To retire in 5 Years

[EMone]

Hello Everyone ,

Goal: To retire in 5 years (December 2026)

Age: 45 (Husband) & 44 (Wife). Three kids (5,5, & 14)
Occupation: Engineer & Nurse
Household income including rental: $276K (257K-salary and 19K-rental)

We have 2 properties; between our primary residence and rental property we have about $753K of equity. Our remaining loan balance is $393K.

Our retirement balance on deferred account is $930K. Our current contribution is $160 per month. We have $515K in stocks (17 individual stocks), and $17K in cryptocurrency these funds will supplement to our retirement income. We contribute about $3,000 monthly towards the stocks and cryptocurrency.

We have $116K in college funds (ESA & 529). The first few years of college expenses of our eldest child will be cashed flow since we are still going to be working. We are not planning to touch the college till we retire.

Current total net worth is about $2.3M.

Our investments allocations on our retirement accounts, stocks, and college funds are invested 97% equity and 3% bonds. I will gradually increase my position in cash/bonds as we get closer to retirement, by the time we retire our allocations will be 56% equity & 44% cash/bonds. Our average investments return since we started in 2002 has been about 11%.

We both work for government agencies and have a defined pension benefit when we retire. Our approximate retirement income will be 62% of our pre-retirement income; 28% will be from defined pension and the other 34% will be generated from our retirement and stocks account. My withdrawal rate will be 4%. The 62% of our pre-retirement income will generate about $13,500 gross per month. Rental income is excluded on our retirement income, this will be our safety net. I’m also fortunate that our healthcare insurance for the whole family is a benefit I’ll be receiving if I retire with my current employer, my wife and I will have healthcare coverage till we turn 65 years old and our children will be covered till they turn 26. Based on FIRECALC calculator we have 99.2% success rate.

Anticipated monthly expenses during retirement is $13,500:
· Mortgage: $3,400
· Rental property expenses: $800
· Utilities: $1,300
· Car: $1,500
· Taxes: $2,000 (based on federal & state tax brackets with child tax credit, $2,500 w/o)
· Disposable income: $4,500 (food, gas, vacation, entertainment, misc.)

Please advise:
· Is our goal reasonable? Is our current allocation too aggressive? Is there anything you would do differently? How to minimize tax during retirement?

 

[38Chevy454]

I think your savings is pretty good for your age, and having pensions is a great benefit to allow for income in retirement. I am one that doesn't count net worth of house for anything in calculations - you need a place to live and the house does not generate income itself. I would say that per your numbers it seems you can do it. Not a lot of safety margin, but also pretty low chance of failure. The pension and insurance benefits are really nice to have and that allows you to keep high equities allocation since you can think of the pensions as like fixed income investment returns. It is not, but in the general sense it functions similar. I was 100% equities until I was about 50 years age, then reduced slightly to 85/15 as I was nearing retirement. So I do not have problem with your allocation, just beware of livability and don't make panic selling moves. Just roll with it and stay invested as your time horizon is longer term. I do think a move to more conservative is good once you retire, you can choose the target based on your risk tolerance and budget withdrawal rates.



A question, in one part you state the rentals give $19K of income, but then in your budget it states rentals cost $9.6K ($800/mo). That doesn't seem to make sense to me unless that is your rental mortgage each month? Still having hard time to understand the numbers since the $19K should be after all expenses, or is that gross amount before expenses? More questions: Does your house mortgage include prop taxes and insurance? What about house repairs and maintenance? Is retiree medical any expense each month? Seems $1500/mo for car expense is on high side, unless that also covers insurance and repairs? Or do you drive expensive luxury cars and trade-in a lot? Your $160/month pretax contribution seems low, is there no company match? Are you planning to continue adding to kids 529 plans, not seeing that in budget? Is taxes including both fed and state?


ETA: with your high after tax savings $3K/month, is that going to Roth at all? or just to std brokerage type account?

 

[rodi]

Hi and welcome to the forum.

If you haven't seen it yet, there is a good FAQ on some gut checks when making the decision to retire.
https://www.early-retirement.org/forums/f47/some-important-questions-to-answer-before-asking-can-i-retire-69999.html

My opinion (and only my opinion) I don't count my primary home value in my nest egg calculations. Yes - it's part of the net worth - but it's illiquid. I *do* count mortgage debt.

My opinion - 4% withdrawal is too aggressive for someone retiring at age 50. (Says the woman who retired at 52... but with a 3.5% WR).

