Retiring in 2 months at 49

[surprising]

Been planning this since I was 45 and think I'm ready. Would like to present my plans and hopefully gain some insight from the experts here.

Only debt is $170K of mortgage debt for rentals.

Cash bucket currently sits at $120K in high yield savings account. Will be used for emergencies as well as provide buffer to avoid selling investments at a loss. Bucket will be topped back up occasionally (dividends from lean expense years, stock sales from good investing years).

Basic expenses are ~80K/year, but we're planning for $100K to account for heavy vacation years.

For the next 10 years we will live on investments, rents and dividends. Of the $8333/month, income will come from:
- Rentals - $4100/month
- Dividends - $3000/month
- Investments - $1233 remaining - sell company stock first, followed by low yield dividend stocks, followed by high yield dividend stocks (some lean spending years may not require any selling).

Total investable assets currently sits at $560K to fund this bucket. Over next couple months will increase to $600K before I retire, plus another $100K of company stock vesting for retirement, so hopefully will be at $700K total at start of retirement.

Once I hit 59.5 I will be able to tap 401k. Currently sits at $1.4M invested in s&p and high yield funds. Haven't fully thought about distribution strategy yet for that phase of retirement, but will most likely be similar to current approach (if it works!).

If we run into trouble, we have several other income sources we can tap
- public employee retirement pension estimated at $12K/year today with yearly COLA
- sell the rentals as needed, currently have $880K of net value.
- annuity and deferred compensation accounts, worth $300K
- roth-401k contributions, $400K

One question I have is how to handle yearly property taxes for primary and rentals, which comes out to about $13K/year in November. I could set aside a portion monthly (the $8333/month above includes it), or just wait until November and figure it out then.

Well that's it. Will it work!? Any feedback would be greatly appreciated!

 

[RetiredHappy]

Your number looks very good.

However, have you priced out your health insurance, unless you are getting "free" public employee retirement health insurance? My private individual health insurance, a silver plan, costs $1.1K per month and I am 60 yo. I retired 7 years ago and sucking up the health insurance costs until I turn 65 when Medicare kicks in. We are spending more now than before retirement because all we want to do is play.

There are all sorts of retirement tools, my favorite being the one on Fidelity site, which is very granular and allows for lumpy expenses. Have you tried one of these tools?

 

[bloom2708]

You can always lower spending or go back to work.

Those are not much of failures for most people.

You don't mention spouse or kids. Those are two barnacles on the retirement boat for many.

 

[surprising]

Your number looks very good.

However, have you priced out your health insurance, unless you are getting "free" public employee retirement health insurance? My private individual health insurance, a silver plan, costs $1.1K per month and I am 60 yo. I retired 7 years ago and sucking up the health insurance costs until I turn 65 when Medicare kicks in. We are spending more now than before retirement because all we want to do is play.

There are all sorts of retirement tools, my favorite being the one on Fidelity site, which is very granular and allows for lumpy expenses. Have you tried one of these tools?

Plan is to go with ACA and keep MAGI low enough to get subsidies. Looks like I can get silver plan for family of 4 for $0-$200 with subsidies, but have to really watch the income level!

I've used i-orp.com for most of my modeling, which shows even larger potential maximum income, so that's why I feel pretty good with the current plan.

 

[surprising]

You can always lower spending or go back to work.

Those are not much of failures for most people.

You don't mention spouse or kids. Those are two barnacles on the retirement boat for many.

Wife and I are (mostly) empty nesters with two kids in college. Colleges are paid for with 529 plans.

 

[HarveyS]

Looks good. A few things to consider: Did you include income tax in your expenses? What about dental coverage? Car replacement? House repairs?

 

[RetiredHappy]

Plan is to go with ACA and keep MAGI low enough to get subsidies. Looks like I can get silver plan for family of 4 for $0-$200 with subsidies, but have to really watch the income level!

I've used i-orp.com for most of my modeling, which shows even larger potential maximum income, so that's why I feel pretty good with the current plan.

Rental income are counted as income, in MAGI, for ACA. I don't see how your MAGI can be kept low with such high income of $8,333. I haven't looked at whether you can take depreciation against rental income for purpose of MAGI calculation for ACA.

 

[captain3d]

It is common for rentals to provide cash flow income while netting out tax negative due to depreciation and other ‘losses’.

