Confused...Starting to get my ducks in a row

S

Seattle

Dryer sheet aficionado
Joined
May 10, 2012
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40
First time poster - GREAT site, really appreciate it.

Worked my way up to senior executive management. Way too much stress, too many planes, too many demands. Want to pull the rip cord and live again but not sure I have enough yet.

STATS:

48, married, no kids at all (no college or inheritance to worry about)
$3M in after tax investments in Vanguard (60% bonds, 40% Dividend Stocks)
$500K in my 401K (100% stocks)
Paid off mortgage - house worth about $650K
Paid off mortgage on vacation condo worth $325K

Total net worth, about $4.5M...I can also turn my condo into a rental if needbe for extra income.

I also generate about $500K a year in cash in my current position. I know it sounds amazing, but believe me, it does come with a severe price to health and happiness. I figure I got 1, maybe 2 years left in me before I wear out...hopefully can roll out into retirement before I am 50 and with $6M in total net worth.

What I am confused about is how to invest to get a 5% tax free return on my $3M that is liquid and at $4.5M net worth, how am I doing compared to everybody else? Do I dump my current investment strategy and just go pure tax-free muni's? Just trying to figure out how I put it all together and pull the rip cord...

Any thoughts or recommendations for me? Appreciate any and all advice...

PS. The cost of health care scares the hell out of me too. We are both healthy and I can do a catostrophic health plan with a $10K deductible, but I heard they drop you like a hot rock at the first sign of anything serious...How are the rest of you dealing with that?
 
Welcome. Whether you've saved enough depends on your spending. IMO you are already overweight bonds, so going all-muni would make that worse and the lack of diversification would be risky. We'd all like a 5% tax free (or after tax) return, but it's tough to come by these days; it may be doable if you have a high risk tolerance.
 
Awesome

Thanks for these tips. I will use the calculator and see what it shows me...
 
As Gray Hare indicates, whether you "have enough" depends on how much you need to live in retirement. A WR of 3.5% or so would be in the ball park for your age which would be 123k a year and for most of us would be plenty with no mortgage debt.

Is there a particular reason that your 401k is stock rather than bonds? Most of us tend to have our bonds in tax deferred accounts like the 401k rather than in taxable accounts since it is more tax efficient. Assuming you are in a high tax bracket then the remaining bond allocation in the taxable account could be in munis.

I see you have a lot at VG. Have you used their financial planning service? I've used them regularly over the last 5-10 years, more as a comfort check on my own plans than anything else.

A 5% after-tax return is difficult in this environment unless/until things revert to "normal". That said, I'm currently using a 5.5% portfolio earnings rate in my planning which is the 8.4% historical annual return based on my current AA target of 55% stocks, 41% bonds and 4% cash with a 2.9% haircut.

I ER'd a couple months ago and had to purchase health insurance on my own. I was able to get a high-deductible plan for about $550 a month which was better than what i was planning on.

I would not go all tax free munis. It would save on taxes but would be suboptimal overall and high risk of inflation reducing your purchasing power.
 
Seattle said:
Total net worth, about $4.5M... I also generate about $500K a year in cash in my current position.... I figure I got 1, maybe 2 years left in me before I wear out...hopefully can roll out into retirement before I am 50 and with $6M in net worth
Click to expand...
Do you really hope to achieve a 33% / $1.5 million increase on your capital base in less than two years? Seems rather ambitious, unless the $500K annual employment income is net of taxes and all non-discretionary spending (but if that is the case, your current net worth appears relatively low).
 
Hello Seattle and welcome to the forum. Congratulations on your achievements.

Just muni bonds are not a reasonable alternative for someone your age. You are young and likely will live another 40+ years, and over that period inflation would ravage your holdings. FIRECalc will confirm this. You need at least 1/3 equities to provide your portfolio with some growth potential. Even 2/3 munis is very concerntrated, you should diversify your fixed income some just to lower risk. The tax impact of some taxable fixed income should be manageable if your equity holdings are managed passively.

Heath care access is a challenge many of us face and there is no easy answer. The PPACA addresses some of your concerns. Fortunately you intend to continue working for the next year or two, and over this period the most important provisions will be implemented, so hopefully these concerns will be addressed.
 
