for college...if we're OK with living on ramen again. And I would be OK with that, I think, but of course it would be nice to take another safari or another all-inclusive cruise when we retire. I joke with my partner about taking one of those 6-month cruises when we both finally retire, but I'm really excited to note that we might actually be able to do that!

 

[HI Bill]

...what do people do in retirement?

People do nothing, or everything...they start businesses, they sit on the rocking chair, they travel. The question is, IMHO, is what hobbies/things do you like to do in your off time? Do you play golf? Would you like to? Besides the financial goals, you might consider taking the next 6 years to also develop some interests/activities outside of work! (Just my work-life-balance in everything philosophy). Best wishes! Sounds like you're well along the right path!

 

[StuckinCT]

Hi, my parter and I are in our late 40s, gross income about $220K/year (of which at least $62K goes right into retirement or other savings); NW about $2.6M including about $500K of home equity, most of the rest in retirement accounts. No debt except for about 25K on a 0% auto loan. (We were ready to pay cash for a new car, but they offered us 0% financing, so we took the lump sum and paid off the mortgage early instead!)

Even before I read this forum, I figured we could have retired already if our COL was low. I was brought up in a LBYM household while partner's upbringing was more comfortably middle-class, and while I've learned to enjoy spending money, part of the reason I can enjoy it is because I pay myself (save for my future) first.

So our child is going to go to college in 2020, and although we have a 529, it probably won't cover more than one semester at a private school, or one year at a state school if we're lucky. We plan on paying cash for the rest, as we don't want the kid to be saddled with debt like I was -- that's not very conducive to FIRE! And we know we have no problem saving like crazy and LBOM, so we're not worried about that.

So right now, if the markets do well, we might retire in 6 or 8 years, although once our kid's educational expenses are gone and we really feel completely financially independent, we might telework or consult or otherwise work part-time for a few more years to subsidize our early retirement.

I guess I'm here to learn more about the fine points in two areas:

First, to start to plan out the next phase, like, how much should we have in cash? Neither of us has a pension, so should we take a big chunk of our retirement money and buy annuities or ladder some bonds to generate guaranteed income?

Second, what do people do in retirement? We would like to travel a lot, so we might want to work a little longer to subsidize that. And we've kind of gotten used to nice things, I wouldn't mind if we can spoil ourselves in retirement. We need to consider whether we'll sell our current house or rent it out; and if we sell it, do we buy another place with cash? Or maybe invest the proceeds and take out another mortgage, because if I have 15, 20, 30 years I'm sure I can make more than current mortgage rates on my money!

EDITED TO ADD: We saw a USAA financial advisor for a free check-up in 2014, and they said basically that we were doing pretty much what they would advise. We've got an appointment with a Fidelity advisor later this month to start asking questions about retirement planning and income-generating investments, which were never my focus before.

You should feel good and be congratulated for your savings.

Like you I am late 40s but I have three kids 8,7,5. College costs can be a detriment to retiring early and if you feel like you want to cover it, it sounds like you have built this into your savings assumptions. For our family, we are budgeting a big number-$1.35mm- living in the expensive Northeast and though we have a lot saved for them, if you live in Virginia or North Carolina for example they have great state schools but who knows what your kid will decide!? We have even considered relocating based on this reason alone.

In terms of safe investments like annuities and laddered bonds, I think it all depends on your risk tolerance. Would you hit the panic button and sell if the market went down 50%? I think at your young age in retirement terms, you need at least 60%-70% in stocks; we are 80% but I would not and did not sell in the financial crisis. I have a love/hate relationship with annuities but if they allow you to sleep at night and not hit the panic button with your other assets, they are a viable option. I would also look at municipal bonds. I would keep cash to a minimum- 6-8 months of expenses.

The mortgage question is one I just was giving some thought to this morning. I recently refinanced into a 15 year fixed at 3.25% and have a $470,000 balance on a home that is worth $1.45mm with a $50k HELOC balance. I have set aside an account with $670k earmarked to pay off these loans with stocks that have a low cost basis- all my investments have a low basis. The payment is $3750 per month so this is an aggressive withdrawal rate on the account but like you, I figure if I can average 6% on the account over 15 years I can pay off the mortgage and spread out the tax liability and at the end I may still have my $670k. I have a different investment approach with these assets versus my retirement assets as I will allow myself to sell out if I think we are heading into recession or to have a non traditional approach depending on market conditions to preserve principal to pay off the mortgage.

So I think on the mortgage, you get leverage on your assets, some tax benefits, but I think the key for guys like you and I is to be honest with what volatility you can accept to pay it off over say 15 years and if the return is enough to warrant it.

