Hello-Need Advice

[TOPDAWG]

Hello,

I will be 43 in August.

My wife and I are considering retirement.

Here is my situation:

1. My House is paid for.
2. I own one rental property with a value of 250k which brings me $22k per year.
3. I have $600k in a retirement account.
4. I have $75k in each of my childrens college accounts. My children are 4 years, and 7 years away from college.
5. I have $2.1m in savings.
6. I currently spend 100k per year.
7. My wife does not work, and will not qualify for SS.
8. My vehicles are paid for.
9. I have zero debit.
10. My wife and I have $80k in IRA's.

Questions:

1. Can I retire, or semi retire at the age of 43?
2. Currently my investments range from Muni Bonds, to Stocks, and Cash. What is the best balance to handle retirement?

 

[Rambler]

Welcome Topdawg. Is your 100k spending pre or post tax? How is your savings allocated? Stocks/bonds/cash? Have you investigated healthcare costs and are they included in your 100k? Of the 22k income on the rental, how much goes into expenses (advertising, mortgage, prop tax, insurance...etc). I might have forgotten something, but answers to these questions will help us give you some advice, but with that amount in savings and rental income you may be able to, if your asset allocation and planning was right.

R

 

[TOPDAWG]

Rambler,

Thanks for the response.

1. The Rental income is after taxes, and expenses.

2. I have not investigated Health Care, yet, but I am assuming $1,500 per month for a family of 4?

3. Currently I am 50% Bonds, 40% Stocks, and 10% cash.

4. I need 90K to 100K after taxes to continue living like I do now.

TOPDAWG

 

[Rich_by_the_Bay]

Welcome to the board, Topdawg. Quick look tells me you are probably OK but a couple of items raise questions:

- your college savings may be fine for state schools, but at $45K per kid per year at a private school you may be short.
- your savings and retirement total about $2.7mm which by most rules of thumb should generate about $110K per year inflation adjusted for the long haul. You need more to cover taxes before netting $100K
- rental income seems great for now, but can you count on it indefinitely?
- don't assume you can get health insurance just because you can afford it; be very, very confident that you are covered before retiring, esp with kids at home.

My gut reaction is that you are very close to having what you need but might benefit from a little more cushion in the form of either a little more savings or reduced expenses (or ongoing part-time income).

You should get to know FireCalc and spend a few hours testing out your scenario.

 

[TOPDAWG]

Well, I am certainly disappointed to here I am just borderline.

 

[Rich_by_the_Bay]

Well, I am certainly disappointed to here I am just borderline.

Well, only you can decide that. $120k is a lot of income for a nest egg to spin off every year forever. But maybe you live in a high cost region. In some parts of the country a fairly luxurious lifestyle can be had for less.

Just trying to point out some of the commonly overlooked or misinterpreted issues which folks on this board have gotten good at spotting. Maybe you'll decide you're fine after further analysis.

FireCalc will help, too.

 

[Rambler]

OK, saying you needed 100k after tax, minus the rental income which you stated was an after tax figure leaves you 78k to find (and I am assuming that includes the 1.5k/mo healthcare cost). You would really need to check your own tax situation, but if you made a rough guess of 20% effective tax rate (which I believe is conservative), you would need 97.5k pre-tax in addition to the 22k rental income. 97.5 divided by 2.7m is about 3.6%. Standard starting withdrawl rate for a 30 year retirement is considered to be 4%. However at your age, the SWR probably should be a bit lower. In addition, your asset allocation looks to me to be pretty conservative. So, I would say you are probably a little shy of the mark. I think it would be a wise move for you to run your numbers thru FIREcalc to see what that gives you. You may also want to re-visit your AA, but everyone has their own level of comfort.

I'm pretty close to you in age at 46, so I will give you a bit of my info just as a data point to consider: I will need about 90k post tax, 112.5 pretax by my estimation. I estimate taxes based on my AA and my state, plus federal. According to FIRECalc, we will need about 3.3 million to enjoy a 50 year retirement with 100% probability of our money outlasting us. For me, I need this level of comfort. You should also know that my AA will be closer to 60/40 or 65/35 equity to bonds/cash. I am shifting into relatively higher dividend yield equities, targeting an overall initial yield of about 2.5-2.75%, plus bonds/CD/MM/cash interest/yield of around 3-3.5% might not get that in today's interest market).

Using the simple format of firecalc, plugging the above 97.5k for you, you would need about 2.9m to achieve the 100% probability level.

All of this said, you need to consider your own comfort level for the probabilities, inflation, AA, taxes, etc.

Finally, I am not a financial planner, and my commentary is for information purposes only, hoping that it may provide food for thought.

Hope it helps, and good luck with your planning!

R

 

[FIREd]

I too think you are very close to being able to retire. One thing I wanted to point out is that probably a substantial amount of your retirement income would be tax free (because of the large amount of munis you are holding), so your tax liability might not be as large as what others have assumed (unless you enter AMT hell). I believe however that you need to increase your stock allocation to at least 60% because you are still very young.