Seattle said:
What I am confused about is how to invest to get a 5% tax free return on my $3M that is liquid and at $4.5M net worth, how am I doing compared to everybody else? Do I dump my current investment strategy and just go pure tax-free muni's? Just trying to figure out how I put it all together and pull the rip cord...
Click to expand...

We would all love to know how to do that but unfortunately it's not realistic. However, as others have said, you can get to 5% with some risk. To answer your "how am I doing" question, with $3.5 million in investment assets and no debt, you are ahead of your peers. However, whether that's enough money to retire on depends on your spending (as others have said). +1 on the Firecalc.
 
How important is staying in your current house/within Seattle city limits. You could sell the house and take your gains tax free, move into the vacation condo for two years (maybe combined with signficant travel), and then sell that after 2 years and have those gains be tax free as well. Not sure what your cost basis is on the houses, but maybe this strategy would enable you to take the leap a bit earlier.

A lot probably depends on how tied to the house you are, and how important it is for you to stay in the city. There are great deals to be had in East King County and other outlying areas at the moment now due to the property slump (my family lives that way so I keep an eye on house values).

Another really important question is what you are spending and how that might change after you retire. Folks here are pretty good at picking people's budgets apart and finding places to economize, so if you are brave you might want to post the details -- you might find you have more wiggle room than you think and can pull the plug much earlier if you are willing/able to make some different choices about where you money goes now and in the future.

Another option would be to downshift a bit out of the C-Suite and work a less stressful job for a slightly longer time. With your experience some short term consulting gigs might also make a significant difference and allow you to have a bit bigger of a parachute.
 
Seattle, I realize we all have different comfort levels, but if your happiness and health are that important to you, I say you can make this work now if you want to. $3 million in investments (I'm assuming you can get at this money now without penalty) and $500,000 in 401k should be enough. I would leave that $500,000 in your 401k until you are 59.5 and start using it then (if you even need to).

I would then either sell the vacation condo or move there and live there if you want to be there full-time. Let's say you sell it. That gives you $3,325,000 to generate income for you now. I agree with GrayHare who said you are overweight in bonds. I would drop that to maybe 30% bonds and 70% stocks (or maybe 40-60). Conservatively you should be able to get 6% on that annually, and likely higher.

Take 4% of your investment the first year. That's $133,000 a year. You have a paid for home and supposedly no other debt. You also have the $500,000 that will continue to grow. If you get a 7% annual return (you might do better), by age 60 that will turn into $1,126,095, so you give yourself more than a $40,000 a year raise in just 12 more years.

Sell you $650,000 home in Seattle and buy a cheaper one somewhere else and you'll have even more to retire on. People retire and have a great life on much less than you would have.

If you don't feel that's enough, then leave your high stress job and take a $40,000 a year job doing something that isn't stressful. Do that for a few years.

I agree with you that the high cost of insurance is a problem, but if you REALLY want to do this, you could make it happen today. There are many areas of the country where $200,000 will buy you a very nice house...you could then bank the $450,000 from the sale of your home and put that in a fund to help you pay for health insurance.

Health and happiness are paramount right? If I were in your position at age 48 (net worth of 4.5 million dollars including two paid for homes and in a job I hated), I would be retired tomorrow.
 
Seattle:

Congratulations on doing a terrific job with building your assets!
Most people would be able to retire comfortably given the assets that size, but that doesn't help you. What you must decide is how much do you need to live on comfortably including living expenses, travel/recreation and incidentals.

I would suggest that you start logging all your expenses for the next 3 to 6 months so that you know how much you spend and on what. You will then be able to figure out how much you will be able to save by not working viz: money spent on business clothes, eating out due to work etc. Once you figure out the bare minimum you need to maintain a decent lifestyle, calculate how much money you need to invest in NO RISK investments (Treasuries, TIPS, Munis etc). Invest that amount so that you can pay for your basic expenses with the interest without touching the principal ensuring that you have a good portion of that in TIPS(inflation protected Bonds). $2M will provide you $80k annually TAX FREE to live on. This would be good enough for most people without any mortgage/college expenses/work related expenses etc.

You may want to be prepared to consult parttime on your terms for a
few years to provide more play money if you so desire.

