Lawyers in Love

[Hiredgun]

Hello Everyone!

My wife and I are both attorneys and run our own small law firm. We are both 42 years old and are hoping to early retire in five years. Our vital stats are as follows:

401Ks: About $500,000 (40% VBMFX (total bond), 40% VIPSX (TIPS) and 10% VGSIX (REIT);

Private (non-tax advantaged account): About $1,100,000 (50% FSTVX (Fidelity Total Mkt), 30% VFWIX (VG World Ex-US), 10% IJS (Small Cap) and 10% VWIUX (Muni-Bonds).

Cash Emergency Fund: $60,000 in ING savings account

We are able to put away an additional $300,000 to $400,000 per year (depending on business/market fluctuations). I get the above figure by totaling our 401Ks ($80,000 per year by maxing plus safe harbor plus profit sharing --we can put this amount away due to owning a small business), $200,000 per year in earnings (this fluctuates depending on business but should be fairly accurate) and I'm assuming about a 5% return on our 1,600,000 already set aside, for another 80K (hopefully the 5% return assumption is not too agressive). We work really hard and would like to hang it up in 2015.

Our magic number is somewhere between $3,000,000 and $4,000,000. The latter would give us alot more cushion and leeway, but not sure if we can make it there in 5 years. Regardless, if we hit the former we are ready to hang it up.

There is also a chance we can sell the practice and make some extra $$ there. If I somehow reach the $4M early, we are out!

We have an 11 year old son and will have put enough away to pay for all of his college by the time he is 18. If he gets scholarships, I'll by a boat with the money and sail away

I've been mostly lurking up until now, but it's nice to meet everyone This is already my 2nd most visited board (after Bogleheads). Hello all!

Hiredgun

 

[growing_older]

Just goes to show that the concept of ER is considerably flexible and relative to expectations. I will try not to be envious of your asset base, which would be enough for me to ER immediately. Twice over actually. But meanwhile, you have your lifestyle choices and given the frame you are operating in seem to be on a wonderful track to make your goals. Welcome to the board and good luck making it all work out.

With such a seemingly successful practice, how prepared will you be to walk away? There's a lot to be said for making the most of such a lucrative business while you can, but usually that also means you like what you do.

 

[Hiredgun]

Thanks for the welcome,

And yes, the practice has turned out to be lucrative. We started the firm just over 3 years ago and had no idea how much the other "partners" at the Big Firm were screwing us.

But we do not enjoy it and life is much too short. The work is detailed, stressful and managing employees is not fun. And you can always argue to work a few more years, (i.e. golden handcuffs). I need about 100k a year to maintain my current life style (although it might be less if I put together a real budget which is on my to do list).

If I can reach our number, $4mil, I would walk tomorrow. I think we will come close in 5 years, but we may fall short. I'm not confident I can count on strong returns on our investments due to the current course this country is taking (debt, higher taxes, unemployment, etc). But I'm hopeful we will eventually turn it around.

 

[CaseInPoint]

Hi Hiredgun,

I'm curious how someone who is upper middle class with a child can retire on just a few mil, considering how little income portfolios really yield these days.

Work part-time in 5 years, probably. Retire - doubtful considering your relatively young age.

But of course, who knows how much portfolios will yield in 5 years and how much the tax rate will be. It might be helpful to check threads in this forum about how much people's portfolios really yield, and also to figure out how inflation will affect your present-day $100k requirement.

 

[Hiredgun]

Well, a four million dollar portfolio from which I withdraw only 3% a year would net me $120,000. That would be plenty.

Also, if there is anyone here that doesn't think 4 million will do it, please let me know. I'm shocked to hear someone else doesn't think so.

And I don't live high on the hog: drive old cars, get books from library, see movies once in a while. And my house will be paid for in retirement.

I do have some things I don't want to give up: pricey health club, housekeeper, etc, thus I need the 100K, but no more than that.

 

[Nords]

I'm shocked to hear someone else doesn't think so.

Most of us are of the opinion that $4M is more than enough, a few of us may feel that $4M will never be enough without deprivation and drudgery. Doesn't matter what we think. Run your numbers in FIRECalc and see how you feel.

Many of us had the health club, housekeeper, and so on when we were working, and then in ER realized that they no longer afforded the value/convenience of the working days. In particular spouse & I felt it was easier to do our own workouts around our house/neighborhood than it was to head over to the health club, and to clean up after ourselves rather than to stay out of the housekeeper's way.

