FI at 45? Can I RE?

[LongestLurker]

I am a very long time lurker, having first found this website in 2004 or so. It has simultaneously been inspiring (so many people accomplishing incredible financial goals at a very young age) and, at times, depressing (will I ever be able to realistically accomplish what so many others have done). In 2004 I set a goal of saving $1 million by 40 and $2 million at 45, with the hope that I would be able to FIRE at 45. At the time, I thought these goals were incredibly optimistic but was determined to try. I did better than expected, hitting my first goal at 38 and my second at 41, but also quickly realized I needed much more than $2M to FIRE. I am now 45 and have $4,350,000 saved, and feel I am getting very close, but I have doubts and concerns.

Of my investments, about $2M are pre-tax investments (401Ks, IRAs) and the rest (about $2.35M) are after tax investments/cash and make up my “bridge” fund. The overall investment breakdown is as follows:

50% Large Cap
20% International/Emerging Markets
10% Medium/Small Cap
10% Cash
10% Bonds

My two largest expenses are my mortgage (about $40K annually, not including taxes and insurance) and private school tuition until my kids reach college, which will total about $160 over the next 6 years (I already have college pretty well covered, with about $360K in 529 plans). My spouse has a low-impact job and can continue to work until the kids get to college to cover our health insurance. If I set aside $200K to cover tuition and other school-related expenses for the next 6 years, I will need to withdraw about $145K annually from my remaining portfolio to cover my estimated expenses and taxes. Once the kids are in college, we plan to use our home equity (currently about $600K) to downsize, which will eliminate my mortgage expenses but by then I will also be paying for health insurance, so it will probably be a wash.

When I use the “couch potato” setting of FIRECALC with a .7 expense ratio based on a portfolio of $4,150,000 for a 45 year retirement, I get a success rate of 91.4 percent. When I try using my actual investment percentages (which is hard since there is no international stock entry), I get 100 percent. My mutual fund company also ran their Monte Carlo analysis, and they get 86 percent. So it seems I am not quite there yet. My mutual fund company tells me that I can get to 90 percent in their analysis if I have a 60/40 ratio of stocks and bonds, but I have concerns with the durability of a 60/40 portfolio for a 45 year retirement. My current percentages seem more in line with my age and timeline.

So do I need to wait a few more years and get my portfolio closer to $5M to be safe? Also, for those of you who have retired before 50, what is your asset allocation and what is your approach for withdrawing money each year? Based on the past few years, my after tax investments will probably only return dividends of $50K or so annually, so I will need to sell some mutual funds to cover the bulk of my expenses. And I can only make asset allocation adjustments to my pre-tax investments. Otherwise, I would incur massive tax bills. But because these are pre-tax investments that I do not plan on touching for another 14 years or so, it seems to me that making them more conservative now would be a wasted opportunity for growth.

I have enough cash for about 3+ years of expenses, so I could live off of cash with the hope the market will climb higher, but that seems like a risky strategy. I would rather use the cash as a hedge against future market crashes to hopefully weather future downturns and avoid the need to sell investments when they are low. But it is nice to have the option to possibly pull the FIRE trigger now and return to work in a few years if needed.

Sorry for the long post, but I wanted to provide a full picture. Any and all thoughts/comments are welcome. Thanks!

 

[SecondCor521]

First and most important, make sure that whatever you choose to do that your spouse is on board. Divorce sucks, it sucks worse when kids are involved.

Second, you are probably fairly set on living where you currently live and living your current lifestyle. Nothing wrong with that, but you probably have to make the trade off between working a few more years, retiring with some risk, or downsizing your COL. I live in a flyover part of the US, and me and two of my kids can live for a year and a half on what you pay for your P&I on your mortgage alone.

To put it a different way, I FIREd at 46 and have a sub-40 basis point net WR not because I have a massive portfolio but because I know ways to live cheaply and still have a great life.

To put it yet a third way, if you take the 4% rule as an approximation, you can either save up $25 in a year or spend $1 less a year. Which is easier? For many people, it's easier to spend a dollar less.

...

To answer your questions:

I retired in 2016 at age 46. My AA was 100/0 when I retired. I dropped it to 90/10 shortly after I retired to better reflect the ideal AA to maximize historical SWR for a 40 year retirement. I'm back up to about 96/4 at the moment as I realized that, since I have more than I need, and the excess will go to my kids in 30 years, that excess can be 100% stocks.