The rest of the liquid funds ($1M) may be invested in a diversified portfolio of equities with growth, value and small cap growth stocks/mutual funds to provide the growth. This will provide you with growth needed @ 8%-10% annually and grow to approximately $3-$4M by the age 62.

Selling one of the properties will provide you with extra cash to invest into the growth portfolio of stocks/mutual funds.

I would also suggest that you contact Social Security Administartion to find out how much you will receive at age 62, 65 and also at 67.

Seattle, as you probably know and also understand by reading all the posts so far, that it should not very difficult for you financially if you chose to retire early. The question really is how badly you want to relieve yourself of the stress and start living a stressfree lifestyle?

Best Wishes,

Rick
 
Rickt said:
Seattle:

You may want to be prepared to consult parttime on your terms for a
few years to provide more play money if you so desire.
Click to expand...

+1

I'm nowhere near where you are Seattle, but I'm starting to look at a similar curve a few years out. Going from 100MPH to zero sounds pretty sweet right now, but you only got where you are b/c at some level you really enjoy working. After a month or two of twiddling your toes, you're going to want to do SOMETHING.

I wouldn't be thinking about how you "pull the rip cord" but rather how you throttle back. Perhaps you can earn $200K per year consulting part-time?

Great job.
 
You want to ER on only $6MM? You might want to wait until you've built your nest egg up to $10MM. That's pretty much considered the minimum around here.
 
There are several of us once-and-future citizens of the Emerald City here. I wish I could afford to live there again, but it is not in the cards.
 
Ed_The_Gypsy said:
Group: Does this thread tell you-all something about Seattle?
Click to expand...

I can't help myself . . .

The bluest skies you've ever seen are in Seattle . . .

Every year salmon return to Seattle

Big airplanes are made in Seattle fueled by coffee from Starbucks with cups bought at Costco (whoops! They're based in Issaquah).

HaHa lives right in the middle of it, and many others here live nearby
 
One way to conserve MORE of one's assets can be to annuitize a PORTION of one's assets for lifetime income. $1M can provide $63K per year at age 62.5 which is a lot more than one could expect safely to withdraw per year from unannuitized funds.
Unfortunately, starting at the OP's age 50, the amount per year would be considerably less.
:(
 
TheWizard said:
One way to conserve MORE of one's assets can be to annuitize a PORTION of one's assets for lifetime income. $1M can provide $63K per year at age 62.5 which is a lot more than one could expect safely to withdraw per year from unannuitized funds.
Click to expand...
But then 3% annual inflation would reduce the purchasing power of that $63K to under $30K by the time the annuitant was 87...

No thanks.
 
Really great feedback. Thanks so much to all of you wise people. Very helpful.

I figure another year or two and I will be set

Thanks again for all your advice

Seattle
 
REWahoo said:
But then 3% annual inflation would reduce the purchasing power of that $63K to under $30K by the time the annuitant was 87...

No thanks.
Click to expand...
Umm, you forgot about the other few million that were NOT annuitized and grew larger in the interim due to the annuity cashflow paying most of the bills...
 
Congrats Seattle. My two cents: see if you can live on $140,000 per year (4% of 3.5M).If you think you can do it, then go ahead. Agree with all of the previous posts about the difficulty of earning 5% in munis. My guess is you are going to wind up doing something that generates income after you leave this job. 48 is very young to sit back on the porch in your rocker.
 
I was in a similar work stress situation with no where near your net worth or income and negotiated an exit. Heck, just planning to leave removed a boat load of stress. Just about the time I was getting bored I was recruited back into the workforce, subsequently I did consulting for several years.

Your current employer must treasure your skills, faced with the possibility of your quitting they may be willing to find another role for you. You may be a key executive and your departure newsworthy, they may choose a lower profile role for you to facilitate the transition. Alternately there are consulting and temp jobs you could take on just to keep yourself busy. I know a Starbucks executive who did the latter under similar circumstances.

When you are in your early 50s work is both an economic and a social activity. I don't recommend moving beyond your social circle or professional network. Don't sell your house unless you intend to move out of the area, you are at a good valuation point for Seattle metro professionals/executives and know your neighbors.

I lived on Bainbridge Island during the consulting phase of my life. If you are likely to travel by air regularly be mindful of access to SEA.
 
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