Your final question on what to do in retirement is one I wrestle with a lot. I am too scared to quit my job completely with a very high net worth but lately I have come to the realization that travel is cheap. We just booked a four night couples trip to Barcelona to a 5 star hotel for $2500. Unlike you, I have three young kids, so no matter where I am financially, I won't feel comfortable spending a lot of time at home. Kids learn by example and it just doesn't feel right. For you, you don't have this problem. I have started to think about volunteering and even teaching. There is plenty you can do but it is harder than it sounds and even scary letting go.

 

[The Cosmic Avenger]

@StuckinCT, we're about 80% stock...my default is 75% stock index funds (gotta love those low expense ratios!), but I inherited some stocks that I figured I'd leave for now, and they're doing well. I think we'd be ready to ride out even a 50% crash, as I know that after 5-10 years (usually less), it'll probably be above where it was before the crash. And while I want to live high on the hog in retirement, I'm very used to a LBYM lifestyle, and I'm sure I could get used to a lifestyle of movies/volunteering/night classes (cooking, photography, etc) if we needed to tighten our belts.

Good for you for booking the trip! We've done a few really big trips, but due to random life events we haven't had an international trip in 4 years now. If you're saving like crazy, you should be able to indulge yourself a little once in a while (we've been spending money, but on other things lately).

 

[Housewife]

Avenger,

I think financially you are in great shape overall. Congratulations!

That said, if your child is going to college in a couple of years, particularly if there is a good chance that he will go to a private school, you may need to plan ahead to make sure that the $ will be ready when the tuition bills arrive. Cost of four year private college for each child runs about $300k. Because of the tax benefits, I would prefer not to take money out of retirement account, or to interrupt regular contributions to the retirement account, for kids’ education expenses. Instead, I would look into the $ pool outside the retirement accounts. Earmark/Rebalance $300k (or whatever you think the amount may be) in non-retirement account, so that there is sufficient liquidity when bills are due, and that the amount is not subject to a lot of market risk between now and then. Two years is not a long time, and rebalancing portfolio could have market/tax consequences. It does not hurt to plan ahead. Since you are still working and have stable income, this arrangement might not be as important to you than to those of us who have already ER’d, but it is still something to consider.

Other than that, ppl usually keep 6 months of living expenses in cash. But that typically is much smaller than the amount of college tuition/fees that we need to set aside.

We live in a modest house in a HCOL area. we will downsize to an apartment in a city after the kids go to college. We just don’t want to deal with yard work, snow shoveling, and frequent house maintenance work at old age. However, all the possible candidate cities that we like are expensive. So downsizing unfortunately does not necessarily mean less expensive residence. It will probably be a cash purchase (not sure if we can even qualify for mortgage without a job between the two of us).

 

[flintnational]

Welcome to the forum!

What do people do in retirement? The value of financial independence is that it allows you to do what you want with your time. That will vary from individual to individual. So, the question should be, "What do you want to do in retirement?". And yes, you need to think about this and have some rough draft plans prior to FIRE.

 

[The Cosmic Avenger]

Hi, my partner and I are in our late 40s, gross income about $220K/year (of which at least $62K goes right into retirement or other savings); NW about $2.6M including about $500K of home equity, most of the rest in retirement accounts. No debt except for about 25K on a 0% auto loan.

Update: what a wild 18 months! Our NW is now over $3.9M, with all of the increase coming from investments, not home equity. FIRECalc now tells me:

Your spending in every year after the first year will be adjusted for inflation, so the spending power is preserved.
Because you indicated a future retirement date (2024), the withdrawals won't start until that year. Your contributions will continue until then. The tested period is 3 years of preretirement plus 37 years of retirement, or 40 years.

FIRECalc looked at the 110 possible 40 year periods in the available data, starting with a portfolio of $3,400,000 and spending your specified amounts each year thereafter.

Here is how your portfolio would have fared in each of the 110 cycles. The lowest and highest portfolio balance at the end of your retirement was $-2,025,430 to $50,447,730, with an average at the end of $11,795,363. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 40 years. FIRECalc found that 4 cycles failed, for a success rate of 96.4%.

My previous post gives a 92.5% success rate, but I believe I ran that with $120K annual spending, and this time I put $150K, to better account for "lumpy" expenses (new cars, home improvement projects, etc.).

Also, our child got a 50% merit scholarship...to a very small, expensive private school....but with COVID, there has been no room and board (or, the previous level of it) for the first year, so our 529 will last another year, and after that our total out of pocket should be around $60-70K, which we can easily do over the next three years without pulling from investments if we both stay employed for a few more years!

My only problem is that I LIKED not working (for those who missed it, I was basically furloughed for six months)! I feel like I'm ready to retire, I don't have a problem with having too much free time, but I also feel like eventually we'll want to travel more, which means spend more, so I'll try to keep at it until our expenses go down.