You're right-- you do need to track your spending to figure out when you have whatever amount you personally deem to be "enough". When you ER you'll have plenty of time to take another look at your spending and decide what you feel is worth it and what's not so valuable. That's especially true in the areas of insurance, investment expenses, dining out, and travel/vacations/entertainment. However in ER you'll also find yourself re-evaluating your lifestyle. The things you felt were essential may no longer seem to be that way.

 

[Hiredgun]

I hear what you're saying Nords. We only have the housekeeper once a week and I could see cutting down to once every other week, but that would be my limit.

I've run $4mil through Firecalc and it never runs out (over 40 years) even when taking out 120K a year.

Quite frankly, if 4mil doesn't do it I'm not sure I'd ever figure out the appropriate number. I mean, would 5 mil be better? sure, 10 mil? Yeah even better and soon I'm working until I'm dead.

The unknown is the scary thing. I could quit with 4 mil (let's say for sake of argument 50% stock 50% bonds), the market could tank and inflation could skyrocket, dropping my portfolio significantly. In that case, I might wish I'd worked a few more years. Then again, I have no love for my work so I want to quit as soon as possible.

It's tough knowing what the right number is and when it's just the right time to quit. But reading the posts on this board is helping. Alot of intelligent people here that are throwing good ideas out there.

 

[samclem]

Welcome aboard.
Yes, by all means track your expenses and then build at least two budgets that are informed by it: "how we'd like to live" and a "Minimum standard that we'd find acceptable." That will tell you a lot.

Medical care is usually the biggest hurdle when trying to figure future expenses, particularly as there are so many changes afoot in the health insurance biz.

If you feel that you're being pulled along into the "one more year" syndrome, or that you'd feel guilty in retirement spending money on non-necessities, building the two budgets can help. Also, some folks find it helpful to do some head games: work until you've got enough for the basic budget, then start a separate (real or virtual) account for the frills. If you can tell yourself "I'm now accumulated a separate pot of money that will spin off enough each year to pay for the housekeeper and the gym membership for 40 years" then you may feel more comfortable retiring the shingle. Of course, if stocks tumble 40% the next day, you might decide to bid farewell to Hazel after all and install a Stairmaster in the basement.

 

[Nords]

I hear what you're saying Nords. We only have the housekeeper once a week and I could see cutting down to once every other week, but that would be my limit.

You're missing my point.

You don't sit at your office and make decisions about what your retired life is going to be like. You make a budget for what you think your retired life is going to be like, and frankly you're probably going to overshoot the conservative mark. You build one "bare bones" budget for "I have to quit working before my third heart attack kills me" and another budget for "I require a weekly housekeeper". Then you can sit at the office and make informed decisions about when you're going to start your retired life-- "Hey, I could ER next month if I fired the housekeeper tomorrow, or I could work for another year to make sure we can continue to live in the style to which we've become accustomed."

After you ER you have the time, mental acuity, & focus to step back and think about why you hired a housekeeper in the first place. (http://www.early-retirement.org/forums/f30/the-fog-of-work-42328.html) In our case we realized that the same things were getting cleaned every week whether they were dirty or not (usually "not") and we didn't care to have the housecleaner underfoot (or leave the house) for those few hours every week. Our kid was finally starting to haul her own weight in laundry & food prep & cleanup. Now that we weren't working 50-60 hours/week we didn't mind doing a little of our own cleaning every day, and in most cases we'd stopped making messes in the first place. A housecleaner no longer had any value to us, so we do for ourselves now. A month's wages for the housecleaner also bought a Scooba to keep up with our tile floors.

Same with the health-club question. We have a free military gym six miles from the house so it's not even an expense question. When we were working it was convenient to our commute and our schedule. But in ER it became a minor hassle of getting all your stuff together, getting into the car (or on a bicycle), going to the gym (making sure it was open first), working out around the nice equipment (along with the not-so-nice blaring TVs and crowds of other customers), getting it all back together for the trip home, and so on. After a few months of that we bought the equipment we like from Craigslist and set up a home gym. Now we exercise the way we want (and when we want) on the spur of the moment without having to deal with the all the other factors.

