39 and confused

[midlifechange]

I sold my business last year and now I'm worth a little over 2 million (after taxes). By the time I'm 40 I will be worth 2 million because I'm experimenting with a new business and living off my savings.

My family is moving to Northern Virginia from California to save on expenses and to enjoy a quieter lifestyle (we plan to live about 1 hr. from Wash DC). It looks like my expenses will go down on health insurance, auto insurance, etc. by moving. I have a wife and 2 kids. I figure 200K will send my kids to college in 16 or so years...so that leaves me with 1.8 million. I do not own a house and plan on spending 500K around this time next year to purchase one. So that will leave me 1.3 M...I plan to sell the house about the same time the kids go to college and down size or go back to renting a smaller house as I do now.

I enjoy working for myself and hopefully I will be able to start another tech business because I would like to live at least an hour away from a major city. However, I may get a job in 6 months if my new idea does not pan out, so I need to be within an hour of a major city...I have not worked for someone in 14 years so I guess I could make between 50K - 70K given my skills...but who knows...I have 300K in stocks - started dollar cost averaging about 3 months ago into Vanguard total stock market index - the rest is cash. I figure 60K/year would be fine to live on in todays dollars - includes travel, health insurance, property tax, etc.

Any help would be appreciated:

1) Is 200K too little for college in todays dollars? 100K each. I guess sending my kids to Harvard would be too little...but a state school may be ok...if they are smart enough I will help pay.

2) Should I pay cash for a house or get a mortgage?

3) When can I FIRE at the earliest?

 

[FIREd]

When can I FIRE at the earliest?

It greatly depends on the kind of lifestyle you want in retirement. What minimum gross income would you need to enjoy the life you want? Is the 60K you quoted net or gross? And how much will you be able to save a year after you move?

 

[midlifechange]

60K

I just updated my original question - thanks for reminding me of this - impossible to give an answer without...60K/year which includes travel, house insurance, property tax, etc.

 

[FIREd]

So it looks like the 60K does not include income taxes which may not be that high for you because most of your money is in taxable accounts and you are married if I understand correctly.

In general you want to have a portfolio worth at least 25 times your annual gross retirement income. So if we say that you need 65K gross per year, then you need to have at least 1.625M in your portfolio to be able to retire (assuming no pensions). So you're pretty close but not quite there yet. For young folks like us though, it is often advised to have a bit of padding in our portfolio because our retirement is going to last 40-50 years if everything goes well! So before retiring you may want to have a portfolio worth 30-35 times your annual gross retirement income.

 

[WanderALot]

If you use the 4% "rule", then to get 60K/yr you will need a portfolio of 1.5 mil. If you think that you will have additional income of 50-70K, then I think FIRE is a goal you have already achieved and then some! Especially if you have healthcare taken care of. I also plan on semiretiring with a similar amount.

College costs are rising faster than inflation but I think 100K in today's dollars is a reasonable amount unless you are counting on paying for 100% of their education.

Be sure to experiment with the FIRECalc calculator. It's very useful for running what-if scenarios. Check the link at the bottom of this site.

 

[midlifechange]

Thanks FIREdreamer - I forget that the 60K is taxed as I take it out...lets see...I have already paid my capital gains taxes, etc. Now, as my income grows in my Vanguard index fund I will not be taxed until I withdraw my money...interesting....

WanderAlot - congrats! You are only 33 - amazing...so both of you came out with approx the same numbers 1.6M and 1.5M - so even with my 500K house sold when I'm approx 55 yrs old I still cannot retire soon? WanderALot says if I have the 50K-70K income - what if I do not have this income? What if I want to quit working ASAP? I have run FIRECalc but it's interesting to see what the "human brain calc" says...

 

[FIREd]

When I quoted you the 1.6M minimum, I assumed $0 of extra income, meaning you get to stay home all day if you want. I haven't factored in the sale of your house at 55, because who knows how much net gain you will realize when you downsize in 15 years. I think you should probably not include it in your calculations at this point. The alternative would be to buy a smaller home right now (one you could stay in forever) and keep more money in your investable portfolio. It could make a big difference.

 

[midlifechange]

Thanks for the clarification. So I could get a 200K home and be retired...of course my family would have to stay healthy...but this is good news to see I could stop right now...firecalc agreed with you (but I'm a bit new to this tool so I could be doing something wrong).

