Young family considering 2015

[2015maybetheyear]

A quick introduction: I'm 42 with a DW of 36 and three kids under 4. We currently live in the high cost area of Southern CA and I've been fortunate enough through a combination of LBYM and good income to potentially be in position to FIRE.

I've been lurking on this board for a couple of years and have learned a lot from the collective wisdom of the group...thank you. It has helped me understand that ER is a possibility and what is required. Especially since I've had some minor health problems (none of which would be remotely life threatening but an early wake up call about the price the career grind is extracting and could continue to extract).

However, nothing is certain in life and I wanted to ask the community what kind of SWR they would feel comfortable with given how young my family is. In my reading I have seen many Southern CA posters, a number of people post in my age range and some people post with young children but not too many with the combination of all the above. It's very difficult to leave Southern CA as we've never lived anywhere else and most of our family is here or nearby.

I know a lot of posts seem to focus on the 3%-4% range which we fit into but I'm curious given my particular situation whether people might think going below 3% might be warranted.

 

[rodi]

Hi and welcome from another SoCal-er with kids.

Before I would be comfortable looking at SWRs - I'd try to model/anticipate your expenses. Expenses with kids are different than expenses for a single person or married couple.

I modeled our expenses as follows:
- continued saving/contributions/set-asides for kids college funds until they reach college age.
- Increase in insurance costs when they reach driving age.
- continued funding for sports fees, school activity fees, etc during the active teen years.
- increased food budget from now till they are off the payroll. (I have a 12 yo and 14 yo boy - and both have reached the insatiable appetite stage. The older one eats about 3 times what I do and is skinny.)

I also plan on a decline in expenses as they get launched. I have them dropped from my health insurance at age 25. (I'm planning on covering them for a year or two after college if they need it.) I have them dropped from my car insurance in a similar time frame.

You get the idea... I tried to model the changes in our annual budget, year by year, based on their stage/age.

We're withdrawing 3.2% from investments but that will drop to 2.9% when I turn on my small pension at age 55.

Good luck, and welcome!

 

[Travelwanted]

2015maybetheyear-

Welcome. First congrats on your success and family. While I don't live in So Cal, I live in a major metro and have young children. I am 43. I plan to ER July 2015.

FWIW, I would first get a handle on current annual expenses. Then, I would suggest that amount will increase over time due to the cost of children. I am projecting a large increase to be safe. I am still working but we spend the equivalent of 1.85% WR. Once ER'd I have budget a 2.8% WR.

Given our younger ages, having younger children and lower expected investment returns, a SWR of 3% or less is important. Keep in mind the 4% is based on a 30 year retirement. We could be looking at 40-50 years.

 

[Rothman]

Congrats on your achievement. I'm older but have struggled with this SWR question and the related OMY syndrome. I like my job and am well paid, so my motivation is I'd even enjoy more using my time for my own pursuits, hence the desire to go as early as possible but being prudent like us LBYM would act. The result of my search for my answer was the alternative action plan. The risk to long retirement really comes down heavily to a sequence of returns risk. Meaning if the market has a prolonged bad streak early in your 40-50 year plan the numbers can't recover. If you model such scenarios it tells you work 4 more years to get an even lower SWR, but the cost of those young retired years when you can enjoy your kids is priceless and giving them up most likely not needed. So my counter measure is to have a reaction plan that helps me be comfortable to take the plunge. Retire when I can as early as I hit a reasonable SWR of 3% or so, and if in the next 5 years the market moves go the wrong way, go back to work. I'll still be young enough to do so, skilled enough to reasonably expect to find job, maybe lower level than what I retire from but would earn enough to cover all expenses and replenish some savings and retire again in the more traditional 60s age. Not sure if it would be a good answer for you but gives you another concept to consider.


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[2015maybetheyear]

Rodi, thanks for the reply,

I have tried to do some similar modeling as well...it's nice to know that we’ve been thinking the same way!
My children are younger by about 10 years so I’m not as knowledgeable how expenses will change over time. On one hand I did model in preschool expenses now that go away when they start kindergarten. On the other hand, as you suggested, I tried to estimate how food, energy, transportation, enrichment/extra-curriculars might grow as they get older.
Rather than put in expenses for college savings I built those in directly as expenses.
So the way my model looks is that I have an annual budget until they graduate from college (hopefully...and hopefully in four years!). After that I have an estimate of what an annual budget for my wife and myself might look like.
So for better or worse I’ve been looking at the annual average and then using more and less aggressive budgets to come up with a SWR range .

