Almost 40 years old and SOOO happy to find this forum!!!

[Coach]

Maldini, my gut feeling is that you'll be able to retire before 50, but the best we can do is guess at what the future will bring.

A previous poster pointed you to FIREcalc -- give it a run if you haven't. I also use the retirement planner in Quicken. There are others on the web. I'm not sure any one planning tool is the best, but I feel a lot better when they all say I'm on track.

Coach

 

[dessert]

Welcome Maldini.
I know the feeling when you find this site. You want to figure out how you stack up.
IMO you are in great shape. Just keep saving like you are doing now and when you reach 50 you will have options. If you want to w**k, continue on. If you don't, then RE or some version of it. At that point, you will be calling the shots. Good luck.

 

[maldini]

Have you actually modeled a tax return for retirement? It sounds like you're thorough so I'm guessing you have. MFJ plus exemptions and the standard deduction may mean that you don't owe very much tax on the $68K. Sounds like your in CA though, and I know they have high state income taxes.

yes I do model taxes. I try to take into rough account capital gains from the brokerage account as well as income tax that will come from tax deferred accounts. I live in Mass. State Income are about 5.3% here. I model using todays tax brackets and rules which of course will likely change in by the time I get to and am into retirement so its another inexact science in the modeling.

I do have a question though. Which accounts should I drain first in retirement? The brokerage or the retirement accounts? Instincts tell me to defer the retirement accounts as long as possible but I am not sure.

 

[papadad111]

so..what keeps you working?

As you know, you are probably in the top 1% of americans as far as savings go, but, I'd expect to have saved more with a house paid -- i mean, earning 231K/year, no mortgage, only 1 kid, and both adults working.....

i am looking to find a way to FIRE in the next 2 years. I just dont want to wait longer than that (personal choice). Currently searching for a few "second career" options - which is taking time- not sure I want to own my own headache..er business.... so maybe thats not really fully FIRE.
When I FIRE (which means tell the corporate bozos to go have a coke and a smile...) i dont want income to drop to zero - am now considering what will intrinsically make me happy and whether or not I'd be OK if i can just persist (let the retirement money grow, but not add more to it and not dip into it for the next 5 to 7 years). I've always wanted to be a high school teacher....god knows the public schools need qualified, capable, motivated educators. Salary is so low, it's almost charity work...but rewarding....!

So...what keeps you motivated to work til age 50? In your financial position, I'd definitely quit as early as possible. Your estimates are pretty conservative. Only thing that would be a concern is your mix of cash to retirement/deferred is 50/50 - you might wind up running out of cash until you can dip penalty-free into the retirement accounts.

 

[papadad111]

Keep in mind you could always spend the house rather than passing it on- that would cover you if the money started to run out.

As for inheritance, best thing you can do for your kids is to teach them to earn for themselves, to not expect anything and to be financially self reliant. Then, anything you ARE able to pass along (house, other assets etc) becomes total upside for them later in their lives, well after they've hopefully learned to be financially capable.

One of my all time favorite books is an oldie but goodie - millionare next door. Dont see that talked about a lot in the forums here but it's good refresh reading when teaching the kids about money and teaching how to be financially responsible.

Same goes for you - if you/wife have parents who pass on inheritance to you, that becomes upside. So does social security if there is anything left for us at that point, future pensions, etc.

 

[MooreBonds]

I do have a question though. Which accounts should I drain first in retirement? The brokerage or the retirement accounts? Instincts tell me to defer the retirement accounts as long as possible but I am not sure.

As a fellow engineer, I appreciate your intense detailed approach .

I would personally say that you can't use a hard-and-fast rule on your question: what if one of your holdings distributes a big taxable distribution in your taxable account one year? Or if you sell a position due to rebalancing or a large run-up? You sure wouldn't want to also have made a large withdrawal from your retirement account earlier in the year, since that would jack up your taxable income even more.

