We would like to retire in 9 years.

[EMone]

Hello everyone,

My wife and I would like to retire in 9 years from our 8-5 job and pursue our dream in flipping house.

Ages: 42 (Bread) & 41 (Tsong). Three kids (3,3, & 12)
Occupation: Engineer & Nurse
Household income including rental ($16K): $240K

Debt is $75K will be paid off in 3 years.
· Car 1 – $10K (interest 1.5%)
· Car 2 – $19K ((interest 1.75%)
· Solar – $16K (interest 5%)
· HVAC – $10K (Interest 0%)
· Personal loan – $20K (Interest 5%)

We own 2 properties and between our primary residence and rental property we have $570K of equity. Our remaining loan balance is $450K and it’s scheduled to be paid off by time we retire.

Our retirement balance is $619K deferred account. Our current contribution was reduced to $2K per month to ease some of the financial burden and will increase contributions as we pay off our debt and maxed out in three years.

We have $70K in college funds and $65K in stocks (20 individual stocks) that are dedicated for college expenses. We contribute about $500 a month to their college funds. The first few years college expenses of our eldest child will be paid out of our pocket since we’re still going to be working. We’re planning not to touch the college funds till we retire and will continue to contribute till the twins go to college.

Current total net worth is $1.25M

Our investments allocation including retirement accounts and college funds are invested 100% equity. I plan to change our retirement allocation 75/25 (equity/bonds & cash) when my wife turns 45. Our average investments return since we’ve started in 2002 has been about 8.9%.

We both work for government agencies and have a defined pension plan when we retire. Our approximate retirement income will be 55% of our salary, 30% will be from defined pension plan and other 25% will be generated from our retirement account which is based on a conservative calculation of 3.5% withdrawal rate. The 55% of our salary will generate about $10K gross a month not accounting for inflation. I’m also fortunate that our healthcare insurance for the whole family is a benefit I’ll be receiving if I retire with my current employer, my wife and I will have healthcare coverage till we turn 65 years old and our children will be covered till they turn 26.

The rental property will be our first home we’re going to flip to get our business started. The money from the first flip project will be rolled over to our next project. Income from retirement will not be utilize for the business.

Expected expenses during retirement per month not accounting for inflation:
· Property tax: $700
· College fund: $500
· Utilities: $1,100
· Car: $1,500 (Splurging)
· Taxes: $1,500 (based on federal & state tax brackets w/o child tax credit, very conservative)
· Disposable income: $4,700 (food, gas, vacation, misc.)

Seeking for advise:
· Is my goal reasonable?
· Is my current allocation too aggressive?
· Is there anything you would do differently?
· How to minimize tax during retirement?

[HI Bill]

First, IMHO (and most of us here), only retirement assets are retirement assets. College funds, and the primary house don't count as investment assets, as you're not going to be able to spend them. Since you're going to use the second house to start a business, it also doesn't count. What year will you be able to tap the pensions? How much are you saving per month now ($2K?)? I only see $619K in retirement assets. Assuming you save $2K monthly for 9 years, $2Kx12x9=$216K; adding in $619K (not accounting for profit/loss in investments), you'd have about $835K in retirement assets. This could throw off $3300 per month in income, to add a buffer to your $10K. Sounds reasonable, as long as you don't have any want/needs, such as extensive travel. The house flipping thing would require some buffer in funds, but we don't know the value of houses you intend to buy/sell. I'd think about having 12 months of expenses prepared in addition to house remodeling funds for each property, in the event that mortgage rates go up dramatically, or the real estate market tanks, a la 2008. Most would suggest adding some taxable accounts, so that you're not paying taxes on 100% of your distributions (and can easily tap them prior to age 59.5), enjoying (possibly), the tax-free long term capital gains. Personally, at 9 years, 100% equities is not a problem, as long as they're in diversified mutual funds, and not singular stocks. Just be aware that you might have a down market that could take 50% for a while...I'd think about a more traditional allocation about 5 years out.

[Golden sunsets]

I would pay off the 5% debt Asap and increase payments on the remaining debt at that point or perhaps increase savings. Regarding house flipping, have you done this before? Do you have special handyman skills? I hope your new chosen profession is not based on the entertaining house flipping shows on HG TV. We aren't all Joanna and Chip Gains or the Scott brothers who have established a great brand.

Everyone seems to want to flip houses these days. It has to be the right environment for that plan to work. My neighbor's son started flipping but can no longer find the right properties, with the potential to flip quickly at a profit. And that environment changes with the economy.

Sent from my iPad using Early Retirement Forum

[joeea]

Quote:

Originally Posted by EMone My wife and I would like to retire in 9 years from our 8-5 job and pursue our dream in flipping house. Ages: 42 (Bread) & 41 (Tsong). Three kids (3,3, & 12) The rental property will be our first home we’re going to flip to get our business started. The money from the first flip project will be rolled over to our next project. Income from retirement will not be utilize for the business. Is my goal reasonable?

Your goal doesn't appear to actually be retirement, but rather a transition to a career in house-flipping. Do you have a background in real estate and renovations?

If you take those flips slowly, then you'll quickly realize if you are any good at it or not. In 9 years, nobody can say what the real estate market will be, nor if house-flipping will be lucrative. Hopefully you have a Plan B in mind.

Quote:

Is there anything you would do differently?

Well I certainly wouldn't strive to become a house-flipper. I don't have the expertise, temperment, and risk tolerance level. And if I did choose that for a career path, I'd make sure I had at least 2 years of expenses sitting in cash. The only flipper I personally know has gone through some major dry spells even in hot real estate markets.

And I'm not sure I'd leave a lucrative career for this "not actually retirement" path with two young children.

But I wish you luck.