Some questions - do you think your kids will be going to CSU or UC schools - Will they attend local. I live in California and have an 18 year old senior in high school and a 20 year old taking a covid and maturity break from college. I budgeted $20-25k/year for CSU - and most of that was taken by dorm fees. The tuition and books are cheap - housing is what kills you with the California college expenses.

Final question - are the pensions COLA? This is a biggy... If not COLA - you need to plan for that. My grandfather found out the hard way that inflation will decimate a big pension. My grandmother had to get a job when the 70's inflation hit.

 

[Whisper66]

Overall you appear to be in very good shape. Just a couple comments.

Net Worth of 2.3M includes house values. I think most would suggest (as 38Chevy454 says) to exclude home value unless you intend to sell them and not buy another residence.

Retiring in 5 yrs means your kids will be 10,10 and 19 when your retire. Ensure you have thought about your plans for if they don't "launch" successfully as adults. You may end up supporting a childs' needs for longer than your initial plans assume. We have at least two couples we know of that will be responsible for one of their children for the rest of their lives due to issues unknown when they were young.

Try running https://www.i-orp.com/Plans/extended.html to look for a couple ways to optimize your taxes over your lifetime by controlling income to lower tax brackets. It may suggest doing some Roth conversions in your early years of retirement. Also may suggest getting some of your yearly spending money from Roth accounts rather than from tax deferred accounts since money from the later accounts will count toward your AGI and could increase your tax bracket.

Your allocation is too aggressive if you are uncomfortable with it. Most retirees are more comfortable in the 50/50 to 70/30 range. From my perspective, I just like to have 3 yrs of expenses covered with fixed assets to avoid having to sell equities during a short bear market. We are retired and currently are 85% equities. If I get concerned about the market, we may drop it to 60% just to make more $$ available to buy into a bear market. Everyone is different so no right or wrong answer.

 

[EMone]

Thank you 38chevy454 for your input!


Real estate equity is included in my networth, but not included on my post-retirement income.


A question, in one part you state the rentals give $19K of income, but then in your budget it states rentals cost $9.6K ($800/mo). That doesn't seem to make sense to me unless that is your rental mortgage each month? Still having hard time to understand the numbers since the $19K should be after all expenses, or is that gross amount before expenses? $800 is for property tax, HOA, & maintenance, If I decide to rent it when we retire. The 19K income is not include on my post-retirement income, however it is included on my pre-retirement income. This will be my safe net if I decide to sell or rent it. Rental is owned outright. More questions: Does your house mortgage include prop taxes and insurance? Yes. What about house repairs and maintenance? Yes. Is retiree medical any expense each month? No. Seems $1500/mo for car expense is on high side, unless that also covers insurance and repairs? No. Or do you drive expensive luxury cars and trade-in a lot? Yes, I would like a luxury car. Your $160/month pretax contribution seems low, is there no company match? $160 includes company match. Are you planning to continue adding to kids 529 plans, not seeing that in budget? No, we’re still going to be working when my eldest goes to college, so his college funds will be cashed flow. However, my youngest (twins) once they go to college our mortgage will be paid off and should free some money from our monthly budget. Also, the balance we have on the college funds will be worth more 13 years from now from the power of compound interest. Is taxes including both fed and state? Yes


ETA: with your high after tax savings $3K/month, is that going to Roth at all? No. or just to std brokerage type account? Yes, stocks & crypto currency

 

[EMone]

Thank you Rodi for your feed back!

Real estate equity is included in my networth, but not included on my post-retirement income.

[FONT=&quot]I’m working on brainwashing my kids to go to CSU, but if they do decide to go to UC I will set a limit I’m willing to contribute and rest will be on their own. COLA is included with my retirement (CALPERS)[/FONT]

 

[Ready2Go]

Can you elaborate on the healthcare coverage? My DW is a state govt employee and she's not eligible for retiree medical until age 55. I think this is a pretty common provision. These govt's don't want to be giving away medical coverage to people in their 40's. Maybe you have hit a service threshhold but I think it's worth double checking. Good luck!

 

[Love This Community]

$515K in 17 individual stocks? I see a risk there. Any appetite for diversifying into ETF’s.

 

[Bob_Walter]

Hi and welcome to the forum.

If you haven't seen it yet, there is a good FAQ on some gut checks when making the decision to retire.
https://www.early-retirement.org/forums/f47/some-important-questions-to-answer-before-asking-can-i-retire-69999.html

My opinion (and only my opinion) I don't count my primary home value in my nest egg calculations. Yes - it's part of the net worth - but it's illiquid. I *do* count mortgage debt.