I would say approach retirement with 1 year (or more) of expenses in a MM account. Using that as your spendable cash, as the year goes on, you will see what your taxable account brings as far as taxable sales/distributions/dividends. Then, as the end of the year approaches, you will know exactly how much you 'should' be taking out of retirement accounts to minimize your taxes - or if you should let it ride and sell taxable positions with capital gains (if cap gains rates are still this low in the future).

There are also points to be taken with delaying SS until age 70, and taking out of retirement accounts before age 70. This has a two-fold effect:
1) Delaying SS increases your SS benefit permanently (only worth doing if you have a reasonably good health history in at least one spouse's family).
2) Drawing down your retirement accounts up to age 70 leaves a lower balance to take Required Minimum Distributions from when you turn 70.5 (which is also the age you could take SS at ). If you never take out of your retirement account until age 70, your balance will be much larger, and your subsequent RMD will be that much larger, possibly throwing you into higher tax brackets. If you start taking from your retirement account earlier, your RMD will be lower, and thus help reduce your marginal tax bracket.

Of course, if you SEPP your accounts, your strategy will be modified for the 59.5/5 year duration.

To sum it up - depending on actual retirement age, you could SEPP it until 59.5/5 years, make up the difference (if any) with taxable account sales. Then, at 60, review your account balances, figure out income needs, and calculate your withdrawal strategy for delaying SS until age 70, with an eye on taking as much out of your retirement accounts (to reduce age 70 RMD), while still not ballooning into 2 higher marginal brackets because of large retirement account withdrawals.

 

[tightasadrum]

Moorebonds hits on a lot of the common strategies you might consider. If you hang it up at 50, since the retirement accounts were designed for you to retire around 60 or later , taxable accounts first offers you a better choice I think. You can set things up to withdraw equal amounts at 55, but here are two other things to consider if you wait until 59 1/2:

1. When you decide to draw from the retirement accounts, look carefully for any stocks that you can pay the taxes on and transfer into a taxable account as equity, not income, during the 401K rollover to an IRA, I believe it's called Unrealized Appreciation. That allows you to reduce the MRA at 70 1/2 but still keep the good stocks working for you with fewer taxable considerations.

2. When you stop working and get to the ripe old age of 59 1/2 you can also reduce MRD by withdrawing as much from the taxable account as you can, up to the point where your tax rate increases, and throw it into a Roth. This assumes that the rules don't change in the next 20 years...a huge assumption. At the moment, I can't think of anything bad about Roth accounts. I wish I had more of that.

Based on your comments so far, I'm sure you've considered these angles already. By building up your taxable accounts you get more flexibility between 50 and 59 1/2. (See your CPA for details.)

 

[maldini]

As you know, you are probably in the top 1% of americans as far as savings go, but, I'd expect to have saved more with a house paid -- i mean, earning 231K/year, no mortgage, only 1 kid, and both adults working.....

Thats disappointing.

I thought we have been doing quite well saving >$90k a year the last 6 years after taxes especially considering my wife is just a part time worker. Last year we put away $109k for the year in savings and that is not including the $11k we put into the 529 plan. I guess we could always cut our expenses more but I think we are living so far under our means as it is, that it starts to get a little much to continue to chop things.

Perhaps my investments are not aggressive enough and thats why the portfolio number looks low to you at my age of 39.

How much do you figure we should be saving noting that we live in a relatively high cost of living area of Mass?

So...what keeps you motivated to work til age 50? In your financial position, I'd definitely quit as early as possible. Your estimates are pretty conservative.

If I could quit tomorrow I would. For now my models tell me I have a shot at 50. Until my conservative numbers tell me I can quit I won't because the last thing I want is to have to find a job in my 60's.

Only thing that would be a concern is your mix of cash to retirement/deferred is 50/50 - you might wind up running out of cash until you can dip penalty-free into the retirement accounts.

I think I will be easily covered under the SEPP (substantially equal periodic payments) rule.