I withdraw from taxable as I need it, a few months' worth at a time. I rebalance across my entire portfolio but only within my traditional IRA. Regarding your "wasted opportunity" comment, I don't worry about that as I view the portfolio as a whole. I actually have only ever worried about the reverse - having my entire taxable portfolio in stocks creates the risk that in a downturn I'd chew through my taxable and have to start in on my tax-deferred sooner. In my case I just shrugged and said I'd figure it out if that happened; fortunately I got lucky and my taxable is up since I retired.

Final bit of advice, since you mentioned "bridge fund". There are multiple ways to access retirement funds without penalty before retirement. You might look into them and see if any of them work for you and would change your plans and calculations. Since you have a lot in taxable and have 3 years expenses in cash, a Roth conversion ladder might appeal. The other main option is a 72(t), aka SEPP, but at age 45 I'd be concerned about the lack of flexibility.

Good luck.

P.S. - Welcome to the board!

 

[LongestLurker]

Thanks, SecondCor521! Very helpful suggestions! My spouse is on board with continuing to work. We live in a high COLA, so the only way we could both FIRE right now is if we moved to a lower COLA. We’ve discussed this, but my spouse does not want to uproot the kids or leave our friends behind. And my spouse has a very low-stress job and does not mind continuing to work - whereas mine is a killer. So we’re staying put for at least another 6 years. I also have a lot of excess built into my budget than can be cut if necessary, including vacations and eating out. I still feel like I am missing something, but I have spent countless hours on it and think I have captured everything. The hardest part is walking away from a career that I have spent two decades building. Once I leave, I would never be able to get back to my current income level.

Do you work with an investment professional or just handle the asset allocations yourself?

 

[SecondCor521]

It sounds like you understand your situation well. I understand the leaving a career, although in my case I just did something that was high-earning and that I was good at. It was never a passion for me so I didn't have much of myself tied up in it. And although I did well enough, I didn't have a career that anyone would call illustrious or fascinating. So for me it was just a math problem in terms of walking away. But I hear where you are coming from in terms of walking away from a high salary and something you've poured a part of yourself into.

Can you cut back to part time or to a lesser position? That often doesn't solve the "killer" aspect, but might make it more bearable to where you can grind out a few more years.

I do my asset allocations myself. I have everything in VTSAX (96%) and VBTLX (4%), so it's not hard to do the math. With an Excel spreadsheet, I don't even have to do the math.

I personally don't think "investment professionals" are worth their cost and haven't ever used one. I'm in the Bogle/Buffett camp of buying high quality, low cost, broadly diversified index funds and then just holding them pretty much forever. I've looked at all of the fancier options and none of them seem to me to be better. But that's my opinion; others will have different thoughts and maybe some will chime in here.

Many (most?) others here are also DIY. There are some who use advisors; I think @RobbieB is one.

 

[LongestLurker]

My firm will not let me go part time and my profession (litigator) is one where going part time is hard to accomplish. I have thought about a career change for a few years as a stop gap, but really would prefer to FIRE

 

[Dtail]

It sounds like you understand your situation well. I understand the leaving a career, although in my case I just did something that was high-earning and that I was good at. It was never a passion for me so I didn't have much of myself tied up in it. And although I did well enough, I didn't have a career that anyone would call illustrious or fascinating. So for me it was just a math problem in terms of walking away. But I hear where you are coming from in terms of walking away from a high salary and something you've poured a part of yourself into.

Can you cut back to part time or to a lesser position? That often doesn't solve the "killer" aspect, but might make it more bearable to where you can grind out a few more years.

I do my asset allocations myself. I have everything in VTSAX (96%) and VBTLX (4%), so it's not hard to do the math. With an Excel spreadsheet, I don't even have to do the math.

I personally don't think "investment professionals" are worth their cost and haven't ever used one. I'm in the Bogle/Buffett camp of buying high quality, low cost, broadly diversified index funds and then just holding them pretty much forever. I've looked at all of the fancier options and none of them seem to me to be better. But that's my opinion; others will have different thoughts and maybe some will chime in here.

Many (most?) others here are also DIY. There are some who use advisors; I think @RobbieB is one.

