I am 44 and DW is 40. 2 kids one will be college age in 6 years and another in 12 years. Savings thus far: 401K is $700,000 (mostly target retirement fund going out to 2040 target date), taxable account is at $3M, and 529 is at $125,000. A rental property nets $6K a year (after taxes and expenses). I take care of my parents (who live in a house and I pay the mortgage) and I have a house with a mortgage. Yearly expenses are $150K (with mortgage payments). I am targeting $175K in expenses (after taxes) to retire early. Investments are 80% equity, 15% fixed and rest is cash. I have used FireCalc. Job pays well and DW does not work. Job is more about keeping head down and building assets. Questions I have 1) how do you plan for college expenses, and 2) how do you account for a 50 year ER time period. Any comments are welcome esp. on planning and avoiding the one more year trap.
SoCal father w 2 kids FIRE Goal & College
- Thread starter vakil
- Start date
USGrant1962
Thinks s/he gets paid by the post
Welcome to e-r.org!
You didn't say when you want to retire. At your desired spending level, say $200K/yr including taxes, you have a ways to go for a low-risk ER. Most folks around here would suggest maybe a 3% withdrawal rate for a 50-year retirement. So about a $6.7M portfolio of stocks, bonds, investment real estate, and cash. I actually think ~3.5% is a reasonable perpetual withdrawal rate for a balanced portfolio, so a target of $5.7M works. If you have Social Security and perhaps some consulting, side gigs, hobby jobs, you could feel comfortable with ~$5M.
As far as college, 529 is a good way to go and with $125K already invested you are on a good path. Keep contributing and you should be fine. The actual cost is quite a wild card depending on where they go, what scholarships they get, what financial aid you/they qualify for. So don't over-plan because you will probably be wrong!
One caveat is that if your kids get scholarships or go to a cheaper school than you expect you could be overfunded in 529s. The scholarship issue is not too bad because you can withdraw the scholarship amount without penalty (regular income tax is due on the gains). But if you are actually overfunded you will be stuck with either keeping the account for grad school, grandchildren or inheritance; or cashing it out with a 10% tax penalty on the gains. Which is not really too bad, actually, because it is just on the gains.
You didn't say when you want to retire. At your desired spending level, say $200K/yr including taxes, you have a ways to go for a low-risk ER. Most folks around here would suggest maybe a 3% withdrawal rate for a 50-year retirement. So about a $6.7M portfolio of stocks, bonds, investment real estate, and cash. I actually think ~3.5% is a reasonable perpetual withdrawal rate for a balanced portfolio, so a target of $5.7M works. If you have Social Security and perhaps some consulting, side gigs, hobby jobs, you could feel comfortable with ~$5M.
As far as college, 529 is a good way to go and with $125K already invested you are on a good path. Keep contributing and you should be fine. The actual cost is quite a wild card depending on where they go, what scholarships they get, what financial aid you/they qualify for. So don't over-plan because you will probably be wrong!
One caveat is that if your kids get scholarships or go to a cheaper school than you expect you could be overfunded in 529s. The scholarship issue is not too bad because you can withdraw the scholarship amount without penalty (regular income tax is due on the gains). But if you are actually overfunded you will be stuck with either keeping the account for grad school, grandchildren or inheritance; or cashing it out with a 10% tax penalty on the gains. Which is not really too bad, actually, because it is just on the gains.
You did not say what is your target age fore retirement but it sounds like you are thinking 50. If that's the case then I am in a similar boat as far timeline goes with less assets and less expenses.
1. What is your savings rate today? If it is high enough when kids hit the college then you don't really have to plan for college expense. You just divert your savings to pay for college. I plan to pay outright for college expenses. If you live in a state with high income tax then 529 might be better. If you are not going to be working then you should set the college expense aside in a cash bucket or 529 before they hit college. Don't overfund 529 like USGrant1962 said.
2. I plan for a long RE period by keeping my WR to under 3%. Also I have a lot of discretionary items in my expenses so that should help if things go really bad.
Good luck and welcome.
1. What is your savings rate today? If it is high enough when kids hit the college then you don't really have to plan for college expense. You just divert your savings to pay for college. I plan to pay outright for college expenses. If you live in a state with high income tax then 529 might be better. If you are not going to be working then you should set the college expense aside in a cash bucket or 529 before they hit college. Don't overfund 529 like USGrant1962 said.
2. I plan for a long RE period by keeping my WR to under 3%. Also I have a lot of discretionary items in my expenses so that should help if things go really bad.
Good luck and welcome.
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Welcome, vakil!
You're ahead of the game by starting to plan and obviously you've done well at saving.
For college, you first need to decide your "rules" - how much will you provide and how much do you expect your children to cover through work and/or loans? There are lots of threads on that topic, and there is no right or wrong answer, but you need to know what you're aiming for.
For avoiding OMY, my best advice is to stay active here on e-r.org. We're pretty good at talking people out of it!
You're ahead of the game by starting to plan and obviously you've done well at saving.
For college, you first need to decide your "rules" - how much will you provide and how much do you expect your children to cover through work and/or loans? There are lots of threads on that topic, and there is no right or wrong answer, but you need to know what you're aiming for.
For avoiding OMY, my best advice is to stay active here on e-r.org. We're pretty good at talking people out of it!
Thank you for the feedback. I am targeting 47 as ER ready. Here is the thought process:
1) College: 70% funding for UC (university of california) college tuition for four years. It is about $40K per year today. @pjigar, there will be some flex built in as I reconsider the comments on the overfunding.
2) Later this year I will have about $300K added as part of stock option vestment and divestment. Not counting my chickens before hatching.
3) My expense number assumes full expenses for rental property. That is, I am targeting $30K in income from rental property and $145K from my other investments to reach the $175K per year target.
4) Two additional years to build up for tax liability and buffer for health care expenses.
5) Adding $70K for the next two year in 401K and after tax savings.
1) College: 70% funding for UC (university of california) college tuition for four years. It is about $40K per year today. @pjigar, there will be some flex built in as I reconsider the comments on the overfunding.
2) Later this year I will have about $300K added as part of stock option vestment and divestment. Not counting my chickens before hatching.
3) My expense number assumes full expenses for rental property. That is, I am targeting $30K in income from rental property and $145K from my other investments to reach the $175K per year target.
4) Two additional years to build up for tax liability and buffer for health care expenses.
5) Adding $70K for the next two year in 401K and after tax savings.
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You seem to be mixing expense and income. Try to go back and figure out your current "real" expenses. If you don't have the data then start tracking your expenses. Expenses are the key to figuring out the RE puzzle. And don't forget to add expected taxes on top of those expenses. Math becomes simple at that point: You need nest egg bigger than 33 time your RE expenses.
I have been tracking my expenses for over a decade. Some of those expenses (kids, work related, higher taxes, etc.) would go away in RE but new expenses (healthcare, hobbies, more travel, etc.) will come along. My estimated RE expenses seems to be only little bit lower that my current expenses. So again, focusing on "current real expenses" will put you on a good starting point.
PS: I wouldn't add rental expenses to your "personal expenses". It's mental accounting.
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