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Can I make it in 3-years?
Old 12-03-2009, 03:09 PM   #1
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Can I make it in 3-years?

1st time poster here! Really enjoy this forum (been lurking for awhile now!) and wish to get some input on my personal financial situation.

I am 41 years old, happily married with two kids - 9 & 6. In an ideal world I would like the flexibility to achieve financial freedom by age 45, not sure if I would retire or just find another profession. Regardless, I’m fortunate enough to be in a great paying job now and probably wouldn’t be able to replicate my compensation immediately should I choose to shift gears. Basically I want to see if I can have the flexibility to retire in 3 full years, the end of 2012, here are my details . . .

$1.1m in brokerage account (50% equities / 40% bonds / 10% cash)
$265k in 401k – I add annually about $20k to this including match
$110k in college savings – VUL and 529’s

Due to our company sale I still have 2 installments of cash coming to me in the next 3 years, $330k each, of which I will invest about $500k. These dollars are a long term capital gains taxed, so I just pay 15% plus State taxes.

By my projections by age 45 I’ll have about $2m in the brokerage account, about $400k in my 401k and $160k saved for my children’s education. In an ideal world I’d like the brokerage account dollars to bridge the gap (retirement date to the date I can start collecting qualified dollars) until I can draw upon my 401k, SS, pension (about $1200/mo). For what it’s worth my annual comp. is about $350k of which I save about 20% on a gross basis.

My question is do you think $125k - $150k withdrawal is feasible during the 15 year period prior to age 60? But furthermore and probably more importantly, can I get this kind of withdrawl rate for the next 35 years. I probably didn't write things as accurately as I should have but clearly I don't want to chew up the entire brokerage account by age 60, it'll need in some way to supplement the retirement dollars (qualified money).

Also, any thoughts relative to converting my current 401k into a Roth early in 2010? I ask that question as I’d be converting it in a year which I’m taxed at a high bracket, I’m still not sure on this one . . .

Almost forgot, we live a pretty conservative lifestyle, home mortgage is about $1400/mo, will have it paid for in about 8 years and don’t have any other debt. Our annual expenses are likely about 75k – but college for our children is going to play a big role in our future considerations.

Any thoughts would be appreciated.

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Old 12-03-2009, 03:58 PM   #2
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Can you retire? The answer is, it is going to depend on your expected expenses.

Basic retirement scenario:

Estimated Assets: 2.4M
Safe 60-year withdrawal rate: 3.5% (4% is more suited for someone close to a normal 30 year retirement)
Estimated withdrawal taxes: ~15% of assets

(2.4m)(.035)(.85) = $71400 per year (in 2013 dollars)

Expected Costs: 75k/year

My analysis: You will be pretty close to being able to completely retire by 45, if you do not increase spending, but you need to thoroughly go over your expenses to get an accurate idea of what your costs will be post-retirement. Spending 125-150k per year post retirement would require you to work about 6-8 more years past 45, in the job you are in now.

Additional major considerations:

- Health care costs, if you will be covering HC costs through private insurance, especially if you will be covering them for a whole family, you will need to probably budget an additional $10-15K per year for these costs.

+ How long you will continue to have a mortgage, once you no longer have a mortgage, this may free up a large portion of your budget.

- Will you be contributing to your children's college funds any further.

+ Additional, lower paying work you may end up doing.

+ Social security, with the understanding it is very likely you will only receive 80% of your estimated benefits.

Your Roth Question:

It is not a good idea to convert to a Roth when you are in a high tax bracket, unless you think your taxes will skyrocket in the future, you also very likely may not even be allowed to do it because of the Roth income limits. You can convert to an IRA, if you wish, or you can wait until after retirement to covert when you are in a lower tax bracket.

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Old 12-03-2009, 09:46 PM   #3
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Hi cfran, and welcome to the forum!

plex had some good advice -- give some thought to the points mentioned. Having a good handle on expenses in retirement is as important as the size of your nestegg.

If you haven't yet, I'd suggest you spend some time with FIRECalc -- a retirement calculator that's designed to answer your question. You'll find a link to it at the bottom of each page.

"Comprehensive health insurance is an idea whose time has come in America." President Richard M. Nixon, February 6, 1974
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Old 12-04-2009, 08:38 AM   #4
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Welcome to the board.

These two statements confused me.
" For what it’s worth my annual comp. is about $350k of which I save about 20% on a gross basis."
Our annual expenses are likely about 75k"

Maybe the second statement refers to your future living costs after you quit working. It seems to me to be a big drop from your current lifestyle. If I am correct, I recommend that you try living within that budget now. That will let you know if you and your family will be happy within those constraints.