My opinion - 4% withdrawal is too aggressive for someone retiring at age 50. (Says the woman who retired at 52... but with a 3.5% WR).

Some questions - do you think your kids will be going to CSU or UC schools - Will they attend local. I live in California and have an 18 year old senior in high school and a 20 year old taking a covid and maturity break from college. I budgeted $20-25k/year for CSU - and most of that was taken by dorm fees. The tuition and books are cheap - housing is what kills you with the California college expenses.

Final question - are the pensions COLA? This is a biggy... If not COLA - you need to plan for that. My grandfather found out the hard way that inflation will decimate a big pension. My grandmother had to get a job when the 70's inflation hit.

The problem regarding inflation is, do you plan your retirement with the return of 15% inflation? If that high of inflation returns, many many asset classes will be wiped out.

The pensions I've seen usually cap their cola at 2%, some will bank excess, so if inflation is over 2% you'll get that on years where inflation is under 2%.

 

[Bob_Walter]

What's the calipers pension survival benefits?
Does the state pay for health insurance before the age of 55? I think they do, as it says you'll get the benefit upon retirement at separation but double check that. I assume you'll get 100% coverage (twenty years of service)?

I would diversify your individual stocks. If a few of them blow up, it can change your plans. Maybe just buy SPY or similar.

I see nothing wrong with csu. I've always said, you get out of school what you put into it.

 

[EMone]

Can you elaborate on the healthcare coverage? My DW is a state govt employee and she's not eligible for retiree medical until age 55. I think this is a pretty common provision. These govt's don't want to be giving away medical coverage to people in their 40's. Maybe you have hit a service threshhold but I think it's worth double checking. Good luck!

Free medical insurance for my DW & myself till 65 and my kids till 26 as long as retire with them and be at least 50 yrs old. I work for a small city with great medical benefits.

 

[EMone]

$515K in 17 individual stocks? I see a risk there. Any appetite for diversifying into ETF’s.

No..stocks market have been really good for me. I have high tolerance on the market volatility. Although my retirement accounts are invested in mutual funds.

 

[EMone]

Overall you appear to be in very good shape. Just a couple comments.

Net Worth of 2.3M includes house values. I think most would suggest (as 38Chevy454 says) to exclude home value unless you intend to sell them and not buy another residence.

Retiring in 5 yrs means your kids will be 10,10 and 19 when your retire. Ensure you have thought about your plans for if they don't "launch" successfully as adults. You may end up supporting a childs' needs for longer than your initial plans assume. We have at least two couples we know of that will be responsible for one of their children for the rest of their lives due to issues unknown when they were young.

Try running https://www.i-orp.com/Plans/extended.html to look for a couple ways to optimize your taxes over your lifetime by controlling income to lower tax brackets. It may suggest doing some Roth conversions in your early years of retirement. Also may suggest getting some of your yearly spending money from Roth accounts rather than from tax deferred accounts since money from the later accounts will count toward your AGI and could increase your tax bracket.

Your allocation is too aggressive if you are uncomfortable with it. Most retirees are more comfortable in the 50/50 to 70/30 range. From my perspective, I just like to have 3 yrs of expenses covered with fixed assets to avoid having to sell equities during a short bear market. We are retired and currently are 85% equities. If I get concerned about the market, we may drop it to 60% just to make more $$ available to buy into a bear market. Everyone is different so no right or wrong answer.

I do plan to gradually increase my positions on stable funds (cash/bonds). So by the time I retire my allocations will be 56/44.

 

[pjigar]

I am in the similar boat except
* my assets are little higher than you
* my expenses are lower than you
* No pension or healthcare for me

Having said that, I think few red flags I see:
* Your withdrawal rate is on high side for your age. I would target 3.5% max.
* Firecalc shows 99% because most likely because there are not enough cycles to fit such a long retirement horizon. I use retirement horizon which is half of the total and runt he firecalc with residual portfolio value that is 100% of original. I know it is not exact science but this gives me more simulations.

 

[Vacation4us]

Can you elaborate on the healthcare coverage? My DW is a state govt employee and she's not eligible for retiree medical until age 55. I think this is a pretty common provision. These govt's don't want to be giving away medical coverage to people in their 40's. Maybe you have hit a service threshhold but I think it's worth double checking. Good luck!

DH was a state employee with a CALPERS pension and was eligible at 50 to retire with medical. It just depends on what kind of employee ie job you had. Not all state employees have the same benefits. DH gets 90% of his pay after his 30 plus years of service. Far more I relieve than most.