Trout Bums + Hound Dogs looking for early retirement advice!

[makeitrain]

Hello! Great forum here with lots of good advice. We would love to share our story and hear feedback from the community as to whether we are on the right track to early retirement and hear advice re. additional steps we could take.

Background - Married couple, each 36 years old. Own 1 home (~280K mortgage) and 1 rental property (~50K mortgage, rent covers monthly payment + also gives us an extra $600 month). Combined, we currently make 173K/year, plus the rental income ($1200 per month).

Retirement Savings - Our 401Ks, Roth IRAs, and Trad. IRAs are at about 70K. We also have a mutual fund that we hope to eventually use for "gap years" with about 20K currently. This fund also currently functions as an emergency savings should we need it, but we are trying to bolster a separate emergency savings account. We also have another short-term savings account with ~9K that we are trying to get to 20K then put away for emergency savings, and use that short-term savings for things like vacations and house projects.

Assets - Our current home is valued at ~420K. We currently pay an extra $500 a month into our principal, which we have calculated out to mean our house will be paid off by Jan 2031 (we will each be 52 years old). The townhome (rental property) is valued at ~190K. A few years back we refinanced it to a 15 year mortgage and it will be paid off in 2026.

Debt - The mortgages referenced above, plus 1 student loan for myself. I have worked at nonprofits for the past 7 years and am enrolled in public service forgiveness program. Meaning if I keep my job at a 501c3, my student loan will be forgiven in 2019. The loan is income dependent - currently I pay ~$500 a month but this payment will likely go up next year as we recently started making more money.

Rate of savings - I am currently maxing out my 401K contribution with a 3% employer match for about $21,500/year. My husband saves 7% with 3% employer match totaling 10% into his 401K, about 4,600/year. We are both maxing out our Roth IRA contributions, each at 5,500/year. So our total retirement savings per year are at ~37,000. We also put 2K per month into our short-term savings (see emergency savings goals above), and pay $500 extra to our mortgage principal each month.

Goals - We would like to retire at age 52 (or earlier). At the current rate of savings, we anticipate having 1.2 million in the retirement accounts at that time, which we think will be enough based on our calculations of needed income in retirement, in combination with perhaps selling assets (house and townhouse). As we can't withdraw from 401Ks and Roth until 59 1/2, we want to figure out when and how to put additional $ into the mutual fund for gap years, and address gap years with a combination of mutual fund, continued rental income from townhouse, and/or odd jobs. We would also be interested in getting creative to figure out how to retire even earlier (age 48-50).


Recap - So, to re-cap, after retirement savings and taxes we bring in about 10,600 a month. Then, 2K to short-term savings, 920 to Roth IRAs, and 500 extra mortgage. Then, after fixed expenses (mortgages, student loan, insurance, bills), we have about $3540 for groceries, gas, house/yard improvement, entertainment, clothes etc.

We like having cash available for house and yard projects - we live on 4 acres with a big garden, orchard, and chickens - and there is always something going on. We also do like taking road trips on weekends to fly-fish, hike, explore and float rivers, etc., and we like taking one overseas vacation a year - very comfortable doing this thing on the cheap, we don't like resorts and enjoy camping. Still, we have ambitious goals for early retirement and are interested in saving more if advised to get us there, esp. for gap years.

Other notes - we have 2 dogs and aren't planning on having children. We are on a high-deductible health insurance plan provided by my work, but my work also puts the full deductible amount into an HSA for us each year. We each have a 500K life insurance policy, but we don't have disability policies. We are both healthy, fit, and active.

So our biggest questions -

- do we seem to be on track for ER at 52?
- what can we do to save specifically for gap years?
- How can we retire earlier?
- Any other creative ideas?

Thank you!

 

[MBAustin]

Welcome makeitrain! You certainly seem to be on the right track, congratulations!

Have you tried putting your numbers into FIREcalc?

Also, tracking your expenses may give you some ideas to free up more $$ for your "gap year" fund. Because of the power of compounding, you might want to try putting more money into it for a few years now and delay some discretionary spending until later. Also you don't mention your asset allocation, which is key when you are trying to build up the asset base for ER.

If you haven't seen them yet, there are two excellent resources here that might be helpful:
http://www.early-retirement.org/forums/f47/some-important-questions-to-answer-before-asking-can-i-retire-69999.html

and

Early Retirement FAQs - Early Retirement & Financial Independence Community

Hope this helps, and I'm sure some other folks will chime in also.

 

[bingybear]

have you considered that when you retire, you will need to pay for your own health insurance? If not, need to figure this into the budget after ER.

It looks like your budget from you notes is about $7500/month (after retirement, 2k emergency fund savings, Roth, and extra mortgage payment which I assume would vanish after retirement. so $7500/mo*12/1.2mil is 7.5% withdraw rate (assuming all my assumptions are correct. Also this is likely before taxes.

I believe you can take contributions out of a Roth after it has been established for 5 years. Doing a roth conversion will restart the 5 year clock.

If you work until 55 and leave employment, you may be able to tap your 401k at that point without penalty.

Using today's expenses might not be the best estimate as inflation may increase your expenses. Projecting that far out is prone to error... like all retirement planning. Firecalc or other planing software may help estimate your likelihood of success. Make sure you're honest with you expenses.

 

[wingfooted]

I agree with Bingy Bear's comments. $1.2MM at age 52 with a $100K per year lifestyle won't be enough.

So either the expenses need to come down significantly, or you'll need more to retire on.

What is your asset allocation on investments ?


Sent from my iPad using Early Retirement Forum

 

[petershk]

You'll probably get much better advice from more experienced members, but as a noob who has been trying to do the research I'll do my best.

The first thing is to perhaps think about ER as a convergence point of risk instead of number to hit.