Having an escrow account on the mortgage is one way to pay the taxes and insurance without having to plan for it. But these days you might prefer to put it in a savings account

 

[FLSUnFIRE]

Looks good. Do your basic expenses count HI? I would guess you won't get a subsidy with the rental income unless you have much higher cashflow than realized income from the property. I know for my state, ACA plans I'm interested in are affordable for me without subsidy (and I'm far more lean than you!) all the way to medicare eligibility. You can probably price out on your state's exchange.


For cash flow, I don't manage any real estate, but I project my primary checking account through the year in excel. I have a monthly allowance transferred in and for known lumpy expenses (like RE Tax), I have that in the projection and move the funds over in time to pay the bill in addition to the monthly allowance. My RE tax, along with the rest of my late year funds, are in T-Bills right now.

 

[surprising]

As far as I can tell, MAGI for ACA is AGI plus a handful of things that don't apply to me:

- Non-taxable Social Security income (on the 2021 Form 1040, this is Line 6a minus Line 6b3).
- Tax-exempt interest (this is Line 2a on Form 1040)
- Foreign earned income and housing expenses for Americans living abroad (Form 2555)

I take this to mean any rental income and losses calculated on schedule E still apply. Same as for capital gains/losses. Regarding capital gains/losses, nearly all my company stock is underwater so will show as losses to offset dividend gains. This plus rental depreciation and expenses should put us at quite a low overall income level.

 

[surprising]

Looks good. A few things to consider: Did you include income tax in your expenses? What about dental coverage? Car replacement? House repairs?

This is one of my top worries - when things don't go as planned and there are extra expenses. I do have a large cash buffer which can be used for this, but then I have to figure out how/when to replenish that buffer. This means selling more investments, which could have multiple impacts - ACA subsidies, selling investments for a loss, etc.

One of the main reasons to retire is to enjoy life before I'm too old. However, if I am constantly worrying about sticking with the plan during the first few years, I wonder if it even makes sense.

 

[brydanger]

Will it work? only depends on whether you can live on $8333/mo. Most would be thrilled with that number and you can always reduce your overhead as needed (or change the real estate portfolio to get more income or cash out of it).

Go enjoy yourself!!

 

[pb4uski]

As far as I can tell, MAGI for ACA is AGI plus a handful of things that don't apply to me:

- Non-taxable Social Security income (on the 2021 Form 1040, this is Line 6a minus Line 6b3).
- Tax-exempt interest (this is Line 2a on Form 1040)
- Foreign earned income and housing expenses for Americans living abroad (Form 2555)

I take this to mean any rental income and losses calculated on schedule E still apply. Same as for capital gains/losses. Regarding capital gains/losses, nearly all my company stock is underwater so will show as losses to offset dividend gains. This plus rental depreciation and expenses should put us at quite a low overall income level.

Yes, you are correct... ACA MAGI is based AGI with adjustments that often don't apply, so includes Schedule E so after expenses and depreciation.

 

[surprising]

Yes, you are correct... ACA MAGI is based AGI with adjustments that often don't apply, so includes Schedule E so after expenses and depreciation.

Thanks for the clarification, that is a relief.

 

[38Chevy454]

Welcome to the forum. Looks like you have a pretty good plan and enough flexibility to make it work out. The biggest challenge is getting from now until 10 years when you turn 59.5 age and can access your pretax savings. You can do a 72t to access the pretax, but it seems that you have enough after tax money to cover the additional budget you need after your rental and dividend income.

 

[Kork13]

Can you do it? Yes, almost assuredly. There are alot of technical factors to consider (ACA, taxes, etc.) that I won't dive into... others here are better at those maths.

I just wonder why you're calling a public employee pension a secondary/backup income source? Unless it doesn't start paying until a certain age in the future...? The pension will definitely more reliable than dividend & stock sale income, and likely more reliable even than the rental income.

Personally, I'd reassess your income stream prioritization. I would prefer to use up the deferred comp money (which have no age limits) before selling taxable investments, and maybe even before pulling off dividend income.... assuming that doing so won't send you over an ACA cliff or similar (again, I'm not the one to run those calculations). Selling the homes would also be an option so far down my priority list that it's almost off the table, as long as you can still manage them successfully -- unless you're starving (for cash in this case), why kill the goose laying golden eggs?

Bottom line: To the greatest extent feasible, I would keep as much as I can invested & growing, deferring the realization of low-tax (LTCG & QD) or tax-free (Roth) money for as long as possible. Once you're old enough for RMDs & SS (+ pension), those items will "fill up" your lower tax brackets, and that fully-taxed income will not be controllable. So you can save the less-heavily taxed stuff for times when you need to keep your tax exposure down.