+1
Most folks here who post appear to do DIY low cost index fund investing, plus some also have rental properties.
Nothing wrong with advisors, if it helps you to sleep at night. However, once you do your due diligence to pick an advisor, you will most likely have enough knowledge to DIY.

 

[OldShooter]

My firm will not let me go part time and my profession (litigator) is one where going part time is hard to accomplish. I have thought about a career change for a few years as a stop gap, but really would prefer to FIRE

Once you've bailed, you might find a very rewarding part-time career consulting for nonprofits whose mission you believe in. Probably not so much litigation (hopefully) but more contract and employment law, neither of which come with quite the schedule demands of a litigator. Estate planning assistance to nonprofits' development departments might be another opportunity. You could do this consulting pro bono or for a reduced hourly rate.

 

[LongestLurker]

Once you've bailed, you might find a very rewarding part-time career consulting for nonprofits whose mission you believe in. Probably not so much litigation (hopefully) but more contract and employment law, neither of which come with quite the schedule demands of a litigator. Estate planning assistance to nonprofits' development departments might be another opportunity. You could do this consulting pro bono or for a reduced hourly rate.

These are all great suggestions, OldShooter, and I will definitely be exploring some of them. I have been mostly focused on hitting my FIRE number and have not yet focused on potential next steps. Thanks!

 

[HI Bill]

Sounds like you're 'close' or there! A $145K annual budget could have you guys paying little to no Federal taxes. If you're MFJ, your first ~$24K of taxable income is tax-free. $145K-24K=$121K. If you have a brokerage account that has 50% LTCGs, you could withdraw $121K, and only ~$60K are LTCGs. Since you're MFJ, and your AGI is less than $80K, $0 taxes (fed)! So, with this in mind, could you drop the $145 by whatever tax savings you might have?

 

[pb4uski]

Welcome from out of the shadows! I think you're ready now as $145k is only 3.5% of $4,150k and that doesn't include SS and I assume that the $45k includes your mortgage payments and those won't last forever.

If your $145k of spending does include your mortgage, then you need to make adjustments when you use FIRECalc... otherwise FIRECalc will assume that your mortgage payments increase annually for inflation and last forever. You can adjust in one of two ways. Either way, you exclude your mortgage payments from your expenses.

One way, include your mortgage payments as fixed off-chart spending starting in on the Other Income/Expenses tab and enter a corresponding offset as a pension starting in the year your mortgage is paid off. The other way is to simply reduce your portfolio by the amount of your mortgage... as if you used portfolio money to pay it off and no longer had a mortgage payment.

Either way, I think your success ratio will increase dramatically.

 

[tb001]

Agree with pb4uski. The mortgage payments were my first thought when I saw your scenario. Are you using the manual spend function and assuming they go away? When your mortgage is a big chunk of annual spend, it’s striking to see the effect on success when you break it out and make sure it’s not subject to inflation.

 

[skipro33]

Financially, you are set; enough in retirement to cover what you expect your budget to be, medical, housing, education, reserve funds for emergencies or unexpected expenses. How about long term health care? I have reserved roughly $450,000 for that at age 63. If I and DW never need it, the kids will inherit. I may spend that down if I ever down size from my current house that is worth around $800,000 in today's market and pocket some home equity though.

But it seems to me you haven't yet seriously considered what you would do with your life post retirement. You'll have kids still at home for, what, another 6 years? If your job has kept you away from daily caring for them, and most dads with stressful careers experience this, are you prepared for that? Teens are not for the weak and are constantly testing themselves and their parents. It can be a great time if you are mentally ready for it though. I retired at 56. You'll have a full 11 years head start on me so I can only imagine what your idea of what retirement is going to look like. The traditional retirement things like long trips, get aways, spontaneous activities of any sort will be stymied by the fact your wife still works and your kids are still at home. My kids were already well into successful careers and produced grand kids for me to while away the days. DW is always up for a quick 10 days to Hawaii when the short notice packages would pop up in e-mails. Etc....

So get a plan for post retirement life and make sure your family is on board with it. Otherwise, great job getting here! You deserve the life and future you are planning.