To be quite honest I've always wanted a nice home - I'm 39 and still not an owner...always a renter...so I've kind of built up in my mind what I have always wanted...nothing super huge - just something that gives my family some room and newer construction.

I plan to keep working - I enjoy creating and building new ventures ...but it's nice to know I could stop if I wanted.

 

[CaseInPoint]

Any help would be appreciated:

1) Is 200K too little for college in todays dollars? 100K each. I guess sending my kids to Harvard would be too little...but a state school may be ok...if they are smart enough I will help pay.

2) Should I pay cash for a house or get a mortgage?

3) When can I FIRE at the earliest?

Hi Midlife,

Sorry to say but, as you know deep inside, you're nowhere near being able to FIRE at this moment or in the near future. But hopefully, in the long term, you will. Moving to a lower cost area is a good move financially. However, not to get too personal, but I would not underestimate the price of uprooting your family. Especially with young kids.

Here are some specific answers:

1. That $200k for college is fine. Ask your financial advisor about a nice 529 plan, so the money can grow tax-free.

2. There is no easy answer about paying cash or taking a mortgage. Although it's great to be mortgage free, no one has lost any sleep for having an extra $500k at their disposal, but plenty of people lose sleep over not having enough financial security. And, a home is NOT liquid in case you need to take out the cash in a pinch.

3. You will be able to FIRE when you've accumulated a minimum of $4.5M, or when you get old enough so that you need to worry about a much shorter retirement period than now. Although it's common for people to rely on the 4% rule, that (arguably) works for people who are looking at a retirement period of 20-30 yrs. You, however, could be looking at more than 60 yrs. So, IMO, you must look for your income being 2% of your investable assets. To produce $60k after taxes, you will need to start with $85-90k/yr. Hence the $4.5M.

But I say the $4.5 is a minimum, because the current rate of inflation with gas prices breaking new records, may be much more than most retirement plans take into account.

So... the best advice I can give you is to do the $200k for college, buy the $500k house (maximum) after you're sure you want to settle down in a particular location, then invest your remaining $1.3 and go get a job you enjoy, and/or start a new venture that you will love. Wait for the current market and gas crisis to stabilize and see what your life is like at the time and then figure out what it takes for you and your family to live a happy life.

 

[midlifechange]

Thank you CaseInPoint - your message is filled with great nuggets of information. You and the others are very kind to spend your time analyzing my situation.

Yes, moving will be hard at first but living in a concrete jungle is not fair to me or my family - I've lived in a smaller town and know there is a huge difference in lifestyles...we will be renting for about a year in Virginia while we figure out where to live and if we like it enough. I see you are from LA - I know most people in Southern California love it here but I just have a different view.

I had better get a 529 plan - I did not think about the money growing tax free - very important...thanks!

4.5M seems way high...but you could be absolutely right...you just gave me a huge piece of information that conflicts with what the others are saying...so I guess it's back to the drawing board for me to try to prove/disprove what you are saying.

Again, thank you for your thoughts - kind of depressing but then again...bad news is better than making the wrong decisions.

 

[jambo101]

That concrete jungle will be knocking on your door in no time if you are only an hour out of Washington.
The kids college expenses will be drastically reduced if you send them to a university in Canada,not sure how the cross border thing works but my daughter will be starting at Mcgill university in Montreal in the fall and tuition will be $1500 for the year.I think there is an extra charge for non residents but it doesnt come anywhere near what most of the US colleges charge,Might be worth some looking into.

 

[midlifechange]

Trust me my friend...the concrete jungle will be far away - I've driven around Virginia a few months ago and there is no way it will expand that fast an hour away from Washington DC - the countryside is huge with beautiful rolling hills...the problem is if I am an hour from DC my commute would be long and hard - not to mention gas prices...so 30 minutes from the areas near DC would be better (I would not need to go to DC itself). 30 minutes can still be rural but it will be more populated...but it still won't be as bad as the LA area...

I've been to Mcgill in Montreal! This is an excellent school from what I hear - congrats to you and your daughter. My first kid is still 16 years off but I will always remember this idea and pass the idea onto some relatives with kids almost in college...

 

[midlifechange]

CaseInPoint - I just re-read your post - you said this, "You, however, could be looking at more than 60 yrs" - this is unrealistic - I am looking at 45 yrs (if I retire next year) at the most because if I live past 85 the chances of my health being good are small...if it looks like my health will be good past 75 I will cut back but I will not plan for having much money past 85 yrs of age - most likely if I live that long I will be in a nursing home...and to get in they will demand all of my money anyway. So, 45 yrs. is all I have left according to my planning - so 4.5M would be too much. Perhaps I would need to wait until 43 years of age to retire to be safe...