 

[Out-to-Lunch]

B
For the next 10 years we will live on investments, rents and dividends. Of the $8333/month, income will come from:
- Rentals - $4100/month
- Dividends - $3000/month
- Investments - $1233 remaining - sell company stock first, followed by low yield dividend stocks, followed by high yield dividend stocks (some lean spending years may not require any selling).

Total investable assets currently sits at $560K to fund this bucket. Over next couple months will increase to $600K before I retire, plus another $100K of company stock vesting for retirement, so hopefully will be at $700K total at start of retirement.

Am I reading this correctly? Are you counting on a 6%+ dividend yield?

 

[surprising]

Can you do it? Yes, almost assuredly. There are alot of technical factors to consider (ACA, taxes, etc.) that I won't dive into... others here are better at those maths.

I just wonder why you're calling a public employee pension a secondary/backup income source? Unless it doesn't start paying until a certain age in the future...? The pension will definitely more reliable than dividend & stock sale income, and likely more reliable even than the rental income.

Personally, I'd reassess your income stream prioritization. I would prefer to use up the deferred comp money (which have no age limits) before selling taxable investments, and maybe even before pulling off dividend income.... assuming that doing so won't send you over an ACA cliff or similar (again, I'm not the one to run those calculations). Selling the homes would also be an option so far down my priority list that it's almost off the table, as long as you can still manage them successfully -- unless you're starving (for cash in this case), why kill the goose laying golden eggs?

Bottom line: To the greatest extent feasible, I would keep as much as I can invested & growing, deferring the realization of low-tax (LTCG & QD) or tax-free (Roth) money for as long as possible. Once you're old enough for RMDs & SS (+ pension), those items will "fill up" your lower tax brackets, and that fully-taxed income will not be controllable. So you can save the less-heavily taxed stuff for times when you need to keep your tax exposure down.

Thank you for the suggestions. The pension is small but has payment calculation that allows it to grow with the market. The longer we wait to turn that on, the higher the payments should be (acts like an annuity).

I am also hesitant to annuitize anything at this point since we are young and it will forever reduce payments.

I've used i-orp to model retirement distribution and it invariably has me drawing down taxable investments first, but for pensions and other sources of income, it requires a starting date, which I've always put off into the far future. Perhaps I will rerun some scenarios with earlier start dates for those and see what it comes up with.

 

[surprising]

Am I reading this correctly? Are you counting on a 6%+ dividend yield?

Dividend producing assets are more like 8% average yield on cost right now. Spent much of 2020-2022 building a portfolio of high yield bond funds, reits, and high quality dividend stocks to help fund these first years of retirement.

 

[ncbill]

Dividend producing assets are more like 8% average yield on cost right now. Spent much of 2020-2022 building a portfolio of high yield bond funds, reits, and high quality dividend stocks to help fund these first years of retirement.

Do you mean actual yield on today's stock price or yield on what you paid for them?

 

[Exchme]

Is the rental number free cash after an allowance for repairs, maintenance, etc? Our house is worth less than your rentals, but between our actual outlays and an allowance for future big "knowns" like a roof and new carpets, we run $8-10K/year in upkeep.

Real estate is hard for others to give you opinions on. On the one hand it's nice to have something besides stocks and bonds, but there are specific risks associated with your state, town, neighborhood, property and renters that could hurt (or help) your plan and there is no historical data or academic literature that can help quantify that risk. I suggest you be conservative in your evaluation of the future free cash flow.

Dividends stocks have no academic support as being superior to the broader market and you are less diversified by limiting your tax deferred to them. In taxable, tax drag is your enemy, so if capital gains on high vs. low dividend stocks are at all similar, selling high dividend stocks first is probably better.

You need to think about your stock/bond allocation as that is how you set a portfolio risk level you can tolerate. Once you spend down taxable, are you really going to be 100% stocks (which is what you have in tax-deferred), that's a lot of risk unless your cash needs are covered by rentals, SS, pension.

You did not describe your SS benefits, so your post SS finances are not clear.

I-orp is unique in its simple input and lifetime analysis, but it does not look at SORR. There have been multiple times in history where really awful investment (and presumably property rental) environments persisted for well over a decade, your plan needs to be flexible enough to survive.