 

[rodi]

I wasn't as young as you when I retired at 52... but faced some of the same issues - kids at the time in middle school. Budgets are completely different, even though I also live in a high COL area. My math started working well when we paid the house off... but there are lots of folks here who argue that mortgages are good debt. For me cash flow was a driver.

On the kids front... You mention your wife retiring when the kids go to college, and the healthcare going away with her job. Keep in mind kids still need healthcare in college, so plan on paying that bill for a while longer. ACA allows parents to have their kids on their healthcare to age 26. With my older son (now almost 20)... I suspect he'll be on our policy for a while. 2ndCor has been much better at launching his kids off the payroll... (Although one of mine is just starting his senior year... so he has a good excuse for not being self sufficient yet.)

Welcome out of lurkdom.... I look forward to your contributions to the forum.

 

[LongestLurker]

Sounds like you're 'close' or there! A $145K annual budget could have you guys paying little to no Federal taxes. If you're MFJ, your first ~$24K of taxable income is tax-free. $145K-24K=$121K. If you have a brokerage account that has 50% LTCGs, you could withdraw $121K, and only ~$60K are LTCGs. Since you're MFJ, and your AGI is less than $80K, $0 taxes (fed)! So, with this in mind, could you drop the $145 by whatever tax savings you might have?

Hi Bill, thanks for the feedback! My spouse will still be working and receiving income on top of the $145K I will be withdrawing from my assets, so I expect we will be paying taxes until (at least) we both stop working. I've estimated 30 percent for US and State taxes, which is included in the $145K. You've used a few acronyms I am not familiar with (MFJ, LTCG). Would you mind letting me know what they stand for? Thanks!

 

[LongestLurker]

Welcome from out of the shadows! I think you're ready now as $145k is only 3.5% of $4,150k and that doesn't include SS and I assume that the $45k includes your mortgage payments and those won't last forever.

If your $145k of spending does include your mortgage, then you need to make adjustments when you use FIRECalc... otherwise FIRECalc will assume that your mortgage payments increase annually for inflation and last forever. You can adjust in one of two ways. Either way, you exclude your mortgage payments from your expenses.

One way, include your mortgage payments as fixed off-chart spending starting in on the Other Income/Expenses tab and enter a corresponding offset as a pension starting in the year your mortgage is paid off. The other way is to simply reduce your portfolio by the amount of your mortgage... as if you used portfolio money to pay it off and no longer had a mortgage payment.

Either way, I think your success ratio will increase dramatically.

The $145K does include $40K in mortgage payments and I did not realize I need to back that amount out. Thank you for letting me know! I'll try re-running my numbers to see how much that impacts the success rate.

 

[brokrken]

You've used a few acronyms I am not familiar with (MFJ, LTCG). Would you mind letting me know what they stand for? Thanks!

MFJ = Married Filing Jointly
LTCG = Long Term Capital Gains

 

[LongestLurker]

I wasn't as young as you when I retired at 52... but faced some of the same issues - kids at the time in middle school. Budgets are completely different, even though I also live in a high COL area. My math started working well when we paid the house off... but there are lots of folks here who argue that mortgages are good debt. For me cash flow was a driver.

On the kids front... You mention your wife retiring when the kids go to college, and the healthcare going away with her job. Keep in mind kids still need healthcare in college, so plan on paying that bill for a while longer. ACA allows parents to have their kids on their healthcare to age 26. With my older son (now almost 20)... I suspect he'll be on our policy for a while. 2ndCor has been much better at launching his kids off the payroll... (Although one of mine is just starting his senior year... so he has a good excuse for not being self sufficient yet.)

Welcome out of lurkdom.... I look forward to your contributions to the forum.

I've gone back and forth on paying off my mortgage, and have settled for now on keeping it to have a higher amount available to FIRE (the reason I have so much currently in cash is I was saving up to pay off the mortgage). We do plan on selling our house at some point and buying the next one in cash, which may reduce our expenses depending on health care. I've thought about health care for college, and am hoping we will qualify for some reasonably-priced options at that time. But can always substitute my mortgage payment for health care premiums if needed.

 

[LongestLurker]

Financially, you are set; enough in retirement to cover what you expect your budget to be, medical, housing, education, reserve funds for emergencies or unexpected expenses. How about long term health care? I have reserved roughly $450,000 for that at age 63. If I and DW never need it, the kids will inherit. I may spend that down if I ever down size from my current house that is worth around $800,000 in today's market and pocket some home equity though.