Thank you for your feedback. I do need to consider more on why my savings may not be as strong as you think they should be.


Maldini

 

[maldini]

Keep in mind you could always spend the house rather than passing it on- that would cover you if the money started to run out.

Yes, we always look at the house as the last gasp emergency in late retirement. At the very very very worst of times,we could take out a reverse mortgage. But we are only looking at that as an emergency vehicle and do not plan for that occurrence in any sort of way.

As for inheritance, best thing you can do for your kids is to teach them to earn for themselves, to not expect anything and to be financially self reliant. Then, anything you ARE able to pass along (house, other assets etc) becomes total upside for them later in their lives, well after they've hopefully learned to be financially capable.

I agree 100%.

my 8 year old daughter, ends up listening to my favorite personal finance radio show for hours on end every Saturday and Sunday (the people who are behind this site www.bestmoneyinfo.com) and we always talk to her about finances. She doesn't get a lot of it yet but I will keep pounding it in as the years go on.

Same goes for you - if you/wife have parents who pass on inheritance to you, that becomes upside. So does social security if there is anything left for us at that point, future pensions, etc.

Agreed. I am pretty confident that I will be receiving an inheritance some where along the line but like social security, I model 0$ for it because I want it to be gravy since its not under my control.

Thanks again for your feedback!

 

[maldini]

As a fellow engineer, I appreciate your intense detailed approach .

I would personally say that you can't use a hard-and-fast rule on your question: what if one of your holdings distributes a big taxable distribution in your taxable account one year? Or if you sell a position due to rebalancing or a large run-up? You sure wouldn't want to also have made a large withdrawal from your retirement account earlier in the year, since that would jack up your taxable income even more.

I would say approach retirement with 1 year (or more) of expenses in a MM account. Using that as your spendable cash, as the year goes on, you will see what your taxable account brings as far as taxable sales/distributions/dividends. Then, as the end of the year approaches, you will know exactly how much you 'should' be taking out of retirement accounts to minimize your taxes - or if you should let it ride and sell taxable positions with capital gains (if cap gains rates are still this low in the future).

There are also points to be taken with delaying SS until age 70, and taking out of retirement accounts before age 70. This has a two-fold effect:
1) Delaying SS increases your SS benefit permanently (only worth doing if you have a reasonably good health history in at least one spouse's family).
2) Drawing down your retirement accounts up to age 70 leaves a lower balance to take Required Minimum Distributions from when you turn 70.5 (which is also the age you could take SS at ). If you never take out of your retirement account until age 70, your balance will be much larger, and your subsequent RMD will be that much larger, possibly throwing you into higher tax brackets. If you start taking from your retirement account earlier, your RMD will be lower, and thus help reduce your marginal tax bracket.

Of course, if you SEPP your accounts, your strategy will be modified for the 59.5/5 year duration.

To sum it up - depending on actual retirement age, you could SEPP it until 59.5/5 years, make up the difference (if any) with taxable account sales. Then, at 60, review your account balances, figure out income needs, and calculate your withdrawal strategy for delaying SS until age 70, with an eye on taking as much out of your retirement accounts (to reduce age 70 RMD), while still not ballooning into 2 higher marginal brackets because of large retirement account withdrawals.

wow, lots of good info in here! Thank you.

Let me absorb most of this and then get back to you with questions if I have them.

 

[maldini]

1. When you decide to draw from the retirement accounts, look carefully for any stocks that you can pay the taxes on and transfer into a taxable account as equity, not income, during the 401K rollover to an IRA, I believe it's called Unrealized Appreciation. That allows you to reduce the MRA at 70 1/2 but still keep the good stocks working for you with fewer taxable considerations.

Fascinating info!!

I don't own any stocks though. All investments in the retirement accounts are in mutual funds.

When you stop working and get to the ripe old age of 59 1/2 you can also reduce MRD by withdrawing as much from the taxable account as you can, up to the point where your tax rate increases, and throw it into a Roth. This assumes that the rules don't change in the next 20 years...a huge assumption. At the moment, I can't think of anything bad about Roth accounts. I wish I had more of that.