 

[WhenIsItTime]

Is the rental number free cash after an allowance for repairs, maintenance, etc? Our house is worth less than your rentals, but between our actual outlays and an allowance for future big "knowns" like a roof and new carpets, we run $8-10K/year in upkeep.

Real estate is hard for others to give you opinions on. On the one hand it's nice to have something besides stocks and bonds, but there are specific risks associated with your state, town, neighborhood, property and renters that could hurt (or help) your plan and there is no historical data or academic literature that can help quantify that risk. I suggest you be conservative in your evaluation of the future free cash flow.

Dividends stocks have no academic support as being superior to the broader market and you are less diversified by limiting your tax deferred to them. In taxable, tax drag is your enemy, so if capital gains on high vs. low dividend stocks are at all similar, selling high dividend stocks first is probably better.

You need to think about your stock/bond allocation as that is how you set a portfolio risk level you can tolerate. Once you spend down taxable, are you really going to be 100% stocks (which is what you have in tax-deferred), that's a lot of risk unless your cash needs are covered by rentals, SS, pension.

You did not describe your SS benefits, so your post SS finances are not clear.

I-orp is unique in its simple input and lifetime analysis, but it does not look at SORR. There have been multiple times in history where really awful investment (and presumably property rental) environments persisted for well over a decade, your plan needs to be flexible enough to survive.

Bond funds have been a poor investment the last 18 months. I don't think anyone who owned them felt de-risked. Are you suggesting owning specific bonds or something else?

 

[surprising]

Do you mean actual yield on today's stock price or yield on what you paid for them?

They are pretty close - 8% yield on cost, 7.8% yield today.

 

[surprising]

Is the rental number free cash after an allowance for repairs, maintenance, etc? Our house is worth less than your rentals, but between our actual outlays and an allowance for future big "knowns" like a roof and new carpets, we run $8-10K/year in upkeep.

Real estate is hard for others to give you opinions on. On the one hand it's nice to have something besides stocks and bonds, but there are specific risks associated with your state, town, neighborhood, property and renters that could hurt (or help) your plan and there is no historical data or academic literature that can help quantify that risk. I suggest you be conservative in your evaluation of the future free cash flow.

Dividends stocks have no academic support as being superior to the broader market and you are less diversified by limiting your tax deferred to them. In taxable, tax drag is your enemy, so if capital gains on high vs. low dividend stocks are at all similar, selling high dividend stocks first is probably better.

You need to think about your stock/bond allocation as that is how you set a portfolio risk level you can tolerate. Once you spend down taxable, are you really going to be 100% stocks (which is what you have in tax-deferred), that's a lot of risk unless your cash needs are covered by rentals, SS, pension.

You did not describe your SS benefits, so your post SS finances are not clear.

I-orp is unique in its simple input and lifetime analysis, but it does not look at SORR. There have been multiple times in history where really awful investment (and presumably property rental) environments persisted for well over a decade, your plan needs to be flexible enough to survive.

Rental income is total rent coming in. Expenses include all rental expenses plus maintenance. We've owned the rentals for over a decade now and so far they have been very low maintenance. The main question I have is when to sell them, as they have a lot of equity, each one could fund a few years of retirement. And honestly the level of income we get from them after expenses is pretty low, so selling would offer way more support (at the expense of huge tax bill).

Allocation strategy is something I think about a lot. I am using the bucket approach, where there are 2 buckets - first 10 years of retirement, and after 10 years. The first bucket is conservative with dividends and bond funds to cover basic expenses, whereas the second bucket is 401k and is more aggressive with 70/30 stock/bond allocation. First bucket also has a healthy stock allocation that can be used for overages, but are you suggesting I start selling high dividend assets first? I figure once I start selling the dividend paying stocks, then it will be more difficult each year to maintain a baseline level of income due to compounding effect.

SS is estimated at $3300 at 67, $4000 at 70. The pension I mentioned is estimated at $1300 now, and $2000 in 5 years.

 

[matjung]

Compared with a number of other people I met on this site, you may not have enough money.
Your combination of rental/mortgage could be considered as risk.
Almost 50% of your monthly income is coming from that source.
Is the mortgage fixed for 20 years at 2%?
You expect your expenses to be 80K ~ 6.6K per month
Income 8.3
Expense 6.6
-> Buffer 1.7
You may have to access your emergency account a few times.
People tend to overestimate Income and underestimate Cost
With 600K you expect to get annual dividends of 36K?
Any thoughts about replacing your current car with a new one for road trips?