As a short cut, most people tend to reference the 4% rule which is that you can "safely" withdraw 4% of your savings per year indefinitely.

So as a convergence point, think of it this way... 1M$ gives you an 25k inflation adjusted income forever.1.2M gives you about 30k.

Something I started doing a few years ago is tracking all my expenses in mint. I was amazed/appalled at what I was spending on. Just looking at that probably dropped 15% from my monthly spend.

That also started me thinking about spending from the opportunity side. For example, say you want to buy a 30k car. Most people think "ok, that's 500$/mo, I can easily afford that." The 4% method makes the price of that car $1200/mo FOREVER. Maybe a 20k or 15k car is nicer .

That can translate to new laptops, computers, ipad, and especially things like houses and cars. It also works wonders on hidden costs like mobile phone bills and cable bills. If you figure them annually and then apply the 4% rule it's amazing how they punch holes in ER.

I'm not suggesting that people should live a certain way. My family and I live in one of the most expensive parts of the country and if we moved we could cut our expenses by about 30-40% just because of housing... and we may do that at some point. What I'm suggesting is that this was a cheap and dirty way for me to reduce the "cost" side.

The other nice thing about thinking this way is that it gamifies savings. Instead of it being a "what am I giving up" it becomes "how can I save more." Plus as you reduce expenses you also increase your savings and over 15 years that is an exponential improvement.

 

[bingybear]

As a short cut, most people tend to reference the 4% rule which is that you can "safely" withdraw 4% of your savings per year indefinitely.

4% rule I believe it the annual withdraw rate with inflation increase the will likely work for 30 years... worst case. Some think that rule of thumb may have issues in this low interest environment. It also assumes some AA... 60/40 or 50/50... not sure which.

So as a convergence point, think of it this way... 1M$ gives you an 25k inflation adjusted income forever.1.2M gives you about 30k.

1Mil would give 40k, 1.2Mil would be 48k annual income... likely before tax... as everyone's tax situation is different.

 

[walkinwood]

Congratulations on your progress & welcome to the forum.

There are 3 things that you need to do to achieve FI earlier. The first two are more in your control than the third
- Earn more
- Save more
- Invest

You don't say how much your student debt is, but if you're paying $500 till 2019, that's $6000/yr for ~5 years, which is $30,000 - so your debt is at least that much. Would you earn more than your debt over 5 years if you just paid it off and took a better paying job? Only you can answer if that's even a possibility.

Like others have indicated, track your spending - every little bit. It will open your eyes as to where your hard earned money is going & will change your spending behaviour. The more you save, the less you spend and the smaller your savings need to be to sustain your living standard. But like many things, there is a point of diminishing returns. You have to enjoy your life too!

As to investments, my belief is to pick an asset allocation that is comfortable - ie. you can live with the volatility, and try to match the market with the lowest cost funds you can find. Learn how to do this yourself so you aren't paying someone a big fee for an easy task.

All the best.

 

[makeitrain]

Hi all, thank you so much for reviewing and offering feedback! I will try to address some of the questions. Really good points here.

We have estimated needing about 4-6K per month in retirement, plus inflation (so 48-72K after tax), which includes health insurance for 2 people, long term care insurance, other bills, utilities, and insurance, along with the food/gas/entertainment equation. I tried to estimate high. We are also considering selling one or both properties (house we are currently in and/or townhouse) around that time to add to the nest egg. Although having rental income from the townhouse esp. in gap years could help significantly. We are spending more now on our house and property (has been a fixer upper and we have put a lot into it) than we imagine we will be spending in the future. We hope to have most major house projects complete within next 3-5 years or so. We do enjoy traveling and are happy to do it on the cheap, just trying to balance that save for the future/live in the moment mentality.

So yes - all of these are great points - is 1.2 mill enough for what is hopefully 35-40 years of living (till our mid-eighties or nineties). ER is a goal we are setting for ourselves and we are trying to figure out what is realistic and feasible.

Great advice to take a closer look at spending. We don't always spend all the leftover cash in the checking account every month so would be good to track this closer and tighten the belt. Agree that saving should be viewed in positive light and not as scrimping! Anyone have recommendations for good budget apps etc?

So sounds like we need to save more and spend less . I like the recommendation to put some $ in mutual fund now for compounding effect to help in gap years. Other ideas would be:

- more in mutual fund
- more in husband's 401K (mine is maxed)
- more in short term savings and roll into other funds.
- what about putting more into mortgage? would this outweigh tax benefits of mortgage?

We appreciate easy methods of savings, auto-deductions work well, of course. We are both busy w. full time jobs and any convenient options work best for us.

 

[makeitrain]

And thanks Walkinwood and others who commented on asset allocation. We currently work with a friend of the family on our fund allocations. He knows our target date and has been helping us in this regard. Our funds for the most part are set up as moderate risk although we have one fund in my 401K that is viewed as higher risk.

 

[racy]

...and hear feedback from the community as to whether we are on the right track to early retirement....- Married couple, each 36 years old. ... - Our current home is valued at ~420K. We currently pay an extra $500 a month into our principal, ... We would like to retire at age 52 (or earlier). ... we anticipate having 1.2 million in the retirement accounts at that time, which we think will be enough...we both have 500K life insurance policy....- Any other creative ideas?

Thank you!

Hi,
At your young age I would definitely NOT be pre-paying more on my mortgage. I would be investing it instead. I'd much rather have that money getting me 6-10% and compounding rather than paying off a 4% mortgage that's actually getting cheaper every year with inflation. And, as others have said, $1 million is not going to be that much when you retire. Google something like "is $1 million enough?". A $1 Million Dollar Nest Egg for Retirement - Is it Enough?
Lastly, is $500K enough if either one of you were not contributing to the future plan any longer? Term insurance is pretty cheap.

Good luck!