I've run $4mil through Firecalc and it never runs out (over 40 years) even when taking out 120K a year.
Quite frankly, if 4mil doesn't do it I'm not sure I'd ever figure out the appropriate number. I mean, would 5 mil be better? sure, 10 mil? Yeah even better and soon I'm working until I'm dead.
The unknown is the scary thing. I could quit with 4 mil (let's say for sake of argument 50% stock 50% bonds), the market could tank and inflation could skyrocket, dropping my portfolio significantly. In that case, I might wish I'd worked a few more years. Then again, I have no love for my work so I want to quit as soon as possible.

Now you can figure out whether $3M is acceptable. $2M? $1M? How low are you willing to go, and how much longer are you willing to work? Do you want to never work again, or are you willing to go part-time for special treats (or Great Recessions)?

Lemme reassure you on that "great unknown". If you live long enough in ER, then just about every one of those things you fear will eventually happen. (http://www.early-retirement.org/for...ment-calculator-from-hell-articles-32828.html) Instead of worrying about them happening before you die, you could plan for how you're going to handle their eventuality-- instead of fretting over probabilities.

An ER's biggest strength isn't even financial and it's extremely difficult to model in the calculators-- it's our ability to change the plan. When (not "if") really bad stuff happens during ER then you can reduce your expenses by slamming shut your wallet, getting a job, and even growing your own groceries. It'd be nice to have an ER calculator that modeled the ER years by switching between a "regular" budget and a "bare bones" budget depending on that year's portfolio returns, but I'm not aware of one. The reality is that you run FIRECalc for 95% (or 99%) success and assume you can change your lifestyle if the other 5% (or 1%) is bad enough.

You also need to choose an asset allocation that won't keep you awake at night with regrets. It could be as simple as annuitizing a portion of your ER portfolio so that your bare-bones standard of living will be met no matter how bad the market gets, or choosing a more aggressive (and more volatile) AA but then be willing to seek part-time work if a black swan shows up.

I would say that the vast majority of the board's ERs have found that their actual ER expenses are lower than they projected. (In my case, way lower. I planned for an engineer's belt & suspenders but the reality is that I'd rather wear surf shorts.) Some (still working) posters may feel that we ERs are merely rationalizing our predictive failure to adequately fund our ERs by saying "Oh, I didn't want that [whatever it was] anyway." While I agree that's possible, none of us have been willing to go back to work to get enough money to afford those [whatever]s. In our case after eight years (and two significant recessions) the money is piling up faster than even our trophy kid can spend it, and I can only surf one longboard at a time.

You may determine that the only unrealistic aspect of your planning is having to work as long as five years...

 

[CaseInPoint]

Well, a four million dollar portfolio from which I withdraw only 3% a year would net me $120,000. That would be plenty.

Also, if there is anyone here that doesn't think 4 million will do it, please let me know. I'm shocked to hear someone else doesn't think so.

I hear what you're saying. Of course $4 mil is a good chunk of change for most retirees. Although, if you check the threads in this forum that discuss real return on portfolios, you'll see that the return is often somewhat less than 3% (sadly), and depending on your investments, the dividends may be taxable.

In five years, when you're ready to retire, there will most likely be a different rate of taxation than there is today, so you'll have a better idea of the feasibility of ER at that time.

On a related note, I've seen a good number of early retireees in this forum either:

1. Move to part-time work instead of retiring as they originally planned, or
2. Come out of retirement to return to full-time work altogether, or
3. Sincerely regret not saving up more before retirement.

In general, I'd say that you'll be ready for a secure ER when you're willing to make do with a lot less than your current lifestyle, and when you're all set to go back to work if necessary.

BTW - I totally understand and relate to the practice of law being very unpleasant. Maybe now that you've taken the step to be your own boss, you should figure out how to move to the next business phase of being more of a manager than a hands-on production person.

For someone who is saving hundreds of thousands a year, as you say, it might make good sense to improve your job satisfaction and work just a bit longer in exchange for more long-term financial security.

On the upside, the big picture is that you've done very well financially and are on the road to retire earlier than most. That's a big accomplishment. Congratulations.

 

[Westernskies]

Welcome to the forum.

If you can't retire off the income stream from 4M, ER won't matter- you will be standing in the bread lines with the rest of us.

Sounds like you are there- LBYM, sufficient assets, good attitude, realistic expectations. I say go for it, and keep us posted.

 

[Hiredgun]

Caseinpoint,

I haven't been a member of the forumS for long but I do read bogleheads and other websites. I'm unaware of people having a hard time getting 3 or 4% with a diverse portfolio. However, who knows what the future holds? I'm sure more taxes and wealth redistribution are on the way at least in the next few years.