[MBAustin]

Welcome, EMone! As others have mentioned, a lot can change in 9 years. You're on a good path now for your ages, so my suggestion would be to keep close tabs on your spending and continue to build up your financial assets.

I would also suggest you get some experience with the flipping business (more than watching HGTV) before you dive in head first. Particularly once the younger children are a bit older, perhaps you can spend time visiting properties that are in the process of being flipped and talk with the owners. You can also go to open houses of houses that have been flipped and see what works and doesn't.

Our neighborhood generally has a couple of houses being flipped at any given time. Many of them stay on the market for a LONG time because the flippers set the prices way too high (and we're in a very desirable area). They've spent lots of money on things people either don't like or don't care about.

[bloom2708]

You have a great income. Many, many things are eating at your nice income.

Based on the debt and cars, I would say you have a spending problem that will conflict with your transition to house flipping.

As mentioned above, start thinking about retirement assets as things that will produce income (interest, dividends or selling shares) as different from things that will be spent (college) or cost (cars, primary house, etc). What will you do for healthcare?

A lot can change in 9 years. I don't know if you are doing the things that will allow you to transition. Pay off all debts. Understand all spending. $1,500 a month goal for cars? Is that a realistic goal?

I agree that "house flipping" might be a challenge. There are 1,000s of people trying to find a "deal" and do exactly what you want to do. Why will you be better than the other 999? Will it produce enough income after taxes, fees, costs to allow you to live? Can you do 3 flips a year or 7?

I guess it is best to start to ask the questions now almost 10 years out. Good luck!

[Aerides]

In 10 years, you have pensions (non-cola?) and investments that will pay $120k per year, and you'll have college+HI covered? Sounds good.

I'm not sure why the interest in house flipping, as that will add risk to your plan, but if I assume it's neutral, and more a hobby, with with no debts + your pensions + HC covered, the only question will be expenses. And echo other comments about not counting equity.

I'd focus immediately on paying down those debts and building up taxable savings as buffer to avoid needing debt in the future. And max out your non-taxable contributions.

[kgtest]

Skip the flipping, dial back college contributions to any state minimum tax breaks, and take that money and put it toward that 5% interest personal loan. Pay down debt, so that you can then contribute more to retirement.

IF you really want to flip homes, have some cash stashed for cash offers on your flips, likely that would yield highest ROI. And avoid the realtors commission or you will never profit.

Don't treat equity as retirement, you need to live somewhere. As for the rental, leverage that for your college expenses later. Use the money you earn from that to either pay taxes or fund the kids college.

I've flipped houses and worked as an engineer. Trust me when I say this, working as an engineer is much easier and more manageable with less stress than flipping houses.

There is this whole underground network of rental owners that sort of know eachother. Once you get into flipping, you should conceivably be networked with at least some of these guys so you can potentially share in selling/buying assets.

None of the smaller ma and pa house flippers were making great money back when I was doing it.

200k own for two years sell for 250k. At first glance it looks like you earn a $50k profit or 25% ROI over 24months or 12.5%/year, but you had to pay the realtors 6% to buy the home, you had to pay the realtors 6% to sell the home and you likely had your time you should pay yourself for to maintain the property, lawn care, snow removal, pest control, HOAs etc.

Now let's look at the reality of this...
200k *(.06) = - $12,000 realtor fee
250k *(.06) = - $15,000 realtor fee

So you see now that profit of $50k is actually 50k-12,000 -15,000 or

$23,000/2 for each year you owned it and you get $11,500/year in profits or an ROI of
about 5.75% /year.

Have I turned you off yet?

Add in Maintenance, HOA, Tax and Insurance and it all eats into that 5.75%/year return.

Of course the real flippers usually look for better margins, but this above example is one reason why it's hard to make it flipping.

I've seen guys buy a home for 50k and flip it and sell for 90-100k less than 6months later and they didn't use a realtor on either end of the transaction. Now that's the milk n honey you want to strive for.

[HI Bill]

Quote:

Originally Posted by kgtest Have I turned you off yet?

To be a successful house flipper, you'll have to be consistently lucky, or very good. To be very good, you need to know how to do home inspections, identify problems up front, anticipate unseen problems, know how much money it will cost for repairs/remodels, be a contractor, or at least oversee contractors. You should know something about electrical, water, sewer, plumbing, roofing, dry rot, termites, pests, hazardous waste, asbestos, lead-based paint, etc. If I were going to do this again (I only did it once), I'd get my realtor's and home inspector's licenses, and would want to find a small group of very diverse contractors that are explicitly trustworthy. You won't have the time/energy to do all the work yourself, even if you are capable of doing so. High risk, potential high reward, potential high losses. All it takes is one house with an unsolvable problem like being built on geologically unstable ground.

[EMone]

Thanks guys! These are great advices and inputs! Just some clarification:


Retiring in 9 years from an 8-5 job and starting a business as my own boss and work at own pace. This flipping business is something that will keep my wife and I busy. Our rental property will be our first house to flip and sell. Money acquired from this will be our cash flow for our business, meaning this will be rolled to the next project and soon. I understand the risk that is involve in flipping house and I’m willing to take that risk.


I did not factor into my calculation that primary residence and rental property will be part of our source of income during retirement. Properties are scheduled to be paid off in 9 years. Our source of income during retirement will be our pension and retirement account.


Anticipated pension for both of us - $70K
Anticipated retirement account withdrawal - $50K, is based on $619K current balance with a $2,000 monthly contribution for the next 3 years and maxing it out after with a 6% return conservatively that’s about $1.35M. With a 3.5% withdrawal rate.


I’m also aware the possibility of the economy crashing as I’ve gone thru it. If this happens I’ll put off my retirement plans till the economy rebounds. Note: there will be no early withdrawal penalty, government retirement account restriction is different from 401K.