 

[Rambler]

FIREdreamer, I thought most munis were AMT exempt...no?

R

 

[TOPDAWG]

I appreciate everyones help here so far.

Ok, some more questions

1. Assuming that I Semi-Retire, and earn 20k to 25k pre-tax, would that help my situation?

2. Having never had to deal with Health Insurance outside of my business, what would be my best deductible to set, knowing my current situation.

3. At 43, I don't want to do "nothing". I just want to do a lot less, and lose the stress in my life. Obviously the stress was good to me financially, but it's time to lose the stress.

 

[TOPDAWG]

What would be wrong with 100% Muni's? 4.5% Fed and State exempt? What tax would I have to deal with then?

 

[Rambler]

1) As far as I know, most/many munis are callable...so when the rates go down and they refi, you get your capital back to re-invest...but you will have a harder time finding those higher level interest rates.

2) munis at 4.5% (if you are 100% munis) do not provide enough protection against inflation. You would quickly lose your buying power.

I'm dealing with the same questions about healthcare and don't have the answers. as for your point #3, I hear you...the stress has been and is financially rewarding, but it has taken its toll (and continues to take its toll). I don't want to do "nothing" either, but I want to be free to choose what to do and when to do it.

R

 

[FIREd]

FIREdreamer, I thought most munis were AMT exempt...no?

R

I don't know what percentage of munis are AMT-exempt overall, but I just know that many are not, so you need to choose your munis very carefully if you think that you might get into AMT territory (especially when most of your income will be derived from muni dividends). Why not go 100% munis? Because inflation will eat you alive (If you were immensely rich, then it would be a different story). Also munis could carry a political risk. What if congress decides they need more money and start taxing munis down the road? I know, it seems unlikely right now, but you need to remain diversified...

 

[jIMOh]

600k in retirement savings- is this a Roth, 401k, taxable account or similar?
2.1 M in savings- is this in a taxable account, 401k, or something else?

2.7M will allow (4% SWR ) $108,000 per year withdraws before taxes. The issue is whether taxes have been paid on this money already (I am guessing the $2.1 M is in a taxable account).

You have $22k per year in rental income to supplement this, or a 250k addition to the 2.7 M above. Depending on how you position this 22k/250k, I think you have enough.

Assuming the 2.1 M is in a taxable account. I would consider investing this in two things:
1) dividend paying stocks. Assume a 2.2% yield for starters.
2) bonds, muni bonds, or other cash investments (which may or may not be tax free). Not sure what a suitable yield will be. 4.5% for taxable bonds is reasonable predicatable.

In addition, check the tax code. Currently dividends are taxed at 5% if earned income/taxable income is less than $66100, and 15% if above $66101.

So for example if you put $2.1 M into a mix of dividend stocks (2.2% yield) and bonds (4.25% yield), you can do the following

75% equities/25% bonds =$57k pre tax income (37k taxed at 5% and 22k taxed at close to 15%)
50%/50%=$68k pre tax income (23k taxed at 5% and 45k taxed at close to 15%)
25%/75%=$78k pre tax income (12k taxed at 5% and 67k taxed at close to 15%)

There is probably a sweet spot around 50-50, because the 22k rental income plus 45k bond income puts you just over the threshold for 15% tax bracket (and 5% taxes on the dividends). You need to make a tax decision, risk tolerance decision and similar to decide if you would pay more in taxes to get the 100k of income, or are willing to take on more risk (75-25) to save more in taxes.

You still have the 600k in the retirement account which I would allocate towards growth and start using to supplement this at age 59.5. I might advise converting this to a Roth slowly over time to save on taxes later (if you can keep yourself in 15% tax bracket in ER).

The advantage to using a dividend strategy is that the dividends should increase with time, and the principal value should also increase with time- so the 2.2% is just the dividends, more than likely that mutual fund will increase the NAV (share price) around 4-6% each year too, and the yield will continue to be 2.2% of the higher share price.

My favorate dividend fund is PRFDX (T Rowe Price Equity Income)- I hold 45% of my retirement assets in this one fund. Similar funds would include Vanguard Windsor II or an S&P 500 index fund (the dividend yield on the index will be lower than the equity income funds).

For the bond fund I like RPSIX (T Rowe Spectrum Income). It holds 15% stocks and 85% bonds and shoots off around 4.5% in interest (which is all taxable). I am sure you could find some muni bonds to lower the tax bite. The issue I see with this is how diversified you are in bonds. Spectrum Income generates interest from real estate, foreign bonds, corporate bonds, government bonds and dividend paying stocks. Highly diversified with lower risk than any single muni bond fund (IMO). A mix of a diversified bond fund (like RPSIX) and a muni bond fund would make sense- lowers tax bill and provides more diversification.

 

[samclem]

TOPDAWG,
I second Rich's recommendation that you experiment with FIRECalc for a few hours. That's the best way to get a feel for the cause-effect of changing variables. You're asking your portfolio to throw off a lot of income every year.

 

[FIREd]

I appreciate everyones help here so far.

