38 in SoCal, not sure how to make ER a possibility

[dvalley]

First off I'm very impressed (and somewhat depressed) by what you guys have been able to do with ER and the money you've amassed. My congratulations to all of you who've done it already and those who are pursuing it!

I graduated with a degree in computer science at the age of 23. I've always been frugal and have had 401k since my first prof job. Unfortunately I lost a lot in my divorce a few years ago. It set me back almost 10years financially (legal fees and split of 50/50 on everything, buying her out of the house, alimony, child support, taxes etc) but I'm trying to get back on the horse. However, I also learned through my divorce that life can change suddenly so save hard for the retirement but don't forget to enjoy the life you have now. I spend more on small indulgences, eat out, go on small weekend trips and vacations with my kiddo more often etc.

Here're my current assets/stats:
W2 income: $125k
401k/IRA: $180k (also contribute $15k/yr to it)
Brokerage: $30k
Cash/emergency fund: $30k
House: worth $430k, owe $310k (small modest house by SoCal standards)
cars: 12-16years old but in the process of buying a new one since I commute a lot

My goal now is to retire by 50. Based on my understanding of the age limits when you can tap into 401k, IRAs, Social Security etc here's when and how much I'll need in each types of accounts if I want to retire by age 50 and be able to have $4k/mo (today's dollars, not adjusted for inflation).

Age: Goal
50-55: cash/savings $240k
55-60: 401k $240k
60-70: IRA $500k
70-90: Social Security

I just pulled most of my money out of the market after the Dow hit 15k. Now before anyone says anything about me trying to time the market I know, I know but I'd rather take my 40-60% appreciation than wait for the market to pull back and be back where I started 4 years ago.

I'm really thinking of buying an investment property as a vehicle for my retirement but not sure I can afford one? I'm also a single earner now so if I lose my job I don't want to lose everything. I'm not sure what my next move(s) should be

[LitGal]

I didn't weather a divorce, but from ages 18-43 faced the myriad challenges of fulfilling middle-class dreams in the California economy. I had chosen a less-than-lucrative major (English), and entered teaching with eyes wide open. Plus, I knew I'd probably fall for a spouse who had as little interest in getting rich as I did. Well, I married a theology major (at least his undergrad degree was in biology/chemistry/math). We were far more interested in "helping the world" than in building a bank acct.

While we're still idealistic-- and continue to volunteer in altruistic settings---- back in our thirties we had to face hard facts: the quality of our son's education would depend on which school district we lived in (ie. the cost of our house would determine the quality of his school); high school teachers earn far more than college adjunct faculty (so I returned to teaching h.s., to help pay a whopping mortgage payment in a highly rated Bay Area school district); that mortgage payment + daycare took my whole teacher's salary each month (so we lived on what my husband made----- he eventually worked for a pharmaceutical co.)

We could save little for retirement or DS's college. Our big idea (when he was in preschool) was to refinance to a 15-yr. mortgage, so the house would be paid off when he entered college. Then we would use the former mortgage $ to pay for college expenses each month.

However, with growing drug and gang-activity on campus, I became disillusioned with the wonderful high school from which I thought I would retire. Plus, we needed a bigger yard for our son to play in as he grew. We learned he had special needs, and would probably need private schooling. But we could not afford private schools for 13 years, or a larger mortgage payment for a bigger house or lot.

So, we took 3-5 years to research possible transfers within my husband's co. In 1996, we sold our house (had doubled our $), moved to Ohio (where he kept the same job at the same salary, with a 50% cut in the cost of living). We bought a 3,000 sq. ft. house for less than the sale price of our 1300 sq. ft. California home. I took time off work, then went back part-time, our son attended private school (to get the needed help), and we were able to save aggressively for retirement. DH ER'd at 61, and I at 59.

With the $ saved by moving to Ohio, we can easily afford to visit the CA friends and family, at least every two years. Plus, they like to come here on vacation, relaxing on our porch overlooking a 400 acre forest (which is city park, never to razed by developers).