Only thing "bad" about a Roth is that I have never been able to join one.

I am hopeful that my company will some day offer a Roth 401k which I could join.

Based on your comments so far, I'm sure you've considered these angles already. By building up your taxable accounts you get more flexibility between 50 and 59 1/2. (See your CPA for details.)

Actually no. Taxes are by far my weak spot in personal finances. The information alone in this thread is going to give me enough impetus to get off my ass and start educating myself more.

 

[maldini]

One more question for the kind group of people here.

Up till now I have never met with a financial adviser. I assume if I want to retire at 50, I should likely try and meet with one, even if its only for a one time look over of the numbers to make sure I am on target and that I have not made any mistakes.

My wife worries though that we will end up paying someone who will simply run the numbers through a similar sw package to the ones we use on Fidelity, Schwab and in Quicken for retirement.

What is the common thought here regarding the few years before early retirement and meeting with a financial adviser, not to manage the money, but to look everything over?

 

[Kronk]

You're getting a lot of great advice here. But it is a lot of money, and it is your money and your future. Would you sleep better at night having spent 0.05% of your portfolio having a professional look things over?

You're obviously doing great. I think you're a bit conservative in your outlook -- unless I missed something, $3.5 mil is huge overkill for $70k per year. Saving $100k per year is awesome, and your current savings are good (wish I had them). Again, you're on the right track, and if hiring a financial advisor makes you feel more comfortable, go for it.

 

[maldini]

But it is a lot of money, and it is your money and your future. Would you sleep better at night having spent 0.05% of your portfolio having a professional look things over?

I honestly would sleep a little better.

By the way, do financial advisor's offer this type of one time look everything over service?

You're obviously doing great. I think you're a bit conservative in your outlook -- unless I missed something, $3.5 mil is huge overkill for $70k per year.

The ~$70k is after tax needs and in todays $'s. I think that may be throwing everyone off who say I am being too conservative in my portfolio goal.

By the time I retire in 10 years and hope to have the $3.5M, the first years expenses before taxes in tomorrows dollars will be ~$123k (assuming a 4% inflation and an effective tax rate of 20%).

Every model I run tells me I am going to need between $3.5 and $4M to meet my goals, assuming my after retirement growth stays at 2.5% ahead of inflation.

 

[SecondCor521]

By the way, do financial advisor's offer this type of one time look everything over service?

Yes, but remember that the vast majority of those are financially incentivized to persuade you to become involved in a long term relationship with them. Making you afraid is one way to persuade people like you.

The ~$70k is after tax needs and in todays $'s. I think that may be throwing everyone off who say I am being too conservative in my portfolio goal.

Most folks here have pretty sharp pencils. I got the "today's dollars" part in my first reply to you and the "after tax" part after you mentioned it later.

Every model I run tells me I am going to need between $3.5 and $4M to meet my goals, assuming my after retirement growth stays at 2.5% ahead of inflation.

You might want to familiarize yourself with FIRECalc: A different kind of retirement calculator and see what it says about you retiring at 50. Just plug the numbers in for where you expect to be at that age and it'll tell you the historical chances of success.

2Cor521

 

[maldini]

Most folks here have pretty sharp pencils. I got the "today's dollars" part in my first reply to you and the "after tax" part after you mentioned it later.

Sorry, I did not mean to say you did not understand.

I was referring to the poster mentioning the $70k based on $3.5M when in reality I think it will be closer to $123k on $3.5M

You might want to familiarize yourself with FIRECalc: A different kind of retirement calculator and see what it says about you retiring at 50. Just plug the numbers in for where you expect to be at that age and it'll tell you the historical chances of success.

yes I have been using it quite a bit since it was first mentioned in this thread. Thanks!