But if you do not consider 4 mil enough for ER, I'm really curious, what number would u consider safe for ER? And what cash-flow would you expect to take from that amount every year? These are questions I am constantly going over in my own mind.

Your point on doing more managing is well taken. We have just hired several paralegals that should help with the burdens once they have been trained. Still it is a slog and I'm ready to be done in 5 years even if it means sacrifices. I don't live an elaborate lifestyle (I.e. Fancy cars, fancy travel, mansion), but I do like new toys, like the iPad I am writing this on. But I will cut back even more and clip coupons if it means more freedom. You only live once and being miserable longer than you have to is simply not worth it.

 

[Milton]

There is also a chance we can sell the practice and make some extra $$ there.

You know your own situation best; but generally speaking, the value of a small law practice is little more than depreciated cost of its hard assets. I.e., because your client relationships are personal and it's questionable whether they can be successfully transferred to a potential purchaser, you can't count on capturing significant value for 'goodwill'.

BTW - I totally understand and relate to the practice of law being very unpleasant. Maybe now that you've taken the step to be your own boss, you should figure out how to move to the next business phase of being more of a manager than a hands-on production person.

Makes sense. However, at most small law firms there is not much real potential for that.

 

[Hiredgun]

The sale of a practice is usually done in a merger. We would go work for a large firm for a year and slowly transfer control of the clients to other attorneys and paralegals. It's done all the time and I know another firm in our specialty that did the same thing a few years back.

 

[CaseInPoint]

Caseinpoint,

I haven't been a member of the forumS for long but I do read bogleheads and other websites. I'm unaware of people having a hard time getting 3 or 4% with a diverse portfolio. However, who knows what the future holds? I'm sure more taxes and wealth redistribution are on the way at least in the next few years.

Exactly. And people in your income range (including me) are the ones who will be forced to foot the bill for the ever-expanding government. That's why it's much more likely that you'll be working for years to come to pay off government workers' pensions before being able to enjoy your own retirement.

FWIW, here's a recent thread I posted. As you scroll down the thread, you'll see some interesting numbers. At least they were to me: http://www.early-retirement.org/forums/f28/what-does-your-portfolio-yield-these-days-50168.html

But if you do not consider 4 mil enough for ER, I'm really curious, what number would u consider safe for ER? And what cash-flow would you expect to take from that amount every year? These are questions I am constantly going over in my own mind.

Safe for someone married with kids, upper middle class, in their 40s, living in a nice suburban setting, nice home, moderate luxuries: $4.5 - 5M minimum. I would see $4.5 as a base amount to safely take out $100 - $150/yr, and the extra .5 as a safety net or personal slush fund. I would recommend decent grade triple tax-free munis be part of anyone's portfolio who is in a high tax bracket. If the portfolio yields more than expected, great. Nothing wrong with that, even if the extra safety costs you another year's work (that one extra year will be so much more tolerable with the knowledge that you're already capable of retiring in decent style at any time and that you're now working for your personal slush fund).

Your point on doing more managing is well taken. We have just hired several paralegals that should help with the burdens once they have been trained. Still it is a slog and I'm ready to be done in 5 years even if it means sacrifices. I don't live an elaborate lifestyle (I.e. Fancy cars, fancy travel, mansion), but I do like new toys, like the iPad I am writing this on. But I will cut back even more and clip coupons if it means more freedom. You only live once and being miserable longer than you have to is simply not worth it.

Right. That's why the misery needs to be eliminated asap. You're probably just one good experienced office manager away from seriously reducing the misery -- a person who can take on all the administrative, HR, billing, collections, and workflow incidentals that you don't want to deal with. At the same time, it sounds like you need to focus on what's really causing the rest of the stress and come up with a plan to cut that out or at least reduce it.

You're not a meat packer stuck doing the same function day in, day out -- you're an attorney and a sophisticated business owner. You're much more in control of your own level of stress that you might think. So, make your job an art form rather than a miserable battle. Take a break, even if it's a long weekend once every 4 or 6 weeks. You won't get fired...

Once you get the work situation under control, saving the rest of the money you'll need/want for retirement will come easier and maybe even faster.

It may be blasphemy around this forum, but if you can have a good business that is rewarding professionally and financially, it may actually beat retirement. Good luck.