We still get to enjoy the delights of sunny Cal, visiting friends up and down the coast. But it's much easier to do as a tourist, than as middle-class wage earners. Plus, rush hour here lasts for about 20 min., and we can still drive at 55-65 MPH (no gridlock).

I know that moving is drastic.......but our quality of life improved 100%, and we retired about 3-5 years earlier than expected.

[dvalley]

Great story LitGal, thanks for sharing! and congratulations on making it!

My ex and I had considered moving out of CA, we just couldn't figure out where to move to. However, at this point I can't move because of DD, as is I only get to spend 50% of my time with her and she's everything to me in this life.

I have thought about paying $200-300 more each month on my mortgage (I currently pay 1 extra payment each year) as it'll cut down the length of mortgage by 6-8 years but haven't done it yet. The reason being I'm hoping to build up some additional savings and potentially look into buying an investment property (condo or townhome since single family homes will be too much of a stretch).

[LitGal]

dvalley,

Even though you may feel somewhat restricted right now, you have a great deal going for you. In your first post, your list of assets and annual earnings show much careful planning and hard work on your part, in spite of going through the difficulties of divorce. I know many college grads in CA who earn less than half your annual salary, have far fewer assets, and also have 2-3 children.

While staying near your daughter, it also looks like you are doing many financial things "right." You just need more years of working, saving and investing to get you to ER. You are only 38! I know professionals in their 50's and 60's (in San Diego, Fresno, the Bay Area, etc.) who don't know if they will be able to retire by 65.....nor has their home equity returned since the housing bubble burst. (And they haven't had to deal with the challenges of divorce.)

I know I'm not answering questions about how you can ER. But, here is something else that helped us when we lived in No. Cal. In the years when we looked for a transfer, several appeared that just didn't pan out. So we hunkered down, assuming we would need to stay put and find ways to make the best of the situation. We both invested heavily in the parts of our jobs we enjoyed (which brought some extra projects with special stipends or bonuses). Though our neighbors were often tapping their home equity to buy boats, RVs or vacations, we refused to tap ours, because it was our major "savings acct." if/when we could make a move.

We did some minor remodeling to make the house more useable, and create more play space for DS. We invested in hobbies and friends, who helped alleviate the stress of workloads and demands of the Bay Area pace of life.

It costs a lot to live in CA. One can economize only so much (though it helps to have friends who share the values of LBYM). Plus, you want to enjoy the time you get to spend with DD, and that can cost $ too.

For someone who is 38, you seem to be on track for FI one day. (By reading the other threads/forums here, you'll see much good advice on investments and retirement planning........from folks who know much more than I do.)

Best of luck!

[clifp]

Informative post DValley, my first impression.

Salary 125K Very good
Savings $240K @38 good
Savings rate $15k/year OK
Most money out of the market Bad

If you were planning on retiring sometime in your mid 60s I'd say you'd be doing fine. However, I think you'll need to make dramatic changes to your savings rate and investments in order to realistically retire by 55 much less 50.

My rule of thumb is in order to retire by 50, you need to save 25% of your income starting when you are 25 and preferably earlier, you have to invest pretty aggressively 50-75% stocks. Even after this you are likely to only have 60-70% of your pre retirement income, so minor cutbacks after retirement.

The biggest mistake I think you are making is believe you can live in So Cal on $4K/month in todays dollar. By the time you are 53 inflation (3%) will have reduce $4K a month to $2500. I bet you currently pay little for your healthy insurance. I am 53 and pay $4K/year for my insurance and insurance cost are lower here than in So Cal so that leaves $26K a year for you to live on.

To be perfectly honest, if you were as frugal as you think you are you would have saved a lot more than you have on $125K salary.

Now early retirement isn't everything as you say life is short for many people the little indulgence are worth more than quitting work earlier. This is particularly true if you like your job.