If I can get to the $3.5M and using the $123k number and hoping to last 43 years, (which is the amount I model to spend in my first year of retirement at age 50), I will get a 91.4% success rate.

Not sure if that is a highest enough number to feel safe, which is why I think I need between $3.5 and $4M.

 

[SecondCor521]

I was referring to the poster mentioning the $70k based on $3.5M when in reality I think it will be closer to $123k on $3.5M

Ah.

yes I have been using it quite a bit since it was first mentioned in this thread. Thanks!

Whoops, I scanned the thread but didn't notice that it had been mentioned before. (Where's the blushing smiley?)

If I can get to the $3.5M and using the $123k number and hoping to last 43 years, (which is the amount I model to spend in my first year of retirement at age 50), I will get a 91.4% success rate.

Not sure if that is a highest enough number to feel safe, which is why I think I need between $3.5 and $4M.

Yeah, I personally calculate my retirement date based on a 4% withdrawal rate, which is something like 95% safe over 40 years. I guess part of me figures I'll wing it if things go south and I'm actually in the 5% failure mode.

There are sort of two extremes in mental perspective I've seen here. One is the more conservative approach which is to try to cover every base and every eventuality and not count on any safety nets such as inheritances, part time work, reverse mortgages, Social Security, etc. The other is the "I want to retire now" approach which usually says something like, "Well, we probably won't hit the Great Depression, and if we do I can always [get a part time job | take SS early | get a reverse mortgage | spend less]."

The nice thing is that if all goes according to your plans or better, you'll have more and more options with each passing day. So if you wake up at 47 and one or the other of you is laid off, or work becomes toxic, or whatever, you'll have choices.

2Cor521

 

[Kronk]

I was referring to the poster mentioning the $70k based on $3.5M when in reality I think it will be closer to $123k on $3.5M

Well, that was me. And you're right, I was mentally normalizing to today's dollars. Most of the time you'll find that monetary discussions here use current spending power. It is usually easier to reduce the expected returns by inflation prior to adding it all up.

Of course, if you are using future dollars, at a 4% inflation rate and a not-unreasonable 5% real return, you'll be up to $3.15 mil from your current $1.3 mil without adding any more to it. Add in your $100k/year (increased for inflation) and you'll be pushing $5 mil in 10 years. If you assume a 4% SWR (which it sounds like you prefer a smaller SWR), your expected pre-tax income would be $200k per year.

Now, I'm nowhere near a tax expert [-]but I did stay at a Holiday Inn Express last night[/-], but it looks like half your assets are already post-tax accounts, and you'll be contributing more heavily to post-tax accounts as well. So not all of your spending power will be taxed as income (maybe half?), and so that 20% effective tax rate doesn't seem right there.

 

[maldini]

Well, that was me. And you're right, I was mentally normalizing to today's dollars. Most of the time you'll find that monetary discussions here use current spending power. It is usually easier to reduce the expected returns by inflation prior to adding it all up.

Yah that is my mistake. I think I have been mixing todays expenses with tomorrow's portfolio needs and its confusing the discussion. I apologize for that.

Of course, if you are using future dollars, at a 4% inflation rate and a not-unreasonable 5% real return, you'll be up to $3.15 mil from your current $1.3 mil without adding any more to it.

My goal is 7.5% or a 3.5% real return. I have been doing better than this on average, but that is the goal.

Add in your $100k/year (increased for inflation) and you'll be pushing $5 mil in 10 years.

We don't expect that we will be able to continue our savings rate which is why the goal is to save $30k a year.

Believe me, if I thought for even a second that the $5M number was achievable in 10 years, I don't think I would even post here as I would be as certain as could be that I could retire at 50.

Now, I'm nowhere near a tax expert [-]but I did stay at a Holiday Inn Express last night[/-], but it looks like half your assets are already post-tax accounts, and you'll be contributing more heavily to post-tax accounts as well. So not all of your spending power will be taxed as income (maybe half?), and so that 20% effective tax rate doesn't seem right there.