 

[2015maybetheyear]

Travelwanted, thanks for your reply.
Yes, I was thinking the same thing too…I probably need to be at 3% or less ideally. Is your increae from 1.85% to 2.8% based primarily on increased spending on children? If so, I may be off in my thinking…I’m curious can you give me a sense of how much you increase spending as children grow?
Or perhaps rodi, as a more experienced parent, and fellow socal’er, would you mind sharing your thoughts?
I don’t have expenses growing too much as I mentioned…a number of costs go up, food, transportation, extra-curriculars, cellphone bills, etc. However, preschool /childcare is expensive and perhaps I make the overly simplying assumption that we won’t be spending as much on vacations/travel when they become teenagers as they will probably want to hang out with their friends more. Of course, college is a separate expense.

 

[2015maybetheyear]

Rothman, thanks for the reply.
That’s a helpful construct…I’m considering 2015 for RE but facing OMY thoughts but what you are suggesting makes sense of course…a SWR isn’t static and one can always go back to work doing something. One thing I am going to do if I ER this year though is to try to keep our SWR out of the gate lower than our actual spending the last few years have been just to make sure we don’t hit the prolonged bad streak out of the gate (which definitely is more possible given generally high asset prices across the board relative to historical norms…although I’m certainly not smart enough to predict when a correction occurs).

 

[Rothman]

Yep you are right on with the concept, the other choice some suggest is a very heavy treasuries AA instead of the 50-75% equities most analysis conclude as optimum. The tragedy of this path is that inflation risk destroys this scenario and such inflation risk is a more probable risk than the bad luck of a low sequence of returns out of the retirement gate. The alternative of going back to work isn't likely to be needed, but gives the freedom to retire 3-4 years earlier in youth than getting a small incremental SWR which is still susceptible to bad sequence of return luck. Again congrats on what you've done, plan to enjoy it.


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[FUEGO]

Hey 2015maybe,

I'm in North Carolina and only budget $32k per year, which is probably a nonsensical number in southern CA. We have 3 kids (2,8, and 9).

Our current WR is around 2.7% but partly because the portfolio has edged up. I'm thinking a lower WR is prudent when you have some extra unknowns due to having young kids. 3% or so seems reasonable.

Sure, the kids will eat more in a few years and might need braces, but long term those kid-related costs will trail off. I don't have a really eloquent solution to this issue other than getting the WR down to around 3% and keeping some flexibility in the budget. Like we might skip a cruise to the Caribbean or two and get braces instead one year.

My wife is still working but might put in her notice in a week or two depending on whether they grant her a 3 month sabbatical before then. But I'm pretty sure we'll be okay to great over the long term. And there's always the possibility of finding something that makes money. I've already fallen into a decent little stream of income from a side hustle and related freelance work others ask me to do. At this point it's come down to naming a stupid high price just so I don't get too busy! So far that hasn't turned any work away though...

 

[TallTim]

To the OP Q w/r/t childcare costs ... we're similar to Rodi in that we live in SoCal and have older (17, 15) kids. What we've observed over time (n=1 sample, admittedly) was that our kid costs were high at the outset with pre-school, clothes needing regular replacement from growing out of them and also childcare ... then went a bit lower as they were in later elementary school and into middle school .. and then have shot up a great deal in high school (think sports, travel teams, car + insurance + gas, other trips). Admittedly alot of that is optional, but thus far we have actually found it easier to slug away college money for tuition, room and board than to keep up with the ad hoc costs of teens. In terms of percentages, I would guess our total costs just for kids have increased 50% over the past 3 or 4 years and don't show signs of going down.

In terms of RE, we have modeled in FIRECALC using specific dollar inputs a higher rate until they both go to/through college and then a return to net of kids budget, which is about 80% of spending when not in college and probably 50-60% of spending in a year where we would pay one or two tuition bills.

YMMV, but this kind of thing may be useful in your model for out-year kid costs.

 

[2015maybetheyear]

Thanks everyone for the input, all great perspectives for me as I think about RE this year potentially. I think almost everyone can agree that expenses are higher (or at least theoretically should be…) while raising children than after they graduate from college (if that’s the path they go down…). If that’s the case and we assign a SWR of 3% or less because of age, children, etc then wouldn’t it be rational to think that once my children are hopefully independent then (1) expenses go down while (2) the possible theoretical SWR goes up. I suppose I’m stating something that is obvious to anyone who has already gone through raising children but it does make me feel a little more comfortable with RE at 3% as it is a 3% for approx. 20 years but then after that you have a lot more “margin for error” so to speak.
I’m curious if anyone sees any faulty logic or thinks I may be missing something in my thought process?

 

[Travelwanted]

Is your increae from 1.85% to 2.8% based primarily on increased spending on children? If so, I may be off in my thinking…I’m curious can you give me a sense of how much you increase spending as children grow?

Great question: I have girls. Does that explain it?