 

[cute fuzzy bunny]

no one has lost any sleep for having an extra $500k at their disposal

I'm not losing any sleep right now over the bear market because I dont have to sell depreciated shares to make a large debt payment every month.

And, a home is NOT liquid in case you need to take out the cash in a pinch.

Home equity lines of credit, mortgages, reverse mortgages, roommates, renting and a plethora of other simplistic devices can create liquidity or cash flow.

 

[ChrisC]

1) Is 200K too little for college in todays dollars? 100K each. I guess sending my kids to Harvard would be too little...but a state school may be ok...if they are smart enough I will help pay.

2) Should I pay cash for a house or get a mortgage?

(1) I'm in close-in Northern Virginia now and commuted for many years in the exhurbs of Northern Virginia. Two of my kids went to the University of Virginia and we used a 529 Plan for one of them (the other received a full-ride scholarship and the 529 Plan wasn't available for her when we started our college planning.) $200K in today's dollars is more than plenty if your kids attend any of the excellent public colleges in Virginia. Current cost of attendance for in-state residents is probably around $17-20K; however, $200K for two kids at a selective private college might not be enough; I think the most expensive private school in Virginia is probably Washington & Lee and that would probably cost around $30K per year. The more elite schools like Duke, Cornell, Yale, Georgetown, etc will probably cost you around $44-48K in today's dollars. I recommend the excellent 529 plans that Virginia offers its residents.

By the way, admission into the selective public colleges in Virginia is extremely competitive; there is also an in-state geographical diversity element that plays an important part in the selection process; thus, it is not uncommon for students in the more populous and academically challenging parts of Northern Virginia to have greater difficulty in admission into the selective public colleges because of the academic talent pool in the area. I recall the Washington Post did a story about some student in Northern Virginia with perfect SAT scores who got frozen out of all of the public colleges in Virginia that he applied, including James Madison University! If you are within the Northern Virginia band that drops down to Stafford County or Loudon County to the west, expect to be in a very deep talent pool of students.

(2) If you pay cash for a house -- and cash is king in this housing recession -- then for student financial aid purposes, you will probably improve your chances for obtaining a student financial assistance for a high-cost school. Won't comment on the other aspects of this issue.

 

[midlifechange]

I guess super higher taxes in NY and CA gets you a huge selection of public universities but relatively lower taxes in Virginia gets you a small selection of universities thereby locking kids out of a good deal. Something to think about...thanks for the heads up.

 

[CaseInPoint]

So, 45 yrs. is all I have left according to my planning - so 4.5M would be too much. Perhaps I would need to wait until 43 years of age to retire to be safe...

Hi,

Actually, I would give the same recommendation for anyone who would expect to be retired for more than 30 yrs.

The 4% is really a figure that has been the "golden standard" for the past decade, is usually based on an annual inflation rate of 2.5% and investments yielding 7% (pre-tax). Obviously, people should reconsider their strategy, based on the new realities. I would give 2% as a realistic figure for anyone thinking of ER in their early or mid 40s.

As for assuming that you'll get long-term care and give away all of your assets, I'm pretty sure that you'll think differently about that strategy once you're a little older. That's why you should seriously consider getting long-term care insurance and lock in a low rate while you're at a young age. I'm 42, have young kids, a good deal of assets, and that's what I've done to avoid the scenario you described.

In general, though, as much as I totally understand your desire to be able to cash out and call it quits, you'd be making a much better decision if you use the financial security you have at the moment to take a little vacation time and figure out quietly what kind of job or business would make you happy and cover your expenses for a few years while your assets appreciate enough to give you long term security.

I'm not losing any sleep right now over the bear market because I dont have to sell depreciated shares to make a large debt payment every month.

Yes, if you would have to sell your stocks just to make your mortgage payments, it's probably a good idea not to have a mortgage. But remember that midlife is just 39 and is easily capable of earning a few thou a month, so he can preserve his financial security.

As I said, though, paying all cash vs. taking a mortgage has its pros and cons. There's no obvious answer in most cases.

Home equity lines of credit, mortgages, reverse mortgages, roommates, renting and a plethora of other simplistic devices can create liquidity or cash flow.

Well, reverse mortgages are not appropriate for someone who is 39, and roommates and renters are not a "simplistic" answer for anyone, especially not for someone with a wife and kids.