Does your 401k have a conservative asset allocation like your investment account? Also, common wisdom is to keep away from your own company stock.

That said, I agree with previous posters. I also recommend reading William Bernstein's Four Pillars of Investment and Bob Clyatt's Work Less, Live More.

All the best.
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Old 12-04-2009, 11:20 AM   #5
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If I am correct, I recommend that you try living within that budget now. That will let you know if you and your family will be happy within those constraints.
The thing is that isn't always possible. I recently looked at our spending the last year and about 75% of it would be gone if we were retired. But most of that is not stuff that I can change while unretired. Much of the expenses relate to DH and I working 50 miles apart from one of us (one or both of us have to drive a lot), the specific house we have now, and other expenses that can't be easily changed unless we are retired. Virtually none of that 75% is for the discretionary type of spending that is simply lifestyle related.

Don't know about the OP but for us what we are doing to estimate is to look at expenses very hard and project how they vary if we retire and downsize the house.
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Old 12-04-2009, 11:28 AM   #6
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In taking the leap to retiring you need to consider the potential huge expense of college for two kids. Are you thinking four year private university for both? If so you are looking at easily $350,000 to $400,000 for two kids in today's dollars. That puts a significant strain on your numbers.

Something to think about...
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Old 12-04-2009, 01:20 PM   #7
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Thanks for the thoughts thus far, pretty helpful. Regarding the comment on what we save versus what I spend. At $350k my take home pay is likely closer to $180k, of that we put away about $70k leaving us spending no more than $110k per year. Once retired I could live on less no doubt.

I know we can have the home mortgage paid off in the next 3 years if need be. The college thing is a big question mark. I project we can easily have $200k available in the appropriate accounts once our kids hit college age. The remainder will need to come from somewhere.

After further consideration, things probably get a lot easier if we look at a 5 year window, at that point I think we can breath a little easier, so call it 47 or so . . .
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Old 12-04-2009, 07:37 PM   #8
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Originally Posted by cfran View Post
The college thing is a big question mark. I project we can easily have $200k available in the appropriate accounts once our kids hit college age. The remainder will need to come from somewhere.
You're probably on your way to being in great shape, if you don't feel parentally obligated to FULLY pay for ANY college DD or DS may get into. If you wish to do that, then LARS' cautions are spot on. (I make no judgment - see numerous threads where the "right" contribution is discussed.)

But remember the saying: your kid can borrow for an education, but you can't borrow for retirement.

FWIW, these are some of the things I overlooked or underestimated that have been pleasant surprises in spending out of a 529 account for DD#1, now a junior at State U with $0 in scholarships:
  • The published college cost calculators project total education and living costs, all in. By their nature, they tend to be a bit conservative.
  • Even with a teen frivolity discount, most every dollar Junior makes over summers can count toward that number in some way. Ten weeks at a minimum wage job grosses about $3200. Times four summers. Part time work during school or over Christmas break could easily double that.
  • There was a grandparent contribution (one so far) that I didn't anticipate. Not large, but it helped in avoiding a planned 529 withdrawal one semester. Your windfall may vary.
  • There is a base level of expenses for a high schooler that is already built in to the parental living expense budget, which also represents a painless head-start toward the total. I traded a prom dress in '07 for college textbooks in '08, senior sports participation fees for a laptop, graduation expenses for a trip to parents weekend, etc.
  • Girls don't eat everything on their meal plan budget. The balance was spendable on school supplies and other consumables.(YMMV - the opposite could easily be true for sons.)
  • Sophomore year, my daughter found an inexpensive, multi-roommate off campus housing situation living in the type of squalor only a 20-year-old would tolerate that she enjoyed for a year. It cost much less than the dorm rate.
Knock on wood, so far the borrowing has been minimal.

Two and 1/2 years in, I worry much less about financing DD#2, who is now 13 with a much, much lower 529 balance than you have now.

Obviously your schools and cash flow situation will be different.

My point is that you appear on a track that has many college financial scenarios well-covered. The worst-case ending maybe that your DS or DD will be graduating from a top-level (or at least high-cost) school owing on loans for the equivalent of two or three semesters of tuition, R&B and fees.

A high school senior isn't the sharpest tool in the shed, but if he's college material he or she will understand and meaningfully participate in discussions on balancing a fixed 529 pot, high- vs. low-cost schools and the resulting amount of student contribution or loans.

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