I know that food, CLOTHING, travel expenses will increase. And, everyone keeps saying "girls are expensive". So I have not plotted out an exact increase but know there will be one. The idea is I want my SWR to be <3%. If it is, I feel good. If I think it will take a higher rate, I'd probably OMY. Building in cushion is important to me at our younger ages.

 

[bingybear]

just remember the 4% rule is a hand wave rule that is based around a 30 year retirement. Yes, it does assume a high likelihood of success ... thus most likely will end up with a lot left over. Make sure that you include the cost of health insurance and some spending on the health care itself. I'm 53 and assume the ACA cost of insurance "sans subsidy" and also assume max out of pocket every year for budget purposes. Likely overly conservative.

Also.. someone noted that retirement could be 40 or 50 years.. add 10 to that for being a youngster.... especially if you have the genes.

edit: also look at where your assets are. IRA/401k could be expensive to get to at this age.

 

[Live And Learn]

If you use FIRECALC and make a donation you can model specific expenses each year and it will give you a probability of success. With the large variablity of yearly spend involved in raising children I don't think calculating a starting WR makes much sense.

Having said that, DH and I have no children and are 52/56. I would not have been comfortable with anything less than a 3% WR (excluding SSI, and like Bingybear, including unsubsidzed ACA HC plus annual OOP max in the budget).

 

[rodi]

Ok... some more thoughts.

- I'm in the low cost years, using TallTim's info... which is kind of what I anticipated. They play sports - but rec leagues and little league... so not too expensive. The 14 year old has started being more style conscience - but since they go to a magnet school that has a uniform, I'm saved some money there because older son is limited in how he can express this new interest in style. (I did buy him tan colored pants that are the skinny cut he wanted... and fortunately his footwear expression is satisfied by high top converse.)

- I'm comfortable, for me and my family, going up to 4% for a few years since I have SS and a small pension coming online in the future. And I'm older (I'm 53, and DH is in his 60's) so that money isn't too far off. I would *not be comfortable retiring in my 40's with a 4% WR. We also have rent income which helps offset our spending.

- To put it in a SoCal perspective on budget (vs. Fuego's annual spend). I'm budgeting $84k/year. This does NOT include college savings. Since my DH collects SS the boys get a small SS check each month also... and we divert that to their college savings accounts/529s. Prior to the SS thing we were budgeting $6k/kid/year for college savings - so our budget would have been $96k.

The $84k works for us because
- our mortgage is paid off and our house has low taxes thanks to prop 13. We live in a neighborhood with no mello roos or HOAs.

- we drive old cars.

- we cook from scratch most of our food - not big on restaurants (although taco stands or in-n-out get hit about once a month.)

- we've eliminated as many monthly recurring costs as we can... cut back on cable, no newpaper subscription, no software subscriptions, use a cheap cell phone service, change our landline from a baby bell to magic jack.... etc.

- we work hard not to get caught up with the neighbors. I am not impressed by the fancy cars and fancy trips that many of our neighbors spend on. This can be a challenge in SoCal... I saw 3 teslas sprinkled in among the audi's, mercedes, and bmws as I was driving home from La Jolla Shores after walking the dog this morning.... It would be easy to feel entitled to that expensive stuff... but it's not in our budget. (And yes - I look at the teslas and think "sure would be nice".)

- I work the public school system... Our neighborhood schools are great school 10's - but I wasn't thrilled with them... so I used the choice/magnet system to get them into an international baccalaureate program that is one of the best in the state. Since it's public, it's free.

 

[2015maybetheyear]

Sorry for the late reply (our family of five has been sick the last week at the same time...). I wanted to thank everyone for sharing their perspectives. It has been very helpful as I'm considering some key decisions that will likely lead to RE in 2015.

 

[papadad111]

Good comments. Age 45 here. 2 kids. Senior and freshman in HS. Boys. Plan to retire to lower cost Midwest town.

@Fuego- is your budget 32k taken as withdrawals or are you spending 32k PLUS your side hustle income ? I Would imagine that's near full time w@rk to run a side hustle like you're doing and I bet it tosses off some decent incremental cash/income. How is it used ? Saved and added to portfolio or spent incrementally as it comes in to reduce actual portfolio WD ? Are you and spouse net adding to retirement savings or are spending down at your current WD ?

With respect to WD rate, my opinion is 4 percent is a baseline for a 55 year old to retire and fund 30 years. For each 7 years below 55, reduce that WD rate by about 0.5%. So a 48 year old needs to be no more than 3.5% WD and a 41 YO should be no more than 3%. Conservative home gamers could deduct an addition 25-50 basis points from that percentage WD to reduce risk of a near term, early on in retirement negative protracted market event.

In my case: I'll FIRE at 46 in 2015 and plan to use an initial WD of 3% to start as one of the boys is off to college as I fire and the other a sophomore in HS. Cars and insurance are expensive. So is food. We will test 3% as we do not have a good set of cost and expense data on our planned location- no budget as we have not lived in usa for the past decade - so no clue what things cost. It's fairly random swag but we will learn more after a year into things.