Ok, some more questions

1. Assuming that I Semi-Retire, and earn 20k to 25k pre-tax, would that help my situation?

2. Having never had to deal with Health Insurance outside of my business, what would be my best deductible to set, knowing my current situation.

3. At 43, I don't want to do "nothing". I just want to do a lot less, and lose the stress in my life. Obviously the stress was good to me financially, but it's time to lose the stress.

1) It definitely would.
2) I would personally go for a high deductible ($5000?) policy coupled with a HSA.

 

[Milton]

If you want/need to build up a 'cushion' to protect against future contingencies, you have three choices:

(1) continue working for two or three more years;

(2) semi-retire, and take a part-time job; or

(3) reduce your expenses a bit.

At age 42, I would hope that you've got it in you to put in a couple more years, and the realization that you don't really need to work should help keep the stress under control. However, ultimately you're the only one who can say how difficult option (1) would actually be for you.

Option (2) seems superficially attractive, but for many people it's not really viable. Perhaps you are lucky enough to possess the necessary skills and contacts to make it practical to scale back and make reasonable money working reasonable hours. However, the last thing you want to do is exchange the stress of a high-paying job for the stress of a low-paying one. If you're going to have to work fairly hard for the anticipated $20-25,000, you'd probably be better off just postponing your retirement by a year of two.

Option (3) is probably the easiest. $100,000 after-tax dollars buys a pretty nice lifestyle, and with a little work you may find one or two frivolous expenditures that could be eliminated without any real impact on you or your family.

 

[Rich_by_the_Bay]

I appreciate everyones help here so far.

Ok, some more questions

1. Assuming that I Semi-Retire, and earn 20k to 25k pre-tax, would that help my situation?

2. Having never had to deal with Health Insurance outside of my business, what would be my best deductible to set, knowing my current situation.

3. At 43, I don't want to do "nothing". I just want to do a lot less, and lose the stress in my life. Obviously the stress was good to me financially, but it's time to lose the stress.

1. Yes, tremendously. Seems like that would do it (of course, do your own due diligence).

2. If healthy, highest deductible is probably best, with an HSA. See the FAQ forum here for more details.

 

[jclarksnakes]

Well, I am certainly disappointed to here I am just borderline.

TOPDAWG,
.....Well it is mighty impressive that you are worth at least 3 million dollars more than most people your age. Just reading your original post it would seem like the 100 grand to spend every year was mandatory and you would not be willing to flex in any other areas. All of that made most of us think you were close but not quite totally prepared. Your later post about maybe working parttime or adjusting expenses makes me think that you are flexible enough to go ahead and retire now and make adjustments if needed in the future. As you probably know the biggest enemy of an early retirer is inflation and that taxes and health care costs are the other big issues to consider. Spend more time looking at AA ideas from others here and also running and rerunning the FireCalc and you can make it work. So in summation, CONGRATULATIONS!!!!!
Jeff

 

[SteveR]

Welcome to the board Topdawg. You have received a lot of good information so far. One word of caution. You alone must determine how much you will spend, how much you need in assets and how you will mix your allocations. Advice is always good to get you thinking but in the end it is your decision.

I found that tracking expenses over 5+ years (10 now) gave me a really good idea of what I actually spent vs what I needed to spend. My desired retirement income was based on need and desire along with what it would take in assets to generate the needed income. Our plan has higher spending in the early years with several reductions along the way as our life-style changes over time. Our cash flow is designed around these changes.

W*rking in retirement (an oxymoron to some), may be what works for you. The key is to be happy at whatever you do while keeping the wolf away from the door.

 

[TOPDAWG]

Thanks for everyones help so far.

Breaking things down last night, I know I can live for sure on $80,000 per year after taxes, but $85,000 to $90,000 would be a little nicer. 100K was a little overboard. Does anyone want to offer an opinion on this, in lieu of my 100K per year option?

Regarding health insurance, what does a typical family of 4 pay per year? Avg. We are all healthy.

 

[benmichaelx]

If a $250K home produces $22K in income (seems a bit high) why don't you buy 3 more homes at a cost of $750k to produce $80k+ in annual income? That'll leave you with $2mil in investments you won't really need to use at least right away.

This investment idea will cost you in time but you didn't seem to mind working a little.

In reality houses should be cheap but it might still be hard to find the returns you're getting on that first home.

 

[TOPDAWG]

The 250K is a business lease, not a home.

 

[Htown Harry]

Regarding health insurance, what does a typical family of 4 pay per year? Avg. We are all healthy.

You can get an idea of premium costs and deductible options at Health Insurance, Medical Insurance, Individual Health Insurance Quotes. There may be other comparison sites, as well.

Note that only some policies offer the HSA option.

 

[Zoocat]

You might consider getting an opinion from an independent health insurance broker who is willing to prescreen your family with a few companies. Considering yourself "healthy" is an advantage of course, but insurance companies may have a different idea of what constitutes a "healthy" person. You would be surprised at what conditions can/will be excluded from a policy.