[aida2003]

Quote:

Originally Posted by clifp The biggest mistake I think you are making is believe you can live in So Cal on $4K/month in todays dollar. By the time you are 53 inflation (3%) will have reduce $4K a month to $2500. I bet you currently pay little for your healthy insurance. I am 53 and pay $4K/year for my insurance and insurance cost are lower here than in So Cal so that leaves $26K a year for you to live on. To be perfectly honest, if you were as frugal as you think you are you would have saved a lot more than you have on $125K salary. Now early retirement isn't everything as you say life is short for many people the little indulgence are worth more than quitting work earlier. This is particularly true if you like your job.

As the OP said, everything was split 50/50, so his savings are adequate considering the situation, IHMO.

I agree that OP shouldn't bank on $4k/mo. to survive in CA in 20 years. OTOH, life changes fast and the girl will be a student by the time the OP wishes to retire, so it might come natural to move wherever she decides to study... It could also be a good opportunity for the dad to buy an apartment/condo in that area and rent to students. Anyway, now's the time to save as much as you can and then you never know where his life takes him to.

LitGal, what a great story you shared with us. Thank you

[rodi]

Welcome.
As mentioned by Clifp - your salary and savings are in good shape - but you won't reach your goals if you have the savings 100% in cash.

I know you're looking to fund pre-59.5 (taxable) funds - but I'd still bump the 401k up to 17k (max allowed)... The tax advantage helps. Then dig deep and find more money to put in your taxable accounts.

I know how expensive SoCal is. But once the house is paid down/off... the most expensive part of SoCal goes away. Prop 13 limits your property tax increases. There are caps on the increases of Mello Roos (if you have them.) So then your housing expense because manageable and more deterministic than places with ever increasing property taxes.

With some slight changes you'll reach your goal.

[dvalley]

Thanks to all that have taken the time to respond, it is much appreciated!

I'll answer a few questions and attempt to clarify by topic:

Net-worth:
I used to have quite a bit more in all my accounts but I lost a big percentage due to the divorce. Between my ex's salary and what I had saved up I was pretty well set to be FI by age 45-50. Then two things happened, first the economy crashed and second the divorce which had a significant impact on what I ended up with after all said and done.

House:
I'm not sure if I'll want to stay in CA after I retire, most likely not. It has been said before though that once you exit the CA realestate market it's not easy to get back in. I do believe owning a house in CA for me will be beneficial for my retirement. The real estate market will appreciate in CA at a faster pace than most other places. My house already has approx. $100k equity in it after a bad real-estate market crash a few years ago. If I make an additional payment of $300/mo I can knock down 8yrs off my mortgage. By the time I turn 50 even if the house sells for $550k (a modest appreciation in 12 years) I would have $177k left on the mortgage. The rest I can use to buy a house in a cheaper state free and clear and still may have some money left over. My current house has no Mello-rose or HOA (very hard to find a house without these in a good area in SoCal). Most people pay $200-400 in just HOA dues here! I recently (after 5 years of living in it) did a few minor upgrades to the house ($4k worth) and it feels good to come home now. It needs a few more things; a/c is on its last legs, the roof is getting bad and the landscaping...well there's none left

Current savings:
- I contribute $15k/yr to my 401k
- I contribute $1200/yr to a sharebuilder (VTI ETF) account for my kiddo. The 529 I have for her I no longer contribute to because in the last 7 years it's only appreciated by $300
- I save another $6k-8k/yr in my checking account which is simply income I don't end up using (fluctuates with variable expenses like car repair, house repair, travel etc).

Future needs:
$4k/month (net): this is about what I spend and $2k/mo of that is just my mortgage. I figured by the time I retire the $2k/mo of mortgage would free up but I was thinking $1k/mo is what I'd probably spend on health insurance. In today's dollars $4k/mo should be enough for me to live comfortably (not lavishly). Of course, any more will be icing on the cake

Investments:
- I pulled money out of the market as of last week because I strongly feel the market is artificially inflated and there will be a pull back. I only pulled the money out that was in my IRA and brokerage and only the stocks that had appreciated 50%+. I still have $80k in my current 401k invested in a target retirement fund for 2025.