With paid for house it's really a budget of: health insurance, property and investment income taxes, cars/transportation/insurance, home maintenance, food, tuition and school costs and a bit of fun money.
Spouse may work for a few more years and her income would be used for additional fun, recreation, house remodel Etc. Not planning to use that money to add to retirement portfolio but may use it to fund incremental lifestyle !!!


I plan to modulate our WD rate based on market conditions, phase of retirement, health, kids success, etc. I would never WD more than 3.5% in a given year til I get to 59.5 yo... when tax advantages accounts can be tapped and social security is near.

 

[FUEGO]

@Fuego- is your budget 32k taken as withdrawals or are you spending 32k PLUS your side hustle income ? I Would imagine that's near full time w@rk to run a side hustle like you're doing and I bet it tosses off some decent incremental cash/income. How is it used ? Saved and added to portfolio or spent incrementally as it comes in to reduce actual portfolio WD ? Are you and spouse net adding to retirement savings or are spending down at your current WD ?

2014 had us living on DW's earned income ($70k gross), so no portfolio withdrawals at all. In fact we maxed her 401k, I put $12k into my solo 401k and we maxed 2 IRAs ($11000) and an HSA ($6500). All together we saved close to $50k last year (plus DW's employer match of $5400).

But DW's paycheck will come to an end soon. At that point, the $32k spending will be ~$10k dividends from taxable investments plus selling $22k of mutual funds/ETFs each year. The side hustle income would offset part of the $22k sale of mutual funds. In 2014, the side hustle netted $12k after expenses and taxes, so if that continues in 2016, our $32k spending will come from $10k dividends, $10k mutual fund sales, and $12k side hustle income. In other words, we won't up the spending permanently just because I have a little fun money coming in.

But if the markets keep rising, I will re-evaluate our spending. If we're only pulling $20k from the portfolio, that's about a 1.5% withdrawal rate and probably way lower than necessary. I'm taking it one year at a time right now. DW hasn't even jumped into ER yet (though might resign March 6 depending on a few things). I'm not sure what we'll spend extra money on. Perhaps travel?

As for the effort required for my side hustle, it's not that much really. The freelance gigs take 2 to 8 hours per month and work out to $40-60/hr. I treat my blog as a hobby and write when there's something on my mind worth saying which happens about 3-4x/month. I've been in talks about a book deal but not too interested in working that hard right now.

 

[papadad111]

Thanks Fuego. Helpful insight. You are also being tax and ACA efficient by limiting the income side. Is recall you are fairly young in the ER dance and thus it makes sense to be prudent with respect to saving vs spending any income and trying to stay on budget for the first several years of ER ...

Div. yield seems low. On your passive income (dividends) what is the div yield on your portfolio and the overall AA ? Reason for asking is that assuming 1.3M net and 75/25 AA, the yield seems to be. 10/975= 1 percent where SP500 yields around 2.2 percent. Do you hold a majority of non dividend yielding equity such as Berkshire Hathaway ? Which allows you to avoid higher annual div income for tax and (ACA) income planning purposes?

Or maybe your AA is more conservative? Or mix between taxable and tax deferred accounts?

 

[FUEGO]

Thanks Fuego. Helpful insight. You are also being tax and ACA efficient by limiting the income side. Is recall you are fairly young in the ER dance and thus it makes sense to be prudent with respect to saving vs spending any income and trying to stay on budget for the first several years of ER ...

Div. yield seems low. On your passive income (dividends) what is the div yield on your portfolio and the overall AA ? Reason for asking is that assuming 1.3M net and 75/25 AA, the yield seems to be. 10/975= 1 percent where SP500 yields around 2.2 percent. Do you hold a majority of non dividend yielding equity such as Berkshire Hathaway ? Which allows you to avoid higher annual div income for tax and (ACA) income planning purposes?

Or maybe your AA is more conservative? Or mix between taxable and tax deferred accounts?

Overall dividends were around $30,000 on a $1.3 million-ish portfolio. The $10k in dividends I mentioned is only taxable accounts (~$350k) and is mostly stocks with some cash and bonds. The other million dollars of the portfolio is in mostly tax deferred accounts with a small slice of Roth IRAs.

You're right - we're trying to start out with prudent spending and will adjust that as the portfolio fluctuates over time. No hard and fast rule, but I doubt we'll spend only 1.5% of the portfolio for long.

 

[2015maybetheyear]

@papadad111,
Your formula for reducing SWR by 0.5% for every 7 years below 55 isn't one that I have seen before. Can you explain a little bit more about the thinking or theory behind that?
Thanks!