A HE line of credit is something that every home owner should apply for BEFORE they have a desperate need for it. It's a good thing to have ready in case of urgent need. (It's the same as establishing any credit line). But, it doesn't require pre-paying the entire cost of a house. One can have an HE line of credit based on any down payment on a house.

 

[cute fuzzy bunny]

Just pointing out that your blanket statement that a paid off home is not liquid isnt necessarily the case. You didnt include an age qualifier. My comment indicates a series of options for creating liquidity of some or all of the original amount or creating nearly endless income streams, granted with different issues, timeframes and age ranges.

For "cash in a pinch" one generally doesnt need a half million bucks. Unless your plan stinks and you screwed up. Not necessarily in that order.

While being 39 certainly gives one more options and creates more challenges, I think the idea of returning to work after 8-10 years of retirement during a rough economic period might be a lot less appealing than taking in a renter.

As a note to the OP, I retired early at 39. You shouldnt need 4-5 million, at your stated budget requirements and holdings you should be able to do it now. I'm married with a 3 year old who wasnt even conceived (of) at the time I retired 7 years ago. As long as you're flexible and creative, and willing to be a little bit agile, mobile and occasionally hostile...you oughta be just fine.

 

[EagleEye]

FWIW, I don't agree with CaseInPoint. I am surprised no one else piped up on this. Here is what I find problematic:

1. He assumes that you will live until you are 99.

2. He assumes that the money you withdraw will be taxed at a 30% rate, thereby necessitating a 90K withdrawal to yield 60K after tax.

3. He asserts, without any support, that you should withdraw only 2% per annum. The 4% withdrawal rate is based on FIREcalc results and results from other retirement calculators. FIREcalc can run caclulations on period of 40, 50, and 60 years. Where does his 2% edict come from? Why is it not 2.5% or 1.8% or 3%? We don't know.

I took 2 minutes to run your numbers on the basic FIREcalc (which does not count any Social Security or other pension income). With a portfoliio of $1.7M, spending of 60K (inflation-adjusted), and a term of 60 years, you get a 98.7% success rate. Obviously, you should run your own numbers in the more advanced FIREcalc, and in other calculators, but the above quick-and-dirty check shows that the right ball park is something short of $2M, maybe a little more with padding. But not $4.5 M.

There are some who love to show the world how conservative they are in their planning, since they equate "conservative" with "prudent". In general, it is good to be conservative in your assumptions. But like anything else, it can be taken to an extreme, at which point it is no longer prudent or helpful. If you assume that you will live to be 100 (heck, or 150, given the advances in anti-aging medicine), that Obama or McCain will tax capital gains like ordinary income and that the markets and inflation over the next several decades will be "off the charts" thus rendering FIREcalc useless, then maybe you will "need" a minimum of $4.5 million. Or more likely, you will just never retire.

 

[jclarksnakes]

EagleEye,
....I also do not agree with CaseIn Point but I do not agree with you on one point. There is some small chance that the OP or his wife will live to age 99. It is not a bad idea to plan for that possibility.
....While the market was rising it seemed like everyone on this forum believed in the FIRECALC. Now that we are having a down market there seem to be more people who are not as comfortable with it. I use it and have much faith in it but I do recognize that it is impossible to predict the future.
....It does seem to me that the OP is much closer to FIRE than CaseInPoint says he is. I too was surprised that noone questioned his numbers earlier. Many on this forum have successfully and happily RE'd with portfolios WAY less than what the OP has.
Jeff

 

[CaseInPoint]

1. He assumes that you will live until you are 99.

Right, I always advise people to plan for their money to outlive them, not the other way around. However, as I said before, I would arrive at the same result for anyone facing a retirement of more than 30 years, because inflation for that period of time is too unpredictable NOT to be conservative.

2. He assumes that the money you withdraw will be taxed at a 30% rate, thereby necessitating a 90K withdrawal to yield 60K after tax.

Yep. Once you take into account Federal, State and local taxes, 30% is a good figure, with or without being hit by AMT.

3. He asserts, without any support, that you should withdraw only 2% per annum. The 4% withdrawal rate is based on FIREcalc results and results from other retirement calculators. FIREcalc can run caclulations on period of 40, 50, and 60 years. Where does his 2% edict come from? Why is it not 2.5% or 1.8% or 3%? We don't know.