But it seems to me you haven't yet seriously considered what you would do with your life post retirement. You'll have kids still at home for, what, another 6 years? If your job has kept you away from daily caring for them, and most dads with stressful careers experience this, are you prepared for that? Teens are not for the weak and are constantly testing themselves and their parents. It can be a great time if you are mentally ready for it though. I retired at 56. You'll have a full 11 years head start on me so I can only imagine what your idea of what retirement is going to look like. The traditional retirement things like long trips, get aways, spontaneous activities of any sort will be stymied by the fact your wife still works and your kids are still at home. My kids were already well into successful careers and produced grand kids for me to while away the days. DW is always up for a quick 10 days to Hawaii when the short notice packages would pop up in e-mails. Etc....

So get a plan for post retirement life and make sure your family is on board with it. Otherwise, great job getting here! You deserve the life and future you are planning.

Thanks for the feedback! I have thought about buying long term care insurance when I get to 60, but have not otherwise included it as a line item in my budget and do not have a reserve. I will give that some more thought. As to what to do with my time, that is the million dollar question. I have been exploring some volunteer options and may consider a new line of work, but have not settled on anything yet. I know I like to keep myself busy, so I will definitely need to have something lined up before I take the plunge.

 

[SecondCor521]

On the kids front... You mention your wife retiring when the kids go to college, and the healthcare going away with her job. Keep in mind kids still need healthcare in college, so plan on paying that bill for a while longer. ACA allows parents to have their kids on their healthcare to age 26. With my older son (now almost 20)... I suspect he'll be on our policy for a while. 2ndCor has been much better at launching his kids off the payroll... (Although one of mine is just starting his senior year... so he has a good excuse for not being self sufficient yet.)

Emphasis added. Thank you for the kind words.

 

[skipro33]

Thanks for the feedback! I have thought about buying long term care insurance when I get to 60, but have not otherwise included it as a line item in my budget and do not have a reserve. I will give that some more thought. As to what to do with my time, that is the million dollar question. I have been exploring some volunteer options and may consider a new line of work, but have not settled on anything yet. I know I like to keep myself busy, so I will definitely need to have something lined up before I take the plunge.

To get the juices flowing, here are some of my interests that I was able to expound upon once retired.
1. I got into restoring classic motorcycles. Since I was 13 years old, I've always owned at least one. I've also always needed to do my own work due to budgeting constraints. However I enjoyed it. Now retired, I came across a totally dilapidated 1972 Honda Trail 90. That took most of a winter to restore. I really got into it and considered it near museum quality restoration. It was given to me, I put $800 into it and sold it when I decided I couldn't bear to ride it and watch it deteriorate in any way for $5,000 to a doctor who stores it in a hanger in Las Vegas where he frequents. I took that money, bought two more; a find in a storage yard in the Mojave desert, for $2,000 and sold both of them to a Network TV producer who takes them out once a year on a family reunion camping trip. He still calls on me to fix flats and other maintenance issues. I got almost $8,000 for the pair and continue to this day funding my hobby of restoring bikes.

2. I got into kayak fishing big time. Fishing on the ocean and competing in tournaments. I landed a few pro deals with vendor sponsors.

3. Got into RC 4x4 trucks. An interesting hobby from several perspectives, I mostly am into scale models. Photos are near impossible to tell from the original full sized vehicles. My last was a 72 International Scout.

4. Skiing. I still sign up as a weekend ski instructor, teaching private lessons for advanced skiing technique; the bumps, powder, off piste, etc. Usually a few businessmen out for a holiday, sometimes families of the rich and famous. It's an interesting way to meet new people, that's for sure!

5. Landscaping. I now own a backhoe tractor and have 5 acres to play with. Built my wife a she shed that she prefers to call Gammy's Cottage. It's English Tutor style with everything salvaged materials.

The point is, hopefully you find something that is both interesting, fulfilling and relaxing. My trade prior to retirement was technology, working with venture capital funding and participating in patentable discoveries in medical equipment. It was always work, not my idea of something I cared to do as a past time, but was a way to make lots of money in a hurry. Later worked for a utility company in the mountains on hydro projects. That was fun! Loved the mountains.