You are right and I struggle with this.

There will be some combination or income tax from the retirement accounts and capital gains from the non retirement accounts. What the rate will be is anyones guess. It could be 10%, it could be 25%. Impossible to guess without knowing what the tax laws will be.

As always I would rather skew towards more conservative rather than less conservative.

 

[maldini]

There are sort of two extremes in mental perspective I've seen here. One is the more conservative approach which is to try to cover every base and every eventuality and not count on any safety nets such as inheritances, part time work, reverse mortgages, Social Security, etc. The other is the "I want to retire now" approach which usually says something like, "Well, we probably won't hit the Great Depression, and if we do I can always [get a part time job | take SS early | get a reverse mortgage | spend less]."

I definitely skew much more towards the first group.

My goal is to try and cover everything I can understand today and then for all the unknowns that 40+ years will throw at me, I hope to cover that with items like social security, reverse mortgages, inheritances or even simply reducing our retirement expenses.

 

[Kronk]

Yup, you're a lot more conservative than most people on the board. Your assumptions across the board are pretty much worst case scenarios -- inflation, low returns, high taxes. And if that's what it takes for you to enjoy retirement, that's what you should do.

Most of us are a lot more willing to go with the 90% (or less) scenario and modify spending if the bottom does fall out of the market. So that's why you're getting a lot more of the "why wait until 50 when you could retire at 45?" comments than you are getting encouragement to keep plugging for another 10 years.

 

[maldini]

Yup, you're a lot more conservative than most people on the board. Your assumptions across the board are pretty much worst case scenarios -- inflation, low returns, high taxes. And if that's what it takes for you to enjoy retirement, that's what you should do.

not sure I buy this as worst case.

4% "real" inflation (not the one quoted by the media) is not worst case IMO. Items like health care alone should make people realize this.

Also, anyone who lived through the dot com bubble knows that a geometric mean of 7.5% is not really worst case either.

Conservative? Yes
Worst case? Not IMO

Most of us are a lot more willing to go with the 90% (or less) scenario and modify spending if the bottom does fall out of the market. So that's why you're getting a lot more of the "why wait until 50 when you could retire at 45?" comments than you are getting encouragement to keep plugging for another 10 years.

Believe me, no one will be happier than I if my estimates are proven to be conservative over the next 5 years and I can actually retire at or before 50.



Thank you for all your help in this thread. If anything that fact that people are telling me that I am being conservative is great because that is my intention. It would have been much worse if people said I was being realistic or even worse I was being too aggressive that would have been crushing.

To use your words, if retiring at 50 is close to "worst case", then thats not too bad

 

[Kronk]

While that was a good note to end things on, I just couldn't resist, since you took my phrase and ran with it. Obviously having the stock market go up over the next 10 years isn't worst case. You're right, conservative is a better word. But, heck, you're planning for the year 2057.

 

[maldini]

While that was a good note to end things on, I just couldn't resist, since you took my phrase and ran with it. Obviously having the stock market go up over the next 10 years isn't worst case. You're right, conservative is a better word. But, heck, you're planning for the year 2057.

lol, how insane is that?

Most people I know aren't planning for next year

oh well, it is a hobby

 

[Nords]

Welcome to the board, Maldini.

It sounds like the last 40+ posts have been along the lines of "Help me find the mistakes, if there are any" and "I sure hope I don't #$%^ this up". Between FIRECalc and your spreadsheets you'd have found any holes big enough to matter. If you go looking for a financial advisor you may spend a lot of time correcting their math and being frustrated by their lack of attention to detail.

If you want to get a feel for tweaking the parameters, though, it's well worth the $40 for a three-month membership at FinancialEngines. With your spreadsheet skills and their modeling you'll be able to figure out if you've left out any significant factors. Monte Carlo is a little more conservative than FIRECalc's historical record but you'll be able to test all sorts of assumptions & asset allocations.

You may also be able to access FE for free through one of your fund companies.