I don't like a lot of cash sitting on the side lines. I want to buy an investment property but I'm gun shy because it'll stretch me a bit too much. Also, despite my desire for a long time I've never been a landlord before. I've heard both good and bad experiences being a landlord. This is where I need some guidance and ideas...saving money is not good enough, that money is decreasing in value if not being invested. So what should I invest my money in besides the volatile stock market?

[clifp]

I don't want to push too strong but, doing some back of the envelop calculations something doesn't seem to add up.

Salary- Saving - Taxes > 4K/month. If you haven't already done so I'd spend some time with Mint or Quicken and really track your spending careful for 6 months.

Regarding investment properties. 3 year ago I bought my first rental property in Vegas and then over then next year or so buy three more properties, and quickly bailed out of the 4 PLex, with modest loss due to transaction costs.
At the time a number of board members warned me about the hassles associated with being a landlord. They were right and while I don't regret buying the properties,they have gone up in value quite a bit on my cash on cash return is very respectable. The experienced landlords on forum were exactly correct, I evicted a tenant last week my 2nd eviction, and have pigeon problem in my other house, and I am fighting the HOA on $1200 worth fines in my condo. Eventhough real estate is about 7% of my portfolio I easily spend 25% of my time dealing with it.

But don't kid yourself that only the stock market is volatile. All of my Vegas properties were picked u between 1/3 and 1/4 the price that previous owners had paid. Closer to where you live my niece and her husband bought a gorgeous house near Palm Spring for $150,000 that had previously sold for $500,000. This far worse than the stock market losses in 2008. Plus since all of these people were using leverage they end up losing their down payment plus any principal, and they trashed their credit.

All that said lots of people have retired via real estate, and I guess there are still some place in So Cal where you can get bargains (Inland Empire for example) On the other hand you only have 30K in your brokerage account. Investment properties typical require 25% down, plus other closing cost, and fix up. I think limits you to purchasing properties work a $100K or so I am not sure there is many of those in So Cal.

[dvalley]

@Clifp, thanks for the feedback and please feel free to question anything I write May be I am doing something wrong.

I did get my Expenses number ($4k) from Mint. I also have a PersonalCapital account and it shows the same thing...on average, it does fluctuate but not by a lot).

I've heard of similar accounts of real-estate gone bad but like you I've also heard many success stories too.

I have $30k in my brokerage and $30k in cash/savings/emergency-funds so I could buy up to around $250k house but around here that would be a condo or a small town home. If I look in further away areas like inland-empire as you suggested I may be able to find something but then being an hr to 2hrs away would have its own challenges when it comes to managing it. Not to mention I would be heavily leveraged against my own cash and if anything goes wrong (losing my job etc) the strategy could back fire.

So back to my first question what can I invest in? what are my options i.e. REITs etc?

[LitGal]

Since rolling over our 401K's into T-IRA's, DH and I have been reading this newsletter and considering using one of his model portfolios (all comprised of Vanguard funds). DH has created a mock-up of Wiener's Income portfolio on Market Watch, monitoring how we would be doing if we had invested in an actual one. The process has been informative and very educational for us. And we haven't even invested the money yet. We're just watching the mock portfolio to see how we would be doing.

Wiener has other model portfolios: Growth, Conservative Growth, etc. Right now he is offering a "2 years for the price of one" subscription special. We have learned a lot from him, as fledgling investors transitioning from the "accumulation phase" to the retirement/fixed income/withdrawal phase.

He writes for all investors who are interested in making $ with low-cost Vanguard funds. His advice has helped DH and me already, with actual investments we've made (not just the mock income portfolio we're currently checking out). Wiener was recommended to us by a friend who was using the newsletter for advice on managing both his taxable and tax-deferred portfolios.

FWIW......