I like FIRECalc as a seond or third opinion. But seeing completely different conclusions on FIRECalc than in my Schwab retirement calculator and other reputable calculators, I wouldn't gamble with the future of my family on FIRECalc alone, especially as its developers recognize that it's a work in progress.

With all due respect, your conclusion that a 39 year-old with young kids and an after-tax expenditure of $60k/yr, can retire on 1.7 for 60years , is way off base.

I've seen plenty of others on this forum who understand that the 4% doesn't apply for long retirements. I've seen some say 2.5% pretty recently, but the longer the retirement, the lower the percentage needs to be, IMO. That's why I chose 2%. If it turns out to be 2.1%, 2.%, fine with me.

And, FWIW - here are people who agree with my 2% figure:

http://www.early-retirement.org/forums/showpost.php?p=674713&postcount=34

and -

http://www.early-retirement.org/forums/showpost.php?p=674739&postcount=35

There are some who love to show the world how conservative they are in their planning, since they equate "conservative" with "prudent".

Sure, I'm definitely fiscally conservative, and I wouldn't gamble unnecessarily with my family's future. I'd imagine that anyone who has a family they love, wants to live a comfortable lifestyle, and doesn't want to sit around hoping to die before their money runs out, would be conservative, too.

 

[cute fuzzy bunny]

My family likes me fine at home rather than at the office for 60 hours a week.

My overall tax rate is less than 10%.

I havent seen any evidence that suggests that 4% doesnt work for "long retirements".

Many "reputable calculators" use monte carlo schemes that can produce far more conservative or far more liberal results than real world data would offer up simply because they dont incorporate satisfactory correlative factors in the data series over the passage of time. You can end up with very long negative return series or very long positive return series that simply wouldnt happen in the real world. So its not surprising that they come up with numbers far lower than 4%.

Sure, firecalc isnt the be-all, end-all. 4% isnt a sure thing. Its a good idea for young retirees to pay a lot of attention to their spending and how they invest.

But blanket statements with little or no solid backing other than "its a good idea to be conservative" are a little tough to take. If you want to be conservative, work until you're 70.

I've pretty much enjoyed the heck out of the last non rat race 7 years, and i'm pretty sure I'll enjoy the next 50 just as much.

 

[CaseInPoint]

My family likes me fine at home rather than at the office for 60 hours a week.

Tough to comment since, of course, I really don't know your personal situation at all.

If you're a stay-at-home mom with another income earner, there are definitely some advantages to that.

My overall tax rate is less than 10%.

Hmmm... No AMT? That's great. Although I'm pretty sure that whenever I hear about such tax miracles, there's some serious catch.

But blanket statements with little or no solid backing other than "its a good idea to be conservative" are a little tough to take. If you want to be conservative, work until you're 70.

Well, it's not like playing a 25-cent slot machine in Vegas. When it comes to gambling with other people's lives, "conservative" is the only way to go.

And, there's no need to work till 70. For example, I'm 42, no longer work full-time, though I enjoy my job very much. I can spend as much time with my family as I choose. In the future, I can either sell my company, or have someone run the day-to-day operations for me. So, it's possible to be conservative and also FIRE. I've seen this formula several times on the forum.

 

[Marquette]

If you're a stay-at-home mom with another income earner, there are definitely some advantages to that.

CFB, you've got you change your username, man.

 

[WanderALot]

WanderAlot - congrats! You are only 33 - amazing...so both of you came out with approx the same numbers 1.6M and 1.5M - so even with my 500K house sold when I'm approx 55 yrs old I still cannot retire soon? WanderALot says if I have the 50K-70K income - what if I do not have this income? What if I want to quit working ASAP? I have run FIRECalc but it's interesting to see what the "human brain calc" says...

Midlifechange, I didn't mean to imply that I have already semi-retired. I plan to, but not there yet. I tend to be a little conservative so I would like to have some extra income and not touch the portfolio for my living expenses, especially considering I'll be [semi] retiring pretty early in life. If you abide by the 4% rule, then I don't think you would need extra income at all with around 1.5 million.

I'm think I am missing something though, you have 2M now, if you take out 200K for the college fund and take around another 500K for a house, you'll still have 1.3M. You're 39 now, so you should be able to save enough to retire way before 55.

I'm definitely sure that I don't want to wait till I have 4 million to retire. Sure, it might be safer, but I'm not prepared to work fulltime for at least another 10+ years to get to that number. I'll take the small added risk to retire with a smaller number.

Remember, I'm just some guy on the Internet.