[dvalley]

That sounds interesting and something I should research further. You're so right, it is one thing to passively buy ETFs/funds etc when you're 20 and leave it all there but it gets a lot more tricky when it comes time to retire. At that point asset management becomes critical and the typical 'buy-n-hold' investors have to learn new tricks/strategies. Thanks again for the info LitGal

[dvalley]

It's a new year so an update is in order:

1. In 2013 I maxed out my 401k contributions and will continue to do that this year ($17.5k)
2. Purchased a nice but not super expensive new car with a very low 1.5% financing
3. Towards the end of the year I increased my monthly contributions to sharebuilder from $100/mo to $300/mo which are being invested in VTI and will be the main college fund for DD
4. I also started saving $300/mo into my other brokerage account via auto-deduct but haven't invested that sum yet, not sure what to put my taxable income in, any suggestions?

As of today investments+savings=$280k ($40k increase since I posted in July 2003, thanks to the market appreciatiation). This excludes house equity which is showing as another $180k for a total NW of $460k.

Once I reach the $500k point in my investment+savings is when I'll feel a little better about it. For now I just worry I don't have enough and if something were to happen with my job situation it won't be good.

Next milestone, hoping to bump my savings/investments by another $200/mo soon for a total of $27k/yr with the eventual goal of $30k per year.

[LitGal]

Congratulations, dvalley!

You have taken to heart your hours of effort and research. These should pay off handsomely in the future, both for you and DD!!

(All this was done while California prices continue to go up! When my mom tells me what she's paying for groceries in Sacramento, I get worried....)

Time for you to reward yourself with some kind of LBYM treat!!!!

[dvalley]

Thanks LitGal, I appreciate the kind words. I have long ways to go, hopefully it all pans out. I'm still unclear as to my withdrawl plans so I need to research that out too i.e. if I decide to retire at 50 where will the money come from at the various stages of life e.g. savings/taxable investment first, IRA/401k next then SS. I need to map that out because it seems not only are there rules for when you can withdraw from these retirement accounts (as many of us know) but there are also rules for when you MUST withdraw from them. And if you want to pass down anything left over what is the best way. So much to do so little time

[dvalley]

A little self-motivational post so feel free to ignore it

Today, about 6mos into restarting my aggressive savings plan I'm really pleased (and thankful) to see that I actually added a total of $65k to my savings+investment accounts. My current savings+investments balance now stands at $305k - up from the $240k when I started this thread. Not counting mortgage/equity etc.

Random thoughts/wishes/regrets:
1. Only if I had done this for the past 5 years
2. Only if I didn't lose what I did
3. I hope the stock market continues to be as nice to me as it has the past 6mos...for the next 10 years
4. There's still some room to increase my contributions because I did buy a few non-essential things but cutting out everything non-essential will also make it taste like a bitter pill on a day to day basis.
5. If I can manage to keep adding $60k to my portfolio every year for the next 10 years and somehow pay off the house I can be FI if not completely RE.
6. Still feels like long ways to go and anything can happen. However, I hear after the first 500k the next 500k seems easier...I really hope that is true

[daylatedollarshort]

Great job on the savings!

[rodi]

Great job, dvalley.

[dontworry]

So awesome!!! I have a lot of the same hopes as you. Looking at about ten years of work yet, but hoping for part-time for the last few. We are very close to 500k in retirement savings. I am hoping the next 500k comes easier!!! We WILL do it !!!

[dvalley]

Thanks everyone! If my job situation stays the same I should be able to save 40k for the remainder of the year and whatever the market returns, hopefully positive My current NW also includes the money I'm putting away for DD's college in about 9yrs so it's not all mine. I'm estimating that I'll need to fund her college expenses at 12k/yr (so that's $50k out of the NW). Honestly, I'm not even sure how realistic $12k/yr is but hoping her mom would fund the other half and DD won't have to rely on financial aid.

@dontworry, Congrats! on the first (almost) 500k! way to go! Keep up the great work on the second 500k and keep us posted